Source: THISDAYLIVE
The International Monetary Fund (IMF)
has pointed out that the Nigerian economy is currently facing
substantial challenges, saying lower oil prices have significantly
affected the country’s fiscal and external accounts.
The fund stated this in the conclusion
of its 2016 Article IV Consultation with Nigeria, by its Executive
Board. The document dated March 31, was posted on the multilateral
agency’s website yesterday.
The IMF, however welcomed recent
monetary policy tightening by the Central Bank of Nigeria (CBN), and
recommended that the central bank targets price stability to maintain
inflation within the target range.
The Monetary Policy Committee (MPC) of
the CBN in its meeting last week, raised the Monetary Policy Rate (MPR)
otherwise known as the interest rate, to 12 per cent from 11 per cent.
It had also increased bank’s Cash Reserve Ratio (CRR) to 22.5 per cent
from 20 per cent, in a move aimed at tightening liquidity, which the
central bank blamed for the current pressure in the foreign exchange
market with a strong pass-through to consumer prices.
Continuing, the IMF noted that while the
non-oil sector accounts for 90 per cent of the country’s Gross Domestic
Product (GDP), the oil sector plays a central role in the economy.
Furthermore, it pointed out that lower
oil prices have significantly affected Nigeria’s fiscal and external
accounts, decimating government revenues to just 7.8 per cent of GDP and
resulting in the doubling of the general government deficit to about
3.7 per cent of GDP in 2015.
Nigeria’s exports dropped about 40 per
cent in 2015, pushing the current account from a surplus of 0.2 per cent
of GDP to a deficit projected at 2.4 per cent of GDP.
With foreign portfolio inflows slowing significantly, reserves fell to $28.3 billion at end-2015.
It added: “Exchange restrictions
introduced by the Central Bank of Nigeria (CBN) to protect reserves have
impacted significantly segments of the private sector that depend on an
adequate supply of foreign currencies. Coupled with fuel shortages in
the first half of the year and lower investor confidence, growth slowed
sharply from 6.3 per cent in 2014 to an estimated 2.7 per cent in 2015,
weakening corporate balance sheets, lowering the resilience of the
banking system, and likely reversing progress in reducing unemployment
and poverty. Inflation increased to 9.6 percent in January (up from 7.9
percent in December, 2014), above the CBN’s medium-term target range of
6–9 percent.”
Inflation, however climbed further to 11.4 per cent in February.
The multilateral agency noted that the
recovery in economic activity was likely to be modest over the medium
term, but with significant downside risks.
It stated that Nigeria’s growth in 2016
was expected to decline further to 2.3 per cent, with non-oil sector
growth projected to slow from 3.6 per cent in 2015 to 3.1 per cent 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 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,” it
added.
IMF’s Executive Directors welcomed the
authorities’ policy agenda of enhancing transparency, strengthening
governance, improving security, and creating jobs. They 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.
Given the uncertain global outlook and
the likelihood of oil prices remaining low, the directors stressed the
need for significant macroeconomic adjustment. They highlighted 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 advancing
structural reforms to support inclusive growth.
Directors emphasised the critical need
to raise non-oil revenues to ensure fiscal sustainability while
maintaining infrastructure and social spending. They called for a
gradual increase in the VAT rate, further improvements in revenue
administration, and a broadening of the tax base.
In addition, the IMF supported an
orderly adjustment of budgets at the sub-national level through reform
in budget preparation and execution. They also stressed the importance
of strengthened public financial management and service delivery. They
called for the implementation of an independent price-setting mechanism
to address petroleum subsidies, while strengthening the social safety
net.
“Directors noted 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. They 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.
“In this context, they welcomed the
recent monetary policy tightening and recommended that the central bank
target price stability to maintain inflation within the target range.
Directors 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
“Directors 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 report stated.
Meanwhile, the total assets of Nigeria’s
sovereign wealth fund (SWF) grew to N213.67 billion ($1.07 billion) in
2015, up by 20 per cent compared with the previous year, its managing
director said on Friday.
Nigeria, Africa’s biggest oil producer,
established the Sovereign Investment Authority (SIA) in 2011 with $1
billion of seed capital in an effort to manage oil export revenues.
President Muhammadu Buhari took office
last May and has prioritised cracking down on corruption and
mismanagement, particularly in the oil sector, which has deepened an
economic crisis exacerbated by falling crude prices.
“Total assets recorded a growth of 20
percent to N213.66 billion at year end,” Reuters quoted the fund’s
managing director, Uche Orji, to have said in a report issued on Friday.
The total assets were up from N177.84
billion the previous year. And investment income grew by 47 percent to
close at N5.8 billion. The report said 2015 was a “difficult year” but
the SIA had “managed to protect its capital in a harsh and volatile
market environment”.
The fund is divided into three parts, a
‘Stabilisation Fund’ to act as a buffer against economic turbulence, an
Infrastructure Fund and a Future Generations fund.
In November officials announced that
$250 million from liquid natural gas export proceeds would be injected
into the wealth fund. Orji said this additional capital was received in
February 2016 and will be invested within the new fiscal year. He said
it would be invested using the existing deployment ratio of 40 percent
in Infrastructure Fund, 40 percent in Future Generations Fund and 20
percent in Stabilisation Fund.
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