Reopen borders to unlock growth potential, IMF advises Nigeria

The International Monetary Fund has advised the Nigerian government to lift trade restrictions as part of reforms needed to unlock strong growth potential.

Nigeria’s land borders have been closed to its West African neighbours for more than a year as part of efforts to check smuggling of contraband into the country.

The Washington-based fund announced on Friday the completion of a virtual mission from October 30 to November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria.

Jesmin Rahman, who led the IMF staff team that conducted the mission, said, “The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks.

“Low oil prices and sharp capital outflows have significantly increased balance of payments pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment.”

The IMF noted that supply shortages had pushed up headline inflation to a 30-month high.

It said, “Under current policies, the outlook is challenging. Real GDP is projected to contract by 3¼ percent in 2020. The recovery is projected to start in 2021, with subdued growth of 1½ percent and output recovering to its pre-pandemic level only in 2022.

“Despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s target range, absent monetary policy reforms.”

The fund said following a significant decline in revenue collections — from levels that were already among the lowest in the world — fiscal deficits were projected to remain elevated in the medium term.

“There are significant downside risks to this near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria,” it said.

The IMF noted that the Nigerian authorities had undertaken commendable and timely measures to counter the pandemic’s impact on lives and livelihoods.

It said, “The Federal Government adopted a revised budget in July which removed fuel subsidies and prioritised spending to make room for a support package, which included higher subsidies on CBN credit intervention facilities and regulatory forbearance measures to ease debt service in affected sectors.

“The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households.”

“But more needs to be done. Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path,” it added.

According to the IMF, a durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning.

It said, “The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.

“Significant revenue mobilisation — including through tax policy and administration improvements — is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.”

The fund said with high poverty rates and only a gradual recovery in prospect, revenue mobilisation would need to rely initially on progressive and efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root.

It welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term.

This could be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management, it said.

The IMF said the approval of the power sector recovery programme financing plan, the ratification of the African Continental Free Trade Area, and the completion of key road projects were positive steps.

“Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential,” it added.