IMF Article IV: Nigerian Economy Facing Substantial Challenges

• Current account moves from 0.2% surplus to a deficit projected at 2.4% of GDP      
• Welcomes CBN’s monetary policy tightening

By Obinna Chima

The International Monetary Fund (IMF) has pointed out that the Nigerian economy is currently facing substantial challenges, saying lower oil prices have significantly affected the country’s fiscal and external accounts.

The fund stated this in the conclusion of its 2016 Article IV Consultation with Nigeria, by its Executive Board. The document dated March 31, was posted on the multilateral agency’s website yesterday.

The IMF, however welcomed recent monetary policy tightening by the Central Bank of Nigeria (CBN), and recommended that the central bank targets price stability to maintain inflation within the target range.

The Monetary Policy Committee (MPC) of the CBN in its meeting last week, raised the Monetary Policy Rate (MPR) otherwise known as the interest rate, to 12 per cent from 11 per cent. It had also increased bank’s Cash Reserve Ratio (CRR) to 22.5 per cent from 20 per cent, in a move aimed at tightening liquidity, which the central bank blamed for the current pressure in the foreign exchange market with a strong pass-through to consumer prices.

Continuing, the IMF noted that while the non-oil sector accounts for 90 per cent of the country’s Gross Domestic Product (GDP), the oil sector plays a central role in the economy.

Furthermore, it pointed out that lower oil prices have significantly affected Nigeria’s fiscal and external accounts, decimating government revenues to just 7.8 per cent of GDP and resulting in the doubling of the general government deficit to about 3.7 per cent of GDP in 2015.

Nigeria’s exports dropped about 40 per cent in 2015, pushing the current account from a surplus of 0.2 per cent of GDP to a deficit projected at 2.4 per cent of GDP.

With foreign portfolio inflows slowing significantly, reserves fell to $28.3 billion at end-2015.

It added: “Exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves have impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies. Coupled with fuel shortages in the first half of the year and lower investor confidence, growth slowed sharply from 6.3 per cent in 2014 to an estimated 2.7 per cent in 2015, weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. Inflation increased to 9.6 percent in January (up from 7.9 percent in December, 2014), above the CBN’s medium-term target range of 6–9 percent.”

Inflation, however climbed further to 11.4 per cent in February.

The multilateral agency noted that the recovery in economic activity was likely to be modest over the medium term, but with significant downside risks.

It stated that Nigeria’s growth in 2016 was expected to decline further to 2.3 per cent, with non-oil sector growth projected to slow from 3.6 per cent in 2015 to 3.1 per cent in 2016 before recovering to 3.5 percent in 2017, based on the results of policies under implementation–particularly in the oil sector–as well as an improvement in the terms of trade.

“The general government deficit is projected to widen somewhat in 2016 before improving in 2017, while the external current account deficit is likely to worsen further. Key risks to the outlook include lower oil prices, shortfalls in non-oil revenues, a further deterioration in finances of state and local Governments, deepening disruptions in private sector activity due to constraints on access to foreign exchange, and resurgence in security concerns,” it added.

IMF’s Executive Directors welcomed the authorities’ policy agenda of enhancing transparency, strengthening governance, improving security, and creating jobs. They noted that the Nigerian economy has been hit hard by the decline in oil prices, which has slowed growth sharply and led to macroeconomic imbalances.

Given the uncertain global outlook and the likelihood of oil prices remaining low, the directors stressed the need for significant macroeconomic adjustment. They highlighted the importance of implementing urgently a coherent package of policies, in consultation with Fund staff and development partners, to safeguard fiscal sustainability and reduce external imbalances, and advancing structural reforms to support inclusive growth.

Directors emphasised the critical need to raise non-oil revenues to ensure fiscal sustainability while maintaining infrastructure and social spending. They called for a gradual increase in the VAT rate, further improvements in revenue administration, and a broadening of the tax base.

In addition, the IMF supported an orderly adjustment of budgets at the sub-national level through reform in budget preparation and execution. They also stressed the importance of strengthened public financial management and service delivery. They called for the implementation of an independent price-setting mechanism to address petroleum subsidies, while strengthening the social safety net.

“Directors noted that the policy approach of expansionary monetary policy, together with a relatively fixed exchange rate and exchange restrictions had adversely impacted economic activity. It also raised concerns about the authorities’ commitment to their inflation objective. They underscored the need for credible adjustment to the large terms-of-trade shock, including through greater exchange rate flexibility and speedy unwinding of exchange restrictions to facilitate an exchange rate consistent with fundamentals.

“In this context, they welcomed the recent monetary policy tightening and recommended that the central bank target price stability to maintain inflation within the target range. Directors observed that further strengthening of the regulatory and supervisory frameworks would help improve resilience even as financial sector soundness indicators remain favorable. With declining asset quality a concern as growth slows, intensified monitoring of

“Directors stressed the need for structural reforms to enhance competitiveness and support investment. They encouraged the authorities to continue core infrastructure investment, further reduce the cost of doing business through greater transparency and accountability, and promote employment of youth and women,” the report stated.

Meanwhile, the total assets of Nigeria’s sovereign wealth fund (SWF) grew to N213.67 billion ($1.07 billion) in 2015, up by 20 per cent compared with the previous year, its managing director said on Friday.

Nigeria, Africa’s biggest oil producer, established the Sovereign Investment Authority (SIA) in 2011 with $1 billion of seed capital in an effort to manage oil export revenues.

President Muhammadu Buhari took office last May and has prioritised cracking down on corruption and mismanagement, particularly in the oil sector, which has deepened an economic crisis exacerbated by falling crude prices.

“Total assets recorded a growth of 20 percent to N213.66 billion at year end,” Reuters quoted the fund’s managing director, Uche Orji, to have said in a report issued on Friday.

The total assets were up from N177.84 billion  the previous year. And investment income grew by 47 percent to close at N5.8 billion. The report said 2015 was a “difficult year” but the SIA had “managed to protect its capital in a harsh and volatile market environment”.

The fund is divided into three parts, a ‘Stabilisation Fund’ to act as a buffer against economic turbulence, an Infrastructure Fund and a Future Generations fund.

In November officials announced that $250 million from liquid natural gas export proceeds would be injected into the wealth fund. Orji said this additional capital was received in February 2016 and will be invested within the new fiscal year. He said it would be invested using the existing deployment ratio of 40 percent in Infrastructure Fund, 40 percent in Future Generations Fund and 20 percent in Stabilisation Fund.