IMF projects 3% GDP contraction in 2020, asks CBN to reconsider LDR policy
By Oludare Mayowa
The International Monetary Fund (IMF) has projected that the country’s economy will shrink by 3 percent this year while seen recovery by next year at 1 percent.
The Fund also asked the Central Bank of Nigeria (CBN) to reconsider its Loan-to-Deposit (LDR) policy due to its downside risk to financial stability.
The IMF in its report at the conclusion of its virtual staff mission to the country said that under current policies, the outlook is challenging.
“Real GDP is projected to contract by 3 percent in 2020. The recovery is projected to start in 2021, with subdued growth of 1 percent and output recovering to its pre-pandemic level only in 2022.
“Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high.
“Despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s (CBN) target range, absent monetary policy reforms,” Jesmin Rahman, head of the IMF team said.
The IMF said in its report at the conclusion of its virtual staff mission to the country said though the banking sector has been resilient, it recommends vigilance and corrective measures by the CBN to prevent financial instability.
Rahman said “the minimum loan to deposit ratio should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients.
“While the banking sector has been resilient thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.
“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations,” Rahman wrote in a statement at the conclusion of the staff mission.
The mission also recommended major policy adjustments embracing broad market and exchange rate reforms to address recurrent Balance of Payment (BOP) pressures and raise the medium-term growth path.
“A durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning.
“The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.
Regarding financial inclusion, the mission welcomed notable progress in narrowing gender and regional gaps in access to financial services, including through fostering financial literacy, agency banking and use of fintech.
“On the structural front, the approval of the power sector recovery program financing plan, the ratification of the African Continental Free Trade Area (AfCFTA), and the completion of key road projects are positive steps.
“Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential.
“Moreover, it is critical to continue strengthening the anti-corruption framework and implement plans to improve the effectiveness of the AML/CFT framework,” Rahman stated in the report.
“The mission welcomed the recent submission of the Petroleum Industry Bill (PIB) to the Parliament. The Fiscal Framework chapter of the bill appropriately rebalances the government take in onshore/offshore production, with the aim of providing a fair share to the government while remaining attractive to investors.
“The mission welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term. This could be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.