Persisting structural and policy challenges continue to constrain Nigerian growth to levels below those needed to reduce vulnerabilities, lessen poverty and improve weak human development outcomes, such as in health and education, the International Monetary Fund (IMF) said.
A large infrastructure gap, low revenue mobilisation, governance and institutional weaknesses, continued foreign exchange restrictions, and banking sector vulnerabilities are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production, the IMF said in its latest Article IV report for Nigeria.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies.
On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
“Under current policies, the outlook remains therefore muted,” the IMF said in the report.
“Over the medium term, absent strong reforms, growth would hover around 2½ percent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock,” the IMF said.
It forecasts that growth will accelerate to 2.1 percent this year from 1.9 percent in 2018, on the back of improvements in manufacturing and services, supported by spillovers from higher oil prices, ongoing convergence in exchange rates and strides to improve the business environment.
However, risks are moderately tilted downwards, according to the IMF.
On the upside, oil prices could rise, prompted by global political disruptions or supply bottlenecks.
Bold reform efforts, following the election cycle, could boost confidence and investments, especially given relatively conservative baseline projections.
On the downside, additional delays in reform implementation, a persistent fall in oil prices, reduced oil production, increased security tensions, or tighter global financial market conditions could undermine growth, provoke a market sell-off, and put additional pressure on reserves and/or the exchange rate.
Current growth rates would still leave Nigeria as one of Africa’s least buoyant economies and will be below the rate of population growth, which is almost 3 percent.
The unemployment rate was 23 percent in September.
The IMF emphasised that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space.
Nigeria caps gasoline at N145 per litre ($0.40, or $1.51 a gallon), among the 10 cheapest levels worldwide, according to GlobalPetrolPrices.com.
Nigeria spent N623 billion ($1.7 billion) on fuel subsidies last year, the IMF estimates. The IMF welcomed the authorities’ tax reform plan to increase non-oil revenue, including through tax policy and administration measures.
It stressed the importance of strengthening domestic revenue mobilisation, including through additional excises, a comprehensive VAT reform, and elimination of tax incentives.
Securing oil revenues through reforms of state-owned enterprises and measures to improve the governance of the oil sector will also be crucial, the IMF said.
With inflation still above the Central Bank of Nigeria (CBN) target, the IMF generally considered that a tight monetary policy stance is appropriate. It encouraged the authorities to enhance transparency and communication and to end direct central bank intervention in the economy to allow focus on the central bank’s price stability mandate.
Directors commended the authorities’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows.
They noted that a unified market-based exchange rate and a more flexible exchange rate regime would support inflation targeting.
Directors also stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification.
The IMF welcomed the decline in nonperforming loans and the improved prudential banking ratios but noted that restructured loans and undercapitalised banks continue to weigh on financial sector performance. They suggested strengthening capital buffers and risk-based supervision, conducting an asset quality review, avoiding regulatory forbearance, and revamping the banking resolution framework.
The IMF also recommended establishing a credible time-bound recapitalisation plan for weak banks and a timeline for phasing out the state-backed asset management company (AMCON).
The IMF also urged the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals. It pointed to the importance of improving the business environment, implementing the power sector recovery programme, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities.
The fund welcomed improvements in the quality and availability of economic statistics from the National Bureau of Statistics (NBS) and encouraged continued efforts to address remaining gaps, including through regular funding.
ENDURANCE OKAFOR
