IMF Asks FG to Implement Urgent ‘Coherent Policies’ to Reduce Vulnerabilities

* Predicts 2% growth in 2018

Ndubuisi Francis in Abuja

An International Monetary Fund (IMF) Mission to Nigeria has asked the federal government to take urgent action “on a coherent set of policies to reduce vulnerabilities and increase growth over the medium term remains”.

The IMF noted that such action should include specific and sustainable measures to increase the currently low tax revenue — including through avoiding new tax exemptions — and ensuring that budget targets are adhered to even in an election year.

The IMF team led by the Senior Resident Representative and Mission Chief for Nigeria, Amine Mati, visited Nigeria between June 27 and July 9, 2018 to discuss recent economic and financial developments, update macroeconomic projections and review reform implementation with top government officials.

At the end of the visit, the mission expressed its observations in a statement.

Higher oil prices and portfolio flows, it noted, have helped strengthen fiscal and external buffers, adding that the outlook for 2018 remains challenging, as private sector lending remains low while foreign exchange inflows are mostly short-term.

The IMF Mission observed that “action on a coherent set of policies to reduce vulnerabilities and increase growth over the medium term remains urgent”.

It added that although higher oil prices and short-term portfolio inflows had provided relief from external and fiscal pressures but the recovery remains challenging.

“International reserves remained stable at about $47 billion, supported by some convergence in existing foreign exchange windows, and despite some reversal of foreign inflows since April. Inflation declined to its lowest level in more than two years. Real GDP expanded by 2 per cent in the first quarter of 2018 compared to the first quarter of last year.

“However, activity in the non-oil, non-agricultural sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.

“Corporate tax collection efforts improved but revenue shortfalls and the late adoption of the 2018 budget impede its implementation. Revenue from higher oil prices is limited by net losses from retail fuel sales while non-oil revenue remains below expectations, with yields from tax administration measures—including the Voluntary Asset Income Declaration Scheme (VAID) and increased tax audits—yet to fully materialise.

“Current spending remains in line with expectations. Carryover from 2017 to 2018 helped increase capital spending in the first four months of 2018, despite delayed approval of the 2018 budget.

“Lower yields have kept interest payments within the budgeted envelope, but the federal government’s interest-to-revenue ratio is expected to absorb more than half of revenues this year.

“Reforms to improve the business environment are progressing, including through identification of priority investment projects and the adoption of the Company and Allied Matters Act (CAMA)—a legislative landmark for private sector development.

“The implementation of the Power Sector Recovery Plan is advancing through a mini-grid policy, and regulations on eligible customers and meter asset providers.

“Under current policies, the outlook remains challenging. Growth would pick up to about 2 percent in 2018, weighed down by lower than expected oil production and relatively weak agriculture growth.

“The fiscal deficit would narrow slightly, with higher oil revenues offsetting increased spending, including those planned in a supplementary budget. Inflation would pick up in the second half of 2018 as base effects dissipate and higher spending and supply constraints in agriculture put pressure on prices.

“Increased oil exports would keep the current account in surplus, helping stabilise gross international reserves even if the current pace of foreign portfolio outflows continues.

“A coherent set of policies to reduce vulnerabilities and increase growth remains urgent. This includes specific and sustainable measures to increase the currently low tax revenue—including through avoiding new tax exemptions — and ensuring budget targets are adhered to even in an election year. This process should be supported by keeping monetary policy tight through appropriate monetary policy tools that will help contain inflationary pressures and support a move towards a uniform market-determined exchange rate. Moving ahead with structural reforms is needed to invigorate inclusive growth, particularly in the power sector where faster progress would be needed to ensure financing shortfalls in the sector are met in a sustainable manner.

“The team held productive discussions with senior government and central bank officials. It also met with representatives of the banking system, the private sector, civil society, and international development partners.

“The team wishes to thank the authorities and all those with whom they met for the productive discussions, excellent cooperation, and warm hospitality,” the statement concluded.