IMF Executive Board Concludes 2019 Article IV Consultation with Nigeria

Wednesday, April 03, 2019 / 04.28PM/ By IMF

Download Here – The IMF 2019 Article IVConsultation – Nigeria

OnMarch 27, 2019, the Executive Board of the International Monetary Fund (IMF)concluded the Article IV consultation [1] with Nigeria.

Nigeria’seconomy is recovering. Real GDP increased by 1.9 percent in 2018, up from 0.8percent in 2017, on the back of improvements in manufacturing and services,supported by spillovers from higher oil prices, ongoing convergence in exchangerates and strides to improve the business environment. Headline inflation fellto 11.4 percent at end-2018, reflecting declining food price inflation, weakconsumer demand, a relatively stable exchange rate and tight monetary policyduring most of 2018, but remains outside of the central bank’s target range of6-9 percent. Record holdings of mostly short-term local debt and equity and acurrent account surplus lifted gross international reserves to a peak in April2018, while the three-times oversubscribed November 2018 Eurobond helpedcushion the impact of outflows later in the year.

However,persisting structural and policy challenges continue to constrain growth tolevels below those needed to reduce vulnerabilities, lessen poverty and improveweak human development outcomes, such as in health and education. A largeinfrastructure gap, low revenue mobilization, governance and institutionalweaknesses, continued foreign exchange restrictions, and banking sectorvulnerabilities are dampening long-term foreign and domestic investment andkeeping the economy reliant on volatile oil prices and production.

Undercurrent policies, the outlook remains therefore muted. Over the medium term,absent strong reforms, growth would hover around 2½ percent, implying no percapita growth as the economy faces limited increases in oil production andinsufficient adjustment four years after the oil price shock. Monetary policyfocused on exchange rate stability would help contain inflation but worsencompetitiveness if greater flexibility is not accommodated when needed. Highfinancing costs, on the back of little fiscal adjustment, would continue to constrainprivate sector credit, and the interest-to-revenue ratio would remain high.

Risksare moderately tilted downwards. On the upside, oil prices could rise, promptedby global political disruptions or supply bottlenecks. Bold reform efforts,following the election cycle, could boost confidence and investments,especially given relatively conservative baseline projections. On the downside,additional delays in reform implementation, a persistent fall in oil prices,reduced oil production, increased security tensions, or tighter globalfinancial market conditions could undermine growth, provoke a market sell-off,and put additional pressure on reserves and/or the exchange rate.

Executive Board Assessment [2]

ExecutiveDirectors welcomed Nigeria’s ongoing economic recovery, accompanied by reducedinflation and strengthened reserve buffers. They noted, however, that themedium-term outlook remains muted, with risks tilted to the downside. Inaddition, long standing structural and policy challenges need to be tackledmore decisively to reduce vulnerabilities, raise per capita growth, and bringdown poverty. Directors, therefore, urged the authorities to redouble theirreform efforts, and supported their intention to accelerate implementation oftheir Economic Recovery and Growth Plan.

Directorsemphasized the need for revenue-based consolidation to lower the ratio ofinterest payments to revenue and make room for priority expenditure. Theywelcomed the authorities’ tax reform plan to increase non-oil revenue,including through tax policy and administration measures. They stressed theimportance of strengthening domestic revenue mobilization, including throughadditional excises, a comprehensive VAT reform, and elimination of taxincentives. Securing oil revenues through reforms of state owned enterprisesand measures to improve the governance of the oil sector will also be crucial.

Directorshighlighted the importance of shifting the expenditure mix toward priorityareas. They welcomed, in this context, the significant increase in publicinvestment but underlined the need for greater investment efficiency. They alsorecommended increasing funding for health and education. They noted thatphasing out implicit fuel subsidies while strengthening social safety nets tomitigate the impact on the most vulnerable would help reduce the poverty gapand free up additional fiscal space. Directors recommended strongercoordination for more effective public debt and cash management.

Withinflation still above the central bank target, Directors generally consideredthat a tight monetary policy stance is appropriate. They encouraged theauthorities to enhance transparency and communication and to improve themonetary policy framework, including by using more traditional methods, such asraising the monetary policy rate or cash reserve requirements.

Directorsalso urged ending direct central bank intervention in the economy to allowfocus on the central bank’s price stability mandate.

Directorscommended the authorities’ commitment to unify the exchange rate and welcomedthe increasing convergence of foreign exchange windows. They noted that aunified market based exchange rate and a more flexible exchange rate regimewould support inflation targeting. Directors also stressed that elimination ofexchange restrictions and multiple currency practices would remove distortionsand facilitate economic diversification.

Directorswelcomed the decline in nonperforming loans and the improved prudential bankingratios but noted that restructured loans and undercapitalized banks continue toweigh on financial sector performance. They suggested strengthening capitalbuffers and risk based supervision, conducting an asset quality review, avoidingregulatory forbearance, and revamping the banking resolution framework.Directors also recommended establishing a credible time bound recapitalizationplan for weak banks and a timeline for phasing out the state backed assetmanagement company AMCON.

Directorsurged the authorities to reinvigorate implementation of structural reforms todiversify the economy and achieve the Sustainable Development Goals. Theypointed to the importance of improving the business environment, implementingthe power sector recovery program, deepening financial inclusion, reforming thehealth and education sectors, and implementing policies to reduce genderinequities. Directors also emphasized the need to strengthen governance,transparency, and anti-corruption initiatives, including by enhancing AML/CFTand improving accountability in the public sector.

Directors welcomed improvements in the quality and availability ofeconomic statistics and encouraged continued efforts to address remaining gaps,including through regular funding.

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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holdsbilateral discussions with members, usually every year. A staff team visits thecountry, collects economic and financial information, and discusses withofficials the country's economic developments and policies. On return toheadquarters, the staff prepares a report, which forms the basis for discussionby the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairmanof the Board, summarizes the views of Executive Directors, and this summary istransmitted to the country's authorities. An explanation of any qualifiers usedin summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

Download Here – The IMF 2019 Article IVConsultation – Nigeria