• Seeks Urgent Macroeconomic, Structural Reforms
The International Monetary Fund (IMF), on Friday projected that Nigeria’s economy could grow by as much as 2.1% in 2018, which it said would be driven by sustenance of the Central Bank of Nigeria (CBN) intervention in the foreign exchange window of the inter-bank market, which has so far enhanced liquidity and confidence among investors and exporters, besides ensuring stability for the Naira.
The IMF by its staff team at the end of a visit between December 6 and 20, where they met with executives of key economic institutions, including the Ministry of Finance and Securities & Exchange Commission (SEC), among others, said growth would be driven also by higher oil production.
Risks to the outlook, according to the team led by Amine Mati, its Senior Resident Representative and Mission Chief, which conducted the 2018 Article IV consultation, “include lower oil prices, tighter external market conditions, heightened security issues, and delayed policy responses.”
The fund also said “macroeconomic and structural reforms remain urgent to contain vulnerability and support sustainable private sector led growth,” calling for new policies to drive economic growth, without which outlook in the near-term remains challenging, warning that although out of recession, Nigeria’s economy remains vulnerable.
The refund however welcomed the ongoing actions to improve the nation’s power sector and business environment as captured in the Economic Recovery and Growth Plan (ERGP) launched by President Buhari in February.
“Containing vulnerabilities and achieving growth rates that can make a significant dent in reducing poverty and unemployment requires a comprehensive set of policy measures.
It noted that Nigeria’s “high fiscal deficits—driven by weak revenue mobilization—generated large financing needs, which, when combined with tight monetary policy necessary to reduce inflationary pressures, increased pressure on bond yields and crowded out private sector credit.”
It equally drew attention to the Federal Government’s ratio of interest payments to revenue to unsustainable levels, leading to the low growth environment and exposure to the oil and gas sector, just as “the banking industry’s solvency ratios “have declined from almost 15 to 10.5% between December 2016 and October 2017, and non-performing loans have increased from 5% in June 2015 to 15% as of October 2017, although with provisioning coverage of about 82%.”
The report equally alluded to slow improvements in overall growth, even amidst the challenging recovery, with GDP expanded by “1.4% year-on-year in the third quarter of 2017—the second consecutive quarter of positive growth after five quarters of recession—driven by recovering oil production and agriculture.
“However, growth in the non-oil-non-agricultural sector (representing about 65% of the economy), contracted in the first three quarters of 2017 relative to the same period last year. Difficulties in accessing financing and high inflation continued to weigh on companies’ performance and consumer demand. Headline inflation declined to 15.9 percent by end-November, from 18½ percent at end-2016, but remains sticky despite tight liquidity conditions.
“The authorities have begun addressing macroeconomic imbalances and structural impediments through the implementation of policies underpinning the Economic Recovery and Growth Plan (ERGP). Supported by recovering oil prices, the new Investor and Exporter foreign exchange window has increased investor confidence and provided impetus to portfolio inflows, which have helped to increase external buffers to a four-year high, and contributed to reducing the parallel market premium. Important actions under the Power Sector Recovery Program increased power supply generation and ensured government agencies pay their electricity bills. Welcome steps were also taken to improve the business environment and to address longstanding corruption issues, including through the adoption of the National Anti-Corruption Strategy in August 2017.
“On the fiscal front, the mission welcomes the recent tax reforms aimed at improving tax administration, planned increases in excises, and latest steps taken to lower debt servicing costs and lengthen maturities. However, with oil prices expected to remain lower than in the past, upfront actions to mobilize non-oil revenues, including through reforming the VAT and removing exemptions, are needed while safeguarding priority expenditures, including scaling up social safety nets and infrastructure investment. “Fiscal consolidation should be accompanied by a monetary policy stance that remains tight to further reduce inflation and anchor inflation expectations. Moving toward a unified and market-based exchange rate as soon as possible while continuing to strengthen external buffers would be necessary to increase confidence and reduce potential risks from capital flow reversals.
“Such a policy package—along with structural reform implementation, including by building on recent successes to improve the business environment, closing infrastructure gaps, and implementing the power sector reform plan——would lay the foundation for a diversified private-sector led economy. Strengthening governance and transparency initiatives, and lowering gender inequality and fostering financial inclusion would also be important.”