By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) on Wednesday projected Nigeria’s inflation rate to rise to 11.5 percent by the end of 2015 from eight (8) percent recorded in 2014, reflecting the pass through from exchange rate depreciation.
The IMF’s executive board said this at the conclusion of Article IV consultation with Nigeria on February 27, 2015.
Also, the global lender in 2015 has projected Nigeria’s oil exports would decline by six (6) percent of Gross Domestic Product (GDP) from the 2014 level and oil revenue by two (2) percent. “A sharp contraction of public investment and domestic demand is projected to reduce growth to 4.75 percent in 2015 from 6.3 percent in 2014,” the Fund affirmed.
According to the IMF, the outlook is subject to downside risks, both external (changes in oil market developments and investor sentiment) and domestic (uncertainty over the election outcome and the security situation).
As part of the Fund’s executive board assessment, they commended Nigerian authorities for progress in promoting the nation’s economic diversification and for their 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 agreed 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.
In the same vein, the 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.
They said achieving the federal government’s fiscal targets will require a careful prioritisation of public spending and a cautious implementation of capital projects.
The IMF board approved 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, it will be important for the central bank to intermediate this supply in a transparent, efficient, and fair manner,” the Fund added.
Nigeria has a large and diverse economy that has achieved a decade of strong growth, averaging 6.8 percent a year, and now accounts for 35 percent of Sub-Saharan Africa’s gross domestic product (GDP).
The nation’s inflation has remained in single digits for two (2) years, and the banking sector, which has a strong capital base, is expanding credit.
The IMF added that while the economy is diverse, with services accounting for over 50 percent of GDP in 2013, and oil only 13 percent, the oil sector remains a critical source for revenue and foreign exchange. “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 underscores the challenging but compelling need to address remaining development challenges,” the IMF board noted.
On February 18, 2015, to respond to the sharp decline in oil prices which has affected negatively the fortune of the naira, the Central Bank of Nigeria (CBN) closed the Dutch Auction System (rDAS) window, unifying the rDAS rate with interbank foreign exchange market rate.
Also, on February 25, 2015, the Senate approved the third revision to the 2015 budget, tightening the fiscal envelope by lowering the budget benchmark oil price to $52/barrel.
This is coming on the heels of the postponed 2015 general elections and rising insecurity caused by the activities of the Islamic terrorists group Boko Haram.
