Nigeria’s Economic Revival: IMF Recommendations on Policy Adjustments

By Godwin Anyebe

The International Monetary Fund (IMF) is one international economic agency that many analysts agree has a lot of influence on Nigeria’s policies. Few weeks ago, the agency released her annual report that deploys its specific instruments to project the wellbeing of Nigeria’s economy.

Each year, the IMF (Nigeria) Staff Country Reports, also known as Article IV Consultation, gives kudos to the government in areas they feel are commendable, while offering options to areas they believe can have damaging effects on the economy.

With the high integrity of the organization, as well as its special role as International Lender of Last Resort (ILLR), views from IMF are taken very seriously.

IMF is also known to influence government’s economic decisions by issuing conditions for approving some requested loans.

The unpopular austerity measures introduced in the 1980s stand out as one of those strong influences the IMF has on policy choices in various countries.

Last year, Nigeria’s economy was hit hard by the COVID-19 pandemic. Following a sharp drop in oil prices and capital outflows, real GDP is estimated to have contracted by 3.2 percent in 2020 amidst the pandemic-related lockdown.

Headline inflation rose to 14.9 percent in November 2020, a 33-month high, reflecting core and food inflation increase emanating from supply shortages due to the lockdown effected to curb infections alongside, the land-border closure and continued import restrictions. The unemployment rate reached 27 percent in the second quarter of 2020, with youth unemployment at 41 percent.

The Nigerian authorities acted swiftly to adopt a pandemic-related support package equivalent to 0.3 percent of the GDP in the 2020 revised federal budget, despite limited fiscal space. External vulnerabilities due to lower oil prices and weak global demand had increased, with the current account remaining in deficit in the first half of 2021. In April 2020, Nigeria received IMF emergency financial assistance of $3.5 billion under the Rapid Financing Instrument to help cushion the impact of the pandemic.

Socio-economic conditions had deteriorated. With rising food inflation, increased youth unemployment, and mass protests in October 2020, surveys show worsening food insecurity with a significant impact on the vulnerable.

The IMF report commended the government for the measures taken to address the health and economic impacts of the COVID-19 pandemic.

Looking ahead, IMF emphasized the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth.

They urged the Federal Government to double up on its resource mobilisation efforts by raising VAT to 10 per cent by 2022, and further to 15 per cent by 2025.

The IMF pointed out that policy adjustment and reforms would be urgently needed to navigate the current crisis and change the long-running lackluster course.

The agency advised the government to rely on progressive and efficiency-enhancing measures with higher tax rates, while awaiting a more sustained economic recovery.

The 2020 Article IV Consultation further stressed the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability.

Among other things, it called for a more flexible exchange rate adding that the Naira is currently overvalued by 18.5 per cent.

The IMF further prevailed on the CBN to introduce more clarity in foreign exchange as well as work towards a unification of multiple exchange rates.

The financial institution welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector. However, they stressed the need for significant revenue mobilization to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures, with higher tax rates awaiting a more sustained economic recovery. They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.

The body also noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.

The IMF observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase. In the medium term, the monetary policy operational framework should be reformed, and Central Bank financing of budget deficit phased out, in order to reduce inflation.

While welcoming the resilience of the banking sector, IMF called for continued vigilance to contain financial stability risks. They noted that COVID-19 relief measures for bank clients should remain time-bound and limited to those with good pre-crisis fundamentals.

On the economic outlook for Nigeria in 2021 and beyond IMF stated that, Nigeria’s recovery is expected to be weak and gradual under current policies. Real GDP growth in 2021 is expected to turn positive at 1.5 percent. Real GDP is expected to recover to its pre-pandemic level only in 2022. The near-term outlook is subject to downside risks from pandemic-related developments with Nigeria experiencing a second wave.

Over the medium term, a subdued global recovery and decarbonization trends are expected to keep oil prices low, and Organization of the Petroleum Exporting Countries quotas in place. This would restrict oil-related activities, fiscal revenues, and export proceeds. Non-oil growth is also expected to remain sluggish, reflecting inward-looking policies and regulatory uncertainties.

IMF also stressed that an appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sector-led recovery. Policy clarity is also important to attract larger capital inflows, including foreign direct investments, which have dropped significantly in recent years and successful diversification.

Once economic recovery takes root, Nigeria will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025—the average in countries belonging to the Economic Community of West African States—to create effective fiscal space.

IMF also stated that economic diversification is important for Nigeria because Nigeria’s export structure has not fundamentally changed over the decades, with hydrocarbon products still accounting for 90 percent of the country’s exports today as they did in the 1970s. Successful economic diversification requires trade openness and competitive discipline. The experience of Malaysia, Indonesia, and to some extent India has shown that a shift toward export-oriented industrialization can boost GDP. The limited gains from inward-oriented policies in terms of creating jobs and improving living standards suggest that Nigeria needs to change course.

To accommodate a growing number of young people entering the labor market, Nigeria will need to create at least 5 million new jobs each year over the next decade. Based on experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.

Read Also: 2021: How to Move the Economy Beyond Current COVID Challenges

On transparency measures put in place to ensure emergency spending is going toward its intended use, they pointed out that the authorities have adopted measures to facilitate tracking and reporting of emergency spending. The government has created new budget lines with monthly expenditure information on emergency funding, which are posted on the Ministry of Finance’s Transparency Portal, although users have found it difficult to access the data.

The Bureau of Public Procurement has issued guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting Portal has been publishing related procurement contracts, although some contract details on beneficiary ownership are yet to be completed.

Going forward, Nigeria needs to further embrace transparency reforms by expanding the monitoring and reporting of all public spending, as well as ensuring easy public access to spending data.

Also speaking on this development, Wilson Erumome, Senior Economist with the Nigerian Economic Summit Group said:

“If we want an investment that will drive high and sustainable growth, to also reduce unemployment and poverty in the country, Nigeria must pay attention to sectors that contribute to growth. There are so many uncertainties in the oil sector. Last year, we have a case where there was a cap on global oil industry.

“Going into the future, there are lots of innovations. Cars are running on batteries, among others. Therefore, for how long would Nigeria continue to rely on one single commodity to shape her economic outcome?

“We need to move from that area and look at other sectors of the economy. Thankfully Nigeria is a blessed economy with lots of potentials, so many untapped industry. We need to attract investment into these critical areas so that Nigeria will feel the impact of economic growth.”