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At the completion of its 2016 Article IV Mission to Nigeria, IMF Staff issued a statement on Wednesday saying the decline in oil prices has affected the economy leading to weaker corporate balance sheets, lower resilience of the banking system, and a likely reversal in the progress made in reducing unemployment and poverty.  

The discussions that the team had during its consultations with government officials were focused on assessing the economic impact of the sharp decline in oil prices. The discussions also looked at government policies focused on addressing near-term vulnerabilities, and structural reforms to promote sustained inclusive growth and reduce poverty. The consultations held between December 14-17, 2015 and January 10–25, 2016. 

By its assessment of the country’s performance last year, Nigeria saw a drop of about 40 percent in exports, which pushed the current account deficit to an estimated 2.4 percent of GDP. The economy grew by 2.8 percent in 2015, down from 6.3 percent GDP growth rate recorded in 2014. Significant segments of businesses that depend on an adequate supply of foreign currencies were impacted by the foreign exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect foreign exchange reserves that depleted to $28.3 billion as of December 31, 2015. The reserves are currently below $28 billion. Inflation increased to 9.6 percent in December (up from 7.9 percent in December 2014), above the CBN’s medium term target range of 6-9 percent.

“With oil prices expected to remain low for a long time, continuing risk aversion by international investors, and downside risks in the global economy, the outlook remains challenging,” said Mr. Gene Leon who led the IMF team.

While acknowledging the positive steps taken by the Nigerian authorities in response to the macroeconomic challenges, the team said, “it will be important to put in place an integrated package of policies centered around: (i) fiscal discipline; (ii) reducing external imbalances; (iii) further improving efficiency of the banking sector; and (iv) fostering strong implementation of structural reforms that will enhance competitiveness and foster inclusive growth.”

The IMF also said a credible package of policies must include the removal of restrictions on access to foreign exchange so that the exchange rate can reflect market forces more, while improvements are being made for the functioning of the interbank foreign exchange market (IFEM).

“It will be important for the regulatory and supervisory frameworks to ensure a strong and resilient financial sector that can support private sector investment across production segments (including SMEs) at reasonable financing costs,” Mr. Leon said.

The IMF team also expressed its support for ongoing efforts to promote targeted and core infrastructure (in power, integrated transport network, housing); reduce business environment costs through greater transparency and accountability, promote employment of youth and female populations.

The IMF team said with the appropriate policies, economic growth would improve slightly to 3.2 percent in 2016 and 4.9 percent in 2017. It said budget deficit will widen before improving in 2017, while the external current account deficit is likely to remain flat at 2.3 percent of GDP. While budget deficit for 2015, according to the IMF, was 3.3 percent of GDP, the 2016 proposed budget has a deficit of 2.16 percent of GDP, slightly lower than 2015.

Key risks to the outlook include lower-than-budgeted oil prices. (Benchmark oil price in the 2016 budget proposal is $38 per barrel. Oil prices are currently below $33 p/b). Other risks to the Nigeria outlook include shortfalls in non-oil revenues, a further deterioration in finances of state and local governments, and also a resurgence in security concerns in the country.   

“Establishing medium-term fiscal policy goals that support fiscal sustainability is a priority. In particular, measures should be implemented to boost the ratio of non-oil revenue to GDP, including from improvements in revenue administration and broadening of the tax base; rationalize spending; adopt safety nets for the most vulnerable; and foster enhanced accountability and an orderly adjustment of sub-national budgets,” Mr. Leon stated.

Nigeria’s tax-to-GDP ratio is one of the lowest among emerging markets at 7 percent. The administration of President Muhammadu Buhari has stated its commitment to increase Nigeria’s non-oil revenue as well as expand the country’s tax base.

In his budget speech in December, the president said, "We have focused on non-oil revenues by broadening our tax base and improving the effectiveness of our revenue collecting agencies."

The president also spoke about improvements in the collection and remittance of independent revenues through the MDAs. He said, "The recently established Efficiency Unit is working across MDAs to identify and eliminate wasteful spending, duplication and other inefficiencies."

The IMF team met with Vice President Professor Yemi Osinbajo, Finance Minister Kemi Adeosun, Minister of Budget and Planning Udoma Udo Udoma, Central Bank of Nigeria Governor Godwin Emefiele, senior government officials, and representatives of the private sector.