International Monetary Fund (IMF) Staff Concludes Visit to Nigeria

A slow economic recovery is continuing, inflation is falling, and external buffers are declining in the face of increased portfolio outflows; Elevated fiscal deficits rely on central bank financing, which complicates monetary policy; Action on a coherent and coordinated set of policies is urgently needed to reduce vulnerabilities and increase growth over the medium term.

An International Monetary Fund (IMF) staff team led by Amine Mati, Senior Resident Representative and Mission Chief for Nigeria, visited Lagos and Abuja from September 25 to October 7, 2019 to discuss recent economic and financial developments, update macroeconomic projections, and review reform implementation. At the end of the visit, Mr. Mati issued the following statement:

“The pace of economic recovery remains slow, as depressed private consumption and investors’ wait-and-see attitude kept growth in the first half of the year at 2 percent, a rate significantly below population growth. Headline inflation has fallen, reaching its lowest level since January 2016, helped by lower food price inflation.

“Spurred by one-off increases in imports, the current account turned into a deficit in the first half of 2019 after three years of surpluses. Gross international reserves have fallen to below $42 billion at end-August 2019, mainly reflecting a decline in foreign holdings of short-term securities and equity. The exchange rate in various windows remained stable, helped by steady sales of foreign exchange by the Central Bank of Nigeria (CBN).

“Carryover from 2018 to 2019 helped increase public investment spending in the first half of 2019, but revenue underperformed significantly relative to the budget target in the first half of 2019. Over-optimistic revenue projections have led to higher financing needs than initially envisaged, resulting in overreliance on expensive borrowing from the CBN to finance the fiscal deficit. Federal Government interest payments continue to absorb more than half of revenues in 2019.

“The outlook under current policies remains challenging. Growth is expected to pick up to 2.3 percent this year on the strength of a continuing recovery in the oil sector and the regaining of momentum in agriculture following a good harvest. Revenue initiatives planned under the 2020 budget—including a VAT reform that increases the rate, introduces a minimum registration threshold and exempts basic food products—will help partially offset declining oil revenues and the impact of higher minimum wages, thus keeping the overall consolidated fiscal deficit elevated. The current account’s shift to a deficit is expected to persist while the pace of capital outflows continues to weigh on international reserves. Inflation will likely pick up in 2020 following rising minimum wages and a higher VAT rate, despite a tight monetary policy.

“A comprehensive package of measures—whose design and implementation will require close coordination within the economic team and the newly-appointed Economic Advisory Council—is urgently needed to reduce vulnerabilities and raise growth.

“The increasing CBN financing of the government reinforces the need for an ambitious revenue-based fiscal consolidation that should build on the initiatives laid out in the Strategic Revenue Growth Initiative. A tight monetary policy should be maintained through more conventional tools. Managing vulnerabilities arising from large amounts of maturing CBN bills—including those held by non-residents—requires stopping direct central bank interventions, the introduction of longer-term government instruments to mop up excess liquidity and moving towards a uniform market-determined exchange rate.

“Banking sector prudential ratios are improving. However, new regulations to spur lending—which has recently increased—should be carefully assessed and may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target. Continued strengthening of banks’ capital buffers would enhance banking sector resilience.

“Structural reforms, particularly on governance and corruption and in implementing the much-delayed power sector recovery plan, remain essential to boosting prospects for higher and more inclusive growth.”

“The team held productive discussions with senior government and central bank officials. It also met with representatives of the banking system, the private sector, and international development partners. The team wishes to thank the authorities and all those it met for the productive discussions, excellent cooperation, and warm hospitality.”