Raise Non-oil Revenue to Ensure Fiscal Sustainability, IMF Urges Nigeria

The International Monetary Fund (IMF) has reiterated the need for the Nigerian government to raise non-oil revenue in order to ensure fiscal sustainability while maintaining infrastructure and social spending.

The Nigerian economy is facing substantial challenges at the moment. Lower oil prices have significantly affected the fiscal and external accounts, decimating government revenues to just 7.8 percent of Gross Domestic Product (GDP) and resulting in the doubling of the general government deficit to about 3.7 percent of GDP in 2015.

The IMF noted that the Nigerian economy has been hit hard by the decline in oil prices, which has slowed growth sharply and led to macroeconomic imbalances, adding that given the uncertain global outlook and the likelihood of oil prices remaining low, it is imperative for the country to adopt significant macroeconomic adjustment.

The IMF’s Executive Board who gave the charge after concluding its 2016 Article IV Consultation with Nigeria, also harped on the importance of implementing urgently a coherent package of policies, in consultation with Fund staff and development partners, to safeguard fiscal sustainability and reduce external imbalances, and advance structural reforms to support inclusive growth.

The IMF’s Board which consist of Directors, equally observed that recovery in economic activity is likely to be modest over the medium term, but with significant downside risks, adding that growth in 2016 is expected to decline further to 2.3 percent, with non-oil sector growth projected to slow from 3.6 percent in 2015 to 3.1 percent in 2016 before recovering to 3.5 percent in 2017, based on the results of policies under implementation—particularly in the oil sector—as well as an improvement in the terms of trade.

The Board further explained that the general government deficit is projected to widen somewhat in 2016 before improving in 2017, while the external current account deficit is likely to worsen further.

“Key risks to the outlook include lower oil prices, shortfalls in non-oil revenues, a further deterioration in finances of state and local Governments, deepening disruptions in private sector activity due to constraints on access to foreign exchange, and resurgence in security concerns”, the Board added.

They also called for a gradual increase in the Value Added Tax (VAT) rate, further improvements in revenue administration as well as broadening of the tax base of Nigeria.

They supported an orderly adjustment of budgets at the sub-national level through reform in budget preparation and execution, adding that public financial management and service delivery should be strengthened in the country.

The Board also called for the implementation of an independent price-setting mechanism to address petroleum subsidies, while strengthening the social safety net. They underlined the need for continued efforts to foster transparency and enhanced accountability.

The team applauded the Federal Government’s policy agenda of enhancing transparency, strengthening governance, improving security, and creating jobs, noting that the policy approach of expansionary monetary policy, together with a relatively fixed exchange rate and exchange restrictions had adversely impacted economic activity. It also raised concerns about the authorities’ commitment to their inflation objective.

The Board also raised concerns about the authorities’ commitment to their inflation objective and underscored the need for credible adjustment to the large terms-of-trade shock, including through greater exchange rate flexibility and speedy unwinding of exchange restrictions to facilitate an exchange rate consistent with fundamentals.

Against this background, they welcomed the recent monetary policy tightening and recommended that the central bank targets price stability to maintain inflation within the target range.

They also observed that further strengthening of the regulatory and supervisory frameworks would help improve resilience even as financial sector soundness indicators remain favorable.

“With declining asset quality a concern as growth slows, intensified monitoring of With declining asset quality a concern as growth slows, intensified monitoring of banks and enhanced contingency planning and resolution frameworks would be important”, they further explained.

The Board also noted that lowering interest rate spreads and increasing efficiency could enhance credit growth, especially for small and medium enterprises and stressed the need for structural reforms to enhance competitiveness and support investment.

They encouraged the authorities to continue core infrastructure investment, further reduce the cost of doing business through greater transparency and accountability, and promote employment of youth and women.

The team commended the renewed effort to adopt legislation to spur investment in the oil and gas sector, and promote policies to strengthen governance of the sector, including targeted AML/CFT measures.