From Uche Usim, Abuja
The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) to take a gradual and multi-step approach towards establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility and removing the payments backlog.
The advice is contained in the IMF Executive Board 2020 Article IV Consultation with Nigeria.
The bank’s directors observed that multiple rates, limited flexibility, and foreign exchange shortages are posing challenges.
They further noted 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.
They highlighted the need for improved social safety nets to cushion potential negative impacts on the poor.
The IMF also stated that Nigeria’s economy has been hit hard by the COVID-19 pandemic.
“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.
External vulnerabilities due to lower oil prices and weak global demand have 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.
“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”, it stated.
The IMF added that 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.
“On the upside, recovering oil prices and completion of the Dangote oil refinery could catalyze more domestic crude oil production and boost growth”.
They commended the authorities for the measures taken to address the health and economic impacts of the COVID-19 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.