Friday, 18th June 2021: International Monetary Fund (IMF) has urged the Nigerian government to step up efforts aimed at strengthening the country’s tax administration to mobilize additional revenues and help address priority spending pressures on the economy.
In its end-of-mission statement, the IMF also advised the Nigerian authorities to keep reliance on the Central Bank of Nigeria (CBN) overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
The global monetary body gave the charge at the conclusion of its virtual meetings with the Nigerian authorities to discuss recent economic, financial developments and outlook.
According to the statement, the recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate are encouraging. It therefore, recommended maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.
On policy that could further strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.
“The banking sector remains liquid and well-capitalized while non-performing loans (NPLs) are contained. The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.
“CBN stress tests purport that the banking system would remain adequately capitalized except in case of a severe deterioration of credit quality. Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability”, the statement added.
It noted that tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 percent of Gross Domestic Product (GDP).
The IMF mission further explained that the downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria.
The mission, however commended the authorities’ measures to contain the transmission of COVID-19 in Nigeria, including the ongoing vaccination programme under the COVAX initiative, and strongly supported the authorities’ efforts to acquire additional doses from countries with surplus stocks.
The IMF team led by Ms. Jesmin Rahman equally expressed their concern with the resurgence of fuel subsidies and reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor masses.
The mission also acknowledged that Nigeria’s economy is gradually recovering from the negative impact of the COVID-19 global pandemic, following sharp output contractions in the second and third quarters, GDP growth turned positive in Q4 2020 and growth reached 0.5 percent (y/y) in Q1 2021, supported by agriculture and services sectors.
“Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 percent, owing to high food price inflation.
“With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage”, the mission further explained.
The incipient recovery in economic activity, according to the mission, is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021, adding that inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels.
