… makes a recommendation for increasing social spending by up to 1.7 percentage points of GDP
The International Monetary Fund ( IMF) has picked holes in the financial reports of the Nigerian Nation Petroleum Company Limited ( NNPC), stating that though authorities in Nigeria have published the annual financial reports of the state-owned company since 2019, uncertainties remain regarding the nature of tax write-offs and fuel consumption volumes.
The mission also recommended a closer look at the nature of NNPC’s financial commitments to the government and the costing details of the fuel subsidy, including through a financial audit.
It stated that Fiscal transparency is critical for a sound fiscal policy: “Notwithstanding some recent improvements, some gaps still remain.”
“Stronger cash management and better coordination among key public institutions is needed to increase the realism of budgetary forecasts and reduce reliance on central bank overdrafts,” the fund stated.
This was contained in IMF’s Staff Concluding Statement of the 2022 Article IV Mission. A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country..
The Fund also advised the Federal Government on how to mitigate food insecurity and cushion the impact of high inflation and fuel subsidy removal on the poor. It stated that to achieve this, the mission recommended increasing social spending by up to 1.7 percentage points of GDP during 2023-27 in well-targeted programs in coordination with the World Bank and other development partners.
On the country’s monetary policies, it stated that the monetary conditions are accommodative despite tightening measures undertaken by the CBN.
“The mission welcomed measures taken by the Central Bank of Nigeria (CBN) to tighten liquidity and curb inflationary pressures through increasing the monetary policy rate (MPR) by a cumulative 400 basis points and raising the cash reserve ratio (CRR). However, overall conditions remain accommodative—the MPR is below inflation, and financing provided to the budget and the CBN’s directed lending schemes continue to drive strong monetary expansion.”
It however stated that decisive and effective monetary policy tightening is a priority to prevent risks of de-anchoring of inflation expectations.
Given the multiplicity of monetary policy tools, market segmentation and weak interest rate transmission, the mission recommended the following measures to effectively tighten the monetary policy stance:
(i) fully sterilize the impact of CBN’s financing of fiscal deficits on money supply;
(ii) stand ready to further increase the MPR to send a tightening signal; and
(iii) continue phasing out CBN’s credit intervention programs, which expanded rapidly during the pandemic to support the economy.
The mission welcomed progress in the securitization of the CBN’s existing stock of overdrafts and recommended speedy finalization. “Going forward, it would be important to limit reliance on CBN overdrafts for fiscal financing to the statutory limit of 5 percent of previous year’s revenues by pursuing fiscal consolidation, better budgetary planning and resorting to supplementary budgets in case of financing shortfalls.”
The mission also reiterated its previous recommendations to modernize the 2007 CBN ACT to establish price stability as its primary objective. It also recommended that transparency should be enhanced through timely publishing of audited financial statements.
It stated t in the report that despite improvement in the current account, the external sector continues to face pressures. “Rising oil prices drove export revenues in 2022, generating a merchandise trade surplus. The current account is also improving despite higher profit repatriation by foreign companies. However, large net private outflows by domestic banks and nonbanks in the form of offshore deposits surpassed net inflows by foreign investors putting downward pressure on gross international reserves. Against this backdrop, Nigeria’s external position is preliminarily assessed to be moderately weaker than implied by economic fundamentals.”
According to IMF, a unified and market-clearing exchange rate remains critical to enhancing confidence, stating further that continued foreign exchange (FX) shortages, a stabilized exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations. “These factors hinder much-needed capital inflows, encourage outflows and constrain private sector investment.”
The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.
“In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.”
