The International Monetary Fund (IMF) has underscored near-term downside risks arising from Nigeria’s elevated inflation, high debt-servicing costs, external sector pressures, and oil sector volatility.
Looking ahead, the IMF directors who recently visited Nigeria recommended decisive fiscal and monetary tightening to secure macroeconomic stability, combined with structural reforms to improve governance, strengthen the agricultural sector, and boost inclusive, sustainable growth.
The IMF directors also urged the authorities to finalise securitisation of the CBN’s existing stock of overdrafts and emphasised that the CBN’s budget financing should strictly adhere to the statutory limits.
The CBN’s total loan to the federal government through Ways and Means advances was recently put at N22.7 trillion, an amount director-general of the Debt Management Office (DMO) Patience Oniha said would take the government between N1.8 and N2.2 trillion to service annually if the National Assembly fails to securitise the facility.
The IMF urged decisive and effective monetary policy tightening to avoid a de-anchoring of inflation expectations. Noting recent increases in the policy rate, they encouraged the CBN to stand ready to further increase the policy rate if needed, and to implement additional actions, including fully sterilizing central bank financing of fiscal deficits and phasing out credit intervention programmes.
“Strengthening the CBN’s independence and establishing price stability as its primary objective is critical,” the Fund stated.
The IMF directors highlighted the need for bold fiscal reforms to create needed policy space, put public debt on sound footing, and reduce vulnerabilities.
They urged the authorities to deliver on their commitment to remove fuel subsidies by mid-2023, and to increase well-targeted social spending.
IMF called on the authorities to strengthen revenue mobilization, including through tax administration reforms, expanding the tax automation system and strengthening taxpayer segmentation, and improving tax compliance is also a priority.
In the medium term, the directors recommended modernizing customs administration, rationalizing tax incentives, and raising tax rates to the levels of the Economic Community of West African States (ECOWAS).
IMF said socio-economic conditions remain difficult in Nigeria, notwithstanding the authorities’ success in containing and managing the COVID-19 infections. The spillover effects of the war in Ukraine, which have been transmitted mainly through higher domestic food prices, worsened the scarring effects of the pandemic, particularly on the most vulnerable—with Nigeria being among the countries with the lowest food security.
It stated that the near-term outlook faces downside risks, while there are upside risks in the medium term. Higher international food and fertilizer prices and continued widening of the parallel market premium could culminate in the de-anchoring of inflation expectations.
The oil sector faces downside risks from possible production and price volatility, while climate-related natural disasters (e.g., floods) pose the same risks to agricultural production.
“Further widening in sovereign premia could increase debt servicing costs. In the medium term, there are upside risks from a potential stronger reform momentum and a larger-than-expected rebound in oil and gas production,” it said.
The IMF directors highlighted the importance of improving the performance of the agricultural sector for job creation and food security. They urged the authorities to implement governance reforms, including delivering on commitments from the 2020 Rapid Financing Instrument. Improving transparency and accountability in the oil sector is also key to strengthening governance.
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