IMF’s Perspective on Nigeria via its Article IV Mission – Coronation Economic Note

The IMF recently published its Article IV on Nigeria. The consultations with Nigerian officials on economic developments and policies ended in mid-January ’23.

According to the publication, Nigeria has recovered from the impact of the covid-19 pandemic on the back of favorable oil prices as well as a boost to consumption patterns.

This was evident in the consecutive q/q growth figures recorded in 2022. Additionally, the report emphasized the importance of reforming fiscal, structural, and exchange rate policies in order to restore macroeconomic stability.

For national output, the Fund projects a moderate GDP growth of 3.2% in 2023. Non-oil growth is expected to broaden to 3.0% largely driven by agriculture, information technology, and trade. Oil production is expected to remain below pre-pandemic levels in the mediumterm largely due to production shut-ins and divestments by IOCs. In our base-case scenario, our estimate for GDP growth is 2.8% y/y.

However, it is as high as 3.9% y/y in our optimistic case scenario.

Headline inflation is expected to moderate in 2023, the IMF projects a headline inflation rate of 17.4% y/y at end-2023. We note that the headline inflation stood at 21.82% in January ’23. Our projection for headline inflation in 2023 is slightly higher at 18% y/y.

According to the IMF, the near-term outlook faces downside risks such as higher global food and fertilizer prices and continued widening of the parallel market premium. These could result in a prolonged high inflation environment.

On the fiscal landscape, despite rising oil prices, the general government fiscal deficit is estimated to have widened further in 2022, mainly due to high fuel subsidy costs. The Fund projects that fiscal deficit could be above 6% of total GDP and public debt could rise to 43% of total GDP by 2027 if revenue mobilization efforts are not strengthened and costly fuel subsidies as well as rising debt servicing costs remain.

Regarding tax measures, the IMF advised the authorities to adopt tax rates comparable to Nigeria’s peers in the Economic Community of West African States (ECOWAS). These include raising the VAT rate to at least 10% by 2023 and aligning the VAT rate with the ECOWAS average of 15% by 2027, as well as increasing the excise rates on alcoholic and tobacco products.

The IMF welcomed measures taken by the CBN to tighten liquidity and curb inflationary pressure as well as steps taken to securitize CBN’s existing stock of overdrafts. We note that emphasis was placed on phasing out credit intervention programs driven by the CBN.

However, further policy rate hikes to tame inflation are encouraged. In our base case scenario, we expect a +150bps policy rate hike in 2023 to 18%. However, in our downturn scenario we see MPR at 20%.

In H2 2022, the gap between the parallel market and NAFEX exchange rate stayed above 50%. The IMF reaffirmed its previous recommendations that the authorities should consider a unified and market clearing exchange rate in a bid to address persistent fx shortages, reduce capital outflow, and narrow the parallel market premium. Meanwhile, the accretion of FX reserves is projected to remain limited over the medium term. From our vantage point, we expect the external reserves level to be at +/- USD35bn in 2023.

The report further stressed the importance of well-targeted social assistance programs. The IMF recommends increasing social spending by up to 1.7% of GDP cumulatively between 2023-2027 in a bid to cushion the impact of high inflation and expected fuel subsidy removal.

We understand that the World Bank plans to disburse USD1.5bn in 2023 with 50% (USD750m) expected to be channeled towards social assistance programs.