IMF: The Resurfacing of Fuel Subsidies in Nigeria is Concerning (Full Report)

An International Monetary Fund (IMF) team led by Ms. Jesmin Rahman held virtual meetings with the Nigerian authorities from June 1-8, 2021 to discuss recent economic, financial developments and outlook. The body made a three-point conclusion about Nigeria’s economy at the end of the meetings.

1. Real GDP is recovering but unemployment and inflation remain elevated.
2. Recent exchange rate measures are encouraging, and further reforms are needed to achieve a fully unified and market-clearing exchange rate.
3. The resurfacing of fuel subsidies is concerning, particularly in the context of low revenue mobilization.

At the end of the visit, Ms. Rahman issued the following statement:

“The Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic. Following sharp output contractions in the second and third quarters, GDP growth turned positive in Q4 2020 and growth reached 0.5 percent (y/y) in Q1 2021, supported by agriculture and services sectors. Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 percent, owing to high food price inflation. With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.

“The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021. Inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels. Tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for Covid-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 percent of GDP. Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria.

“The mission commended the authorities’ measures to contain the transmission of Covid-19 in Nigeria, including the ongoing vaccination program under the COVAX initiative, and strongly supported the authorities’ efforts to acquire additional doses from countries with surplus stocks.

“The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor. The mission recommended stepping up efforts to strengthen tax administration to mobilize additional revenues and help address priority spending pressures. “The mission urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.

“The recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate are encouraging. The mission recommended maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate. On monetary policy, to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.

“The banking sector remains liquid and well-capitalized while non-performing loans (NPLs) are contained. The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals. CBN stress tests purport that the banking system would remain adequately capitalized except in case of a severe deterioration of credit quality. Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability.