An International Monetary Fund (IMF) staff team led by Jesmin Rahman conducted a virtual mission from October 30 to November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria.
When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy.
The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance.
Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed.
The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society.
Following the conclusion of the 2020 mission to Nigeria, here are some key takeaways by MoneyCentral:
CBN Ways and Means Financing of FG Falling
The IMF noted the reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term.
The CBN’s net financing to the Federal government stood at N4.4 trillion as at August 2019 (most recent publicly available data) from less than N400 billion in December 2018.
The N4.4 trillion net loans to the Federal Government (August 2019), is the net sum of outstanding CBN overdrafts to the FG minus the government’s treasury single accounts (TSA) deposits with the CBN.
According to the IMF, eliminating the monetary financing of fiscal deficits 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.
FG Needs to Embrace Broad Market Reforms
Major policy adjustments like embracing broad market and exchange rate reforms are needed to address recurrent Balance of Payments (BOP) pressures and raise the medium-term growth path, according to the IMF.
Nigeria’s Current-Account deficit narrowed in the Second Quarter (Q2) of 2020 as exports again dropped faster than imports amid a global economic slowdown caused by the coronavirus outbreak.
The current-account balance — the broadest measure of trade in goods and services — had a gap of -$3.23 billion in Q2, 2020, down a bit from -$4.881 billion in Q1 2020, but worse than the -$2.719 billion gap a year ago in Q1, 2019.
The deficit was also lower compared to the $6.95 billion gap recorded in Q4, 2019, according to Central Bank of Nigeria (CBN), quarterly Balance of Payments data seen by MoneyCentral.
“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. 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,” the IMF said.
Covid-19 Exacts Heavy Toll on Nigerian Economy
The IMF notes that 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 (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment.
Supply shortages have pushed up headline inflation to a 30-month high.
“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 (CBN) target range, absent monetary policy reforms. Following a significant decline in revenue collections—from levels that were already among the lowest in the world—fiscal deficits are 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.”
FG Taking Tiny Steps Towards Fiscal Transparency
The IMF mission welcomed fiscal transparency measures introduced to facilitate tracking and reporting of budget emergency funding by the Nigerian Federal Government (FG).
These include, new budget lines created, with information on monthly expenditures using emergency funding posted on the Ministry of Finance’s Transparency Portal.
The Bureau of Public Procurement has also issued guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting Portal has been publishing related procurement contracts.
“Further steps are needed to ensure more consistent access to the Transparency Portal and publication of contract details relating to beneficiary ownership,” the IMF said.
Low Yields Aiding Financing of Federal Government
The mission agreed with the CBN that the accommodative monetary stance remains appropriate in the near term given the constrained fiscal space, large fiscal financing needs and strained sovereign external market access.
MoneyCentral has detailed in several articles how borrowing costs are sliding on Central Bank of Nigeria (CBN) policy interventions.
Nigeria’s Federal government’s domestic debt which hit a record high as at June 2020, however MoneyCentral calculations show the FG is paying less as it borrows more.
Interest payments on the federal domestic debt declined by about 2 percent in the first 6 months of the 2020 fiscal year, compared to the same period in 2018, even as total domestic debt surged by 27 percent to N15.4 trillion as at June this year from N12.15 trillion in 2018.
Data compiled by MoneyCentral shows that domestic debt service payments fell to a low of N609 billion between January and March 2020. This compares to the N610.2 billion spent on domestic debt service in the January to March 2019 period and N643.6 billion spent between January and March 2018.
MoneyCentral calculations show that the average interest rate on the domestic debt fell to an annualised 11.92 percent in June 2020, compared to 12.3 percent in June 2019, and 15.46 percent in June 2018.
CBN Should Jettison Minimum Loan to Deposit Rule for Banks
The IMF advises that the minimum loan to deposit ratio (LDR) for Banks imposed by the CBN should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients.
The Central Bank of Nigeria (CBN) has set a regulatory minimum LDR of 65 percent.
“While the banking sector has been resilient thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans. In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations,” the IMF said.
Lift Trade Restrictions to Unlock Growth
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.
Nigerian President Muhammadu Buhari closed the land borders of the country since 2019 with no end in sight.