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IMF reminds Nigeria that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges


By Audrey Lotechukwu

TUE 09 FEB, 2021-theGBJournal- The International Monetary Fund (IMF) Executive Board is blunt and hard on their assessment of the performance of the country’s economy, following the conclusion of their latest consultation with Nigeria.

Their recommendations, published Monday, are a reminder of what the country’s leadership have been told a thousand times. It is also a confirmation that Nigeria is still in dire straits and requires swift and measured policy reforms.

The IMF suggests and emphasized the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment following the appraisal.

It acknowledged the many policy decisions taken by the Federal Government but noted that Socio-economic conditions have deteriorated, with rising food inflation, elevated youth unemployment, mass protests in October 2020, and surveys showing worsening food insecurity with a significant impact on the vulnerable.

It said, ‘’risks are tilted to the downside and include the resurgence of the pandemic, security situation and unfavorable external environment. Capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities.  On the upside, recovering oil prices and completion of the Dangote oil refinery could catalyze more domestic crude oil production and boost growth.’’

The IMF view- Nigeria’s economy has been hit hard by the COVID-19 pandemic. Following a sharp drop in oil prices and capital outflows, real GDP is estimated to have contracted by 3.2 percent in 2020 amidst the pandemic-related lockdown.

Headline inflation rose to 14.9 percent in November 2020, a 33-month high, reflecting core and food inflation increases emanating from supply shortages due to the lockdown effected to curb infections alongside, the land-border closure and continued import restrictions. The unemployment rate reached 27 percent in the second quarter of 2020, with youth unemployment at 41 percent.

The Nigerian authorities acted swiftly to adopt a pandemic-related support package equivalent to 0.3 percent of GDP in the 2020 revised federal budget despite limited fiscal space. External vulnerabilities due to lower oil prices and weak global demand have increased, with the current account remaining in deficit in the first half of 2021. In April 2020, Nigeria received IMF emergency financial assistance of $3.5 billion under the Rapid Financing Instrument to help cushion the impact of the pandemic.

The IMF appraisal and recommendation

Directors welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector. However, they stressed the need for significant revenue mobilization to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures with higher tax rates awaiting a more sustained economic recovery. They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.

Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.

Directors observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase. In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation.

While welcoming the resilience of the banking sector, Directors called for continued vigilance to contain financial stability risks. They noted that COVID-19 debt relief measures for bank clients should remain time-bound and limited to those with good pre-crisis fundamentals.

Directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment. In addition, they encouraged strengthening governance and anticorruption frameworks, including compliance with AML/CFT measures. Directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.

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