Managing Director, International Monetary Fund, IMF, Ms. Christine Lagarde, has warned that the prevailing uncertainty in the oil and gas industry could plunge the Nigerian financial system into crisis.
In a statement during her visit to Nigeria last week, Lagarde also expressed concerns that firms that had increased their leverage and dollar-denominated debts over the last couple of years may come under pressure due to rising interest rates, a strong dollar and a declining naira.
She said: "Growth in 2015 is estimated at about 3.2 percent, its slowest pace since 1999, and only a modest recovery is expected in 2016. For a country with a rapidly increasing population, this means almost no real economic growth in per capita terms.
"On top of the slowdown, vulnerabilities have increased. The ability to manage shocks is restricted by low fiscal savings and reserves. And the weakening oil sector could stress balance sheets and put pressure on the banking system.
"Reduced confidence and lower capital spending would also impact the non-oil corporate sector. Unfortunately, this sector looks less resilient today than during the downturn of 2008-09. Companies that have increased their leverage and US-dollar debt in recent years may now come under pressure as they face rising interest rates and a stronger dollar."
She gave the Nigerian financial sector a pass mark, saying that Nigerian banks are generally well-capitalised and more resilient than during the downturn of 2008 and 2009.
However, she noted that the banks are beginning to feel the impact of the growing vulnerabilities in the corporate sector, leading to rising non-performing loans, which will need to be carefully monitored and managed.
According to her, "The new reality of low oil prices and low oil revenues means that the fiscal challenge facing government is no longer about how to divide the proceeds of Nigeria's oil wealth but what needs to be done so that Nigeria can deliver to its people the public services they deserve - be it in education, health or infrastructure.
"This means that hard decisions will need to be taken on revenue, expenditure, debt, and investment going forward."
She further said that given the structure of the Nigerian economy, the massive fall in oil prices, which is expected to continue, has changed the medium term foundations for economic resilience.
She said: "Additional exchange rate flexibility both up or down can help soften the impact of external shocks, make output and employment less volatile, and help build external reserves.
"It can also help avoid the need for costly foreign exchange restrictions which should, in any case, remain temporary. And going forward, improved competitiveness from improved exchange rate flexibility and other reforms will facilitate the needed diversification of the exports base and, ultimately, growth."
To this end, Lagarde advised that the key policy priorities of government at all levels should be to invest in quality infrastructure, make the banks work, and improve governance.