The fall in oil prices has “decimated” Nigerian government revenues and slashed the country’s GDP growth from 6.3% in 2014 to an estimated 2.7% last year, the International Monetary Fund has said.
IMF executive directors called for significant macroeconomic adjustments, tax increases and stronger public financial management as the Nigerian government deficit has doubled, the current account surplus disappeared and foreign reserves drop by almost $30bn.
The fund said the country’s economy faces “substantial challenges” as a result of the central role played by now cut-price oil and warned that progress in reducing unemployment and poverty has likely been reversed.
“Growth in 2016 is expected to decline further to 2.3%, with non-oil sector growth projected to slow from 3.6% in 2015 to 3.1% in 2016 before recovering in 2017, based on the results of policies under implementation as well as improvement in terms of trade” the fund continued.
The general government deficit, which stood at 3.7% of GDP last year, is also expected to worsen before getting better, as is the current account deficit, which was pushed from a surplus of 0.2% of GDP to a deficit of 2.4%.
Further falls to oil prices or shortfalls in non-oil revenues, a further deterioration in general or local government finances, deeper disruptions to private sector activity and a resurgence of security concerns could all result in an even worse outlook.
In February this year, the IMF said Nigeria could return to 4.9% growth this year if it could undertake widespread economic reforms and curb government spending.
But in their statement yesterday the IMF’s executive board seemed more downbeat about the outlook.
Directors stressed the need for some big macroeconomic changes and urgent implementation of a policy package which should be developed in consultation with IMF staff and development partners.
This will work towards the need to raise non-oil revenues while maintaining infrastructure and social spending.
A gradual increase in the VAT rate, further improvements in revenue administration and a broadening of the tax base were all recommended, as well as an “orderly adjustment” of sub-national budgets through reform in preparation and execution.
“They also stressed the importance of strengthened public financial management and service delivery,” the fund continued.
It said directors encouraged the implementation of an independent price-setting mechanism to address petroleum subsidies, while strengthening the social safety net, and underlined the need for continued efforts towards transparency and accountability.
Directors also “raised concerns” about the government’s “commitment” to its inflation objective. Inflation increased to 9.6% in January 2015, from 7.9% in December 2014, above the central bank’s target range of 6-9%.
Other recommendations included core infrastructure investment and greater employment of women and young people. Well over half of Nigeria’s young people are currently out of work. Earlier this month, the World Bank estimated that the country needs to create 40-50 million more productive and high-income jobs by 2030 as its population continues to boom.
By Emma Rumney and originally published in Public Finance International