Ways and Means: IMF Urges CBN to Stop Full Financing of Nigeria’s Fiscal Deficits

The International Monetary Fund (IMF) has urged the Central Bank of Nigeria (CBN) to go beyond recent increases in the policy rate to implement additional actions, including fully sterilising the apex bank’s financing of fiscal deficits under its Ways and Means window as well as phasing out other credit intervention programmes.

The multilateral lender also called on the Nigerian authorities to expedite action in finalising the moves to securitise the N22.7 trillion overdrafts extended by the CBN to the federal government to finance annual fiscal deficits.

In a statement issued after its Executive Board concluded its 2022 Article IV Consultation with Nigeria, the IMF observed recent increases in the policy rate, but encouraged the CBN to stand ready to further increase the policy rate if needed, and to implement additional actions, including fully sterilising central bank financing of fiscal deficits and phasing out credit intervention programmes.

The IMF stated: “Strengthening the CBN’s independence and establishing price stability as its primary objective is critical. Directors also urged the authorities to finalise securitisation of the CBN’s existing stock of overdrafts and emphasised that the CBN’s budget financing should strictly adhere to the statutory limits.”

According to the IMF, Nigeria’s economy has recouped the output losses sustained during the COVID-19 pandemic supported by favorable oil prices and buoyant consumption activities.

It stressed: “Gross domestic product (GDP) adjusted for inflation has already reached its pre-crisis level and the third quarter of 2022 marked the eighth consecutive quarter of positive growth—despite continued challenges in the oil sector. Growth is estimated at 3 percent for 2022.

“Headline inflation declined in December 2022 for the first time in 11 months, but at 21.3 per cent remains high—driven by elevated international food prices, large parallel market premiums and monetary policy accommodation. While the Central Bank of Nigeria raised the Monetary Policy rate (MPR) by a cumulative 500 basis points in 2022 and another 100 bps in January 2023, inflation remains above the MPR.”

But it stated that despite rising oil prices, the general government fiscal deficit was estimated to have widened further in 2022, mainly due to high fuel subsidy costs, adding that while the current account was estimated to have improved in 2022, foreign currency reserves declined amidst capital outflow pressures.

The global lender observed that notwithstanding the authorities’ success in containing and managing the COVID-19 infections, socio-economic conditions remain difficult.

“The spillover effects of the war in Ukraine, which have been transmitted mainly through higher domestic food prices, worsened the scarring effects of the pandemic, particularly on the most vulnerable—with Nigeria being among the countries with the lowest food security.

“The near-term outlook faces downside risks, while there are upside risks in the medium term. Higher international food and fertilizer prices and continued widening of the parallel market premium could culminate in the de-anchoring of inflation expectations,” it added.

The oil sector, it pointed out, faces downside risks from possible production and price volatility, while climate-related natural disasters, including floods pose the same risks to agricultural production.

“Further widening in sovereign premia could increase debt servicing costs. In the medium term, there are upside risks from a potential stronger reform momentum and a larger-than-expected rebound in oil and gas production,” the IMF stated.

It welcomed the broadening of Nigeria’s economic recovery, but noted that the opportunity to reap the benefits from higher global oil prices was missed even as it underscored near-term downside risks arising from elevated inflation, high debt-servicing costs, external sector pressures, and oil sector volatility.

“Looking ahead, Directors recommended decisive fiscal and monetary tightening to secure macroeconomic stability, combined with structural reforms to improve governance, strengthen the agricultural sector, and boost inclusive, sustainable growth.

“Directors highlighted the need for bold fiscal reforms to create needed policy space, put public debt on sound footing, and reduce vulnerabilities.

“They urged the authorities to deliver on their commitment to remove fuel subsidies by mid-2023, and to increase well-targeted social spending. Strengthening revenue mobilisation, including through tax administration reforms, expanding the tax automation system and strengthening taxpayer segmentation, and improving tax compliance is also a priority.

“In the medium term, Directors recommended modernising customs administration, rationalising tax incentives and raising tax rates to the levels of the Economic Community of West African States (ECOWAS).

“Directors urged decisive and effective monetary policy tightening to avoid a de-anchoring of inflation expectations. Noting recent increases in the policy rate, they encouraged the Central Bank of Nigeria (CBN) to stand ready to further increase the policy rate if needed and to implement additional actions, including fully sterilising central bank financing of fiscal deficits and phasing out credit intervention programs,” the statement added.

The IMF encouraged a continued move towards a unified and market-clearing exchange rate by dismantling various exchange rate windows at the CBN. Providing clarity on exchange rate policy would help boost investor confidence, quell capital outflow pressures, and rebuild buffers.

It also welcomed Nigeria’s intention to participate in the African Continental Free Trade Agreement (AfCfTA), the resilience of the banking sector and encouraged increased vigilance given potential risks associated with dynamic retail credit growth.

The multilateral lenders also emphasised the need to enhance the effectiveness of the Anti-Money Laundering, Combating the Financing of Terrorism (AML/CFT) framework and to avoid public listing by the Financial Action Task Force (FATF).

While welcoming the ongoing efforts to foster financial inclusion, including through the use of mobile money with appropriate regulation and supervision, the IMF

 highlighted the importance of improving the performance of the agricultural sector for job creation and food security.

It urged the authorities to implement governance reforms, including delivering on commitments from the 2020 Rapid Financing Instrument, adding that improving transparency and accountability in the oil sector is also key to strengthening governance.

Ndubuisi Francis in Abuja

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