Officials International Monetary Fund (IMF) who are visiting Nigeria as part of its its regular consultations with member countries have expressed concern about the county’s huge size of recurrent expenditure.
IMF going back to the early days of President Olusegun Obasanjo administration had poited up huge recurrent votes as a major drug to the country’s growth and development.
“A constrained ability to reduce recurrent expenditure could have a significant impact on delivery of social services by state and local governments,” the officials said in a statement.
The team, led by Gene Leon, met with Nigerian officials in Abuja and Lagos for discussions focused on policies aimed at addressing vulnerabilities.
The IMF team usually consults with member countries on strategies to maintaining macroeconomic stability and policies that Forster growth in the economy.
In the past, it had through article 1v consultations delivered strong economic advice to the county, sometimes disagreeing with some policy directions of administrations.
The Fund, in a statement on Monday, said the meeting with Nigerian authorities discussed reforms over the medium-term to address the authorities’ strategic objectives of macroeconomic stability, sustained inclusive growth, and a reduction in poverty and inequality.
Leon said, “We have held very useful and frank discussions with the authorities. Nigeria, like other oil-exporting countries, is facing a sharp fall in the price of oil (a primary source of foreign exchange and fiscal revenue) and increased risk aversion by international investors, who remain uncertain about the future of oil prices.”
He also stated Nigeria’s authorities’ recognition of the implications of the shock in dwindling oil prices, assuring that government had taken bold measures to counteract lower oil receipts, pressure on the naira, and a fall in reserves, and expressed their intent to pursue macroeconomic stability, based on assessments of credible scenarios that reflect downside risks.
Among the measures, Leon stated were tighter budget for 2015; revision of the 2015−17 Medium Term Expenditure Framework (MTEF) to better reflect the latest developments in oil prices and proposing measures to increase non-oil revenue.
“In addition, the Monetary Policy Committee adjusted the exchange rate by -8 percent (from N155/$ to N168/$), widened the currency band, and increased the monetary policy rate by 100 basis points and the cash reserve requirement on private sector deposits from 15 percent to 20 percent,” he stated.
Leon however observed that there were specific risks related to continuing security-related issues and uncertainty ahead of general elections in Nigeria.
“Nigeria’s economy has continued to grow strongly in 2014. Real Gross Domestic Product (GDP) grew by 6.1 percent in the third quarter of 2014 (compared to third quarter 2013), supported by robust performances in the non-oil economy (agriculture, trade, and services). Inflation continued to decline for the third month in a row, registering 7.9 percent for end-November 2014, from lower food inflation. Despite lower oil production in 2014 (compared to budget), the overall fiscal balance is expected to be broadly on target (1 percent deficit) and the non-oil primary deficit to improve, but the current account surplus is projected to decline to about 2.4 percent of GDP and reserves to fall to about $35 bn at end−2014 (5.6 months of imports of goods and services).
“Growth is expected to decline in 2015 to about 5 percent. The magnitude of the adverse oil price shock (projected at about 25 percent for 2015) will sharply reduce fiscal revenues and limit fiscal spending,” he opined.
While observing that the depreciation of the exchange rate was “expected to increase inflation, reflecting pass-through effects of higher domestic prices for imports,” Leon suggested that “the non-oil sector was expected to remain the main driver of growth over the medium term.”
Furthermore, Nigeria remained vulnerable to oil price volatility and global financial developments and fiscal and external buffers are low with less policy space for maneuvering.
Therefore, “A constrained ability to reduce recurrent expenditure could have a significant impact on delivery of social services by state and local governments,” Leon added.
He advised for a build up of buffers, especially the ECA, which he said was necessary in addressing future shocks.
On the need for diversification, Loen opined that “The longer-term challenge is to successfully put the economy on a path to lower oil-dependency and a diversified and competitive investment-driven non-oil sector.”
The Fund expressed her support for the country’s efforts “to promote targeted and core infrastructure (in power, integrated transport network, aviation); reduce business environment costs and encourage high value-chain sectors (agriculture); promote employment of youth and female populations, and advance human capital development (health and education).”
Speaking almost in tandem with issues of taxes contained in the 2015 budget, the Fund expressed contentment with FG’s initiatives to diversify revenue sources as well as address the cost of governance; and improve effective capacity at the state and local tiers of government.
“Nigeria is mobilizing non-oil revenue by improving tax administration and intend to undertake tax reform and lower leakages.”
The IMF team met with Finance Minister and Coordinating Minister of the Economy, Ngozi Okonjo-Iweala; governor of the Central Bank, Godwin Emefiele; Minister of Agriculture, Akinwunmi Adesina; Chief Economic Advisor to the President, Nwanze Okidegbe; Senior government officials, and representatives of the private sector.
