IMF sees hope in Nigeria’s economic recovery plan

The International Monetary Fund (IMF) has expressed confidence in the efforts taken by the Federal Government to resuscitate the country’s economy.

The IMF expressed this confidence in a document obtained by the News Agency of Nigeria (NAN), through the Executive Board, at the conclusion of its 2017 consultation with Nigeria on Friday.

The IMF noted that the economy had been negatively impacted by low petroleum price and production.

The directors commended the efforts already made by the authorities to reduce vulnerabilities and enhance resilience, including increasing fuel prices, raising the monetary policy rate, and allowing the exchange rate to depreciate.

“However, in light of the persisting internal and external challenges, they emphasized that stronger macroeconomic policies are urgently needed to rebuild confidence and foster an economic recovery.

The directors welcomed the authorities’ Economic Recovery and Growth Plan (ERGP), which focuses on economic diversification driven by the private sector, and government initiatives to strengthen infrastructure.

According to them, this includes the recently adopted power sector recovery plan.

However, they underlined that without stronger policies these objectives may not be achieved.

The Fund said the Directors generally emphasised the need for a front-loaded, revenue-based fiscal consolidation starting in 2017, to reduce the Federal Government interest payments-to-revenue ratio to sustainable levels.

“They underscored that priority should be given to increasing non-oil revenue, through raising VAT and excise rates, strengthening compliance, and closing loopholes and exemptions.

“Administering an independent fuel price-setting mechanism to eliminate fuel subsidies, strengthening public financial management, and developing a well-targeted social safety net would also support the adjustment.”

The directors stressed the need to contain the fiscal deficit of state and local governments, through improved transparency and monitoring.

They underscored that external adjustment is necessary to protect foreign currency buffers and reduce vulnerabilities.

They commended the recent easing of some exchange restrictions and urged the authorities to remove the remaining restrictions and multiple currency practices, thus unifying the foreign exchange market and helping regain investor confidence.

The directors emphasised that these policies should be supported by tighter monetary policy and fiscal consolidation to anchor inflation expectations and to limit the risk of exchange rate overshooting, and structural reforms to improve competitiveness.

The directors welcomed the steps to strengthen banking sector resilience through stronger prudential requirements, and with asset quality declining, they recommended further intensifying bank monitoring, enhancing contingency planning, and strengthening resolution frameworks.

The directors encouraged quickly increasing the capital of undercapitalized banks and putting a time limit on regulatory forbearance.

They emphasised that ambitious structural reforms are key to achieving a competitive, investment-driven economy that is less dependent on oil.

According to them, priority should be given to improving infrastructure, enhancing the business environment, improving access to financing for small enterprises, and strengthening governance and anti-corruption efforts.

“Timely and effective implementation of these measures would promote sustainable and inclusive growth.”

The IMF also welcomed progress in improving the quality and availability of economic statistics and encouraged further efforts to compile subnational fiscal accounts.

The Fund noted that the foreign exchange regime was liberalised in June 2016, but forex restrictions remained in place and the market continues to be characterised by significant distortions that had contributed to a 50 per cent parallel market premium.

According to the IMF, the significant distortions in forex market is halved following recent increases in Central Bank of Nigeria’s interventions and the removal of prioritized allocation of foreign exchange.

“Under unchanged policies, the outlook remains challenging. Growth would pick up only slightly to 0.8 per cent in 2017, mostly reflecting some recovery in oil production and a continuing strong performance in agriculture.

“Policy uncertainty, crowding out, and forex market distortions would be expected to drag activity, while accommodative monetary policy would keep inflation in double digits.

“Financing constraints and banks’ risk aversion would crowd out private sector credit and increase the Federal Government’s already high debt service burden.

“A continued policy of prioritizing exchange rate stability would lead to an increasingly overvalued exchange rate, leading to deterioration in the non-oil trade balance and gross reserves below adequate levels,” IMF said.

The Fund said that the Federal Government, recognizing the unsustainability of current policies, had adopted an Economic Recovery and Growth Plan (ERGP), to transform the economy into a more diversified and inclusive economy.

“Key priorities include ensuring food security through agro-related manufacturing, promoting industrialization, and achieving sufficiency in energy – including the recently approved Power Sector Recovery Plan.

“The ERGP’s inclusive growth focus is to be supported through macroeconomic stability, investing in social infrastructure, building a globally competitive economy, and improving governance,” IMF said.

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