IMF says challenges to Nigeria’s economic recovery remain elevated
The IMF said preliminary data for the first half of 2017 indicates significant revenue shortfalls, with the interest-payments to revenue ratio remaining high (40 percent at end-June) and projected to increase further under current policies.
The International Monetary Fund (IMF) has said Nigeria still faces significant risks to its economic recovery. This view was expressed by the Washington D.C.-based institution at the end of its staff mission to Nigeria between July 20 and 31. The IMF said it visited to discuss recent economic and financial developments, update macroeconomic projections, and review reform implementation.
“Near-term vulnerabilities and risks to economic recovery and macroeconomic and financial stability remain elevated,” said the IMF. “At 0.8 percent, growth in 2017 will not be sufficient to make a dent in reducing unemployment and poverty.”
The IMF expressed concerns about delays in policy implementation, reversal of favourable external market conditions, possible shortfalls in agricultural and oil production, additional fiscal pressures, continued market segmentation in a foreign exchange market that remains dependent on interventions by Central Bank of Nigeria, and banking system fragilities as representing the main risks to the outlook.
The IMF said the economic backdrop remains challenging, despite some signs of relief in the first half of 2017. Economic activity contracted in the first quarter of the year by 0.6 percent, mainly as maintenance stoppages reduced oil production. However, following four quarters of negative growth, the non-oil economy grew by 0.6 percent (year-on-year), on the back of a rebound in manufacturing and continued strong performance in agriculture.
According to the IMF, various indicators suggest an uptick in activity in the second quarter of the year. Helped by favourable base effects, headline inflation decreased to 16.1 percent in June 2017, but remains high despite tight liquidity conditions.
However, the IMF said preliminary data for the first half of 2017 indicates significant revenue shortfalls, with the interest-payments to revenue ratio remaining high (40 percent at end-June) and projected to increase further under current policies. High domestic bond yields and tight liquidity continue to crowd out private sector credit. Given Nigeria’s low growth environment and the banking system’s exposure to the oil and gas sector, non-performing loans increased from 6 percent in 2015 to 15 percent in March 2017 (8 percent after excluding the four undercapitalized banks).
“Faced with these challenges, the government has started implementing a number of important measures,” IMF noted. “The Economic Recovery and Growth Plan (ERGP) is driving the diversification strategy, and security in the Niger Delta improved through strengthened engagement. The new Investor and Exporter FX window has provided impetus to portfolio inflows, helped increase reserves above $30 billion, and contributed to reducing the parallel market premium.
“Important steps have also been taken in implementing the power sector recovery plan, introducing a voluntary income and asset declaration programme and moving forward the 60-day national action plan to improve the business environment. Progress is also ongoing within the oil and energy sector through implementation of a new funding mechanism for cash calls.”
However, the statement counsels Nigerian policymakers on the need for an appropriate and coherent set of policies to enhance an economic recovery, as a matter of urgency.
Amongst others, the IMF recommended immediate implementation of specific priorities that will help achieve the goals of the ERGP. In the near term, a stronger push for front-loaded fiscal consolidation through a sustainable increase in non-oil revenues would be needed to create space for infrastructure spending, social protection, and private sector credit, it said.
“This should be simultaneously accompanied by a monetary policy that avoids direct financing of the government and is kept sufficiently tight, a unified and market-based exchange rate, and rapid implementation of structural reforms. Pursuing these policies would help reduce macroeconomic vulnerabilities and create an environment for a diversified private-sector led economy.”
The team, led by Amine Mati, Senior Resident Representative and Mission Chief for Nigeria at the IMF, met with senior government and central bank officials. It also met with members of parliament, representatives of the banking system, private sectors, civil society, and international development partners.
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