Five Questions About Nigeria’s Road to Recovery
February 8, 2021
The COVID-19 pandemic has placed Nigeria at a critical juncture. The
country entered the crisis with falling per capita income, high inflation,
and governance challenges. Policy adjustments and reforms designed to shift
the country from its dependence on oil and to diversify the economy toward
private sector-led growth will set Nigeria on a more sustainable path to
The IMF’s latest economic assessment of Africa’s largest economy recommends exchange rate reforms and strengthened efforts to increase government revenues.
What is the economic outlook for Nigeria in 2021 and beyond?
Nigeria’s recovery is expected to be weak and gradual under current
policies. Real GDP growth in 2021 is expected to turn positive at 1.5
percent. Real GDP is expected to recover to its pre-pandemic level only in
2022. The near-term outlook is subject to downside risks from
pandemic-related developments with Nigeria experiencing a second wave. Over
the medium term, a subdued global recovery and decarbonization trends are
expected to keep oil prices low and Organization of the Petroleum Exporting Countries quotas in place, restricting
oil-related activities, fiscal revenues, and export proceeds. Non-oil
growth is also expected to remain sluggish, reflecting inward-looking
policies and regulatory uncertainties.
How can Nigeria’s movement toward a unified exchange rate and greater
flexibility help with the recovery?
The current system creates uncertainties for the private sector because of
multiple exchange rates and non-transparent rules for foreign exchange
allocation. Unifying the various rates into one market-clearing rate would
establish policy credibility. Sustained premiums in the parallel market and
unmet foreign exchange demand indicate the need for further adjustment in
the exchange rate to reduce the gap between supply and demand. An
appropriately valued exchange rate and a clear exchange rate policy would
also help instill confidence and private sector-led recovery. Policy
clarity is also important to attract larger capital inflows, including
foreign direct investments, which have dropped significantly in recent
years and successful diversification.
How can the government raise more revenues to ensure a sustainable
Nigeria has one of the lowest revenue levels as a share of GDP worldwide. A
large share of revenues is spent on the country’s public debt service
payments, leaving insufficient fiscal space for critical social and
infrastructure spending and to cushion an economic downturn. In this
context, mobilizing revenues through efficiency-enhancing and progressive
measures is a top near-term priority. Revisiting tax exemptions and customs
duty waivers, increasing and broadening the base for excise taxes,
developing a high-integrity taxpayer register, enhancing digital
infrastructure, and improving on-time filing and payment are important
Once economic recovery takes root, Nigeria will need to increase the
value-added tax rate to at least 10 percent by 2022 and 15 percent by
2025—the average in countries belonging to the Economic Community of West
African States—to create effective fiscal space.
Why is economic diversification important for Nigeria?
Nigeria’s export structure has not fundamentally changed over the decades,
with hydrocarbon products still accounting for 90 percent of the country’s
exports today as they did in the 1970s. Successful economic diversification
requires trade openness and competitive discipline. The experience of
Malaysia, Indonesia, and to some extent India has shown that a shift toward
export-oriented industrialization can boost GDP. The limited gains from
inward-oriented policies in terms of creating jobs and improving living
standards suggest that Nigeria needs to change course. To accommodate a
growing number of young people entering the labor market, Nigeria will need
to create at least 5 million new jobs each year over the next decade. Based
on experience of other countries, embracing more open trade and
competition policies would help diversify the economy and reinvigorate
growth, particularly as the African Continental Free Trade Area takes
What transparency measures has Nigeria put in place to ensure emergency
spending is going toward its intended use?
The authorities have adopted measures to facilitate tracking and reporting
of emergency spending. The government has created new budget lines with
monthly expenditure information on emergency funding, which are posted on
the Ministry of Finance’s Transparency Portal, although users have found it
difficult to access the data. The Bureau of Public Procurement has issued
guidelines on COVID-19 emergency fund use, and the Nigeria Open Contracting
Portal has been publishing related procurement contracts, although some
contract details on beneficiary ownership are yet to be completed. Going
forward, Nigeria needs to further embrace transparency reforms by expanding
the monitoring and reporting of all public spending, as well as ensuring
easy public access to spending data.