What Nigeria must do to accelerate economic growth – IMF

IMF advises FG to phaseout CBN financing of the budget deficit in order to reduce inflation.

International Monetary Fund has recommended steps for Nigeria to consider in boosting economic growth in 2021 stating that the economic recovery is expected to be weak and gradual under current policies.

The IMF stated in its report titled ‘IMF executive board concludes 2020 Article iv consultation with Nigeria’ that the real Gross Domestic Product growth in 2021 is expected to turn positive at 1.5 percent but expected to recover to its pre-pandemic level only in 2022.

“The near-term outlook is subject to downside risks from pandemic-related developments with Nigeria experiencing a second wave. Over the medium term, a subdued global recovery and decarbonisation trends are expected to keep oil prices low and Organization of the Petroleum Exporting Countries quotas in place, restricting oil-related activities, fiscal revenues, and export proceeds.”

It also stated that the Non-oil growth is also expected to remain sluggish, reflecting inward-looking policies and regulatory uncertainties. The current system creates uncertainties for the private sector because of multiple exchange rates and non-transparent rules for foreign exchange allocation.

It advised the government on Unifying the various rates into one market-clearing rate as it would establish policy credibility. Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment in the exchange rate to reduce the gap between supply and demand.”

IMF recommended that “An appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sector-led recovery. Policy clarity is also important to attract larger capital inflows, including foreign direct investments, which have dropped significantly in recent years and successful diversification.” 

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“Nigeria has one of the lowest revenue levels as a share of GDP worldwide. A large share of revenues is spent on the country’s public debt service payments, leaving insufficient fiscal space for critical social and infrastructure spending and to cushion an economic downturn.”

In this context, mobilizing revenues through efficiency-enhancing and progressive measures is a top near-term priority. Revisiting tax exemptions and customs duty waivers, increasing and broadening the base for excise taxes, developing a high-integrity taxpayer register, enhancing digital infrastructure, and improving on-time filing and payment are important measures.

According to the report, “Once economic recovery takes root, Nigeria will need to increase the value-added tax rate to at least 10 percent by 2022 and 15 percent by 2025—the average in countries belonging to the Economic Community of West African States—to create effective fiscal space.” 

To accommodate a growing number of young people entering the labor market, Nigeria will need to create at least 5 million new jobs each year over the next decade.

“Based on experience of other countries, embracing more open trade and competition policies would help diversify the economy and reinvigorate growth, particularly as the African Continental Free Trade Area takes effect.”

Going forward, Nigeria needs to further embrace transparency reforms by expanding the monitoring and reporting of all public spending, as well as ensuring easy public access to spending data.

The Executive Director commended the authorities for the measures taken to address the health and economic impacts of the COVID-19 pandemic which have exacerbated pre-existing weaknesses. Looking ahead, Directors emphasized the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.

Also the IMF Directors welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector. However, they stressed the need for significant revenue mobilization to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures with higher tax rates awaiting a more sustained economic recovery.

They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor. Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges.

They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog. Directors observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase.

In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation.

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

Directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment. In addition, they encouraged strengthening governance and anticorruption frameworks, including compliance with AML/CFT measures. Directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.