IMF Executive Board Concludes 2016 Article IV Consultation with Nigeria

imfOn March, 30, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Nigeria.

The Nigerian economy is facing substantial challenges. While the non-oil sector accounts for 90 percent of GDP, the oil sector plays a central role in the economy. Lower oil prices have significantly affected the fiscal and external accounts, decimating government revenues to just 7.8 percent of GDP and resulting in the doubling of the general government deficit to about 3.7 percent of GDP in 2015. Exports dropped about 40 percent in 2015, pushing the current account from a surplus of 0.2 percent of GDP to a deficit projected at 2.4 percent of GDP.

With foreign portfolio inflows slowing significantly, reserves fell to $28.3 billion at end-2015. 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 percent in 2014 to an estimated 2.7 percent 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.

The recovery in economic activity is likely to be modest over the medium term, but with significant downside risks. 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 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.

Executive Board Assessment[2]

Executive Directors welcomed the authorities’ policy agenda of enhancing transparency, strengthening governance, improving security, and creating jobs. Directors 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, 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 emphasized the critical need to raise non‑oil revenues to ensure fiscal sustainability while maintaining infrastructure and social spending. They urged a gradual increase in the VAT rate, further improvements in revenue administration, and a broadening of the tax base. Directors 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. Directors encouraged the implementation of an independent price‑setting mechanism to address petroleum subsidies, while strengthening the social safety net. Directors underlined the need for continued efforts to foster transparency and enhanced accountability.

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

banks and enhanced contingency planning and resolution frameworks would be important. Directors also noted that lowering interest rate spreads and increasing efficiency could enhance credit growth, especially for small and medium enterprises.

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. Directors welcomed 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.

Directors welcomed progress in improving the quality and availability of economic statistics. They welcomed the authorities’ commitment to implement the e‑GDDS, including a National Summary Data Page, and encouraged efforts to improve balance of payments data and compilation of sub‑national fiscal accounts.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: