IMF says Nigerian economy set to bounce back but structural adjustments critical to long-term success

“The Covid-19 pandemic has placed Nigeria at a critical juncture,” said an IMF blog in February. “The country entered the crisis with falling per capita income, high inflation, and governance challenges. Policy adjustments and reforms designed to shift the country from its dependence on oil and to diversify the economy toward private sector- led growth will set Nigeria on a more sustainable path to recovery”.

Responding to a question on the performance of the Nigerian economy, IMF Managing-Director Kristalina Georgieva in a recent interview with Today News Africa was optimistic about Nigeria’s economic outlook as oil prices recover due to increased demand (Nigeria is the largest oil producer in Africa and “has the largest natural gas resources on the continent”). She also cited the need for Nigeria  “to strengthen its own resource base,” or in other words, “to increase government revenues”. Previously, the IMF had also recommended Nigeria make “exchange rate reforms”.  

Without these fiscal and currency reforms, “Nigeria’s recovery is expected to be weak and gradual”: the economy is expected to grow 1.5 percent in 2021 and is projected to return to its “pre-pandemic level only in 2022”. This is after a June 2020 World Bank report wrote that Nigeria would experience its worst economic recession since the 1980s.

According to the World Bank, both the economy and public-sector are heavily dependent on oil exports: “Oil accounts for over 80 percent of exports, a third of banking sector credit, and half of government revenues”. With the collapse in oil prices following global economic shutdown, the Nigerian government experienced a steep decline in revenue. It

already had “one of the lowest revenue levels as a share of GDP worldwide, “ at a tax-to-GDP ratio of 10 percent. According to IMF, a majority of fiscal resources go towards “public debt service payments,” leaving little left for “critical social and infrastructure spending” or to “cushion an economic downturn”.

Low oil prices also impact growth in other sectors of the Nigerian economy as foreign investors are discouraged to taking on risk. The World Bank  pointed out that contrary to a previous economic contraction in 2015-2016 – then its first in 25 years – Nigeria “has fewer buffers and policy instruments to cushion averse effects”. In particular, it has lacked the monetary reserves to respond to the economic shock caused by a decline in oil revenues.

Regarding currency reforms, the IMF sees an “appropriately valued exchange rate and a clear exchange rate policy” as helping to “instill [investor] confidence and private sector-led recovery”. In particular, it recommends Nigeria create “one market-clearing rate” instead of its current multiple exchange rates, and increase transparency in “rules for foreign exchange allocation”. It also mentioned that foreign direct investment, which could aid in economic diversification, has “dropped significantly in recent years,” because of the policy barriers investors face.

Using fourth quarter data from 2019, Nigeria was measured to have the largest economy in Africa in terms of GDP. In sub-Saharan Africa, Nigeria and South Africa were estimated to make up “almost half” of the region’s “gross domestic product”. In Nigeria, it is estimated that it, “will need to create at least 5 million new jobs each year over the next decade,” in order to accommodate a growing labor market. This may require “those that are doing well – individuals and businesses,” to “generate power for the rest of the country”. It is unclear whether Dr. Georgieva meant in terms of economic opportunity or actually providing electricity. Despite its abundant energy resources, only 56 percent of the country’s 200 million people had access to electricity in 2018 – electrification is critical to economic development.

For the continent and the country, a lot rests on the Nigerian government’s economic policy reforms. “‘Don’t waste a crisis; take advantage of this moment to fix problems that were there before,’” was her final message to African governments, in particular to Nigeria’s.

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