IMF warns Nigeria against low fiscal buffers, lowers 2015 growth projections to 5%

…says rebound possible if ‘rebuilding together is actively embraced

The International Monetary Fund (IMF) at the weekend warned Nigeria against low fiscal and external buffers, which unfortunately continue to dwindle in the face of falling oil prices.
The IMF warns that buffers remain a necessity for addressing future shocks and is particularly concerned that in the face of the low fiscal and external buffers, there is less policy space for maneuvering, compared to the onset of the 2008-09 financial crisis – when the Excess Crude Account (ECA) in 2008 was $21 billion for instance compared to $3 billion now.
Gross international reserves was $52 billion then but hovers around $37 billion and is projected to fall further to about $35 billion at end of 2014, supporting only 5.6 months of imports of goods and services in an import-dependent nation.
In its report on 2014 Article IV mission to Nigeria, the IMF said that Nigeria remains vulnerable to oil price volatility and global financial developments, but was, however, comfortable with measures already taken by the authorities, which it said demonstrate their commitment to macroeconomic stability.

But Nigeria’s economy has continued to grow strongly in 2014, it observed as it lowered projections to 5 percent for 2015.
“We have held very useful and frank discussions with the authorities. 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. “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 IMF observed, noting also that the “authorities have reaffirmed their willingness to implement appropriate measures to manage risks.”

Another concern of the global institution is that despite the tightly managed official exchange rate, the inter-bank 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 IMF is, however, comfortable that the Nigerian authorities fully recognise the implications of this exogenous shock and 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.
The fiscal authorities have tabled a tighter budget for 2015, revising the 2015−17 Medium Term Expenditure Framework (MTEF) to better reflect the latest developments in oil prices and proposing measures to increase non-oil revenue.

The monetary authorities have also been complementary with the Monetary Policy Committee adjusting the exchange rate by -8 percent (from N155/$ to N168/$), as well as widening 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.