Despite recovering from the devastation by the global pandemic, the International Monetary Funds (IMF) says a review of the fiscal outlook reveals the Nigerian economy is still facing significant risks.
The COVID-19 crisis, which negatively impacted most world economies, pushed the Nigerian economy into its second recession in 2020 after three successive quarters of decline in the gross domestic performance of its economy.
In the second quarter of 2020, the aggregate value of goods and services, which constitute the gross domestic products of the Nigerian economy declined to minus 6.1 percent.
Although it improves substantially due to timely intervention by the government, the performance merely improved within the negative territory to minus 3.62 percent, before a marginal recovery into the positive zone by 0.51 percent in the first quarter of 2021.
The recovery, which has remained on the slow trajectory to the current GDP rate of 4.03 percent, according to the National Bureau of Statistics (NBS), followed a series of government policy support, improving crude oil prices at the international market and international financial assistance.
But, the IMF said in its latest report of its findings by its staff at the end of their 2021 Article IV Staff Mission that despite the attempts to contain the COVID-19 infection rates and fatalities, the recent emergence of fuel subsidies and slow progress on revenue mobilization presents a fiscal outlook that faces significant risks.
The report said continued reliance on administrative measures by the Central Bank of Nigeria to address persistent foreign exchange shortages was negatively impacting confidence in the economy, adding that unless urgent fiscal and exchange rate reforms were undertaken, the medium-term outlook faces sub-par growth.
Details of the report showed that the overall output of the economy rose by 5.4 percent (year-on-year) in the second quarter, mainly reflecting base effects from transport and trade sectors and continued strong growth in the IT sector.
However, it noted that manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges.
While headline inflation rose sharply during the pandemic reaching a peak of 18.2 percent year-on-year in March 2021, the report said this has since declined to the latest figure of 15.99 percent last October as a result of the new harvest season and opening of the land borders.
However, it said unemployment rates are yet to come down despite COVID-19 monthly surveys showing employment levels returning to their pre-pandemic level.
Following the country’s third wave of the pandemic in August 2021, the IMF said proactive actions by the federal government, through a robust infection tracking system and a national strategy for vaccine procurement and rollout, helped keep infection rates and fatalities lower than in many other countries sub-Saharan Africa.
With real GDP projected to grow by 2.6 percent in 2021, the report said this was marginally above the population growth rate, which suggests a stagnant per capita income in the medium term.
Also, despite an easing of food prices, the report said inflation was projected to remain in double-digits, due to the absence of monetary policy reforms in that area.
“There are significant downside risks to the near-term outlook arising from the uncertain course of the pandemic and the domestic security situation. In the medium term, there are upside risks from faster-than-expected reaching of the Dangote refinery’s production capacity, along with effective implementation of the 2021 Petroleum Industry Act, in terms of higher manufacturing production and investment in the oil sector,” the report said.
The report called for major reforms in fiscal, exchange rate, trade and governance to alter the long-running lackluster growth path.
On the immediate front, the IMF said fiscal and external imbalances required the removal of regressive fuel and electricity subsidies, tax administration reforms, and installing a fully unified market-clearing exchange rate by the CBN.
Over the medium term, it recommended the moving away from inward-looking policies through trade, monetary and foreign exchange reforms, enhancing public trust through governance and fiscal transparency reforms, and improving welfare through job creation and agricultural reforms are priorities.
Despite rising crude oil prices, the report said general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting highlighting rising expenses on fuel subsidies and higher security spending.
Without bold revenue mobilization efforts by the Federal Inland Revenue Service and other revenue generating agencies over the medium term, the report said fiscal deficits are projected to stay elevated above the pre-pandemic levels, with public debt increasing to 43 percent in 2026.
The regressive fuel and electricity subsidies, the Fund said, must be fully removed, and replaced with a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act.
In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed, while a well-targeted social assistance would be needed to cushion any negative impacts on the poor, in view of the elevated inflation level.
Underlining the significance of additional domestic revenue mobilization to put the public debt and debt-servicing capacity on a sustainable path, the IMF said near-term priorities should include the implementation of the e-customs reforms, including efficient procedures and controls, developing a VAT Compliance Improvement Programme, improving compliance across large, medium, and micro/small taxpayers and rationalizing tax incentives and customs duty waivers.
“As the recovery gains strength and compliance improves, Nigeria will have to adopt tax rates comparable to its peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan,” the IMF said.
On the PIA, the IMF stressed the importance of its timely implementation, saying it would help to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment.
On the exchange rate policy the Fund called for a reduction in the administrative measures that would allow for a market-clearing unified exchange rate, saying the discontinuation of the official exchange rate was a step in the right direction.
The IMF however warned that to preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, with macroeconomic policies to contain inflation and structural policies to facilitate new investment.
Despite the recent Special Drawing Rights (SDR) allocation by the IMF and a successful Eurobond issuance, the report said gross reserves remained significantly below the IMF’s recommended adequacy levels.
With Nigeria’s external position assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies.
On the direction of monetary policy, the IMF advised against periodic exchange rate adjustments if monetary policy were to become excessively loose, saying the discretionary use of the cash reserve requirement (CRR) would continue to pose regulatory and operational uncertainties for the banking system.
To forestall stability risks in the system, the IMF said the restructuring of expiring pandemic-related loans planned in March 2022 must be in line with the economic recovery;
Steps must be taken to curb chronically under-capitalized banks and application of the new provisions under the BOFIA to strengthen corporate governance, while undertaking additional regulations to safeguard sound practices and consumer protection in the growing segment of digital payments and lending.
Other recommendations include the introduction of additional macro-prudential instruments to better manage systemic and cyclical risks in the context of Basel III implementation; an assessment by the CBN of the impact of the recent launch of e-Naira on monetary policy transmission and financial stability.