Nigeria’s economy gradually recovering but unemployment, inflation remain elevated – IMF

An International Monetary Fund (IMF) team on Thursday said that Nigeria’s economy was “gradually” recovering from the negative effects of the COVID-19 pandemic.

IMF disclosed this in its End-of-Mission statement from its headquarters in Washington, DC, on preliminary findings following virtual meetings by its staff teams with the Nigerian authorities from June 1 to 8.

The IMF team, led by Ms. Jesmin Rahman, discussed recent economic, financial developments and outlook and noted that “real Gross Domestic Product (GDP) was recovering but unemployment and inflation remained elevated”.

It added among other things that recent exchange rate measures were encouraging and further reforms were needed to achieve a fully unified and market-clearing exchange rate.

The findings also said the resurfacing of fuel subsidies was concerning, particularly in the context of low revenue mobilisation.

“The Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic.

“Following sharp output contractions in the second and third quarters, GDP growth turned positive in fourth quarter 2020 and growth reached 0.5 per cent (year-over-year) in first quarter 2021, supported by agriculture and services sectors.

“Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels.

“Inflation slightly decelerated in May but remained elevated at 17.9 per cent, owing to high food price inflation.

“With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued foreign exchange shortage.”

The report said that the incipient recovery in economic activity was projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 per cent in 2021.

It added that inflation was expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 per cent, following the removal of border controls and the elimination of base effects from elevated food price levels.

“Tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 per cent of GDP.

“Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria,” it said.

The IMF team commended the Nigerian authorities’ measures to contain the transmission of COVID-19 in the country.

It also commended the on-going vaccination programme under the COVAX initiative, and expressed strong support to the Nigerian authorities’ efforts to acquire additional doses from countries with surplus stocks.

The IMF team, however, expressed its concern with the resurgence of fuel subsidies.

It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.

It recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures.

“The mission urged the authorities to keep reliance on the Central Bank of Nigeria (CBN) overdrafts for deficit financing within legal limits.

”The mission also advised the government to continue to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management,” it stated.

It said that the recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the Nigerian Autonomous Foreign exchange rate (NAFEX) were encouraging.

The mission recommended maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.

On monetary policy, to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.

“The banking sector remains liquid and well-capitalized while non-performing loans (NPLs) are contained.

“The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.

“CBN stress tests purport that the banking system would remain adequately capitalised except in case of a severe deterioration of credit quality.

“Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates.”

It, however, cautioned that since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remained critical to safeguarding financial sector stability.

The IMF mission thanked the Nigerian authorities and other counterparts for what it termed “the open and thoughtful discussions and excellent cooperation”.