IMF seeks price stability of commodities in Nigeria

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The International Monetary Fund (IMF) has advised the Nigerian government to put in operational framework that will enable price stability in the country.

IMF staff concluding statement of the 2021 Article IV mission recommended that “in the medium term, the monetary operational framework should be strengthened to establish the primacy of price stability.

“Long-term high inflation in Nigeria is associated with the lack of a well-functioning monetary policy operational framework along with the presence of multiple policy goals.

“The mission reiterated its previous advice to (i) modernise the 2007CBN act to establish the primacy of price stability and (ii) strengthen the monetary transmission mechanism by integrating the interbank and debt markets and using central bank or government bills of short-maturity as the main liquidity management tool.

“As the recovery firms up, the CBN also needs to scale back its credit intervention programs as part of a broader monetary structural reform.”

According to statement by IMF Press Officer, Andrew Kanyegirire, at the weekend revealed that the headline fiscal deficit in Nigeria “is projected to worsen in the near term and remain elevated over the medium term.

“Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 per cent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022.

“There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle.

“Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 per cent in 2026. General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.

“The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act. In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed.

*Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation. Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources,” the statement noted.

IMF Staff Mission urged the implementation of “e-customs reforms including efficient procedures and controls, developing a VAT Compliance Improvement Program, improving compliance across large, medium, and micro/small taxpayers and rationalising tax incentives and customs duty waivers.

“As the recovery gains strength and compliance improves, Nigeria will have to adopt tax rates comparable to its peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan.

“The cumulative net savings from the recommended measures, after making room for additional social assistance to cushion impacts of reforms, could amount to 5.1 per cent of GDP over 2022-26. Such a consolidation would keep public debt below 40 per cent of GDP and reduce dependence on central bank financing of the deficit.”

The mission welcomed the recent passage of the Petroleum Industry Act (PIA) and stressed its timely implementation. “The PIA aims to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment. Preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms will provide greater incentives to invest in the oil and gas industry but will reduce the fiscal take from new and converted fields.”

IMF mission also stated that a “more open trade regime is needed to unleash the growth potential brought by the African Continental Free Trade Agreement (AfCFTA).

“The authorities are committed to implementing the AfCFTA and are working to enhance trade facilitation through increased use of technology. However, the overall trade regime continues to be protectionist and restrictive with numerous products prohibited from FX access for imports, including basic necessities and food items, high tariff and non-tariff barriers, and difficult trade logistics. Building on current efforts to improve port infrastructure and reduce the burden of customs administration, the mission recommended decisive actions to reduce barriers to trade and reliance on import substitution.”

IMF missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s articles of agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

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IMF seeks price stability of commodities in Nigeria