The Executive Board of the International Monetary Fund (IMF), yesterday concluded the Article IV consultation with Nigeria where it advised the country to review its revenue sharing formula. The Article IV is a review of a country’s economy over a period of time.
The Fund directors said there is a need to review the current revenue sharing arrangements in the country so as to help address regional disparities over the longer term and ensure that social and development needs are evenly addressed across the regions.
This, the IMF reasons, is important considering that Nigeria still lags behind its peers in critical infrastructure development, coupled with her high rate of poverty and income inequality. It noted that in spite of the country’s diverse economy, largely dominated by the service sector whch accounts for over 50 per cent of Gross Domestic Product in 2013, and oil sector accounting for only 13 per cent, latter still remains a critical source for revenue and foreign exchange.
However, the IMF regrets that with limited fiscal and external buffers ($2 billion in the excess crude account and $34.25 billion in gross international reserves, respectively at the end of 2014), the sharp decline of oil prices in the second half of 2014 now underscores the challenging but compelling need to address remaining development challenges.
This situation made the IMF to submit that mobilising additional non oil revenues is critical to open up fiscal space and improve public service delivery over the medium term.
The IMF Board also welcomed ongoing initiatives to strengthen tax administration, and encouraged the authorities to also rein in exemptions, keep tax rates under review, persevere with subsidy reform, and improve the management of oil revenue.
The Executive Directors commended the authorities for the progress recorded in promoting Nigeria’s economic diversification and for the macroeconomic response to collapsing export prices. They noted, however, that vulnerabilities remain high in view of the uncertainties about oil price, security, and the political situation, and concurred that additional policy adjustments and broader structural reforms will be necessary in the period ahead to reconstitute buffers, mitigate risks, and meet pressing development needs.
The IMF directors agreed that tightening fiscal policy and allowing the exchange rate to depreciate while using some of the reserve buffer were appropriate responses to the recent fall in oil prices.
“Nonetheless, directors stressed that achieving the authorities’ fiscal targets will require a careful prioritisation of public spending and a cautious implementation of capital projects. Also highlighted was the importance of improved budgeting at the state and local governments levels to help better manage their fiscal adjustment,” the report said.
The IMF directors welcomed the recent unification of the foreign exchange rates, noting that greater exchange rate flexibility could help cushion external shocks. As the largest single supplier of foreign exchange, the fund said it will be important for the central bank to intermediate this supply in a transparent, efficient, and fair manner.
On the banking sector, IMF directors noted that financial soundness indicators remain above prudential norms, but the concentration of credit risks and foreign currency exposures call for continued close oversight. They welcomed progress in strengthening supervision and regulation, including cross border activities, and encouraged additional initiatives to foster financial market development, including hedging instruments, and improve financial inclusion.
The directors emphasised that Nigeria’s longer term prospects rest on lowering oil dependency and strengthening private sector’s participation in economic activity. Lasting and more inclusive growth, it added, calls for improving the business environment, promoting youth and female employment, and advancing human capital development.
Directors noted that Nigeria’s economic data are broadly adequate for surveillance. Nonetheless, they encouraged the authorities to further improve statistics, in particular as regards the balance of payments.
