Monday, February 8, 2021 / 4:10 p.m. / by Ari Aisen, Jesmin Rahman and Jiaxiong Yao, IMF African Department / Header Photo credits: IMF Photo / Ebun Akinbo
The COVID-19 pandemic has brought Nigeria to a critical point. The country entered the crisis with falling per capita income, high inflation and governance challenges. Policy adjustments and reforms aimed at freeing the country from its dependence on oil and diversifying the economy towards private sector-led growth will put Nigeria on a more sustainable path to recovery.
The IMF’s latest economic assessment of Africa’s largest economy recommends exchange rate reforms and increased efforts to increase government revenues.
What is the economic outlook for Nigeria in 2021 and beyond?
Nigeria’s recovery is expected to be weak and gradual under current policies. Real GDP growth in 2021 is likely to develop positively at 1.5 percent. Real GDP is not expected to recover to pre-pandemic levels until 2022. The near-term outlook is subject to downside risks from developments related to pandemics, with Nigeria experiencing a second wave. In the medium term, a subdued global upswing and decarbonization trend is expected to keep oil prices low and the quotas of the Organization of Petroleum Exporting Countries to remain in place, thereby limiting oil-related activities, tax revenues and export earnings. Growth outside the oil sector is also likely to remain sluggish due to inward-looking policies and regulatory uncertainties.
How can Nigeria’s move towards a single exchange rate and greater flexibility contribute to the recovery?
The current system creates uncertainty for the private sector due to multiple exchange rates and opaque rules for currency allocation. The unification of the different rates to a market clearance rate would strengthen the credibility of the policy. Persistent premiums on the parallel market and unmet foreign exchange demand suggest that the exchange rate needs to be adjusted further in order to narrow the gap between supply and demand. An appropriately valued exchange rate and clear exchange rate policy would also help build confidence and a private sector led recovery. Policy clarity is also important in attracting larger capital inflows, including foreign direct investment, which has declined significantly in recent years, and successful diversification.
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How can the government generate more revenue to ensure a sustainable budget?
Nigeria has one of the lowest revenues as a percentage of GDP in the world. Much of the revenue is spent on paying the country’s public debt service, leaving insufficient financial headroom for critical social and infrastructure spending to cushion an economic downturn. In this context, the mobilization of income through efficiency-increasing and progressive measures has top priority in the short term. Reviewing tax exemptions and duty exemptions, increasing and broadening the excise tax base, developing a highly integrated tax register, improving digital infrastructure, and improving on-time filing and payment are important actions.
As soon as the economic recovery takes hold, Nigeria must increase the VAT rate to at least 10 percent by 2022 and to 15 percent by 2025 – the average in countries that are part of the economic community of West African states – in order to create an effective tax area.
Why is economic diversification important to Nigeria?
The Nigerian export structure has not fundamentally changed over the decades. Hydrocarbon products still make up 90 percent of the country’s exports today, as they did in the 1970s. Successful economic diversification requires openness to trade and competitive discipline. The experiences in Malaysia, Indonesia and to some extent India have shown that a shift towards export-oriented industrialization can boost GDP. The limited benefits of inward-looking policies in terms of job creation and improved living standards suggest that Nigeria must change course. To accommodate a growing number of young people entering the labor market, Nigeria needs to create at least 5 million new jobs each year over the next decade. Based on the experience of other countries, more open trade and competition policies would help diversify the economy and revitalize growth, especially when the African continental free trade area comes into effect.
What transparency measures has Nigeria in place to ensure that the emergency spending is being used for its intended purpose?
The authorities have taken steps to facilitate the tracking and reporting of emergency expenses. The government has created new budget lines with monthly emergency funding spending information, which will be published on the Treasury Department’s transparency portal, although users have had difficulty accessing the data. The Bureau of Public Procurement has issued guidelines on the use of COVID-19 emergency funds, and the Nigeria Open Contracting Portal has published related procurement contracts, although some contract details regarding the beneficiary’s property have not yet been finalized. Going forward, Nigeria must continue to drive transparency reforms by expanding the monitoring and reporting of all public spending and ensuring easy public access to spending data.
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