November 19, 2021
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: The Nigerian economy is recovering from a historic downturn benefiting from government policy support, rising oil prices and international financial assistance. The authorities’ pro-active approach has contained the COVID-19 infection rates and fatalities. With the emergence of fuel subsidies and slow progress on revenue mobilization, the fiscal outlook faces significant risks. Continued reliance on administrative measures to address persistent foreign exchange shortages is negatively impacting confidence. Without urgent fiscal and exchange rate reforms, the medium-term outlook faces sub-par growth.
1. The economy is recovering from a historic downturn. Helped by government policy support, rebounding oil prices and international financial aid, Nigeria exited the recession in 2020Q4, earlier than expected. Output rose by 5.4 percent (y-o-y) in the second quarter, mainly reflecting base effects from transport and trade sectors and continued strong growth in the IT sector. However, manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges. Headline inflation rose sharply during the pandemic reaching a peak of 18.2 percent y-o-y in March 2021 but has since declined helped by the new harvest season and opening of the land borders. Reported unemployment rates are yet to come down although COVID-19 monthly surveys show the employment level to be back at its pre-pandemic level.
2. The COVID-19 pandemic has been well managed but there is a lasting imprint on the vulnerable . As much of the rest of Sub-Saharan Africa (SSA), Nigeria underwent a third wave of the pandemic in August 2021. The authorities’ proactive actions, including a robust infection tracking system and a national strategy for vaccine procurement and rollout, have helped keep infection rates and fatalities lower than in many other countries. The economic and social impacts of the pandemic have been more daunting with rising food insecurity and an increase in the already-high levels of poverty. Significant progress has been made in vaccine procurement. However, less than 3 percent of the eligible population has been fully vaccinated reflecting limited vaccine supply, delivery bottlenecks and high vaccine hesitancy.
3. The outlook is for a subdued recovery. While real GDP is projected to grow by 2.6 percent this year and continue in the range of 2.6-2.7 percent per annum over the medium term, this is just above the population growth rate implying stagnant per capita income in the medium term. Moreover, despite an easing of food prices, inflation is projected to remain in double-digits, absent monetary policy reforms. 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.
4. Major reforms in fiscal, exchange rate, trade and governance are needed to alter the long-running lackluster growth path. On the immediate front, fiscal and external imbalances require removal of regressive fuel and electricity subsidies, tax administration reforms and installing a fully unified market-clearing exchange rate. Over the medium term, 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.
Fiscal policy: Remove fuel and electricity subsidies and implement revenue-based fiscal consolidation
5. The headline fiscal deficit is projected to worsen in the near term and remain elevated over the medium term. Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022. There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle. Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026. General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.
6. The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor . The mission stressed the need to fully remove fuel subsidies and move to 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. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation. Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources.
7. Significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path . The near-term priorities are to implement e-customs reforms including efficient procedures and controls, developing a VAT Compliance Improvement Program, 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 cumulative net savings from the recommended measures, after making room for additional social assistance to cushion impacts of reforms, could amount to 5.1 percent of GDP over 2022-26. Such a consolidation would keep public debt below 40 percent of GDP and reduce dependence on central bank financing of the deficit.
8. The mission welcomed the recent passage of the Petroleum Industry Act (PIA) and stressed its timely implementation. The PIA aims to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment. Preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms will provide greater incentives to invest in the oil and gas industry but will reduce the fiscal take from new and converted fields.
9. The mission welcomed steps taken toward unification of the exchange rate and stressed the need for further actions. The discontinuation of the official exchange rate is a step in the right direction but continued dependence on administrative measures to address FX shortages sustains uncertainties and increases the risks of a sudden and large adjustment in the exchange rate. Taking advantage of the favorable global conditions, improving current account and robust oil prices, the mission advised a move to a unified and market-clearing exchange rate without further delays. To preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, macroeconomic policies to contain inflation and structural policies to facilitate new investment.
10. A further move toward a market-clearing exchange rate will also help build foreign exchange buffers through higher capital inflows. Despite the recent SDR allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels. Slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows. With an external position that is 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. The mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate.
11. A more open trade regime is needed to unleash the growth potential brought by the African Continental Free Trade Agreement (AfCFTA). The authorities are committed to implementing the AfCFTA and are working to enhance trade facilitation through increased use of technology. However, overall trade regime continues to be protectionist and restrictive with numerous products prohibited from FX access for imports, including basic necessities and food items, high tariff and non-tariff barriers, and difficult trade logistics. Building on current efforts to improve port infrastructure and reduce the burden of customs administration, the mission recommended decisive actions to reduce barriers to trade and reliance on import substitution.
Monetary and Financial Sector Policies: Support the recovery but remain vigilant against inflationary and stability risks
12. Monetary policy should remain supportive of the nascent recovery but warrants close monitoring . With the recovery yet to be broad-based, inflation projected to decline, and limited fiscal policy space, monetary policy should remain supportive unless exchange rate pressures intensify, or inflationary pressures resurface. The mission advised vigilance to prevent possible adverse feedback loops between persistent high inflation and periodic exchange rate adjustments if monetary policy were to become excessively loose. The out-of-cycle and discretionary use of the cash reserve requirement (CRR) continues to pose regulatory and operational uncertainties for the banking system.
13. In the medium term, the monetary operational framework should be strengthened to establish the primacy of price stability. Long-term high inflation in Nigeria is associated with the lack of a well-functioning monetary policy operational framework along with the presence of multiple policy goals. The mission reiterated its previous advice to (i) modernize the 2007 CBN act to establish the primacy of price stability and (ii) strengthen the monetary transmission mechanism by integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool. As the recovery firms up, the CBN also needs to scale back its credit intervention programs as part of a broader monetary structural reform.
14. The banking sector has been resilient thanks to ample pre-crisis buffers. The systemwide NPL ratio has improved, and profitability has been resilient, resulting in capital buffers above the regulatory minimum. However, stress tests conducted by the authorities show that a severe shock requiring loan reclassification could erode the system’s buffers and there are risks that a part of the restructured loans, which represent less than a quarter of the overall loan portfolio, may eventually become delinquent. Tighter market liquidity due to CRR debits and restricted access to the CBN discount window may raise bank funding costs going forward and possibly restrict credit growth at individual banks.
15. Financial inclusion continued to improve despite the pandemic but remains considerably below Nigeria’s ambitious inclusion targets. The share of the financially excluded population remains large overall, particularly in rural areas and among women and youth. The mission recommended prioritizing provision of financial access points in remote areas and leverage the new technologies to close the inclusion gap more quickly. The launching of eNaira bodes strong promises and, over time, could significantly increase financial inclusion and delivery of social assistance if coverage is extended to those with a mobile phone.
16. The mission supported the time-bound debt relief measures currently in place and recommended vigilance to guard against financial stability risks . The authorities are in the process of implementing a suite of Basel II/III instruments in addition to last year’s passage of the new banking law BOFIA. The mission recommended the following measures to forestall stability risks:
· Expiration of pandemic-related loan restructuring as planned in March 2022 in line with the economic recovery.
· Timely action against the chronically undercapitalized banks and, more broadly, application of the new provisions under the BOFIA to further bolster corporate governance.
· Additional regulation to safeguard sound practices and consumer protection in the growing segment of digital payments and lending.
· Introduction of additional macroprudential instruments to better manage systemic and cyclical risks in the context of Basel III implementation.
· An assessment by the central bank of the impact of the recent launch of eNaira on monetary policy transmission and financial stability.
Structural policies: Increase jobs and worker welfare and strengthen governance
17. Given the large number of projected new entrants in the labor force and stagnant living standards, economic growth needs to increase jobs and improve worker welfare . With agriculture accounting for almost half of current employment, any job-rich growth will need to rely considerably on this sector at least in the near term. However, the welfare level of agricultural workers, measured by per capita consumption, remains far below other workers reflecting lower productivity. Improving agricultural productivity, which requires increased supply and usage of inputs, initiatives to promote storage and the creation of farm cooperatives to reduce food loss in distribution and higher access to credit, will contribute to more jobs, higher income for agricultural workers, food security and economic diversification given the vast potential in agriculture and agroindustry.
18. There are ongoing efforts to improve transparency and governance, but more is needed to build public trust to implement difficult but needed reforms . On transparency, the national oil company NNPC has published its last two annual statements to better reconcile gross and net oil revenues remitted to the Federation account and the Corporate registry has started to publish information on persons with significant control in newly established companies. The government is in the process of presenting whistleblower legislation to the Parliament to facilitate untraceable declarations of corruption. However, perception of corruption remains high regarding the civil service, leading to low tax compliance and buy-in of reforms. Implementation of transparency and accountability measures committed under the RFI has been slow. Access and quality of information on the COVID-19 spending on the Ministry of Finance’s Transparency Portal has been uneven. The COVID-19 spending audits are just starting, and the publication of procurement contract recipients is incomplete.
The IMF mission would like to thank the authorities and other counterparts for the frank and thoughtful discussions and kind cooperation.