FG seeks IMF’s help as flooding, oil output crisis dampen outlook

• Downgrade linked to flooding, crude production crisis
• FX supply will increase with higher crude production, minister insists
• Nigeria’s economic prospect slows behind SSA, global average

The International Monetary Fund (IMF) has marked down Nigeria’s growth outlook for the second time in a row due to “weaker-than-expected activity in the first half”.

In its October World Economic Outlook (WEO) update, the Fund lowered the growth outlook by 0.2 percentage points to 2.9 per cent, putting it behind regional and global pegs. It was earlier downgraded from 3.3 per cent to 3.1 per cent in July.

The downgrade was linked to the recent devastating flood that displaced thousands and washed away farmlands and insecurity, which has kneecapped crude production.

However, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, was optimistic that the country would ramp up oil production, especially to address the foreign exchange crisis, which he attributed to oil supply shock.

Edun also observed that Nigeria and other developing countries would need to take a realistic approach to the climate change crisis as they must necessarily use their resources, including fossil fuels, to drive growth.

He also demanded global financial architecture reforms to help countries who are transitioning to rule-based economies survive short-term (foreign exchange) liquidity shocks, insisting that reforms have desirable long-term benefits. He also kicked against haphazard palliative, saying the cost-of-living crisis issue cannot be an afterthought but properly planned and executed.

Last year, the economy finished at 2.9 per cent last year. But in its April outlook, the IMF was more bullish on the economy, projecting a 3.3 per cent growth.

It was the second time in a row the Fund would downgrade the economic outlook. It was similarly lowered in its July update.

The outlook reversal is linked to the flooding and insecurity concerns that have affected the country’s oil production.

In August, weeks of flooding killed dozens of people in Nigeria and washed away farmlands, with the National Emergency Management Agency (NEMA) raising the alarm about shock in the supply chain, especially in the hard-hit northern states.

The floods blamed on poor infrastructure and badly maintained dams displaced 208,000 people in 28 states, NEMA said.

In 2022, similar flood disasters wreaked havoc especially across the country disrupting food production and worsening the food crisis.

During a briefing at the ongoing World Bank and IMF Annual Meetings, the Director of the Research Department at the IMF Pierre-Oliver Gourinchas, said the devastating flood would affect agriculture performance.

Gourinchas also highlighted insecurity, which has affected crude production, as another downside to the country’s economic performance.

On how the subsidy removal has affected the country’s growth prospect, the team said the IMF had no specific “figures”.

A member of the IMF research team, Jean-Marc Natal, urged the Nigerian government to ramp up support for the vulnerable and victims of the flood.

With the markdown, Nigeria is behind sub-Saharan Africa’s growth outlook, which was pegged at 3.6 per cent. The country is, however, expected to speed up from 2.9 per cent to 3.2 per cent next year, when the IMF expects the economy to have weaned itself from the current risks.

Emerging market growth was also expected to decelerate from 4.4 per cent recorded last year to 4.2 per cent this year through next year.

On per capita output, Nigeria may also slip behind its peers. The country is expected to grow by 0.4 per cent this year as against SSA’s 0.9 per cent and global growth of 2.7 per cent. All things being equal, its per capita out, the IMF said, would expand by another 0.7 per cent next year.

The global growth projection was retained at 3.2 per cent even as the IMF executive insisted that the “battle against inflation” was almost over. The team said it was a major achievement to bring inflation under control without the risk of inflation.

For Gourinchas, who projected that the United States could see another two rate cuts before the end of the year, the monetary easing would reduce the pressure on emerging markets such as Nigeria.

Essentially, lower interest rates in developed economies could see investments flowing from dollar-denominated assets to emerging markets, which were hitherto considered unattractive.

But Nigeria’s FX crisis, negative real rate of return, insecurity and other macroeconomic challenges could undermine the country’s ability to leverage the falling interest to increase its economic competitiveness.

But Edun, who spoke at G-24 Press Briefing, said Nigeria can tame the FX crisis when it scales up crude production even though there was no specific insight into what the country is doing to achieve higher oil production.

“We just need to get our oil supply right to deal with the FX supply and the pressure on the market,” he said.

Edun said the Central Bank of Nigeria (CBN) has rightly continued with the monetary tightening to rein in the high inflation rate, which is at divergence from the single-inflation rate seen in developed economies.

The minister also noticed that FX liquidity constraints “in relation to debt servicing” are common among countries that have keyed into rule-based reforms even though they are able to achieve debt sustainability.  According to him, the scenario paints the context of the discussion on how the IMF could support countries to pull through reform-related challenges such as Nigeria.

Edun said “bridge financing” is important to support countries that have got their fundamentals right but need to survive the lag required for the economy to fully adjust.

With COVID-19-triggered protectionism growing into a major concern, the minister lamented that the trend would continue to affect developing countries negatively with an adverse effect on their ability to leverage trade for growth and job creation.

He demanded the reform of global financial architecture to improve concessional financing for developing economies even as he insisted that the turnout of the United States election would not specifically affect the developing countries.

While he highlighted the need to scale up social safety nets to offset the impacts of reforms on the vulnerable, the minister said the long-term benefits of economic reforms are desirable for the economy. But he said the spike in the cost of living should be planned and dealt with as opposed to treating them as afterthoughts.