Monday, February08, 2021 04:10 PM / by IMF/ Header Image Credit:  IMF

On January 27, 2021, theExecutive Board of the International Monetary Fund (IMF) concluded the ArticleIV consultation with Nigeria.

Nigeria's economy has been hit hard by theCOVID-19 pandemic. Following a sharp drop in oil prices and capital outflows,real GDP is estimated to have contracted by 3.2 percent in 2020 amidst thepandemic-related lockdown. Headline inflation rose to 14.9 percent in November2020, a 33-month high, reflecting core and food inflation increases emanatingfrom supply shortages due to the lockdown effected to curb infectionsalongside, the land-border closure and continued import restrictions. Theunemployment rate reached 27 percent in the second quarter of 2020, with youthunemployment at 41 percent.

The Nigerian authorities acted swiftly toadopt a pandemic-related support package equivalent to 0.3 percent of GDP inthe 2020 revised federal budget despite limited fiscal space. Externalvulnerabilities due to lower oil prices and weak global demand have increased,with the current account remaining in deficit in the first half of 2021. InApril 2020, Nigeria received IMF emergency financial assistance of $3.5 billionunder the Rapid Financing Instrument to help cushion the impact of thepandemic.

Socio-economic conditions have deteriorated,with rising food inflation, elevated youth unemployment, mass protests inOctober 2020, and surveys show worsening food insecurity with a significantimpact on the vulnerable.

Risks are tilted to the downside and includethe resurgence of the pandemic, security situation and unfavorable externalenvironment. Capital outflow risks arise from the record-low domestic interestrates and large foreign holdings of domestic securities. On the upside,recovering oil prices and completion of the Dangote oil refinery could catalyzemore domestic crude oil production and boost growth.

Executive Board Assessment 

Executive Directors agreed with the thrust ofthe staff appraisal. They commended the authorities for the measures taken toaddress the health and economic impacts of the COVID-19 pandemic which haveexacerbated pre-existing weaknesses. Looking ahead, Directors emphasized theneed for urgent policy adjustment and more fundamental reforms to sustainmacroeconomic stability and lift growth and employment.

Directors welcomed notable reforms undertakenin the fiscal sector, including removal of the fuel subsidy and steps toimplement cost-reflective tariff increases in the power sector. However, theystressed the need for significant revenue mobilization to reduce fiscalsustainability risks, relying initially on progressive and efficiency-enhancingmeasures with higher tax rates awaiting a more sustained economic recovery.They highlighted the need for improved social safety nets to cushion potentialnegative impacts on the poor.

Directors noted that multiple rates, limitedflexibility, and foreign exchange shortages are posing challenges. Theyrecommended a gradual and multi-step approach to establishing a unified andclear exchange rate regime with the near-term focus on allowing for greaterflexibility and removing the payments backlog.

Directors observed that the accommodativemonetary stance remains appropriate in the near term, although tightening maybe warranted if balance of payments or inflationary pressures were to increase.In the medium term, the monetary policy operational framework should be reformedand Central Bank financing of budget deficit phased out in order to reduceinflation.

While welcoming the resilience of the bankingsector, Directors called for continued vigilance to contain financial stabilityrisks. They noted that COVID-19 debt relief measures for bank clients shouldremain time-bound and limited to those with good pre-crisis fundamentals.

Directors welcomed recent progress instructural reforms and called for continued reforms aimed at promoting economicdiversification and reducing the dependence on oil and increasing employment.In addition, they encouraged strengthening governance and anticorruptionframeworks, including compliance with AML/CFT measures. Directors also welcomedthe ratification of the African Continental Free Trade Area and underscoredthat implementing trade-enabling reforms remains critical to rejuvenate growth.

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