July 18, 2018/FDC
The IMF, in its latest review of Nigeria, raised some concerns about Nigeria’s revenue shortfalls and low private sector lending. According to the Fund, Nigeria’s recovery from the 2015/2016 recession was supported by higher oil prices and short-term portfolio inflows.
The Fund has also raised its forecast for Nigeria’s growth rate in 2019 to 2.3% from its earlier projection of 1.9%, driven by an improved outlook on global oil prices. IMF noted the following positive events that have occurred in the Nigerian economy:
external reserves level at approximately $47bn, despite the reversal of foreign inflows since April.
- Declining headline inflation to its lowest level in over two years. Inflation rate eased for the 16th consecutive month to 11.61% in May.
- Improved business environment through reforms such as the Company and Allied Matters Act (CAMA), Power Sector Recovery Plan.
- Improved corporate tax collection efforts by the government with schemes such as Voluntary Asset Income Declaration Scheme (VAIDS) and increased tax audits.
Concerns of the Fund
Whilst the Fund reaffirmed its growth forecasts for Nigeria at approximately 2% in 2018, it raised a few concerns about Nigeria’s policy environment and the sub-optimal performance of its non-oil and non-agricultural sectors. According to the IMF, Nigeria’s revenue remains stifled by net losses from its retail fuel sales and sub-optimal performance of its non-oil sectors (non-oil growth in Q1’18 was 0.76% compared to a growth rate of 14.77% in the oil sector). High borrowing rates (ranging between 20%-21% p.a.), which has kept private sector lending at a low level, was also a concern raised by the Fund. The current policy environment in Nige-ria was also a key issue for the Fund. It is imperative for Nigeria to adopt policies that re-duce its vulnerabilities (to both domestic and international shocks), ensure inclusive growth and promote adherence to budget targets.
Outlook for Nigeria
IMF gave the following outlook for Nigeria in 2018 with the brewing political environment:
- Growth would be hindered by lower oil production and weak agriculture growth.
- Inflation would reverse its downward trend in H2’18, driven by higher spending and supply constraints in the agriculture sector.
- FGN interest-to-revenue ratio would absorb a significant portion of its revenue in 2018.
Implications on the economy
IMF’s outlook of Nigeria’s headline inflation rate is in line with many analysts who believe that inflation rate is approaching an inflection point and would start creeping up by Q3-end. With the third MPC meeting for 2018 scheduled for July 23rd and 24th, we expect the reaffirmation by the Fund to reflect in the Committee’s decision. Therefore, there is a 60% probability that the Committee would vote to maintain status quo on all policy parameters. Whilst the revenue potentials of Nigeria remain largely untapped, we expect the yields from tax administration measures like VAIDS to manifest in the near term. This would help fill the gap created by net losses and sub-optimal revenue generated from Nigeria’s non-oil sectors.