Covid-19, oil price volatility, security significant risks to Nigeria, says IMF
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The International Monetary Fund (IMF) has warned that Nigeria’s persistent violence and insecurity challenges and the government’s failure to provide urgent fiscal consolidation, create policy space and reduce debt sustainability risks could hinder the country’s recovery from economic recession.
The executive board of the Washington-based institution issued the warning following the conclusion of its 2021 Article IV consultation with Nigeria, noting that the country’s economic outlook remains subject to significant risks, notably the Covid-19 trajectory, oil price volatility, and security challenges.
Highlighting Nigeria’s performance in relation to the rise in oil prices, the IMF noted that despite the recovery in oil prices, the general government fiscal deficit is projected to widen in 2021 to 5.9 percent of gross domestic product (GDP), reflecting implicit fuel subsidies and higher security spending. It added that the consolidated government revenue-to-GDP ratio at 7.5 percent remains among the lowest in the world.
In this regard, the IMF reiterated its recommendation for removal of fuel subsidies, alongside compensatory measures for the poor and transparent use of saved resources as well as stronger efforts to improve transparency of COVID-19 emergency spending.
The international organisation emphasised the need to implement major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.
It also called on the government to create significant domestic revenue mobilisation through an increase in the value-added tax rate, improved tax compliance, and rationalising tax incentives.
On the upside,the IMF raised optimism that the non-oil sector could be stronger, benefitting from its recent growth momentum, supportive credit policies, and higher production from the new Dangote refinery.
It was also noted that Nigeria’s ratification of the African Continental Free Trade Agreement (AfCFTA) could yield a positive boost to the non-oil sector,while oil production could rebound, supported by the more generous terms of the Petroleum Industry Act (PIA).
The IMF directors commended the removal of the official exchange rate and recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favourable conditions.
They suggested that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy.
Commenting on the newly launched eNaira, the IMF directors agreed that it could help foster financial inclusion and improve the delivery of social assistance. They however stressed the importance of closely monitoring its associated risks.