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IMF Wants Central Bank Deficit Financing Phased Out, Urges Reforms to Lift Growth

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On January 27, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nigeria.

According to the IMF, Nigeria’s economy has been hit hard by the COVID-19 pandemic.

“Socio-economic conditions have deteriorated, with rising food inflation, elevated youth unemployment, mass protests in October 2020, and surveys show worsening food insecurity with a significant impact on the vulnerable,” the IMF said.

“Risks are tilted to the downside and include the resurgence of the pandemic, security situation and unfavorable external environment. Capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities.”

Following a sharp drop in oil prices and capital outflows, real GDP is estimated to have contracted by 3.2 percent in 2020 amidst the pandemic-related lockdown.

Headline inflation rose to 14.9 percent in November 2020, a 33-month high, reflecting core and food inflation increases emanating from supply shortages due to the lockdown effected to curb infections alongside, the land-border closure and continued import restrictions.

The unemployment rate reached 27 percent in the second quarter of 2020, with youth unemployment at 41 percent.

The Nigerian authorities acted swiftly to adopt a pandemic-related support package equivalent to 0.3 percent of GDP in the 2020 revised federal budget despite limited fiscal space, according to the IMF.

External vulnerabilities due to lower oil prices and weak global demand have however increased, with the current account remaining in deficit in the first half of 2021.

In April 2020, Nigeria received IMF emergency financial assistance of $3.5 billion under the Rapid Financing Instrument to help cushion the impact of the pandemic.

On the upside the IMF said, recovering oil prices and completion of the Dangote oil refinery could catalyze more domestic crude oil production and boost growth.

The IMF Executive Directors agreed with the thrust of the staff appraisal.

They commended the authorities for the measures taken to address the health and economic impacts of the COVID19 pandemic which have exacerbated pre-existing weaknesses.

Looking ahead, Directors emphasized the need for urgent policy adjustment and more fundamental reforms to sustain macroeconomic stability and lift growth and employment.

Directors welcomed notable reforms undertaken in the fiscal sector, including removal of the fuel subsidy and steps to implement cost-reflective tariff increases in the power sector.

However, they stressed the need for significant revenue mobilization to reduce fiscal sustainability risks, relying initially on progressive and efficiency-enhancing measures with higher tax rates awaiting a more sustained economic recovery.

They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.

Directors noted that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges. They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.

Directors observed that the accommodative monetary stance remains appropriate in the near term, although tightening may be warranted if balance of payments or inflationary pressures were to increase.

In the medium term, the monetary policy operational framework should be reformed and Central Bank financing of budget deficit phased out in order to reduce inflation.

While welcoming the resilience of the banking sector, Directors called for continued vigilance to contain financial stability risks.

They noted that COVID-19 debt relief measures for bank clients should remain time-bound and limited to those with good pre-crisis fundamentals.

Directors welcomed recent progress in structural reforms and called for continued reforms aimed at promoting economic diversification and reducing the dependence on oil and increasing employment.

In addition, they encouraged strengthening governance and anticorruption frameworks, including compliance with AML/CFT measures. Directors also welcomed the ratification of the African Continental Free Trade Area and underscored that implementing trade-enabling reforms remains critical to rejuvenate growth.

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