20220208-IMF-Nigeria_2021_Article_IV_Consultation-Press_Release_Staff_Report_Staff_Statement,_and_Statement_by_the_Executive_Director_for_Nigeria_86页_4mb

Summary of the 2021 Article IV Consultation with Nigeria

Core Content

The 2021 Article IV consultation with Nigeria, conducted by the International Monetary Fund (IMF), assessed the country's economic recovery from a historic downturn, which was supported by government policy, rising oil prices, and international financial assistance. Nigeria exited the recession in 2020Q4, with real GDP growth of 4.1% in 2020Q3. However, the pandemic left a lasting impact, increasing food insecurity and poverty. The IMF emphasized the need for structural reforms to ensure long-term, inclusive growth.

Main Views and Key Information

Economic Recovery and Outlook

• GDP Growth: Nigeria's real GDP grew by 4.1% in 2020Q3, with a projected 3% growth for 2021. Non-oil sectors showed stronger momentum, while the oil sector faced challenges.
• Inflation: Headline inflation peaked at 18.2% in March 2021 but declined to 15.6% in December due to a new harvest and re-opening of borders. However, risks remain from exchange rate depreciation and low vaccination rates.
• Unemployment: Reported unemployment rates remained high, but recent surveys indicated employment levels returning to pre-pandemic levels.

Fiscal Policy

• The general government fiscal deficit is projected to widen to 5.9% of GDP in 2021 due to implicit fuel subsidies and increased security spending.
• Consolidated government revenue-to-GDP ratio is among the lowest globally at 7.5%.
• The authorities are urged to remove untargeted fuel subsidies and improve tax compliance and domestic revenue mobilization.
• A permanent removal of fuel subsidies in line with the Petroleum Industry Act (PIA) is recommended, along with compensatory measures for the poor.

Exchange Rate Policy

• A unified and market-clearing exchange rate is needed to strengthen the external position.
• The CBN discontinued the official exchange rate in May 2021, but multiple exchange rate windows remain in place.
• Exchange rate reforms should be accompanied by macroeconomic and structural policies to maintain competitiveness and contain inflation.

Monetary Policy

• The CBN has kept the Monetary Policy Rate (MPR) unchanged since September 2020 to support recovery.
• Real lending rates have been negative, encouraging credit growth.
• The central bank is encouraged to strengthen the monetary operational framework, focusing on price stability, and reduce quasi-fiscal operations.

Financial Sector

• The financial sector remains stable despite continued Central Bank support and regulatory forbearance.
• Vigilance is needed against undercapitalized banks and the introduction of macroprudential instruments is recommended.

Structural Reforms

• The government is urged to improve transparency and accountability, particularly in the use of COVID-19 emergency funds.
• Bold trade and agricultural reforms are needed to promote diversification and job creation.
• The ratification of the African Continental Free Trade Agreement (AfCFTA) is expected to boost the non-oil sector.

Risks and Challenges

• The outlook faces balanced risks, including future pandemic waves, fiscal sustainability issues, and security threats.
• Low vaccination rates and the emergence of new variants like Omicron pose significant health and economic risks.
• High debt service to government revenues and potential delays in reforms could threaten long-term stability.

Key Recommendations

• Fiscal Consolidation: Implement significant domestic revenue mobilization and remove untargeted fuel subsidies.
• Exchange Rate Reforms: Establish a unified and market-clearing rate, with clear communication and support from macroeconomic policies.
• Monetary Framework: Strengthen the monetary operational framework and prioritize price stability.
• Structural Reforms: Improve transparency, governance, and trade policies to ensure a robust and inclusive recovery.
• Social Safety Nets: Enhance social safety nets to support vulnerable populations during reforms.

Data Highlights

Conclusion

The IMF Executive Board concluded the 2021 Article IV consultation with Nigeria, emphasizing the need for fiscal consolidation, exchange rate reforms, and structural improvements to ensure sustainable and inclusive growth. While the economy has shown signs of recovery, the country faces ongoing challenges, including inflation, unemployment, and external vulnerabilities, which require continued attention and reform.