By Moses Obajemu
The International Monetary Fund (IMF) has welcomed the decline in nonperforming loans and the improved prudential banking ratios but noted that restructured loans and undercapitalized banks continue to weigh on Nigeria’s financial sector performance.
Towards this end, the IMF suggested strengthening capital buffers and risk based supervision, conducting an asset quality review, avoiding regulatory forbearance, and revamping the banking resolution framework. The directors of the IMF also recommended establishing a credible time bound recapitalization plan for weak banks and a timeline for phasing out the state backed asset management company AMCON.
The fund stated these in their Article IV on Nigeria released on Wednesday.
On the unification of the foreign exchange rate, the IMF commended the Nigeria’s’ commitment to unify the exchange rate and welcomed the increasing convergence of foreign exchange windows. They noted that a unified market based exchange rate and a more flexible exchange rate regime would support inflation targeting.
The IMF also endorsed the Central Bank of Nigeria’s restrictive monetary policy, saying it is appropriate for the Nigerian economy at this time.
The IMF said persisting structural and policy challenges continue to constrain growth to levels below those needed to reduce vulnerabilities, lessen poverty and improve weak human development outcomes, such as in health and education.
” A large infrastructure gap, low revenue mobilization, governance and institutional weaknesses, continued foreign exchange restrictions, and banking sector vulnerabilities are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production. Under current policies, the outlook remains therefore muted. Over the medium term, absent strong reforms, growth would hover around 2½ percent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock”, it said.
It said monetary policy focused on exchange rate stability would help contain inflation but worsen competitiveness if greater flexibility is not accommodated when needed, adding that high financing costs, on the back of little fiscal adjustment, would continue to constrain private sector credit, and the interest-to-revenue ratio would remain high.
“With inflation still above the central bank target, Directors generally considered that a tight monetary policy stance is appropriate,” they stated.
They urged the central bank to enhance transparency and communication and to improve the monetary policy framework, including using more of traditional methods.
They, however, advised the central bank to end its direct intervention in the economy and focus on its price stability mandate.
Directors of the fund emphasized the need for revenue-based consolidation to lower the ratio of interest payments to revenue and make room for priority expenditure. They welcomed Nigeria’s tax reform plan to increase non-oil revenue, including through tax policy and administration measures.
They stressed the importance of strengthening domestic revenue mobilization, including through additional excises, a comprehensive VAT reform, and elimination of tax incentives.
“Securing oil revenues through reforms of state owned enterprises and measures to improve the governance of the oil sector will also be crucial. Directors highlighted the importance of shifting the expenditure mix toward priority areas. They welcomed, in this context, the significant increase in public investment but underlined the need for greater investment efficiency. They also recommended increasing funding for health and education. They noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space. Directors recommended stronger coordination for more effective public debt and cash management”, the IMF said.
They also stressed that elimination of exchange restrictions and multiple currency practices would remove distortions and facilitate economic diversification., Directors urged the authorities to reinvigorate implementation of structural reforms to diversify the economy and achieve the Sustainable Development Goals.
They pointed to the importance of improving the business environment, implementing the power sector recovery program, deepening financial inclusion, reforming the health and education sectors, and implementing policies to reduce gender inequities. Directors also emphasized the need to strengthen governance, transparency, and anti-corruption initiatives, including by enhancing AML/CFT and improving accountability in the public sector.
Directors welcomed improvements in the quality and availability of economic statistics and encouraged continued efforts to address remaining gaps, including through regular funding
Frontpage November 22, 2019