The International Monetary Fund (IMF) is projecting Nigeria’s real Gross Domestic Product (GDP) to contract by 3¼ percent in 2020, the most in four decades.
The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks. Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high.
It had in its World Economic Outlook (WEO) on October 13, 2020, projected Nigeria’s economy to contract by 4.3 percent in 2020 and later recover with a growth rate of 1.7 percent in 2021.
The Washington based Fund made the projection in a statement issued by Jesmin Rahman who led a team of staff to conduct a virtual mission from October 30 to November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria.
In that statement, Nigeria’s recovery is projected to start in 2021, with subdued growth of 1½ percent and output recovering to its pre-pandemic level only in 2022.
Despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range, absent monetary policy reforms.
Read also: IMF projects deeper contraction for Nigeria economy
Following a significant decline in revenue collections—from levels that were already among the lowest in the world—fiscal deficits are projected to remain elevated in the medium term.
There are significant downside risks to this near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria.
On the balance of payments (BOP) pressures, IMF said a durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning.
It said the adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.
“Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path,” Rahman said in the statement.
The IMF mission welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term. This could be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
The mission agreed with the CBN that the accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access.
However, if BOP and inflationary pressures intensify, there might be a need to withdraw liquidity or raise rates. Given weak transmission and record low market interest rates, further cuts in the Monetary Policy Rate are unlikely to provide additional support to the economy.
In the medium term, the operational monetary policy framework, along with policy strategy and communication, should be strengthened to establish the primacy of price stability.
On the structural front, the approval of the power sector recovery program financing plan, the ratification of the African Continental Free Trade Area (AfCFTA), and the completion of key road projects are positive steps.
Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential.
Moreover, it is critical to continue strengthening the anti-corruption framework and implement plans to improve the effectiveness of the AML/CFT framework, the IMF said.
