In spite of the aggregate value of goods and services witnessing gradual recovery from the impact of corona virus pandemic, the International Monetary Fund (IMF) said on Thursday the Nigerian economy still facing serious unemployment and spiraling inflationary pressures.
At the End-of-Mission Virtual Staff Visit with Nigeria, the IMF acknowledged the impact of the interventions by the Nigeria monetary authorities in the recent foreign exchange rate crisis, describing the measures as encouraging.
The IMF team led by Jesmin Rahman said at the end of series of virtual meetings with the Nigerian authorities between June 1 and 8, 2021 said the interventions required further reforms to achieve the Central Bank of Nigeria target of a fully unified and market-clearing exchange rate regime in the country.
In its report issued after holding discussions with key government officials on recent economic, financial developments and outlook, Rahman noted the gradual recovery of the Nigerian economy from the negative effects of the COVID-19 global pandemic.
Following sharp GDP contraction of 6.6 percent in the second and a gradual recovery in the third quarters of 2020 to 3.2 percent, the IMF said Nigeria’s GDP growth turned positive in the fourth quarter of 2020, reaching 0.5 percent (year on year) in the first quarter of 2021.
The team attributed the growth to the significant contributions from the agriculture and services sectors, although the employment situation worsened dramatically, with the National Bureau of Statistics (NBS) reporting a 32.5 percent decline, while inflation spiraled to 18.2 percent in March, before dropping marginally to 18.1 percent in April.
“Inflation slightly decelerated in May, but remained elevated at 17.9 percent, owing to high food price inflation,” the report said, adding: “With the recovery in (crude) oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.
“The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021. Inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year, to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels.
“Tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, and to address security challenges, the fiscal deficit of the consolidated government budget is expected to remain elevated at 5.5 percent of GDP. Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria,” the report.
However, the IMF mission commended the measures adopted by the government to contain the spread of COVID-19 in Nigeria, including the ongoing vaccination programme under the COVAX initiative, it said it strongly supported efforts to acquire additional doses from countries with surplus stocks to curb the pandemic.
The mission expressed concern with the resurgence of fuel subsidies, saying the introduction of market-based fuel pricing mechanism and the need to deploy well targeted social support to cushion any impact on the poor was important.
Some of its recommendations included stepping up efforts to strengthen tax administration to mobilize additional revenues and help address priority spending pressures, while urging the monetary authorities to continue relying on CBN overdrafts for deficit financing within legal limits.
Besides, the mission urged the government to continue to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
Noting the recent removal of the official exchange rate from the CBN website and other measures to enhance transparency in the setting of the Nigerian Autonomous Foreign Exchange (NAFEX) rate, the mission urged the apex bank to maintain the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.
On monetary policy, the IMF mission recommended the integration of the interbank and debt markets and using CBN or government bills of short maturity as the main liquidity management tool, to strengthen the monetary targeting regime, instead of the cash reserve requirements policy.
The banking sector, it noted, remains liquid and well-capitalized, while non-performing loans (NPLs) are contained.
“The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals, while CBN stress tests purport that the banking system would remain adequately capitalized, except in case of a severe deterioration of credit quality.
Nevertheless, the IMF said it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. “Since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability.