IMF Concerns For Nigeria – The Real Issues

The International Monetary Fund (IMF) team which held several virtual meetings with Nigerian Government officials for over a week earlier this month, has released its report.

The team which was led Ms. Jesmin Rahman held discussions with Nigerian officials on recent economic and financial developments in the country and outlook for the future.

The meetings were seen as part of efforts to encourage Nigeria to reform exchange rate and mobilize more revenue to strengthen its recovery from the COVID-19 pandemic.

While noting that real GDP is recovering, the report confirms and expressed concerns that unemployment and inflation remain elevated, with increased deterioration of security conditions.

It says recent exchange rate measures are encouraging, but further reforms are needed to achieve a fully unified and market-clearing exchange rate.

Also, the re-surfacing of fuel subsidies is worrisome to the team, particularly in the context of low revenue mobilization.

Kristalina Georgieva,
IMF Managing Director

Reports and statements by IMF teams like Ms Rahman’s, that provide preliminary findings after a visit to any country, are usually considered as the views of such teams and staff, and do not necessarily represent the views the IMF Executive Board. This, however, was an official team that had direct discussions with government officials and there is no doubt their views will go a long way to provide the IMF and Nigeria with directions on solving the country’s economic problems.

That the IMF or its staff is concerned about Nigeria is not news and should not be news. Nigerians, home and abroad, are concerned about their country. Even friends and business partners are concerned about the country. The issue is what has IMF to offer to mitigate these issues of concern that it has expressed.

There have been times when the 190-member Organisation, of which Nigeria has been a member since 1961, has not been very popular with Nigerians because of the several hard pills it had recommended for the citizens to swallow. This time, however, many people will not argue with their diagnosis of our problems, chief of them being insecurity, unemployment and continuously rising inflation.

It is not rocket science to know that the governments at all levels need to raise more revenues to ensure a sustainable fiscal position – at Federal, State and Local Government, that is.

The IMF itself has confirmed that Nigeria has one of the lowest revenue levels as a share of GDP worldwide and a large share of revenue is spent on the country’s public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn. From this angle, mobilizing revenues through efficiency-enhancing and progressive measures is a top near-term priority. The agency had earlier also suggested revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment.

Its economic report on Nigeria says, “Once economic recovery takes root, the country will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025 – the average in countries belonging to the Economic Community of West African States – to create effective fiscal space”.

A lot had been said about economic diversification and how important it is for Nigeria but the country’s export structure has not fundamentally changed over the decades, with petroleum products still accounting for 90 percent of the country’s exports, even today, as they did in the 1970s.

According to IMF: “Successful economic diversification requires trade openness and competitive discipline. The experience of Malaysia, Indonesia, and to some extent India has shown that a shift toward export-oriented industrialization can boost GDP. The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course. To accommodate a growing number of young people entering the labor market, Nigeria will need to create at least 5 million new jobs each year over the next decade. Based on experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect”.

In their report on the recent online meetings, Team Leader Jesmin Rahman said that the Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic.

Following sharp output contractions in the second and third quarters, she noted, GDP growth turned positive in the 4th quarter of 2020 and growth reached 0.5 percent in Quarter 1 of 2021, supported by agriculture and services sectors. Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 percent, owing to high food price inflation. With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.

Rahman said: “The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021. Inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels. Tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for Covid-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 percent of GDP. Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria”.

The IMF mission also expressed concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor, while recommending stepping up efforts to strengthen tax administration to mobilize additional revenues and help address priority spending pressures.

The Nigerian government was advised to keep reliance on CBN overdrafts for deficit financing within legal limits, while continuing to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.

It applauded the recent removal of the official exchange rate from the CBN website and suggested maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.

On monetary policy, to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using Central Bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.

While noting that the banking sector remains liquid and well-capitalized while non-performing loans are contained, Ms Rahman stated that the extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.

 

IMAGE CREDIT: imf.org

 

 

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