Climate events, such as rising temperatures, greater frequency of extreme heat days and increasing frequency of high-intensity rainfall, pose risks to Nigeria’s macroeconomic stability, the International Monetary Fund (IMF) has warned.
The Fund, which gave the warning in a paper titled, “Nigeria: Macroeconomic Implications of Climate Challenges,” released over the weekend, predicted that the expected intensification of heating and precipitations was estimated to reduce Nigeria’s Gross Domestic Product (GDP) by 8 per cent by 2100, while projected global sea-level rise is likely to impose cost from 0.1 and 0.4 percent of GDP annually on the country.
It also predicted that fiscal cost associated with disaster relief, adaptation investment and mitigation will place significant pressure on the Nigeria’s fiscal position and generate external financing gaps.
As the IMF put it: “Climate events significantly impact Nigeria’s growth outlook, fiscal sustainability, balance of payments and financial sector, potentially undermining macroeconomic stability. Extreme weather events and their frequency have a direct effect on growth and the balance of payments.
“An expected sea level rise would pose significant economic cost for Nigeria, damaging infrastructure in coastal areas such as Lagos—the main commercial and financial centre. While relatively small, the financial sector is exposed to spillovers to asset quality and may even be directly impacted via its physical presence in Lagos. Fiscal policy will have to address lower tax revenues from lower growth and higher demands for spending on disaster relief, infrastructure repair, and investments in climate adaptation and mitigation. As a result, Nigeria will face fiscal and associated external financing gaps.”
Specifically, on how climate events are likely to impact the country’s financial sector, the Bretton Woods institution said: “Extreme weather events and sea level rise would damage physical assets, leading to higher claims and financial losses for insurers and worsening private sector balance sheets, potentially stressing banks’ asset quality.
“At present, Nigeria’s financial sector is small but is expected to play an increasing role in driving growth over time, which would raise its exposure to risks from climate events. The financial sector’s physical presence will have to adjust to the projected sea level rise.”
Also, on climate change’s likely fiscal impact for Nigeria, the IMF stated: “Fiscal revenues would be reduced with lower growth (unit buoyancy). In parallel, the government faces higher spending needs for disaster relief, which could reach up to 1½ per cent of GDP and adaptation investments of 1 per cent of GDP—adaption costs are up to 3 per cent of GDP in the authorities’ estimates which may include other development spending. These pressures come on top the need to strengthen revenue mobilization to create space for priority spending.”
The Fund, however, said that if Nigeria proceeds with its 2030 climate change mitigation objectives, “associated policy changes could generate 0.2 to 0.6 per cent of GDP in additional revenue, some of this could be used to compensate vulnerable households.”
“Taken together, climate events and rising sea levels will give rise to potential fiscal financing gaps,” it added.
Furthermore, the IMF said that climate change can also have an impact on Nigeria’s Balance of Payments (BoP), as extreme weather events, such as floods and droughts, can significantly disrupt agricultural and hydrocarbon production in the country, leading to lower export volumes and at the same time requiring increased imports of food and other essentials which could put pressure on the exchange rate and reserves.
Noting that, “fiscal financing needs may translate into external financing needs,” the Fund pointed out that the authorities are exploring options to tap available external climate financing sources.
According to the IMF: “Pursuing Nigeria’s mitigation objectives would take another 0.06 to over 0.4 percentage points off GDP growth, depending on the policy design.”
