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Economy | World Bank IMF and Dev Agencies

Highlights of the IMF Article IV Consultation with Nigeria

Feb 09, 2022   •   by   •   Source: Proshare   •   eye-icon 130 views

Wednesday, February 09, 2022 / 11:35 AM / by FBNQuest Research / Header Image Credit: Ecographics


Today we delve into the press release of the IMF's recently concluded Article IV consultation with Nigeria. The Fund's commentary, which touches on a wide range of macroeconomic and social issues, strikes a familiar tune. It acknowledges that growth is projected at 3% for 2021 compared with 2.7% in its Jan '22 update of its World Economic Outlook (WEO). It sees growth softening to 2.7% in 2022. It expects non-oil GDP to grow by 2.6% in 2022, with oil GDP likely to improve to 3.2% from -0.7% in 2021, mainly due to favourable pricing and an anticipated increase in crude oil output to 1.7 million barrels per day (mbpd) from 1.65mbpd in 2021.

 

Despite the authorities' proactive approach to containing COVID-19 infection rates and fatalities, and recent growth improvements, the Fund noted that socio-economic conditions remain a challenge, particularly with rising levels of food insecurity and poverty, as well as an outlook fraught with risks such as the pandemic's trajectory.

 

The Fund recognises the fiscal strain being encountered by the government. It reiterates as it has done in its previous commentaries that the consolidated government revenue-to-GDP ratio at 7.5% in 2021 remains among the lowest in the world.

 

On the back of the FGN's low revenue profile coupled with rapid debt accumulation in recent years, the IMF's projections see the FGN's debt-service-to-revenue ratio rising to 92.6% in 2022 from 85.5% in 2021. As such, it sees the fiscal deficit widening to 5.9% of GDP in 2021. This compares with an actual fiscal deficit of 4.3% in 2020 and a projected deficit of 4.5% in 2021. 

 

To this end, the IMF emphasizes the need for the FG to implement concrete policies aimed at reducing fiscal deficits and debt accumulation. Significant domestic revenue mobilisation, a further increase in the value-added tax rate, improved tax compliance, and rationalization of tax benefits are examples of such approaches.

 

It also urged the removal of subsidies which it estimates at 1.0% and 0.5% of GDP in 2021 and 2022 respectively. We note that the NGN3trn approved for the Nigerian National Petroleum Corporation's 2022 fuel subsidy payments amount to a higher ratio of c.1.9% of 2020 GDP.

 

It had mentioned in prior reports that cumulative net savings from such measures could amount to additional revenues of c.5.0% of GDP over the next five years.

 

The Fund believes the monetary authorities should retain a supportive monetary policy posture in the near term while keeping an eye on inflation and balance of payments risks. It does, however, encourage policymakers to be ready to modify monetary policy if inflationary pressures persist. It also calls on the central bank to scale back its quasi-fiscal operations, or discretionary CRR debits.

 

We anticipate that the CBN will adopt a more hawkish posture this year because of the global wave of monetary tightening and persistent inflationary pressure.

 

The Fund recommends that currency reforms aimed at attaining a unified and market-clearing exchange rate should be pursued to boost Nigeria's external position.

 

It sees some potential upside risks by way of sustenance of the growth momentum of the non-oil sector, support credit policies, and the kick-off of operation of the Dangote Refinery.



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