An
International Monetary Fund mission led by Gene Leon visited Abuja and
Lagos December 1?15 to hold discussions for the 2014 Article IV
consultation. Discussions focused on policies to addressing near-term
vulnerabilities and reforms over the medium-term to address the
authorities’ strategic objectives of macroeconomic stability, sustained
inclusive growth, and a reduction in poverty and inequality.
At the conclusion of the mission, Mr. Leon issued the following statement:
“We have held very useful and frank
discussions with the authorities. Nigeria, like other oil-exporting
countries, is facing a sharp fall in the price of oil (a primary source
of foreign exchange and fiscal revenue) and increased risk aversion by
international investors, who remain uncertain about the future of oil
prices.
“The authorities fully recognize the
implications of this exogenous shock. They have already taken bold
measures to counteract lower oil receipts, pressure on the naira, and a
fall in reserves, and expressed their intent to pursue macroeconomic
stability, based on assessments of credible scenarios that reflect
downside risks. The fiscal authorities have tabled a tighter budget for
2015, revising the 2015?17 Medium Term Expenditure Framework (MTEF) to
better reflect the latest developments in oil prices and proposing
measures to increase non-oil revenue. In addition, the Monetary Policy
Committee adjusted the exchange rate by -8 percent (from N155/$ to
N168/$), widened the currency band, and increased the monetary policy
rate by 100 basis points and the cash reserve requirement on private
sector deposits from 15 percent to 20 percent. Fund staff has supported
these measures, noting that the authorities should remain ready, given
the fluid global situation, to manage downside risks if they
materialize. In addition, there are Nigeria-specific risks related to
continuing security-related issues and uncertainty ahead of general
elections.
“Nigeria’s economy has continued to
grow strongly in 2014. Real Gross Domestic Product (GDP) grew by 6.1
percent in the third quarter of 2014 (compared to third quarter 2013),
supported by robust performances in the non-oil economy (agriculture,
trade, and services). Inflation continued to decline for the third month
in a row, registering 7.9 percent for end-November 2014, from lower
food inflation. Despite lower oil production in 2014 (compared to
budget), the overall fiscal balance is expected to be broadly on target
(1 percent deficit) and the non-oil primary deficit to improve, but the
current account surplus is projected to decline to about 2.4 percent of
GDP and reserves to fall to about $35 bn at end?2014 (5.6 months of
imports of goods and services).
“Growth is expected to decline in 2015
to about 5 percent. The magnitude of the adverse oil price shock
(projected at about 25 percent for 2015) will sharply reduce fiscal
revenues and limit fiscal spending. However, the overall impact on
non-oil sector GDP will be relatively muted, because of limited direct
channels from the oil sector. Further, the non-oil sector is expected to
remain the main driver of growth over the medium term. Similarly, the
depreciation of the exchange rate is expected to increase inflation,
reflecting pass-through effects of higher domestic prices for imports,
but the effect is likely to be contained, in part owing to lower food
prices from increased local production of staple food crops.
“Nigeria remains vulnerable to oil price
volatility and global financial developments. The measures already
taken by the authorities demonstrate their commitment to macroeconomic
stability. However, fiscal and external buffers are low and there is
less policy space for maneuvering, compared to the onset of the 2008-09
financial crisis – the Excess Crude Account (ECA) in 2008 was $21 bn
compared to $3bn now, while gross international reserves was $52 bn.
Further, the exigencies of public financial management apply equally to
all tiers of government: although the focus has been on the response of
the federal government, lower oil receipts, low internal generated
revenues, and a constrained ability to reduce recurrent expenditure
could have a significant impact on delivery of social services by state
and local governments, suggest the need for robust risk management
frameworks across all tiers of government.
“Rebuilding buffers, especially the ECA,
is a necessity for addressing future shocks. Capital outflows have
continued and, with lower oil receipts, have led to sustained pressure
on the naira. The authorities have reaffirmed their willingness to
implement appropriate measures to manage risks. Despite the tightly
managed official exchange rate, the interbank foreign exchange market
and bureau de change rates have been trading at significant premia over
the official Dutch auction rate, producing market distortions and
contributing to inflation.
“The longer-term challenge, however, is
to successfully put the economy on a path to lower oil-dependency and a
diversified and competitive investment-driven non-oil sector. In that
regard, staff is supportive of the authorities’ ongoing efforts to
promote targeted and core infrastructure (in power, integrated transport
network, aviation); reduce business environment costs and encourage
high value-chain sectors (agriculture); promote employment of youth and
female populations, and advance human capital development (health and
education).
“Given the developments in the oil
markets, the authorities have embarked on initiatives to diversify
revenue sources, address the cost of governance (an opportunity cost to
capital and social investment), improve efficiency of public sector
service delivery, galvanize public financial management reforms, and
improve effective capacity at the state and local tiers of government.
Also, they are mobilizing non-oil revenue by improving tax
administration (achieving almost double the target for 2014), and intend
to undertake tax reform and lower leakages (through a rationalization
of waivers and exemptions). It is important that these continue. Despite
the outlook, Nigeria could surmount its challenges, especially if a
national spirit of burden sharing and rebuilding together is actively
embraced.
“During our visit, the team met with
Finance Minister and Coordinating Minister of the Economy Ngozi
Okonjo-Iweala, Central Bank of Nigeria Governor Godwin Emefiele,
Minister of Agriculture Akinwunmi Adesina, Chief Economic Advisor to the
President Nwanze Okidegbe, senior government officials, and
representatives of the private sector. The team would like to thank the
authorities for the high quality and openness of the discussions and for
their hospitality.”
IMF Staff Concludes 2014 Article IV Mission to Nigeria
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