8 March 2018

Nigeria: IMF Proffers Options to Sustain Country's Economic Recovery

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The International Monetary Fund on Wednesday proffered options to sustain Nigeria's economic recovery, warning that despite exiting recession recently, the country's economy remained vulnerable to shocks.

After contracting for five consecutive quarters since January 2016, the National Bureau of Statistics said in its second quarter 2017 gross domestic product (GDP) report that the country's economy had recovered with a new 0.55 per cent growth rate.

The NBS data showed that the new growth rate (year-on-year) was 2.04 per cent higher than the rate in the corresponding quarter of 2016 (-1.49 per cent) and higher by 1.46 per cent points recorded in the preceding quarter.

The figures were revised to -0.91 per cent from -0.52 per cent due to revisions to crude output for March 2017.

The IMF said the recovery came on the back of new foreign exchange measures by government, rising global crude oil prices, attractive yields on government securities, a tighter monetary policy and increased reserves to a four-year high level of about $43 billion as at last February.

Other factors include policies to contain inflationary pressures, with economic growth reaching 0.8 per cent in 2017, driven mainly by recovering oil production capacity, while inflation declined to 15.1 per cent year-on-year by January 2018, from 18.5 per cent at December 2016.

But, at the conclusion of its 2018 Article IV Consultation on Monday, the Executive Board of the international finance agency in its assessment report on Wednesday said the reforms, which inspired the country's exit from recession, failed to impact non-oil non-agricultural growth, lower inflation close to single digits, contain banking sector vulnerabilities or reduced unemployment.

Although it commended the country's strides in implementing a National Economic Recovery and Growth Plan, the IMF said the government was still required to initiate urgent, comprehensive and coherent policy actions to curb these vulnerabilities.

The progress in the economy, it noted, showed in the beginning of a convergence between official and parallel market rates in foreign exchange windows as a result of tight monetary policy by the Central Bank of Nigeria; improvements in tax administration, and significant improvement the business environment.

In 2017, the World Bank ranked Nigeria as one of the top 10 reforming economies in the world, having moved up 24 places in ranking from 169th position to 145th out of 189 countries in its Ease of Doing Business Report.

However, the IMF identified lower crude oil prices, which stood at $62.35 per barrel on Wednesday, and tighter external market conditions as the main downside risks.

Besides, it said, domestic challenges bordered on heightened security tensions across the country, delayed financial policy response, and weak implementation of structural reforms.

The security threat by Boko Haram insurgents heightened last week in the wake of the gruesome killing of three UN aid workers and abduction of at least two others during an attack in Rann community in Kala Balge Local Government of Borno State.

The killings followed last month's abduction of 110 young girls from Government Science & Technical College, Dapchi in Yobe state, even as majority of over 200 other girls abducted three years ago in Chibok remained unrecovered.

The IMF directors emphasised the need for a growth‑friendly financial adjustment policy focusing on non‑oil revenue mobilisation and a cut in current expenditure to reduce the ratio of interest payments to revenue to a more sustainable level, while creating space for priority social and infrastructure spending.

Noting improved efforts in tax administration with the introduction of the Voluntary Assets & Income Declaration Scheme (VAIDS) to grant amnesty to tax defaulters, the directors underlined the need for more ambitious tax policy measures, including a reform in the value‑added tax, increasing excises, and rationalising tax incentives.

Already, government is considering increasing the VAT rate from the current five per cent to about 15 per cent before the end of the year.

Besides, it emphasised the need for government to consider implementing "an automatic fuel price‑setting mechanism, sound cash and debt management, improved transparency in the oil and gas sector, increased monitoring of the fiscal position of state and local governments, and substantially scaled-up social safety nets to support the adjustment."

The IMF urged the CBN to continue its monetary policy tightening until inflation was within the target single digit range as well as continue to strengthen monetary policy framework and its transparency.

Specifically, it asked the CBN to consider introducing a higher monetary policy rate, which has remained unchanged for eight consecutive times at 14 per cent last January.

It also called for a "symmetric application of reserve requirements by the government, while curbing direct financing in the economy by the CBN through intervention programmes that appeared to have distracted its focus on the primary mandates of monetary policy and financial systems stability."

Other recommendations included containing the rising banking sector risks, particularly central banks' commitment to help increase capital buffers, by stopping dividend payments by weak banks; review of asset quality to identify potential capital needs and enhanced risk‑based banking supervision as well as strict enforcement of prudential requirements.

"Structural reform implementation should continue to lay the foundation for a diversified private‑sector‑led economy, while building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti‑corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remain essential," the IMF directors said.

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