As the recession occasioned by the oil price plunge and the ravaging covid-19 pandemic takes its toll on Nigerians, the International Monetary Funds (IMF) on Friday projected that the economy will start to recover in 2021 and return to the pre-pandemic era by 2022 if the current policies of the federal government are sustained.
The IMF projection is coming a day after the World Bank raised an alarm that the economic growth of the past decades could be reversed if the government slipped from some reforms such as the withdraw of subsidies from petroleum and electricity.
“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 per cent and output recovering to its pre-pandemic level only in 2022″, the Fund said on completion of its 2020 Article IV Mission to Nigeria held between October 30 and November 17 by the team led by Jesmin Rahman.
The COVID-19 global pandemic exacted a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks. Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high.
The IMF in its projection, echoed the Nigerian Minister of Finance, Budget and Planning, Zainab Ahmed who had earlier noted that the country will begin to exit recession by the first quarter of 2021. Nigeria recorded a -6.1 decline in Gross Domestic Products (GDP) in the second quarter of 2020, pushing the country back into recession. the negative growth brought the cumulative half year 2020 GDP growth to 2.1 per cent
The fund noted that despite an expected easing of food prices, inflation will remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range, and absent monetary policy reforms.
Prices of food items were astronomical in October, pushing inflation into 14.23 per cent and one of the highest on the African continent.
There has also been a significant decline in revenue collections which the Fund stated were already among the lowest in the world, and projecting that fiscal deficits are projected to remain elevated in the medium term and which is noted to be significant downside risks to the near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria.
Rahman and his team noted that the Nigerian authorities undertook commendable and timely measures including a revised budget in July which removed fuel subsidies and prioritized spending to make room for a support package, which included higher subsidies on CBN credit intervention facilities and regulatory forbearance measures to ease debt service in affected sectors. The authorities also remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households.
He, however, said more needs to be done in the area of major policy adjustments that will embrace broad market and exchange rate reforms to address recurrent BOP pressures and raise the medium-term growth path.
“A durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instil 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 efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root.
The Fund welcomed the reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
The mission also welcomed fiscal transparency measures introduced to facilitate tracking and reporting of budget emergency funding and the creation of new budget lines with information on monthly expenditures using emergency funding posted on the Ministry of Finance’s Transparency Portal.
It also commended the Bureau of Public Procurement which issued guidelines on COVID-19 emergency fund use, while the Nigeria Open Contracting Portal has been publishing-related procurement contracts. The Fund, however, requires further steps to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership.
The mission also commended the recent submission of the Petroleum Industry Bill (PIB) to the Parliament and the Fiscal Framework chapter of the bill which appropriately rebalances that government take in onshore/offshore production, to provide a fair share to the government while remaining attractive to investors.
The mission agreed with the CBN that the accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access. It, however, noted that if BOP and inflationary pressures intensify, there might be a need to withdraw liquidity or raise rates.
Rahman’s report argued that 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 while advocating that the operational monetary policy framework, along with policy strategy and communication, should be strengthened to establish the primacy of price stability In the medium term.
The Fund commended the banking sector for its resilience owing to the ample pre-crisis buffers, it, however, recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.
In this connection, it advocated a time-bound debt relief measures with good pre-crisis fundamentals for clients in line with existing regulations.
“The minimum loan to deposit ratio should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients’, Rahman noted in the report.
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.
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