IMF Executive Board Concludes 2017 Article IV Consultation with Nigeria

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On March 29, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation (1) with Nigeria.

With oil receipts dominating fiscal revenue and exports, the Nigerian economy has been hit hard by low oil prices and falling oil production.

The country entered into a recession in 2016, with growth contracting by 1.5 per cent.

Annual inflation levels doubled to 18.6 per cent, reflecting hikes in electricity and fuel tariffs, a weaker naira and accommodating monetary conditions (broad money expanding at 19 per cent y-o-y).

Even with a significant under-execution in capital spending, the consolidated fiscal deficit increased from 3.5 per cent of GDP in 2015 to 4.7 percent of GDP in 2016, because of significant revenue shortfalls.

This resulted, over the same period, in a doubling of the Federal Government (FG) interest payments-to-revenue ratio to 66 per cent.

The external current account turned into a surplus in 2016, as import compression continues to offset falling exports.

The foreign exchange regime was liberalised in June 2016, but FX restrictions remain in place and the market continues to be characterised by significant distortions that have contributed to a 50 per cent parallel market premium.

This was halved following recent increases in central bank interventions and the removal of prioritised allocation of foreign exchange.

Under unchanged policies, the outlook remains challenging.

Growth would pick up only slightly to 0.8 per cent within the year, mostly reflecting some recovery in oil production and a continuing strong performance in agriculture.

Policy uncertainty, crowding out, and FX market distortions would be expected to drag activity.

Accommodative monetary policy would keep inflation in double digits.

Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the Federal Government’s already high debt service burden.

A continued policy of prioritising exchange rate stability would lead to an increasingly overvalued exchange rate, leading to a deterioration in the non-oil trade balance and gross reserves below adequate levels.

Recognising the unsustainability of current policies, the authorities have adopted an Economic Recovery and Growth Plan (ERGP) to transform the economy into a more diversified and inclusive economy.

Key priorities include ensuring food security through agro-related manufacturing, promoting industrialisation, and achieving sufficiency in energy—including the recently approved Power Sector Recovery Plan.

The ERGP’s inclusive growth focus is to be supported through macroeconomic stability, investing in social infrastructure, building a globally competitive economy, and improving governance.

Executive Board Assessment (2)

Executive Directors recognised that the Nigerian economy has been negatively impacted by low oil prices and production.

Directors commended the efforts already made by the authorities to reduce vulnerabilities and enhance resilience, including by increasing fuel prices, raising the monetary policy rate, and allowing the exchange rate to depreciate.

However, in light of the persisting internal and external challenges, they emphasised that stronger macroeconomic policies are urgently needed to rebuild confidence and foster an economic recovery.

Key priorities include ensuring food security through agro-related manufacturing, promoting industrialisation, and achieving sufficiency in energy

Directors welcomed the authorities’ Economic Recovery and Growth Plan (ERGP), which focuses on economic diversification driven by the private sector, and government initiatives to strengthen infrastructure—including the recently adopted power sector recovery plan.

However, they underlined that without stronger policies these objectives may not be achieved.

Directors generally emphasised the need for a front-loaded, revenue-based fiscal consolidation starting in 2017, to reduce the federal government interest payments-to-revenue ratio to sustainable levels.

They underscored that priority should be given to increasing non-oil revenue, including through raising VAT and excise rates, strengthening compliance, and closing loopholes and exemptions.

Administering an independent fuel price-setting mechanism to eliminate fuel subsidies, strengthening public financial management, and developing a well-targeted social safety net would also support the adjustment.

Directors stressed the need to contain the fiscal deficit of state and local governments, including through improved transparency and monitoring.

Directors underscored that external adjustment was necessary to protect foreign currency buffers and reduce vulnerabilities.

They commended the recent easing of some exchange restrictions and urged the authorities to remove the remaining restrictions and multiple currency practices, thus unifying the foreign exchange market and helping regain investor confidence.

Directors emphasised that these policies should be supported by tighter monetary policy and fiscal consolidation to anchor inflation expectations and to limit the risk of exchange rate overshooting, as well as structural reforms to improve competitiveness.

Directors welcomed the steps to strengthen banking sector resilience through stronger prudential requirements.

With asset quality declining, they recommended further intensifying bank monitoring, enhancing contingency planning, and strengthening resolution frameworks.

Directors encouraged quickly increasing the capital of undercapitalised banks and putting a time limit on regulatory forbearance.

Directors emphasised that ambitious structural reforms are key to achieving a competitive, investment-driven economy that is less dependent on oil.

Priority should be given to improving infrastructure, enhancing the business environment, improving access to financing for small enterprises, and strengthening governance and anti-corruption efforts.

Timely and effective implementation of these measures would promote sustainable and inclusive growth.

Directors welcomed progress in improving the quality and availability of economic statistics and encouraged further efforts to compile subnational fiscal accounts.

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.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country’s authorities. ##

Source – APO

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