IMF: Nigeria’s Fiscal Deficit May Widen to 6.2% of GDP in 2022

*Wants govt to remove fuel subsidies, tackle oil thieves, reform FX 

*Commends CBN on MPR measures to rein inflation

Nume Ekeghe

The International Monetary Fund (IMF) has predicted that Nigeria’s fiscal deficit may widen to 6.2 per cent of its Gross Domestic Product (GDP) in 2022, as a result of continuous fuel subsidy.

The fund noted this in its Staff Concluding Statement of the 2022 Article IV Mission on Nigeria released yesterday.
The institution noted that with the increase in Nigeria’s fiscal deficits and high debt servicing costs, public debts may increase over the medium term.
On the flip side, the IMF commended the Central Bank of Nigeria (CBN) for tightening the Monetary Policy Rate (MPR) and urged it to maintain its stance of further tightening in response to rising inflation.

It also urged the apex bank to allow deposit money banks determine FX buy-sell rates, in collaboration with CBN, which earlier this year, at the launch of RT200 policy, mentioned its plan to stop selling forex to banks, allowing them to source forex for their customers.
It called for bolder fiscal reforms to create policy space: “Public finance is under stress with elevated fiscal deficits, high debt servicing costs, and public debt is projected to increase over the medium term. Despite higher non-oil revenues relative to 2021, the general government (GG) fiscal deficit is projected to widen to 6.2 per cent of GDP in 2022, mainly due to fuel subsidy costs.

“Without bolder revenue mobilisation efforts, costly fuel subsidies and rising debt servicing costs will keep overall fiscal deficits above 6 per cent of GDP in the medium term raising public debt to about 43 per cent of GDP by 2027.”
“While still deemed sustainable, such a level of debt is projected to take up nearly half of GG revenues in interest payments, making the fiscal position highly vulnerable to real interest rate shocks. It also leaves little fiscal room for vital social spending on education and health, where Nigeria fares poorly compared to peer countries in sub-Saharan Africa (SSA).”

The IMF added that urgent revenue mobilisation and fuel subsidy reforms “are critical to creating a much-needed fiscal space.”
As a near-term priority, the mission highlighted the urgent need to remove fuel subsidies fully and permanently, “which disproportionately benefit the well-off, by mid-2023 as planned.”

Others included an implementation of tax administration reforms, an increase in well-targeted social assistance to mitigate food insecurity and cushion the impact of high inflation and fuel subsidy removal on the poor.
On the monetary stance, it commended CBN’s MPR tightening and also urged it to limit its overdraft to the federal government, as well as its holistic overview on foreign exchange management.

It states: “The mission welcomed measures taken by the Central Bank of Nigeria (CBN) to tighten liquidity and curb inflationary pressures through increasing the Monetary Policy Rate (MPR) by a cumulative 400 basis points and raising the cash reserve ratio (CRR). However, overall conditions remain accommodative. The MPR is below inflation, and financing provided to the budget and the CBN’s directed lending schemes continue to drive strong monetary expansion.
“Decisive and effective monetary policy tightening is a priority to prevent risks of de-anchoring inflation expectations.

“Given the multiplicity of monetary policy tools, market segmentation, and weak interest rate transmission, the mission recommended the following measures to effectively tighten the monetary policy stance: fully sterilise the impact of CBN’s financing of fiscal deficits on money supply; stand ready to further increase the MPR to send a tightening signal; and continue phasing out CBN’s credit intervention programmes, which expanded rapidly during the pandemic to support the economy.

“The mission welcomed progress in the securitisation of the CBN’s existing stock of overdrafts and recommended speedy finalisation. Going forward, it would be important to limit reliance on CBN overdrafts for fiscal financing to the statutory limit of five per cent of previous year’s revenues by pursuing fiscal consolidation, better budgetary planning and resorting to supplementary budgets in case of financing shortfalls.

“The mission also reiterated its previous recommendations to modernise the 2007 CBN ACT to establish price stability as its primary objective. It also recommended enhancing transparency through timely publishing of audited financial statements.”
It added that despite improvement in the current account, the external sector continues to face pressures.
“Rising oil prices drove export revenues in 2022, generating a merchandise trade surplus. The current account is also improving despite higher profit repatriation by foreign companies.

“However, large net private outflows by domestic banks and nonbanks in the form of offshore deposits surpassed net inflows by foreign investors putting downward pressure on gross international reserves. Against this backdrop, Nigeria’s external position is preliminarily assessed to be moderately weaker than implied by economic fundamentals.”

On FX management, it states: “A unified and market-clearing exchange rate remains critical to enhancing confidence. Continued FX shortages, a stabilised exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations. These factors hinder much-needed capital inflows, encourage outflows and constrain private sector investment.

“The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN, accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies. In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.”

The fund also called for trade-enabling reforms. It states: “The reopening of land borders earlier this year is a welcome move to facilitate trade. To speed-up compliance with rules on non-tariff barriers agreed under the African Continental Free Trade Agreement, the mission recommended making operational the already deployed scanners, which would limit tedious physical ports inspection processes and contain customs delays.”