Impressed by the swift intervention by the Federal Government to push back the devastation of coronavirus pandemic on its economy, the International Monetary Fund (IMF) says more fundamental reforms are needed to sustain macroeconomic stability, lift growth and create employment.
The Fund said this on Monday in a report released in Washington D. C.at the conclusion of its Article IV consultation by its Executive Board on the country on January 27, 2021.’
Under Article IV of the IMF’s Articles of Agreement, bilateral discussions are held every year with members by a staff team who visits the country to collect economic and financial information, and discusses with officials the country’s economic progress.
Despite being hit hard by the COVID-19 pandemic, the IMF said the quick adoption a pandemic-related support package by the government helped maintain 0.3 percent of GDP in the 2020 revised federal budget despite limited fiscal space.
Noting the impact of the sharp drop in crude oil prices and huge capital outflows, the Board said real gross domestic product (GDP) contracted by about 3.2 percent in 2020 as a result of the pandemic-related lockdown.
Also, headline inflation during the period, it said, rose to 14.9 percent in November 2020, a 33-month high, reflecting core and food inflation increases emanating from supply shortages due to the lockdown imposed to curb the spread of infections, amid land-border closure with neigbhouring countries and continued import restrictions.
With unemployment rate reaching 27 percent in the second quarter of 2020, and youth unemployment at 41 percent, the IMF said external vulnerabilities due to lower oil prices and weak global demand increased, with the current account remaining in deficit in the first half of 2021.
Despite receiving the $3.5 billion emergency financial assistance in April 2020 under the Rapid Financing Instrument to help cushion the impact of the pandemic, the IMF said Nigeria’s socio-economic conditions have continued to deteriorated.
The deterioration, the Fund said, manifests in rising food inflation, elevated youth unemployment, mass #ENDSARS protests in October 2020, apart from surveys showing worsening food insecurity with a significant impact on the vulnerable segment of society.
“Risks are tilted to the downside, include the resurgence of the pandemic, deteriorating security situation and unfavorable external environment. Capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities,” the Fund said.
The IMF was optimistic that the gradual recovery of crude oil prices at the international crude oil market and the imminent completion of the Dangote oil refinery could catalyze more domestic crude oil production and boost overall growth of the economy.
“Directors 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 IMF said.
The IMF commended the Nigerian authorities for the measures taken to address the health and economic impacts of the COVID-19 pandemic which have worsened pre-existing weaknesses.
It however 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.
On policies by the fiscal authorities to boost economic growth, the IMF said the Central Bank of Nigeria (CBN) said multiple exchange rates, limited flexibility, and foreign exchange shortages were 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.
Directors observed that the accommodative monetary policy stance remained the most 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 IMF said the monetary policy operational framework should be reformed and CBN financing of budget deficit phased out in order to reduce inflation.
While welcoming the resilience of the banking sector, the IMF called for continued vigilance to contain financial stability risks.
They noted that COVID-19 debt relief measures for bank customers should remain time-bound and limited to those with good pre-crisis fundamentals.
Directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.
In addition, they encouraged strengthening governance and anticorruption frameworks, including compliance with anti-money laundering (AML)/combating fiancé terrorism (CFT) measures.
The IMF welcomed the ratification of the African Continental Free Trade Area by Nigeria and other member countries of the AU and underscored that implementing trade-enabling reforms remained critical to rejuvenate growth.