IMF: Nigeria Must Implement Integrated Economic Package, Contain Fiscal Deficit

• Warns delay could run down buffers, heighten vulnerability

By Kunle Aderinokun

The International Monetary Fund (IMF) has advised the federal government to urgently introduce and implement ‘an appropriate and coherent’ set of policies to address the macroeconomic challenges plaguing the country. IMF, which made this recommendation as part of its appraisal in an 88-page Staff Report and Statement by the Executive Director on its recently-concluded 2016 Article IV Consultation with Nigerian government, released at the weekend, pointed out that the policy measures, when put in place, could reduce “macroeconomic imbalances while supporting sustained growth and job creation.”

The Bretton Woods institution, which its Executive Board on March 31, issued a statement at the conclusion of the 2016 Article IV Consultation with Nigeria, suggested that, “given the large permanent terms of trade shock and the significant adjustment needed, it will be important to initiate in the near-term an integrated package of policies centered around: “safeguarding fiscal sustainability while improving public service delivery; reducing external imbalances; strengthening resilience and further improving efficiency of the banking sector; and advancing structural reforms.” The fund warned that “delaying the needed adjustment would run down fiscal and external buffers, thereby heightening vulnerabilities.” The IMF explained that, “establishing medium-term fiscal policy goals that support fiscal sustainability is a priority, with a critical need to raise non-oil revenues.” Specifically, it pointed out that, measures should be implemented to: “contain the fiscal deficit across all tiers of government; boost the ratio of non-oil revenue to GDP, through a combination of improvements in revenue administration, broadening the tax base, and adjusting tax rates; rationalise expenditure, including through curtailing of waivers and exemptions, and implementing an independent price-setting mechanism to minimize/eliminate petroleum subsidies.”

The measures, it added, should be implemented to also “adopt safety nets for the most vulnerable; and foster transparency and enhanced accountability and an orderly adjustment of sub-national budgets, by encouraging reform of budget preparation and execution and strengthening public financial management.” Stating that, “achieving external adjustment requires a renewed focus on ensuring the competitiveness of the economy, including greater flexibility in the exchange rate, and a more forward-looking monetary policy strategy,” IMF pointed out that, “the combination of monetary easing, an inflexible exchange rate regime, and exchange restrictions has failed to spur economic activity, while fuelling expectations of currency devaluation, and casting doubt on the authorities’ commitment to their inflation objective.” “This has eroded external buffers and given rise to a situation where the external position is weaker than what would be consistent with Nigeria’s fundamentals and desirable policy settings. With the implementation of a credible package of policies to support the adjustment of the economy to the large, permanent terms-of-trade shock, the exchange rate should be allowed to adjust to the underlying fundamentals and exchange restrictions removed, facilitating the diversification of the economy. A forwardlooking monetary policy strategy should be elaborated to help improve its effectiveness,” it added.

The fund categorically stated that, “staff does not support the policies that have given rise to the exchange restrictions and MCP,” adding, “staff urges the authorities to articulate a speedy and monitorable exit strategy for their removal, thus allowing an improved functioning of the foreign exchange market.” This, according to the Bretton Woods institution, would “help narrow the exchange rate spread between the BDC/ parallel and the interbank markets.” It also said: “Advancing structural reforms is also key to a transition to a lower oil-dependent, competitive, investment-driven economy. The authorities have made progress in that regard, especially in anti-money laundering and financial sector supervision. The authorities’ strategy appears appropriate, focusing on: promoting targeted and core infrastructure (in power, integrated transport network, housing); reducing business environment costs through greater transparency and accountability, encouraging value-chain sectors linkages across sectors (agriculture and manufacturing); and promoting employment of youth and female populations. It therefore suggested that: “Emphasis should be sustained on improving the efficiency of public sector service delivery, accelerating and broadening public financial management reforms, improving effective capacity at sub-national levels of government—and on creating an enabling environment to attract investment.

In addition, adopting a sound Petroleum Industry Bill (PIB) along with strong measures to tackle theft and corruption in the oil sector, including by applying targeted AML/CFT measures, will help strengthen the regulatory framework for the oil sector and enhance its transparency and integrity.” “Nigeria’s economy has been hit hard by the sharp decline in oil prices. Reflecting the continued heavy dependence of the fiscal and external sector accounts on oil receipts, the oil price collapse resulted in a doubling of the general government deficit, a sharp reduction in public investment, and a transition to a deficit on the current account. With uncertainty about policy direction, foreign portfolio flows slowed significantly, and reserves fell. Growth is estimated to have slowed sharply—reflecting fuel shortages in the first half of the year and less availability of foreign exchange—weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty.

At the same time, inflation increased, ending above the CBN’s medium term target range,” the IMF acknowledged in its staff report. Nevertheless, the fund added: “Given the prospects for oil prices remaining lower-forlonger, continuing risk aversion by international investors, and downside risks in the global economy, the government needs to adroitly manage the immediate impact of the shocks, while implementing structural reforms for economic resilience. Growth is projected to soften in 2016, but could rebound gradually in 2017, assuming the implementation of the measures envisaged in the draft 2016 budget—especially priority infrastructure investments—continued progress with governance reforms in the oil sector, and with uptick in oil prices as currently projected. Key risks to the outlook include lower oil prices, shortfalls in non-oil revenues owing to uncertain yields from administrative measures, a further deterioration in finances of State and Local Governments, resurgence in security concerns, and policy paralysis.”