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IMF cuts Nigeria’s 2021 growth to 1.5%

Unless Nigeria carries out major policy adjustments, embracing broad market and exchange rate reforms, the country’s economy may post a sluggish growth of 1½% per cent in 2021, the International Monetary Fund (IMF) has said.

In a statement issued yesterday, at the end of its 2020 Article IV mission to Nigeria, the IMF, said the coronavirus (COVID-19) global pandemic continues to exact a heavy toll on the nation’s economy.

It added that while the fiscal and monetary authorities have implemented some appropriate measures to counter the impact of the pandemic, a lot more needs to be done to raise the medium-term growth path. The IMF had in its World Economic Outlook released in October projected that Nigeria’s Gross Domestic Product (GDP) would contract by -4.3 per cent in 2020, but was expected to grow by 1.7 per cent in 2021. However, in the statement issued after their recent visit to Nigeria, IMF staff stated: “Under current policies, the outlook is challenging. Real GDP is projected to contract by 3¼ per cent in 2020.

The recovery is projected to start in 2021, with subdued growth of 1½ percent and output recovering to its prepandemic level only in 2022. The statement reads: “Despite an expected easing of food prices, inflation is projected to remain in doubledigits and above the Central Bank of Nigeria’s (CBN) target range, absent monetary policy reforms.

“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 nearterm outlook arising from the uncertain course of the pandemic both globally and in Nigeria.” While noting that country’s real GDP is contracting, while its inflation rate is heading north and external vulnerabilities remain large, the IMF staff added: “Exchange rate and monetary policy reforms, increased revenue mobilization and structural reforms will help to unlock Nigeria’s growth potential.” According to the Fund, low oil prices and sharp capital outflows have significantly increased Balance of Payments (BOP) pressures in Nigeria and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment.

This is even as supply shortages have pushed up headline inflation to a 30-month high. While commending the government for implementing measures such as the removal of fuel and electricity subsidies, and prioritising spending to make room for a support package, which included higher subsidies on CBN credit intervention facilities, coupled with regulatory forbearance measures to ease debt service in affected sectors, the IMF, however, said more broad market reforms are needed.

“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.

“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. “Significant revenue mobilization— including through tax policy and administration improvements—is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities. “With high poverty rates and only a gradual recovery in prospect, revenue mobilization will need to rely initially on progressive and efficiencyenhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root,” it stated.

The Fund also said that while it welcomes this year’s reduced dependence on CBN financing of the budget, it recommended no such financing should be received from the apex bank in the medium term.

Similarly, the IMF noted that although the government had introduced measures to facilitate tracking and reporting of budget emergency funding, such as the posting of expenditures on the Ministry of Finance’s Transparency Portal: “Further steps are needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership.” On the health of the nation’s lenders, the IMF said: “While the banking sector has been resilient thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing nonperforming loans.

“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good precrisis fundamentals, in line with existing regulations. “The minimum Loan to Deposit Ratio (LDR) should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients.”

The Fund said it supports the CBN’s current accommodative monetary stance, noting, however, that if BOP and inflationary pressures intensify, there might be a need to mop up liquidity or raise rates. According to the IMF: “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.

“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.”

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