The Nigerian economy had grown by 6.1 per cent in the third quarter of 2014.
According to the IMF, the magnitude of the adverse oil price shock (projected at about 25 percent for 2015) would sharply reduce fiscal revenues and limit fiscal spending in the country. Furthermore, it pointed out that Nigeria remains vulnerable to oil price volatility and global financial developments.
The multilateral institution stated this in its 2014 Article IV report on Nigeria released on its website on Friday.
The report was the preliminary findings after a visit by its staff led by Gene Leon to Abuja and Lagos between December 1 and 15.
According to the IMF, 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.
However, the fund pointed out that the Nigerian government fully recognised the implications of the exogenous shock on the country. It supported recent monetary and fiscal policies measures adopted by the country.
The IMF report noted: “They have already 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.
“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.
“Fund staff has supported these measures, noting that the authorities should remain ready, given the fluid global situation, to manage downside risks if they materialise. In addition, there are Nigeria-specific risks related to continuing security-related issues and uncertainty ahead of general elections.
“Inflation continued to decline for the third month in a row, registering 7.9 per cent for end-November 2014, from lower food inflation. However, the overall impact on non-oil sector GDP will be relatively muted, because of limited direct channels from the oil sector. Further, the non-oil sector is expected to remain the main driver of growth over the medium term.
“Similarly, the depreciation of the exchange rate is expected to increase inflation, reflecting pass-through effects of higher domestic prices for imports, but the effect is likely to be contained, in part owing to lower food prices from increased local production of staple food crops.
“The measures already taken by the authorities demonstrate their commitment to macroeconomic stability.”
According to the fund, Nigeria’s fiscal and external buffers are low. It noted that the country had less “policy space for maneuvering, compared to the onset of the 2008-2009 financial crisis – the Excess Crude Account (ECA) in 2008 was $21 billion compared to $3 billion now, while gross international reserves was $52 billion.”
It continued: “Rebuilding buffers, especially the ECA, is a necessity for addressing future shocks. Capital outflows have continued and with lower oil receipts, have led to sustained pressure on the naira.
“The authorities have reaffirmed their willingness to implement appropriate measures to manage risks. Despite the tightly managed official exchange rate, the interbank foreign exchange market and bureau de change rates have been trading at significant premia over the official Dutch auction rate, producing market distortions and contributing to inflation.
“The longer-term challenge, however, is to successfully put the economy on a path to lower oil-dependency and a diversified and competitive investment-driven non-oil sector.”
– This Day