IMF 2016 Report on Nigeria

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IMF 2016 Report on Nigeria

By Correspondent

The International Monetary Fund (IMF) has made a shocking prognosis of the Nigerian economy. In its recent report, the body argues that the prospects of the economy look bleak.In its report dated March 30, 2016 the Fund notes, ”˜The Nigerian economy is facing substantial challenges. While the non-oil sector accounts for 90% of GDP, the oil sector plays a central role in the economy. Lower oil prices have significantly affected the fiscal and external accounts, decimating government revenues to just 7.8% of GDP and resulting in the doubling of the general government deficit to about 3.7% in 2015. Exports dropped about 40 percent in 2015, pushing the current account from a surplus of 0.3% of GDP to a deficit projected at 2.4%”¦ With foreign portfolio inflows slowing significantly, reserves fell to $28.3 billion at the end of 2015.’ The report went further in its analyses, ”˜Exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves have impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies. Coupled with fuel shortages in the first half of the year and lower investor confidence, growth slowed sharply from 6.3% in 2014 to an estimated 2.7% in 2015, weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. Inflation increased to 9.6% in January (up from 7.9% in December 2014), above the CBN’s medium-term target range of 6 – 9%.’ Support for Anti-Corruption PolicyThe IMF supports the Buhari administration’s policy of enhancing transparency, strengthening governance, improving security, and creating jobs. It notes further that the Nigerian economy has been hit hard by the decline in oil prices, which has slowed growth sharply and led to macroeconomic imbalances. Given the uncertain global outlook and the likelihood of oil prices remaining low, authors of the report stressed the need for significant macroeconomic adjustment. The Need to Diversify the EconomyThe IMF emphasized the critical need to raise non-oil revenues to ensure fiscal sustainability while maintaining infrastructure and social spending. It canvasses a gradual increase in the VAT rate, further improvements in revenue administration, and a broadening of the tax base. The global body supports an orderly adjustment of budgets at the sub-national level through reform in budget preparation and execution. They also stressed the importance of strengthened public financial management and service delivery. Directors encouraged the implementation of an independent price-setting mechanism to address petroleum subsidies while strengthening the social safety net. They underlined the dire need for continued efforts to foster transparency and enhanced accountability. On Monetary and Fiscal PoliciesThe IMF contended that the policy approach of expansionary monetary policy, together with a relatively fixed exchange rate and exchange restrictions had adversely impacted economic activity. It worries that the authorities’ commitment to their inflation objective. They underscored the need for credible adjustment to the large terms-of-trade shock, including through greater exchange rate flexibility and speedy unwinding of exchange restrictions to facilitate an exchange rate consistent with fundamentals. In this context, they welcomed the recent monetary policy tightening and recommended that the central bank target price stability to maintain inflation within the target range.It observed that further strengthening of the regulatory and supervisory frameworks would help improve resilience even as financial sector soundness indicators remain favourable. With declining asset quality, a concern as growth slows intensified monitoring of banks and enhanced contingency planning and resolution frameworks would be important. The Fund also noted that lowering interest rate spreads and increasing efficiency could enhance credit growth, especially for small and medium enterprises. In all, the Fund advocated its traditional arguments in favour of Structural Adjustment Programmes (SAP) which was administered on African economies in the 1980s as what Nigeria can do to enhance competitiveness and support investment.

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