The International Monetary Fund (IMF’s) Article IV Consultation Staff Report has shown that Nigeria’s oil earnings would drop to $52 billion this year, from $88 billion it was the previous year.
This represents a reduction of six percentage points in the nation’s Gross Domestic Product (GDP) and would reduce its external current account balance as well as international reserves.
The Fund’s report says Nigeria’s outlook for growth is expected to moderate as the economy adjusts to permanently lower oil prices.
According to the IMF, fiscal oil revenues are projected at 3.4 per cent of GDP, down from 5.8 per cent last year, limiting fiscal spending. It said aggregate demand shocks could lower growth by about 1.5 percentage point from last year to 4.3 per cent this year.
IMF added that the overall impact on non-oil sector GDP will come from cuts in public investment and a reduction in real purchasing power of oil receipts.
It said the depreciation of the local currency will add to inflation, reflecting the pass-through of higher domestic prices for imports, However, it said the effect is likely to be contained, in part due to lower food prices from increased local production of staple food crops.
The IMF said the outlook is compromised by low fiscal and external buffers, which have reduced the capacity to absorb shocks relative to the experience of the 2008-09 financial crisis.
The lender however said the government has expressed its determination to implement appropriate measures to manage risks. “They agreed that the oil price shock is significant and, at least in part, permanent, but saw a smaller effect on economic activity, owing to measures targeted at sectors critical for growth (agriculture, power, small enterprises) and the impact of remittances. They noted that rising food self-sufficiency would limit the pass-through to inflation and activity in housing construction would continue,” it said.
IMF said although small, Nigeria’s exports to Economic Community of West African States (ECOWAS) countries have been increasing, from $1 billion in 1990 to about $6 billion in 2013.
It said the implementation in January of the Common External Tariffs (CET) for ECOWAS member countries is expected to reduce incentives for informal trade and simplify customs procedures, potentially increasing recorded trade volumes.
“Moreover, the slowdown in Nigeria will adversely affect informal exports to Nigeria. Anecdotal evidence indicates that goods that are subject to import restrictions in Nigeria have become key export goods for neighboring countries. “Those informal exports to Nigeria are important sources of income for some neighboring countries and outward spillovers may be non trivial,” it said.
It said growing cross-border activity of Nigerian-based banks has increased the scope for spill-overs through financial channels, along with regulatory and supervisory challenges.