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Nigeria

Author(s):
International Monetary Fund
Published Date:
February 2008
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I. Developments and Outlook1

Nigeria’s economic performance has been strong since the 2005 Article IV discussions (Figure 1), and the immediate outlook is favorable.

Figure 1.Recent Developments

Sources: Nigerian authorities and IMF staff estimates.

1. Economic growth has been strong and prospects are good. Non-oil sector growth is expected to stay robust at about 9 percent. Public and private demand has contributed, with the latter supported by credit growth. Risks relate to the large share of agriculture that is weather dependent. In the oil and gas sector, growth is constrained by unrest in the Niger Delta, but will benefit from the recently completed West African gas pipeline. In the medium term, the authorities anticipate a 50 percent increase in oil production from current levels. Box 1 describes revisions to the national accounts.

Nigeria: Selected Economic Indicators(Percent of GDP, unless otherwise stated)
20052006200720082009201020112012
Act.Est.Proj.
Real GDP growth (percent)6.56.06.39.08.37.07.08.1
Consumer price inflation, annual average (percent)17.88.35.47.38.58.58.58.5
Overall fiscal balance9.47.70.46.24.84.63.94.1
Non-oil primary fiscal balance (percent non-oil GDP)-27.2-28.3-27.1-25.0-25.0-25.0-25.0-25.0
Current account balance7.19.40.84.72.43.12.93.4
Sources: Nigerian authorities and IMF staff.
Sources: Nigerian authorities and IMF staff.

2. Fiscal spending has been contained during the oil boom to manage demand pressures. Unlike in past oil booms, domestic demand was contained by an oil-price-based fiscal rule and by directing revenue windfalls to an oil savings account at the central bank. Execution of the 2007 budget was mostly as projected at the fourth review of the Policy Support Instrument (PSI). The government’s medium-term fiscal strategy is consistent with macroeconomic objectives.

3. The central bank met its inflation target. Liquidity mop up, effective appreciation of the naira (including through unification of the foreign exchange market), a pick up in money demand, and easing food prices helped bring inflation to about 5½ percent on average at end-2007. Core inflation, while more variable, is also in single digits. Keeping headline inflation in single digits remains the policy goal. Supply-side developments—particularly in agriculture—will impact the headline rate.

4. Challenges in meeting monetary targets are being addressed. The reserve money program was difficult to implement owing to the large infusion of oil revenues and to weak and delayed data. Moreover, available operational instruments were limited. These issues are being addressed, and implementation has improved considerably through a Monetary Policy Implementation Committee. To improve the operation of the short-term interbank market, the central bank is using a standing facility and a daily two-way quote in the market.

5. Fiscal and external sustainability have improved. Oil proceeds were used to build savings and repay most external debt. This was complemented by Paris Club debt relief. External reserves increased steeply, boosting both investor confidence and Nigeria’s sovereign ratings, giving the private sector greater access to international financial markets.

6. Integration into global financial markets, developments in domestic markets, and improved fundamentals have resulted in a growing financial sector. Much improved domestic fundamentals, global liquidity conditions, and investors’ search for yield have drawn investor flows. In addition, remittances have risen as investment opportunities have opened up. The banking sector has taken advantage of investor interest to build further on the increase in capital that was achieved when the 89 banks in the sector were consolidated into 25 banks by end-2005.

7. The authorities’ policy program, supported by the PSI, was in accord with the Board’s conclusions at the 2005 Article IV consultation.2 Directors encouraged the authorities to continue efforts to stabilize the economy; improve public expenditure management, including through passage of fiscal responsibility legislation; restructure and better capitalize the banking system; unify the foreign exchange market; and pursue structural reforms that would improve government operations and the business environment. Significant progress has been made in these areas.

Box 1.Revised National Accounts

Nigeria published revised national accounts in October 2007 (Table 6). A revised series, for 1981–2006, was made possible by new surveys that resulted in a significant upward revision of nominal non-oil GDP and some revisions to real growth estimates. Nominal GDP in 2006 is 26 percent higher than in the old series (Table 7). This means that compared with previous staff reports, ratios of economic variables, such as fiscal balances to non-oil GDP, are much lower. The share of the oil sector in 2006 GDP declines from 48 to 37 percent.

Efforts to strengthen national accounts statistics are ongoing. The compilation methodologies for sector data, including natural gas and agriculture, and the deflator are being reviewed owing to weaknesses in these areas (see Annex III). The IMF and others are providing technical assistance.

Table 1.Nigeria: Selected Economic and Financial Indicators, 2004–12
200420052006200720082009201020112012
Act.Est.Proj.
National income and prices (annual percentage change, unless otherwise specified)
Real GDP (at 1990 factor cost)10.56.56.06.39.08.37.07.08.1
Oil GDP3.30.5-4.5-5.69.07.52.52.08.2
Non-oil GDP13.28.69.49.69.08.58.18.18.1
Production of crude oil (million barrels per day)2.502.512.362.162.362.542.602.652.87
Nominal GDP at market prices (billions of naira)11,67414,73518,71020,84524,89327,67231,50036,19242,374
Nominal non-oil GDP at factor cost (billions of naira)7,1638,90711,58213,43815,66918,41921,59725,38029,833
Nominal GDP per capita (U.S. dollars)6568241,0491,1581,4271,5571,6661,7381,849
GDP deflator20.719.819.54.89.62.66.47.48.3
Non-oil GDP deflator10.114.518.85.87.08.38.58.78.7
Consumer price index (annual average)15.017.88.35.47.38.58.58.58.5
Consumer price index (end of period)10.111.68.55.68.58.58.58.58.5
Consolidated government operations (consists of federal, state, and local governments; percent of GDP)
Total revenues and grants35.438.134.128.231.130.730.930.330.3
Of which: oil and gas revenue28.732.329.121.925.224.424.424.024.0
Total expenditure and net lending (commitment basis)29.130.026.427.324.925.926.426.426.2
Overall balance (commitment basis)6.38.17.70.96.24.84.63.94.1
Non-oil primary balance (percent of non-oil GDP)-23.9-27.2-28.3-27.1-25.0-25.0-25.0-25.0-25.0
Excess crude account (billions of U.S. dollars) 15.19.913.317.3
Money and credit (change in percent of broad money at the beginning of the period)
Broad money14.016.039.928.323.1
Net foreign assets62.361.868.627.150.1
Net domestic assets-49.9-45.8-28.71.3-27.0
Credit to consolidated government-42.1-17.4-34.5-31.2-33.2
Credit to the rest of the economy15.719.520.051.623.4
Velocity3.23.43.22.92.7
Treasury bill rate (percent; end of period)15.512.27.4
External sector (annual percentage change, unless otherwise specified)
Exports, f.o.b.34.036.117.83.628.81.84.84.410.0
Oil export volume2.5-3.5-2.7-9.55.38.22.72.29.0
Imports, f.o.b.-6.032.221.424.614.312.55.85.86.0
Terms of trade20.538.018.211.419.6-7.1-0.4-2.4-2.0
Price of Nigerian oil (U.S. dollars per barrel)38.355.365.373.088.583.083.583.383.3
Nominal effective exchange rate (end of period)-2.810.4-6.0
Real effective exchange rate (end of period)4.019.7-0.5
External debt outstanding (billions of U.S. dollars)35.920.53.53.33.44.25.26.27.2
Gross international reserves (billions of U.S. dollars)17.028.341.852.173.291.0111.8133.4158.0
(equivalent months of imports of goods and services)5.88.310.111.214.116.619.221.523.8
Sources: Nigerian authorities and IMF staff estimates and projections.

Including the naira-denominated component.

Sources: Nigerian authorities and IMF staff estimates and projections.

Including the naira-denominated component.

Table 2a.Nigeria: Consolidated Government (Cash Basis), 2004–10(Billions of naira)
2004200520062007200820092010
Act.Est.Proj.
Total revenue4,1275,6216,3765,8867,7418,5109,752
Oil and gas revenue3,3554,7595,4454,5556,2626,7627,681
Government crude receipts1,4401,9381,9941,4522,4742,6742,870
Petroleum profit tax and royalty1,1841,9052,0381,7662,3772,4552,683
Petroleum profit tax8261,3121,4421,2031,7211,8462,043
Royalty358593597562656609640
Gas sales91139190234256387500
Other oil revenue (gas flared; pipeline fees)5532130
Domestic crude6357711,0621,0201,1261,2431,628
Signature bonus00158832800
Non-oil revenue7738639311,3311,4791,7472,071
Import and excise duties217233178246291349445
Companies income tax130162245335391469566
Value-added tax157184227300364449527
Education tax17223043505972
Federal government independent revenue595533168120130135
State and local governments’ internal revenue157175190200217236256
Customs levies35322940475672
Total consolidated expenditure3,1774,2344,9335,7956,1907,1708,315
Total federal government and extrabudgetary expenditure1,6542,2232,4283,0223,3843,8534,404
Recurrent expenditure1,3931,8791,8662,2462,4682,7032,939
Goods and services5717308881,1391,2101,3541,468
Personnel and pensions4435276658649431,0231,115
Personnel370443528700780859936
Pensions7284137164163164178
Overhead cost128203223275267332353
Interest payments231382187208203233246
Transfers5917677918991,0551,1161,225
Of which: NNPC cash calls 1455532528563586581602
Federal government capital expenditure2613445627769161,1501,465
Domestically financed 22312544957058501,0811,388
Foreign financed30906771656978
State and local governments1,5231,9612,3082,4982,5953,0433,617
Primary expenditure1,5151,9282,3012,4912,5913,0393,613
External interest payment, cash83377434
Explicit fuel subsidy00440000
Large-scale infrastructure projects050194235211275294
Overall balance (cash basis)9511,3871,443921,5521,3401,438
Financing-925-1,183-1,637-1,096-1,552-1,340-1,438
External-155-868-761-5214119132
Borrowing3090677165127138
Amortization, cash-185-958-60-124-52-9-6
Debt buyback00-7670001
Domestic financing-777-393-905-1,145-1,565-1,459-1,569
Central bank (net, consolidated government)-975-503-1,306-1,227-1,765-1,759-1,669
Commercial banks (net, federal government)1939539882200300100
Commercial banks (net, states and local governments)41540000
Privatization proceeds02030102000
Recovered funds75900000
Statistical discrepancy26204-194-1,004000
Non-oil primary balance, federation (incl. explicit fuels subsidy)-1,710-2,424-3,280-3,686-3,917-4,605-5,392
Non-oil primary balance, state and local government-1,060-1,424-1,809-1,801-1,766-2,064-2,467
Nominal GDP (billions of naira)11,67414,73518,71020,84524,89327,67231,500
Non-oil GDP (billions of naira)7,1638,90711,58213,43815,66918,41921,597
Sources: Nigerian authorities and IMFstaff estimates and projections.

Includes capital contributions to joint venture projects with oil companies for power plants.

Actual cash spending

Sources: Nigerian authorities and IMFstaff estimates and projections.

Includes capital contributions to joint venture projects with oil companies for power plants.

Actual cash spending

Table 2b.Nigeria: Federal Government Budget, 2004–08(Billions of naira)
20042005200620072008
Act.Est.Proj.
Total revenue 11,4862,0582,4242,2112,895
Petroleum revenue1,2361,7942,1661,7342,411
Crude receipts, net of cash calls and derivation6038009266831,105
Petroleum profit tax and royalty5749249898511,153
Petroleum profit tax401636699580835
Royalty173288289271318
Upstream gas sales and NLNG446792117124
Other oil revenue (gas flared; pipeline fees)22210
Signature bonus01588328
Nonpetroleum revenue250264258476484
Import and excise duties10510880111131
Companies’ income tax6376114156182
Value-added tax2325314251
Federal government independent revenue595533168120
Total expenditure1,0751,4451,6642,1762,451
Recurrent expenditure8441,1921,1691,4711,600
Goods and services5717308881,1391,210
Personnel and pension443527665864943
Personnel370443528700780
Pensions7284137164163
Overhead cost128203223275267
Interest payments231382187208203
Domestic189200167184191
External, cash42182202412
Transfers 2427994141188
Nigerian National Petroleum Corporation (NNPC)004400
National Judicial Council2833354278
Transfer to Niger Delta Development Commission1422262470
Customs levies35
Education Fund17
Universal Basic Education Commission24303540
Capital expenditure231254495705850
Overall balance (cash basis)41161276035444
Financing-517-963-1,433-614-444
External-155-716-621-93-39
Borrowing300000
Amortization, cash-155-716-45-93-39
Debt buyback00-57600
Domestic financing-369-326-841-623-406
Central bank (net)-612-421-1,239-705-606
Commercial banks (net)1939539882200
Nonbank financing500000
Privatization proceeds020301020
Of which: sales of real estate assets1515150
Recovered funds759000
Statistical discrepancy-106-350-673-5780
Memorandum items:
Primary spending8441,0631,4771,9672,247
Non-oil primary balance (including explicit fuels subsidy)-594-799-1,219-1,491-1,764
Budgetary revenue1,4862,0582,4242,2112,895
Budgetary spending (including explicit fuels subsidy)1,2301,3961,7102,2682,489
Balance on the budget (BOF definition, debt service above the line)256661714-57406
Sources: Nigerian authorities and IMF staff estimates and projections.

Oil revenue net of cash call payments.

Excluding transfer to the NNPC for cash call payments. Includes fuel subsidy payments to independent marketers

Sources: Nigerian authorities and IMF staff estimates and projections.

Oil revenue net of cash call payments.

Excluding transfer to the NNPC for cash call payments. Includes fuel subsidy payments to independent marketers

Table 2c.Nigeria: Consolidated and Federal Government, 2004–10(Percent of GDP, unless otherwise specified)
2004200520062007200820092010
Act.Est.Proj.
Consolidated Government
Total revenue35.438.134.128.231.130.831.0
Oil and gas revenue28.732.329.121.925.224.424.4
Non-oil revenue6.65.95.06.45.96.36.6
Total consolidated expenditure27.228.726.427.824.925.926.4
Total federal government and extrabudgetary expenditure14.215.113.014.513.613.914.0
of which: Capital expenditure2.22.33.03.73.74.24.7
State and local governments (recurrent and capital)13.013.312.312.010.411.011.5
Large-scale infrastructure projects0.31.01.10.81.00.9
Overall balance (cash basis)8.19.47.70.46.24.84.6
Non-oil primary balance (excl. fuel subsidy, percent of non-oil GDP)1-23.9-27.2-28.3-27.1-25.0-25.0-25.0
Proxy domestic balance (percent of non-oil GDP)2-26.5-29.0-28.4-26.5-25.1-25.0-25.0
Federal Government
Total revenue12.714.013.010.611.6
Petroleum revenue10.612.211.68.39.7
Nonpetroleum revenue2.11.81.42.31.9
Total expenditure9.29.88.910.49.8
Recurrent expenditure7.28.16.27.16.4
Goods and services4.95.04.75.54.9
Interest payments2.02.61.01.00.8
Transfers 30.40.50.50.70.8
Capital expenditure2.01.72.63.43.4
Overall balance (cash basis)3.54.24.10.21.8
Financing-4.4-6.5-7.7-2.9-1.8
External-1.3-4.9-3.3-0.4-0.2
Domestic financing-3.2-2.2-4.5-3.0-1.6
Privatization proceeds0.00.10.20.50.0
Recovered funds0.10.40.00.00.0
Non-oil primary balance (includes explicit fuel subsidy, percent of non-oil GDP)-8.3-9.0-10.5-11.1-11.3
Non-oil revenue (percent of non-oil GDP)3.53.02.23.53.1
Sources: Nigerian authorities and IMFstaff estimates and projections.

Excluding oil revenue, cash call payments, and cash interest payments. Projections from 2007 reflect revised nominal GDP.

Estimates domestic demand impact of fiscal stance. Defined as non-oil balance (excluding fuel subsidy) less estimated foreign content of large infrastructure projects and foreign interest.

Excluding the transfers to NNPC for cash call payments.

Sources: Nigerian authorities and IMFstaff estimates and projections.

Excluding oil revenue, cash call payments, and cash interest payments. Projections from 2007 reflect revised nominal GDP.

Estimates domestic demand impact of fiscal stance. Defined as non-oil balance (excluding fuel subsidy) less estimated foreign content of large infrastructure projects and foreign interest.

Excluding the transfers to NNPC for cash call payments.

Table 3a.Nigeria: Central Bank of Nigeria (CBN) Analytical Quarterly Balance Sheet, 2004–08
20042005200620072008
Dec.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Dec.
Act.Est.Proj.
(Billions of naira)
Net foreign assets12,2503,6714,5734,9264,9025,3125,4155,3015,9276,2028,564
Foreign assets2,4793,7154,6455,1335,6705,3125,4155,3015,9276,2028,564
Short-term foreign liabilities-229-44-73-207-768000000
Net domestic assets-1,518-2,909-3,844-4,128-4,097-4,401-4,573-4,419-5,003-5,118-7,270
Domestic credit-718-1,135-1,707-2,313-1,994-2,451-2,246-2,049-3,489-3,712-5,477
Net claims on consolidated government2-681-1,185-1,785-2,437-2,252-2,491-2,329-2,095-3,495-3,718-5,483
Net claims on federal government-238-660-844-1,363-1,510-1,887-1,785-1,486-2,588-2,592-3,197
Statutory funds-80-62-90-101-110-92-76-95-101-110-197
Net claims on state and local goverments-363-463-851-974-632-511-467-514-807-1,016-2,089
Net claims on nonfinancial public enterprises-141-20-20-47-33-100-9-3-3-3-3
Net claims on nonfinancial private sector2-2-16-3-3330000
Claims on deposit money banks9261103113233130893000
Net claims on other financial institutions11111162607-146999
Other itema net-800-1,774-2,137-1,815-2,103-1,950-2,327-2,370-1,514-1,406-1,793
Reserve money7327637297988069118418829451,0841,294
Currency in circulation546642564603615779727715722
Banks reserves with the CBN187120165195191132114167223
Memorandum items:(Percent)
Reserve money y/y growth rate6.34.2-1.16.6-0.419.515.410.617.319.019.4
Money multiplier3.093.443.904.424.564.034.754.634.724.354.49
Seasonally adjusted currency ratio0.210.220.200.190.180.190.180.160.150.150.14
Excess reserves ratio0.060.050.050.040.030.040.040.070.070.070.06
Sources: Nigerian authorities and IMF staff estimates and projections.

CBN presents long-term liabilities in other items net.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

Sources: Nigerian authorities and IMF staff estimates and projections.

CBN presents long-term liabilities in other items net.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

Table 3b.Nigeria: Monetary Survey, 2004–08
20042005200620072008
Dec.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Dec.
Act.Est.Proj.
(Billions of naira)
Net foreign assets2,7124,1115,1095,5695,5765,9146,0426,1606,6346,9099,271
Central Bank of Nigeria (net)2,2503,6714,5734,9264,9025,3125,4155,3015,9276,2028,564
Foreign assets2,4793,7154,6455,1335,6705,3125,4155,3015,9276,2028,564
Short-term foreign liabilities-229-44-73-207-768000000
Commercial and merchant banks (net)462440536643673602628859707707707
Foreign assets481463557667718638713954838838838
Foreign liabilities-19-23-21-24-44-36-86-96-131-131-131
Net domestic assets-448-1,485-2,268-2,043-1,901-2,240-2,044-2,080-2,175-2,193-3,468
Net domestic credit1,2851,3357458401,2059631,1281,7101,5271,7011,237
Consolidated government1-224-618-1,161-1,429-1,300-1,523-1,793-1,689-2,528-2,668-4,233
Federal government253-73-194-330-540-903-1,203-1,006-1,522-1,526-1,932
States and local governments-398-482-877-999-649-527-514-588-905-1,032-2,104
Satutory funds-80-62-90-101-110-92-76-95-101-110-197
Claims on nonfinancial public enterprises2254613130000
Other financial institutions11111162607-146999
Claims on private sector1,4971,9391,8892,2032,4382,4652,9083,3534,0464,3605,461
(y/y growth rate)226.329.515.822.026.627.153.952.266.076.935.0
Other items (net)-1,734-2,820-3,014-2,883-3,106-3,203-3,172-3,791-3,702-3,894-4,705
Broad money2,2642,6262,8413,5263,6743,6753,9984,0804,4594,7155,803
(q/q s.a. growth rate)22.421.85.76.13.3-0.210.712.5
(y/y growth rate)214.016.010.331.032.539.940.815.721.328.323.1
Memorandum items:(Contribution to broad money growth, unless otherwise specified)
Net foreign assets62.361.838.055.555.868.63.56.719.627.150.1
Central Bank of Nigeria (net)60.062.834.347.846.962.52.8-0.316.724.250.1
Commercial and merchant banks (net)2.3-1.03.77.78.96.20.77.02.92.90.0
Net domestic assets-49.9-45.8-29.8-21.2-15.9-28.75.34.31.81.3-27.0
Net domestic credit-26.12.2-22.4-18.8-4.9-14.24.520.315.420.1-9.8
Net credit to the consolidated government-42.1-17.4-20.7-30.9-26.0-34.5-7.4-4.5-27.4-31.2-33.2
Net credit to the federal government12.8-14.4-4.6-9.8-17.8-31.6-8.2-2.8-16.8-16.9-8.6
Claims on private sector15.719.5-1.910.119.020.012.124.243.051.623.4
Other items (net)-23.7-48.0-7.4-2.4-10.9-14.60.8-16.0-13.6-18.8-17.2
Broad money (percent change since year’s end)14.016.08.234.339.939.98.811.021.328.323.1
Velocity (non-oil GDP/broad money)3.163.393.152.852.70
Gross international reserves (billions of US$)17.028.336.236.540.541.842.642.647.952.173.2
Sources: Nigerian authorities and IMF staff estimates and projections.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

y/y: year-on-year; q/q: quarter-on-quarter; s.a.: seasonally adjusted.

Sources: Nigerian authorities and IMF staff estimates and projections.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

y/y: year-on-year; q/q: quarter-on-quarter; s.a.: seasonally adjusted.

Table 4.Nigeria: Financial Soundness Indicators for the Banking Sector, 2004–07(Percent, unless otherwise indicated)
2004200520062007
June
Capital Adequacy
Regulatory capital to risk-weighted assets114.717.822.618.6
Regulatory Tier I capital to risk-weighted assets113.416.521.817.5
Capital (net worth) to assets9.912.414.713.3
Asset quality and composition
NPLs to gross loans121.618.18.87.7
NPLs net of provisions to capital190.064.421.323.4
Sectoral distribution of loans1
Manufacturing22.518.616.913.6
Trade and services23.621.122.019.4
Energy and minerals9.48.910.111.9
Agriculture4.93.92.31.9
Construction and property7.67.56.25.6
Households
Government4.24.67.61.9
Other29.435.838.041.3
Earnings and profitability
ROA13.10.91.61.8
ROE 127.47.110.413.8
Interest margin to gross income137.638.139.643.9
Noninterest expenses to gross income153.959.252.747.0
Personnel expenses to noninterest expenses0.037.342.739.0
Trading and fee income to total income45.131.733.332.4
Liquidity
Liquid assets to total assets161.162.2
Liquid assets to short term liabilities1
Customer deposits to total (non-interbank) loans77.473.667.3
Foreign exchange liabilities to total liabilities5.912.56.7
Source: Central Bank of Nigeria (CBN).

Included in the “core set” of financial soundness indicators. NPL - non performing loans; ROA - return on assets; ROE - return on equities.

Source: Central Bank of Nigeria (CBN).

Included in the “core set” of financial soundness indicators. NPL - non performing loans; ROA - return on assets; ROE - return on equities.

Table 5.Nigeria: Balance of Payments, 2004–12(Billions of U.S. dollars, unless otherwise specified)
200420052006200720082009201020112012
Act.Est.Proj.
Current account balance4.38.013.81.310.05.77.98.110.5
Oil/gas (net)16.323.031.225.437.638.743.045.350.5
Other (net)-12.0-15.0-17.4-24.0-27.6-33.1-35.1-37.2-40.0
Trade balance17.524.528.022.534.630.431.432.137.5
Exports36.950.259.161.378.980.384.187.996.7
Oil/gas35.749.258.160.177.678.982.786.394.9
Other1.21.01.01.21.31.41.51.61.7
Imports-19.4-25.6-31.1-38.8-44.3-49.9-52.7-55.8-59.1
Oil/gas-8.9-12.0-13.4-15.3-18.2-18.4-19.2-20.1-21.2
Other-10.5-13.7-17.7-23.5-26.2-31.5-33.5-35.6-38.0
Services (net)-6.1-7.1-6.4-7.6-8.6-9.4-9.9-10.7-11.5
Receipts1.82.13.53.23.13.03.33.63.9
Oil/gas0.30.51.81.21.00.70.80.80.9
Other1.41.61.71.92.12.32.52.83.1
Payments-7.9-9.2-9.9-10.7-11.7-12.5-13.2-14.3-15.4
Oil/gas-2.6-3.2-3.2-3.4-3.7-3.7-3.7-3.7-3.8
Other-5.3-6.1-6.6-7.3-8.0-8.8-9.6-10.5-11.6
Income (net)-9.7-12.8-11.3-17.0-19.4-18.8-17.0-16.9-19.2
Oil/gas-8.2-11.6-11.9-17.2-19.1-18.9-17.5-17.9-20.4
Other-1.6-1.30.70.2-0.30.10.51.01.2
Of which: Interest due on public debt-1.5-1.6-0.2-0.2-0.1-0.1-0.1-0.1-0.2
Transfers (net) 12.83.43.43.43.43.53.53.63.6
Capital and Financial account balance3.15.41.88.711.012.212.813.514.0
Capital Account (net)0.07.310.70.00.00.00.00.00.0
Debt Forgiveness0.07.310.70.00.00.00.00.00.0
Financial Account (net)3.1-1.9-8.88.711.012.212.813.514.0
Direct and portfolio investment (net)4.86.59.110.311.011.411.912.513.0
Oil/gas4.14.95.05.86.05.95.95.95.7
Other0.71.74.14.55.05.56.06.67.3
Official capital (net)-1.3-8.6-16.6-0.40.10.80.91.01.1
Disbursements0.20.70.50.60.61.11.11.21.2
Amortization due-1.5-9.2-17.1-1.0-0.4-0.3-0.2-0.2-0.2
Private borrowing (net)0.00.00.00.00.00.00.00.00.0
Other capital (net)2-0.40.1-1.3-1.2-0.10.00.00.00.0
Errors and omissions0.72.9-1.70.20.10.00.00.00.0
Overall balance8.116.313.910.321.117.820.721.624.5
Net international reserves (increase -)-9.5-11.3-13.9-10.3-21.1-17.8-20.7-21.6-24.5
Exceptional financing1.4-4.90.00.00.00.00.00.00.0
Net accumulation of arrears (decrease -)1.3-5.40.00.00.00.00.00.00.0
Other30.10.50.00.00.00.00.00.00.0
Memorandum items:
Gross official reserves, end-of-period17.028.341.852.173.291.0111.8133.4158.0
In months of next year’s GS imports5.88.310.111.214.116.619.221.523.8
Current account (percent of GDP)5.07.19.40.84.72.43.12.93.4
GS exports (percent of GDP)44.446.542.638.738.935.233.632.833.0
GS imports (percent of GDP)31.431.027.929.726.626.325.425.124.5
External debt 535.920.53.53.33.44.25.26.27.2
External debt (percent of GDP)4,541.318.22.42.01.61.82.02.22.4
External debt (percent of GS exports)4,593.139.25.75.14.25.15.96.77.2
External debt4,5,6116.947.87.17.05.25.86.47.37.8
External debt service due (percent of GS exports)7.920.827.71.90.70.50.40.40.3
GDP (at market prices)86.9112.2146.9166.6211.0236.5259.9278.7304.6
Sources: Nigerian authorities and IMF staff estimates and projections.

Includes capital transfers.

In 2006, the prepayment of post-cutoff Paris Club debt ($0.3 billion) and the cost of the buy-back of remaining Paris Club debt ($4.3 billion).

n 2002 debt buy-back, in 2003–05 recovery of looted funds.

Nominal public sector short- and long-term debt, end of period.

In 2005 (2006) reflecting also a $7.1 billion ($7.2 billion) write-off of Paris Club debt, and in 2006, reflecting the discount ($2.7 billion) on the $7.0 billion buy-back of remaining Paris Club debt.

Percent of general government fiscal revenues

Sources: Nigerian authorities and IMF staff estimates and projections.

Includes capital transfers.

In 2006, the prepayment of post-cutoff Paris Club debt ($0.3 billion) and the cost of the buy-back of remaining Paris Club debt ($4.3 billion).

n 2002 debt buy-back, in 2003–05 recovery of looted funds.

Nominal public sector short- and long-term debt, end of period.

In 2005 (2006) reflecting also a $7.1 billion ($7.2 billion) write-off of Paris Club debt, and in 2006, reflecting the discount ($2.7 billion) on the $7.0 billion buy-back of remaining Paris Club debt.

Percent of general government fiscal revenues

Table 6.Nigeria: National Accounts—Sector Composition, 1997–2006 1
1997199819992000200120022003200420052006
Act.
(Billions of naira)
Nominal GDP2,9072,8163,3124,7174,9107,1288,74311,67414,73518,710
Nominal GDP at factor costs2,8022,7083,1944,5824,7256,9128,48711,41114,57218,565
Oil1,0697371,0242,1871,6691,7992,7424,2485,6656,983
Non-oil1,7331,9722,1702,3953,0565,1145,7457,1638,90711,582
Agriculture9541,0581,1281,1931,5953,3573,6253,9044,7735,940
Non-oil non-agriculture7799141,0421,2031,4611,7562,1213,2604,1345,641
Solid Minerals3445678131727
Manufacturing144141151168199237288349413479
Telecommunication1111710132240166
Wholesale and retail trade3924444865276437729221,4841,8682,742
Building and construction19252831414859166216250
Other2212993734715666828301,2251,5811,978
Taxes less subsidies105108118135184216256263163145
(In percent)
Real GDP growth rates2.82.70.55.38.221.210.310.65.46.2
Real GDP at factor costs2.82.90.45.48.421.310.210.56.56.0
Oil1.52.2-7.511.15.2-5.723.93.30.5-4.5
Non-oil3.53.34.42.910.033.85.813.28.69.4
Agriculture4.34.15.32.93.955.27.06.37.17.4
Non-oil non-agriculture2.72.53.42.916.912.34.223.010.511.8
Solid Minerals6.36.03.83.89.94.35.417.69.510.3
Manufacturing0.4-6.93.43.47.010.15.711.99.69.4
Telecommunication5.85.96.16.7595.327.023.855.829.633.7
Wholesale and retail trade1.53.02.51.62.56.55.836.713.515.3
Building and construction6.46.03.84.012.04.38.7-6.812.113.0
Other4.34.94.33.931.718.40.917.26.16.6
Taxes less subsidies2.3-4.32.51.1-1.814.614.514.7-37.017.7
Sources: Nigeria National Bureau of Statistics: National Accounts of Nigeria 1981–2006, October 2007

The staff notes several concerns about these estimates, including the high non-oil growth rates in 2002 and 2004 (see Informational Annex)

Sources: Nigeria National Bureau of Statistics: National Accounts of Nigeria 1981–2006, October 2007

The staff notes several concerns about these estimates, including the high non-oil growth rates in 2002 and 2004 (see Informational Annex)

Table 7.Nigeria: Comparison of Revised and Previous GDP, 2004–12
200420052006200720082009201020112012
Act.Est.Proj.
Revised GDP
Nominal GDP(Billions of naira)
GDP11,67414,73518,71020,84524,89327,67231,50036,19242,374
GDP at factor costs11,41114,57218,56520,67824,69727,44131,22935,87542,002
Oil GDP4,2485,6656,9837,2399,0289,0229,63210,49512,169
Non-oil GDP7,1638,90711,58213,43815,66918,41921,59725,38029,833
Real GDP growth rate(In percent)
GDP10.65.46.26.49.08.37.07.08.1
GDP at factor costs10.56.56.06.39.08.37.07.08.1
Oil GDP3.30.5-4.5-5.69.07.52.52.08.2
Non-oil GDP13.28.69.49.69.08.58.18.18.1
Per capita GDP (US$)6568241,0491,1581,4271,5571,6661,7381,849
PSI 4th Review Staff Report (IMF Country Report No. 07/353)
Nominal GDP(Billions of naira)
GDP9,60412,93914,83815,68117,66119,68921,88624,65328,362
GDP at factor costs9,37612,65614,50415,30117,22519,18821,30823,98527,588
Oil GDP4,3716,4337,1606,9397,6528,1708,5959,28410,567
Non-oil GDP5,0056,2237,3448,3619,57311,01812,71214,70117,021
Real GDP growth rate(In percent)
GDP6.07.25.64.38.07.55.85.67.1
GDP at factor costs6.17.25.64.28.07.55.85.67.1
Oil GDP3.54.2-2.8-5.010.98.82.71.87.2
Non-oil GDP7.48.69.48.07.07.07.07.07.0
Per capita GDP (US$)5016747778109019881,0411,0741,132
Percentage change of level of nominal GDP(Revised GDP/PSI 4th Review)
Nominal GDP(In percent)
GDP21.613.926.132.941.040.543.946.849.4
GDP at factor costs21.715.128.035.143.443.046.649.652.2
Oil GDP-2.8-11.9-2.54.318.010.412.113.015.2
Non-oil GDP43.143.157.760.763.767.269.972.675.3
Per capita GDP30.822.235.043.158.457.760.061.863.4
Sources: Nigerian authorities and IMF staff estimates and projections.
Sources: Nigerian authorities and IMF staff estimates and projections.

II. Managing Oil Revenue: Developing Key Fiscal Institutions

The success ofpast fiscal policy, which resulted in mounting oil savings, and continued high oil prices have resulted in pressures by state governments to spend more. Agreement on the use of oil revenues by all tiers of government must be reached to avoid spending that goes beyond what the economy can absorb and to preserve macroeconomic stability.

8. The authorities’ medium-term fiscal strategy 2008–10 (MTFS) is a road map for preserving macroeconomic stability. The consolidated government non-oil primary fiscal deficit, projected to stay at about 25 percent of non-oil GDP, in line with recent years, is consistent with macroeconomic stability. The implementation of these deficit targets is supported by an oil-price-based fiscal rule (see Box 2). This oil-price-based fiscal rule is enshrined in the recently approved Fiscal Responsibility Act as a framework to guide budget allocations. The MTFS assumes oil revenues are distributed based on a budget oil price of about $55 per barrel. The overall fiscal position is expected to stay in surplus.3

Nigeria: Staff Estimate of the Non-Oil Consolidated Government Balance(Percent of non-oil GDP)
2007200820092010
Est.Proj.
Non-oil revenue9.99.49.59.6
Non-oil primary expenditures37.034.434.534.6
Federal government16.816.616.516.5
State and local governments18.516.516.516.7
Large-scale infrastructure projects1.71.31.51.4
Non-oil primary balance-27.1-25.0-25.0-25.0
Sources: Nigerian authorities and IMF staff.
Sources: Nigerian authorities and IMF staff.

9. The federal government’s budget for 2008 is consistent with the MTFS. The consolidated government non-oil primary deficit, based on a budget oil price of $53.83 per barrel, is projected to be about 22 percent of non-oil GDP. For purposes of the macroeconomic framework, a higher deficit, consistent with macroeconomic stability, of 25 percent of non-oil GDP is used. This larger deficit could allow for the resumption of large infrastructure projects that were put on hold for review by the incoming government, capital outlays from the 2007 budget that could carry over into 2008, or allocations of oil savings to reimburse states that contributed to the Paris Club debt buyback in excess of their own obligations.

10. The immediate challenge in implementing the MTFS is to manage pressures to spend oil savings. State governments are reasserting their constitutional right to receive oil savings and revenues (Box 2). Oil receipts are a shared revenue source and, in recent years, oil revenue distributions were based on a budget oil price, with oil revenues above budgeted amounts saved. This oil-price-based fiscal rule delinked fiscal spending at all tiers of government from oil revenue fluctuations. The rule was instrumental in keeping spending in line with absorptive capacity and improving macroeconomic stability.

Box 2.Oil Revenues and the Constitution

The constitution provides that all tiers of government - federal, state, and local - share in oil revenues. All oil revenue inflows (as well as certain taxes) are received into the Federation Account. The revenue sharing formulas are set by an act of the National Assembly, based on a recommendation from the Revenue Mobilization, Allocation and Fiscal Commission. For natural resource revenues, the constitution provides that oil-producing states receive 13 percent upfront as derivation grants. Of the remaining 87 percent, the federal government receives 52.7 percent, states 26.7 percent, and local governments 20.6 percent.

The oil-price-based fiscal rule in place since 2004 was based on political agreement. The agreement provided for an allocation of oil revenues, according to the above shares, based on a budget oil price and volume of production. Oil revenues in excess of the budget oil price and production level are transferred into the "excess crude account" at the central bank in the names of the various government entities. It was planned that the recently signed Fiscal Responsibility Act would institutionalize this voluntary use of the oil-price-based fiscal rule.

The view of many legal observers is that a federal Fiscal Responsibility Act cannot bind other levels of government. The act prescribes procedures for setting a macroeconomic and medium term expenditure framework for the federation. However, most of the provisions are legally binding only on the federal government while encouraging states to adhere to the same framework. In September 2007, a political agreement was reached under which all states would pass fiscal responsibility legislation. Such legislation could provide the foundation for better fiscal coordination; the specific mechanisms for harmonizing fiscal plans between different government entities have to be defined.

11. Sizable domestic spending from oil savings would likely result in macroeconomic instability. If some part of oil savings, estimated to total about $17 billion (16 percent of non- oil GDP) at end 2007, were distributed, it is likely that state and local governments would spend the additional resources. The federal government would be expected to adhere to budgeted expenditures and save the distribution. Overall, depending on the scale of the savings distributed and the amount spent domestically, the consequences of the implied fiscal shock could be considerable. Following an immediate stimulus to growth, the spending would likely destabilize the economy. The implications of additional state government spending from a partial distribution of savings under one hypothetical example are shown in Box 3.

Box 3.Impact of Higher State Spending

The impact of a hypothetical increase in state spending, resulting in a higher fiscal deficit of 5 percentage points of non-oil GDP in each year in 2008–10, is estimated using a simple structural model of the Nigerian economy (see accompanying selected issues paper). The additional spending would likely exceed the absorptive capacity of the economy if it is spent domestically.

As shown below, after initially accelerating, growth would slow sharply as the central bank raised interest rates to keep inflation in single digits. (Alternatively, inflation would rise steeply.) Higher interest rates would, in turn, squeeze credit and dampen private sector activity, causing the naira to appreciate. The loss of competitiveness would further constrain the private sector. Knock-on effects on the financial sector would be likely, as demand for credit declines and financial profits flag. Lower bank earnings would increase already high price-to-earnings ratios and leading investors to pull out of the stock market.

Non-oil GDP Growth

(Percent)

Nominal Interest Rate and Exchange Rate

12. The authorities, recognizing that the oil-price-based fiscal rule has improved economic outturns, are seeking ways to manage oil savings consistent with macroeconomic stability. They hope to reach a long-lasting consensus that respects the constitutional rights of each tier of government. Apart from agreeing that states would pass their own fiscal responsibility legislation, the federal government is proposing mechanisms that would limit the harmful consequences of any allocation of oil savings by (i) distributing only a small share of oil savings, (ii) encouraging state and local governments to adopt savings funds, and (iii) suggesting that states participate in infrastructure projects with high import content to minimize domestic demand pressures from new spending.

III. Monetary and Financial Stability: Challenges of Global Integration

Nigeria is integrating rapidly into global financial markets and could see a tremendous growth dividend. At the same time, the challenge of managing monetary policy and preserving financial stability will intensify as capital flows increase, new financial instruments are introduced, and commercial bank trading capacity expands. The central bank faces policy challenges increasingly like those faced by emerging markets.

13. Private sector interest in naira assets has risen reflecting improved macroeconomic conditions, reduced external vulnerability, and favorable global conditions.

  • Macroeconomic conditions. Improved growth and inflation performance, along with high world oil prices, has boosted domestic and foreign confidence in Nigeria’s economic prospects and led investors to anticipate a strengthening naira. Foreign interest in a second-round increase of capital at Nigerian banks has already exceeded $11 billion and is just one indicator of this interest (Figure 2).

  • External vulnerabilities. External debt fell considerably after Paris Club debt relief, triggering investor interest. External reserves have continued to mount. As a result, as shown in the staff’s debt sustainability analysis, Nigeria’s debt outlook appears robust under the baseline scenario and standardized stress tests.4

  • Global conditions. Strong global liquidity and search for yield have fueled investor interest in naira assets. Recent financial market turbulence in developed markets since mid-2007 has not measurably stemmed such interest as evident, for example, in the pick up in government securities trading in the third quarter of 2007 and ongoing foreign interest in the banking sector (Figure 2).

Figure 2.Financial Markets

Sources: Nigerian authorities, EMTA, and IMF staff estimates.

14. Banks are pursuing activities motivated in part by the need to generate returns on their much increased capital base. The return on equity is now about half its rate since consolidation, and is well below that in comparator countries. Banks are seeking to enhance returns by:

  • Expanding credit to the private sector. Private sector credit has doubled since banks consolidated two years ago. With higher bank capital, Nigerian banks have been able to participate in the oil and gas sector; banks are also active in communications and are exploring infrastructure financing. Retail credit has begun to expand, with banks identifying customers through corporate relationships.

  • Increasing treasury activity. Banks are expanding their treasury capacity and the related range of products. Larger banks are importing staff to develop products offered in other emerging markets. The interbank foreign exchange market is operating effectively and, for the first time, is offering forward positions in the naira. Large banks are the main conduit for foreign investor activity in the domestic securities market—both physical securities as well as derivatives.

  • Pursuing cross-border and cross-sector activities. Universal banking groups have emerged, with more than half the banks having insurance and securities subsidiaries. As part of a regional expansion, about half the banks have set up cross-border operations that, while small, are growing rapidly. Operations have been established in many countries including in South Africa, Ghana, The Gambia, Sierra Leone, the United Kingdom, and the United States.

15. Changes in the banking sector underscore the need to strengthen the regulatory framework and supervision. The central bank has developed a legal, regulatory, and operational framework for risk-based and consolidated supervision. It has also increased information sharing and coordination among the domestic supervisors of the various sectors and coordination with foreign supervisors. The challenge for the central bank is to implement these frameworks. The Fund is providing technical assistance in this area. The central bank will also need to build human capacity to understand the complex new instruments being transplanted from emerging markets.

16. The banking system is largely robust but needs careful monitoring(Table 4). Bank restructuring has increased capital and enabled a significant share of nonperforming loans to be written off. Standard stress tests suggest the banking sector is resilient to most quantifiable shocks (Box 4). However, shocks have been calibrated only for standard scenarios, where the asset allocation is constant and banks reduce their capital base. Given the sector’s large capital base, it is not surprising that bank solvency remains resilient. There is a need to monitor links between macroeconomic developments and the financial sector, including for example, the impact of a change in market sentiment on bank valuations and knock-on effects to general banking activities.

Box 4.Banking System Stability

Recent bank consolidation has strengthened the sector (see accompanying selected issues paper). Most banks are well capitalized, liquid, and profitable; the capital adequacy ratio, at 18.6 percent, is well above the minimum regulatory requirement of 10 percent; holding of liquid assets is a robust 62.2 percent; and loan portfolio quality has improved. Overall provisioning levels are high, although they have dipped recently as nonperforming loans have fallen.

Banks are resilient to most quantifiable shocks that could harm loan portfolios according to stress tests. A credit risk shock, the largest quantifiable risk facing banks, is manageable: only a small number of banks accounting for less than 25 percent of assets would be undercapitalized if nonperforming loans doubled, and only a very limited number of small banks, accounting for less than 5 percent of system assets, would become insolvent. Direct foreign exchange risk is small and any exposure is within the net open position limits set by the central bank. Interest rate risk is also minimal since banks are heavily capitalized.

Sensitivity to Credit and Interest Rate Risk(Regulatory Capital to Risk-Weighted Assets)
Bank groupNPL increaseInterest rate
Before25%50%+10%-10%
All banks18.617.216.623.813.5
First-tier banks16.615.615.221.611.7
Second-tier banks20.218.918.226.114.3
Third-tier banks19.916.114.824.914.8
Foreign banks30.930.530.434.727.0

The situation still bears close monitoring, especially in light of rapid credit growth and structural changes in the banking system. Encouragingly, part of the credit growth reflects the new access of the domestic banking sector to well-secured lending activities in the oil sector, but circumstances vary across banks. Older, well-established banks and newer- generation banks that significantly increased their capital as the sector consolidated are faring best. Banks formed by multiple mergers have faced more integration challenges. This and the pressure to rapidly deploy capital to boost returns in new domestic and cross-border activities underscores the importance of vigilant risk-oriented supervision.

17. Rapidly changing financial markets along with greater global integration have led the authorities to consider adopting inflation targeting. On the external side, there has been a pickup in various forms of capital flows. On the domestic side, despite improvements in monetary policy, developments in the banking sector and unification of the exchange rate in 2006 have made it more difficult to set monetary aggregate targets. The central bank believes that an inflation targeting regime might be more effective in this environment where money demand is less stable (Box 5).

18. The authorities recognize that several challenges need to be addressed before inflation targeting can be implemented. The 2007 Central Bank of Nigeria Act made the central bank more independent. A credible mechanism for setting the inflation target (including possibly by the government) will be needed, as well as a strong internal and external communication policy. The large liquidity injections from oil-financed fiscal spending will continue to be a challenge, but fiscal policy in recent years has been more predictable.

Box 5.Developments in Money Demand

In addition to increased confidence in the banking system, staff analysis suggests that three factors have made money a more attractive asset. First, unification of the exchange rate reduced the return on holding foreign exchange cash; there was no longer a profit to be made from conducting foreign exchange transactions outside of the official banking sector. Second, the decline in inflation reduced the return on holding durable goods as assets. Finally, treasury bill rates fell to levels below rates paid on time deposits of similar maturity, making deposits the more attractive asset.

Looking forward, several factors will impact monetary management. The emerging financial sector will not only facilitate further financial deepening, but may increase the length of the transmission lags to inflation from money. Increasing global capital flows could increase the volatility in money demand.

19. The central bank needs to improve its understanding of inflation dynamics and the monetary transmission mechanism. The link between the central bank’s policy interest rate and bank’s lending and savings rates needs to be strengthened. Staff discussed a basic structural model with the central bank, and provided some input on nonstructural time-series models of inflation. The central bank will also need to build its understanding of market expectations of inflation and improve its measure of core inflation.

20. The central bank was in agreement on the challenges of adopting inflation targeting. It recognized that adopting the new regime in 2009 was ambitious and will adjust its timeline as needed. Meanwhile, it plans to build on training and seminars already conducted and to address relevant issues with Fund technical assistance.

21. Monetary aggregates will remain the anchor of monetary policy, as the central bank transitions to an inflation-targeting regime. The targeted growth rate in broad money reflects projected developments in nominal non-oil GDP and the expected impact of further financial deepening on money demand. Inflation is expected to move toward the targeted level as the positive supply impact of good weather diminishes, and supply constraints could emerge due to strong growth.

22. Mounting interest in naira assets and the related strengthening of the interbank foreign exchange market have increased exchange rate flexibility; this can help put monetary objectives in reach. The foreign exchange market has increasingly been driven by the interbank market on account of a rapid growth in supply of foreign exchange from sources other than the central bank. These other sources include portfolio inflows, instruments to finance bank capital, remittances, and involvement of the national oil company. After being relatively stable for an extended period, the naira has appreciated by about 5 percent against the dollar in the last quarter of 2007 (Figure 3).

Figure 3.Exchange Rates

Sources: Nigerian authorities and IMF staff estimates.

23. The central bank welcomes the increased role of the interbank foreign exchange market. It expects the interbank market to become the main determinant of the exchange rate. The greater importance of private capital flows underscores the need to maintain sound macroeconomic policy, pursue exchange rate management practices that ensure investors face two-way risk, and monitor the banking sector because it will be the main conduit for these flows. Recent developments in the exchange rate are consistent with the classification of the rate as a managed float without a pre-determined path.

24. The balance of payments outlook is consistent with external stability(Box 6). The current account is expected to be in moderate surplus in the medium term. By some measures, the real exchange rate was somewhat undervalued at end 2006 relative to various estimates of its equilibrium. The central bank did not dispute the possibility of an undervaluation, but doubted the validity of quantitative estimates, citing data quality and structural changes in the economy. More generally, the central bank identified the risks of too rapid an appreciation of the naira and overshooting as possibly negatively impacting the non-oil sector. In this context, it is likely that nonprice factors dominate any overall measure of competitiveness (see Section IV).

Box 6.Assessing External Stability

The balance of payments outlook is consistent with external stability. The current account surplus is expected to moderate, averaging 1 to 3 percent of GDP over the medium term, as both public and private investment boost imports. This reflects Nigeria’s status as an oil-producing, low- income country. Nigeria, as an oil producer, would appropriately have a current account surplus during a period of high oil prices; but as a low-income country, it should use foreign savings. Estimates show the naira as both over- and undervalued. On balance, staff concludes the naira may have been somewhat undervalued at end-2006. Data limitations and multiple structural breaks complicate the analysis. Some approaches to assessing the value of the naira are summarized below.

Equilibrium real effective exchange rate (REER). There is a strong long-term relationship between the REER and real oil prices. Estimates for 1974–2006 suggest that the equilibrium exchange rate appreciated steadily in recent years as oil prices surged. Since 2000 movements in the real effective exchange rate have been more moderate. By this approach, the naira was undervalued by about 19 percent at end-2006.

Macro balance. Estimating a “current account norm” is complicated by Nigeria’s status as both an oil producer and a low-income country. A current account norm of 7 percent of GDP was derived using the CGER coefficients; this result is in line with that found for other oil producers. With this current account norm, the naira is overvalued by around 15 percent. However, a current account deficit could be appropriate in light of Nigeria’s low-income status. Balancing these two considerations (averaging the ‘oil’ norm with an assumed ‘low-income’ norm of a 2 percent deficit), a current account norm of a 2.5 percent of GDP surplus was used. This analysis suggests the naira is undervalued by about 2 percent.

External sustainability. Like the current account norm, estimating the appropriate level of net foreign assets is complicated by Nigeria’s status as an oil producer and a low-income country. As such, various target levels of net foreign assets ranging from the current 14 percent of GDP to 100 percent of GDP were considered. On this basis, and netting-off from the trade balance outflows to the international oil companies, the naira was estimated to be in the range of overvalued by 14 percent to undervalued by 3 percent.

IV. Growth: Policy Priorities

The private sector is benefiting from reform but much more needs to be done. Measures such as liberalizing the communications sector and privatization have paid off. Yet, these gains have underscored the need to address other bottlenecks in the business environment, particularly infrastructure. In this context, the MTFS provides an adequate spending envelope to make meaningful progress in addressing the infrastructure gap. Identifying the role of the private sector, prioritizing outlays, and strengthening public financial management are priorities.

25. An infrastructure gap is the main impediment to private sector growth. Limited power generation and weak distribution along with a severe lack of transportation raises the cost of business (Figure 4). By some estimates, the cost of power to the private sector is six or seven times the price paid by international competitors. Nigeria also ranks poorly in its provision of other basic requirements for growth. Addressing these basic requirements, such as providing a sound regulatory framework, can have a high pay-off. This payoff is evident from the strong performance of the telecommunications and banking sectors. The developments in these sectors reflect also Nigeria’s stronger ranking on efficiency- enhancing and innovation-driven factors for growth.

Figure 4.The Infrastructure Gap

Sources: Nigerian authorities, International Energy Agency, The Economist, and World Bank Development Indicators.

Nigeria: Global Competitiveness Index 2007–08
Overall rankScore
(out of 131)(1 to 7)
Global Competitiveness 07–08953.7
Global Competitiveness 05–06 (of 117)1083.7
Basic requirements1083.7
1st pillar: Institutions1033.3
2nd pillar: Infrastructure1192.2
3rd pillar: Macroeconomy285.6
4th pillar: Health and primary education1243.6
Efficiency enhancers773.8
5th pillar: Higher education and training1093.0
6th pillar: Market efficiency654.2
7th pillar: Labor market efficiency754.2
8th pillar: Financial market sophistication564.5
9th pillar: Tecnological readiness972.6
10th pillar: Market size524.0
Innovation and sophistication693.6
11th pillar: Business sophistication744.0
12th pillar: Innovation663.2
Source: World Economic Forum.
Source: World Economic Forum.

26. The MTFS provides adequate fiscal space for beginning to address infrastructure and other goals. The expansion of resources for priority spending between 2004 and 2007—federal government capital and priority project spending increased 300 percent—within a prudent fiscal framework demonstrates the scale of resources available. The immediate policy priority rests with ensuring value for money from these already higher spending levels.

27. There is scope to increase fiscal space within the MTFS envelope.

Nigeria: Effects of Port Concessioning
Before2007
Container dwelling times (days)28-323-4
Ship waiting time (days)7-83-4
Berth occupancy rate (percent)5080-85
Employed port workers26,0005,000
Source: Nigerian authorities.
Source: Nigerian authorities.
  • Identify areas where the government may not need to be involved. Theprivatization program has transferred commercial operations to the private sector, reduced subsidies and enhanced efficiency. The port concessioning, for example, has greatly improved port operations while underscoring bottlenecks elsewhere (e.g., infrastructure and customs) that slow the movement of goods. To fund infrastructure projects and bring to bear private sector expertise, the authorities are considering public private partnerships (PPPs), and further privatizations. Staff highlighted the importance of establishing and implementing a clear regulatory, legal, and institutional framework for PPPs to ensure appropriate risk allocation between parties and successful delivery of value for money.

  • Clearly set government spending priorities and ensure that projects are completed. Unfinished projects in the power and other sectors have absorbed fiscal resources without generating benefits. Better prioritization, stronger sequencing, and a commitment to complete projects would make spending more efficient. The authorities have already focused 2008 capital budget resources on the completion of ongoing projects, and plan to improve capital budgeting further for the 2009 budget.

  • Policies need to be costed explicitly to inform policy decisions and ensure resources are directed to priority areas. If costs are fully estimated and transparent, policy makers and the public could better assess the tradeoffs between alternative uses of revenues. Examples where such transparency would better inform policymaking include: recognizing the lower revenue transfers to government from the national oil company resulting from the provision of subsidized petroleum (1.3 percent of GDP in 2007); and, investment policies in the oil sector that address development and social needs by providing low cost domestic gas and power.

  • Strengthen public financial management to improve value for money. Much has been done at the national level, especially for public procurement, culminating in the Public Procurement Act. Next steps include extending procurement reform to all levels of government. Efforts to improve project selection based on consistent cost- benefit analysis in the context of a solid investment planning framework should have high pay-offs. Operationalizing the budgeting and reporting aspects of the Fiscal Responsibility Act, including timely budget execution reports, will support decision making and budget monitoring.

  • Boost non-oil revenues. Nigeria’s tax rates are no higher than rates elsewhere. However, the non-oil tax ratio is low, suggesting that the tax base should be broadened and tax Nigeria: Doing Business—Taxation administration strengthened. The authorities are discussing a National Tax Strategy to improve the tax system, which provides an Source: opportunity to address concerns for the business environment.

Nigeria: Doing Business—Taxation
NigeriaSSAOECD
Tax rates
Profit tax (%)19.424.420.0
Labor tax (%)9.713.322.8
Paying taxes (hours/year)1,12032.1183
Source: World Bank Doing Business Report, 2007.
Source: World Bank Doing Business Report, 2007.

28. The financial sector will play an important role in supporting private sector activity. The financial sector has grown dramatically but remains shallow by international measures, suggesting it has strong growth potential. Credit to the private sector and deposits in the banking system have almost doubled in nominal terms since consolidation of the sector beginning 2006. The number of bank branches increased by about one third in 2007 and the product base is growing. Capital markets and the nonbank sector have also grown; in the pension fund industry, assets under management were an estimated N 300 billion (US$2.5 billion) in mid-2007; another N 300 billion are expected to be added by end-2007. The insurance sector is also undergoing a consolidation process similar to the banking sector.

29. Still, further development of the financial sector is needed. Intermediation ratios are still low: M2 to GDP is an estimated 21 percent and private sector credit to GDP an estimated 19 percent (Figure 5). Capital and asset growth have yet to translate into funding long-term productive investment and better access to finance for small- and medium-sized enterprises. Key in this regard are structural reforms to bolster creditor rights, remove impediments to secured (mortgage) lending, and strengthen disclosure and corporate governance. A strategy is also needed for financing infrastructure development.

Figure 5.Money and Private Sector Credit

Sources: Nigerian authorities and IMF staff estimates.

30. Translating growth into a widespread increase in living standards and poverty reduction will continue to be a challenge. Poverty is estimated at about 55 percent based on the 2004 household survey and development indicators are low (Table 8). Many households are vulnerable to idiosyncratic shocks even when growth is high. Population growth and urbanization are placing pressure on resources, social services, and local infrastructure. Moreover, the quality of public services including primary health and education vary widely across the country, not least because of uneven administrative capacity of the state and local governments to which they have been devolved.

Table 8.Nigeria: Millennium Development Goals—Status at a Glance
Goal1990199620042005Target

2015
Progress

Toward

Target
1.Eradicate Extreme Poverty and Hunger
Percentage of population living in relative poverty431992665454200421Slow
Percentage of population living in extreme poverty (consuming 2,900 calories or lower daily)35352004Insufficient data
Percentage of underweight children (under five)36313030200418Slow
2.Achieve Universal Education
Net enrolment ratio in primary education6881.181.184.26100Good
Proportion of pupils starting grade one who reach grade five67717474100Good
Grade six completion rate586469.267.5100Worsened in 2005
Literacy rate of 15–24 years old70.71991-76.280.2100Good
3.Promote Gender Equality and Empower Women
Ratio of girls to boys in primary education (girls per 100 boys)827981100Good
Ratio of girls to boys in secondary education (girls per 100 boys)1067981100Good
Ratio of girls to boys in tertiary education (girls per 100 boys)461991722003722003100Good
Share of women in wage employment in the non- agriculture sector (percent)661991792003Good/insufficient data
Proportion of seats held by women in national parliament (percent)1.019915.7620035.76200330Slow
4.Reduce Child Mortality Infant mortality rate (per 1000 live births)91100200311030.3Worsening
Under-five mortality rate (per 1000 live births)1912012003197200463.7Marginal improvement
Percentage of one-year-olds fully immunized against measles4631.42003502004

Male: 48.38

Female: 51.62
100Slow
5.Improve Maternal Health
Maternal mortality rate (per 100,000 live births)70419998002004<75Worsening/Weak database
Proportion of births attended to by skilled health Personnel45.036.3200344.0>60
6.Combat HIV/AIDS, Malaria and Other Diseases
HIV prevalence among pregnant women aged 15–245.719995.220034.420051.8Good
Percentage of young people aged 15–24 reporting the use of condom during sexual intercourse with a non-regular sexual partnerFemale

24.02003

Male 46.32003
Female 39.5

Male 49.7
100Slow/Insufficient data
Number of children orphaned by AIDS1.8 mil.1.97 mil.Insufficient data
Prevalence and death rates associated with Tuberculosis7.072004Insufficient data
1.502004
Prevalence of HIV among TB patients (percent)2.219.1200027Worsening
TB detection rate1420002770Slow
TB treatment success rate7920008085Good
7.Ensure Environmental Stability
Proportion of land area covered by forests10.014.613.012.620Worsened in 2005
Proportion of gas flared68.053.843.040.00Good
Proportion of total population with access to safe drinking water54.0576080Slow/weak Database
Proportion of people with access to secure tenure31.0100Insufficient data
Carbon dioxide emissions (per capita)0.320000.20.1Insufficient data
Proportion of total population with access to basic Sanitation39.038.0100Worsened/Insufficient data
Residential housing construction index (ACI) (Proxy)45.8199950.42003Insufficient data
8.Develop a Global Partnership for Development
Per capita official development assistance to Nigeria (US$)3.02.02.34.0Slow
Debt services as a percentage of exports of goods and services22.38.97.43.4Good
Private sector Investment (US$ million)5019996080Slow
Telephone-density (per 1000 people)0.4515.72Insufficient data
Personal computers (per 1000 people)30302004Insufficient data
Internet access (percent)70.120031.9Insufficient data
Source: Nigerian authorities: Millennium Development Goals Information Kit 2007
Source: Nigerian authorities: Millennium Development Goals Information Kit 2007

31. The authorities are moving forward with targeted interventions under the virtual poverty fund that are financed from debt relief resources. The virtual poverty fund aims to provide seed funding, matching grants or funding for mainstreaming activities in MDG priority areas. It is expected to be part of the budget framework until at least 2015, even though no official commitment was made to Paris Club creditors. A first round of MDG costings has been conducted with UN support. Further work is underway to align MDG- focused spending with an expenditure envelope consistent with macroeconomic stability, clarify overlaps and gaps with other spending programs, and identify synergies.

V. Article VIII, Governance, and Statistical Issues

32. Much progress has been made in Nigeria’s foreign exchange system since the last Article IV consultation. Foreign exchange is readily available, with demand being met through the Wholesale Dutch Auction System (WDAS) and increasingly through the interbank market. The Bureau de Change rate effectively converged with the official rate since mid-2006, and a parallel exchange market has not re-emerged. Nigeria is not an Article VIII member. As reported at the time of the last Article IV consultation, the multiple prices, which are a technical characteristic of a Dutch Auction system, give rise to a multiple currency practice (MCP), and staff does not recommend approval of this MCP.

33. Efforts to strengthen economic governance are ongoing. The new government has emphasized that “rule of law” will be its guiding principle in policy decisions and believes that steps in this direction will lead to an improved business environment. The Economic and Financial Crimes Commission has prosecuted additional public officials for misuse of public funds. Perception-based indices suggest anti- corruption efforts will have a positive impact; a majority anticipates an improvement. Nigeria was removed from the Financial Action Task Force list of noncompliant countries in the global fight against money laundering in mid-2006. The authorities are now working to implement recommendations of the recent mutual evaluation conducted by the Inter-Governmental Action Group Against Money Laundering in West Africa.

Corruption remains high but is being addressed.Corruption Indicators
NigeriaMedian

country2
200320072007
WB, Governance Indicators: Control of corruption 1252445
TI, Corruption Perception Index1142240
TI, Global Corruption Barometer
Affirmative answer to question (percent respondents)
Pay bribe for service?4013
Corruption will improve in next 3 years?386220
Government effort to fight corruption is effective?6428
Sources: World Bank (WB), and Transparency International (TI).

Indicators have been scaled to the range 0 (highly corrupt) to 100 (very clean).

TI Global Corruption Barometer is the world average.

Sources: World Bank (WB), and Transparency International (TI).

Indicators have been scaled to the range 0 (highly corrupt) to 100 (very clean).

TI Global Corruption Barometer is the world average.

34. Macroeconomic data are broadly adequate for surveillance, but weaknesses remain. The authorities are continuing efforts to improve data quality in several areasincluding to support the introduction of inflation targeting. Technical assistance from the IMF and other partners is ongoing, particularly on national accounts, fiscal accounting, monetary statistics, and the balance of payments (see Annex III).

VI. Staff Appraisal

35. Nigeria has had strong growth, lower inflation, and much reduced external vulnerability since the last Article IV consultation. This reflects implementation of the PSI supported reform program as well as high oil prices and favorable agricultural conditions. While much progress has been made in institutionalizing reforms, including through passage of the Fiscal Responsibility Act, much more needs to be done to entrench reform gains. Moreover, the challenges in reducing poverty are daunting.

36. The immediate economic outlook is favorable. The prospects for growth, supported by public and private demand, are promising. In the oil sector, an increase in production is anticipated; however, further set backs in the Niger Delta are a downside risk. The non-oil sector, particularly in services and agriculture, has been growing strongly and, subject to weather conditions, is on course for further growth. The buoyant financial sector is providing added impetus to growth. The strong naira helps put inflation targets within reach; weather conditions are the main risk.

37. The success of reforms has brought new challenges that will jeopardize gains if not addressed. With the success of reforms, Nigeria’s financial wealth has increased, as evidenced by its growing reserves and lower debt. Macroeconomic stability, the improved growth outlook, and expectations of a strong naira have also buoyed interest in naira assets. These developments have given rise to policy challenges that must be addressed if Nigeria is to sustain and build on the gains made to date.

38. The immediate challenge is to enshrine a fiscal institution that ensures fiscal policy is consistent with macroeconomic stability. An oil-price-based fiscal rule has been an effective device for securing prudent fiscal deficits by containing spending to levels consistent with absorptive capacity. The oil savings that flowed from implementing this rule were initially used to meet various external obligations, including the buyback element of the Paris Club debt agreement. However, with high oil prices, these savings have continued to grow and, according to the constitution, are to be shared by each tier of government. State governments are now lobbying to receive their share of the savings and plan to spend these resources. An agreement between all tiers of government must be reached on a fiscal framework that ensures that any spending of oil savings and revenues is in accord with macroeconomic stability.

39. Nigeria’s integration into the global economy brings new challenges for ensuring financial stability. Successful bank consolidation, along with improved macroeconomic conditions, has transformed the financial sector. Accounting for about one third of sub- Saharan Africa GDP (excluding South Africa), Nigeria is attracting great interest from global financial markets. The potential growth dividend, already evident in the form of increased intermediation, requires ongoing financial stability. The central bank needs to redouble its efforts to keep pace with the dramatic changes in the sector and to ensure that its supervisory capacity is commensurate with growth and activities in the banking sector.

40. Monetary policy has strengthened. The central bank has successfully brought inflation to single digits, from more than 20 percent at the last Article IV consultation. Nonetheless, monetary policy implementation has been difficult because of large swings in liquidity, stemming from the injection of oil-related revenues, as well as limited policy instruments and data weaknesses. Economic developments triggered by the reforms have resulted in greater uncertainty regarding money demand. Against this background, the authorities’ interest in considering an inflation targeting regime is understandable. Such a regime, however, poses its own challenges, and staff welcomes the authorities’ view that, while pursuing their ambitious timeline for its adoption, flexibility is important to ensure that the right conditions are in place.

41. The balance of payments outlook is consistent with external stability. To underpin external stability, the staff welcomes efforts to finalize a comprehensive debt management strategy and stresses the importance of a prudent approach to any new borrowing. The outlook for a modest current account surplus is appropriate, reflecting a balance between Nigeria’s status as a low-income country and as an oil producer. In the staff’s view, the level of the naira is broadly consistent with external stability though may be somewhat undervalued. The staff welcomes the increased flexibility of the exchange rate in recent months; while enabling the exchange rate to find its equilibrium, this development should, in the short term, help support Nigeria’s monetary objectives.

42. Non-oil sector growth can only be sustained with supportive macroeconomic policies and a resolution of the infrastructure gap. Successes of recent reforms are evident and signs in key sectors like telecommunications, where a regulatory and enabling framework has been put in place, are encouraging. The government’s spending envelope in its MTFS is adequate to make meaningful progress in eliminating the infrastructure gap. In fact, substantial increases in public capital spending have already taken place. The focus should be on improving the effectiveness of public spending and establishing a policy environment conducive to private sector activity.

43. The outlook is positive as long as the reforms are sustained and extended. The government is compiling a medium-term national framework, laying out its reform agenda and encompassing, among other plans, a successor to its NEEDs. In the meantime, it is important for the government to move decisively to sustain past gains and meet its new policy challenges. The staff stands ready to support these efforts.

44. The staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Appendix I. Joint IMF/World Bank Debt Sustainability Analysis 2007 Under the Debt Sustainability Framework for Low Income Countries

1. Exit from the Paris Club and subsequent London Club operations significantly reduced Nigeria’s external debt burden. This, combined with a sustained period of high oil prices, along with prudent fiscal policy stemming from the application of an oil- price based fiscal rule, have transformed Nigeria’s debt outlook. This debt sustainability analysis (DSA) concludes that Nigeria is at a low risk of debt distress (the same finding as in 2006). In the baseline scenario, and in the case of the standardized stress tests, Nigeria’s debt outlook remains robust. However, a prolonged oil price shock, or sustained higher (non-oil primary) deficits, would require compensating policy measures in the medium-term to avoid debt sustainability problems.1

A. The Baseline and Alternative Scenarios

2. The baseline scenario for 2007–27 underlying this DSA assumes the following:

  • Average growth of 7.1 percent over the period reflecting buoyant growth of non-oil GDP of around 7.8 percent and more modest growth of oil GDP of 3.0 percent.2

  • Monetary policy geared towards maintaining single-digit inflation.

  • In line with WEO projections, increasing oil prices in the short term, before falling back to levels just above US$80 per barrel by 2012, and remaining constant in real terms thereafter.5

  • A consolidated government non-oil primary deficit (NOPD) averaging around 24 percent of non-oil GDP. This is consistent with the medium-term projections outlined in the government’s medium-term fiscal strategy, and with the framework that underpinned Nigeria’s previous Policy Support Instrument (PSI).6 Such a stance is also consistent with the range of estimates derived from a permanent income hypothesis exercise. In addition, it is assumed that the oil-price-based fiscal rule continues to be applied.

  • Export growth of around 6 percent per year driven largely by developments in the oil and gas sectors, and import growth of around 9 percent per year. The balance of payments remains in surplus over the medium term, before turning into deficit after 2020. Reserve coverage is projected to average 25 months of imports over the projection period.

3. Various standardized stress tests and country-specific alternative scenarios are also examined (see Tables 1b and 2b, and Figures 1 and 2):

  • Standardized alternative scenarios and stress tests include holding key variables at their historical averages, financing on less concessional terms, and various bound tests. The most extreme bound tests hold export values and GDP at their historical averages minus one standard deviation in 2008-09.

  • Country-specific alternative scenarios are designed to illustrate the impact on debt dynamics of (i) a prolonged oil price shock (in light of Nigeria’s high dependency on oil,7 as well as the high level of oil prices projected over the medium term), and (ii) a higher deficit reflecting a prolonged period of elevated spending (in light of pressing infrastructure and social needs). The oil price shock is calibrated as one standard deviation of Brent crude prices over the 1970-2006 period. This reduces future oil prices by US$19 per barrel, such that average prices are around US$61 per barrel.8 The higher deficit scenario holds the non- oil primary deficit of the consolidated government constant at just over 27 percent of non-oil GDP over the projection period. These alternative scenarios start in 2008.

  • New debt placement assumptions. In the higher deficit scenario, it is assumed that the authorities split the additional debt required to finance the deficit between domestic and external issuance. However, in the oil shock scenario, in addition to financing the deficit, the sharp balance of payments deterioration requires a greater share of external issuance to ensure adequate reserve coverage (especially in the later years).

Table 1a.Nigeria: External Debt Sustainability Framework, Baseline Scenario, 2004–27 1(Percent of GDP, unless otherwise indicated
ActualHistorical

Average6
Standard

Deviation6
Projections
2004200520062007200820092010201120122007-12

Average
201720272013-27

Average
External debt (nominal)141.318.22.42.01.61.82.02.22.42.31.4
o/w public and publicly guaranteed (PPG)41.318.22.42.01.61.82.02.22.42.31.4
Change in external debt-7.9-23.1-15.8-0.4-0.40.20.20.20.2-0.1-0.1
Identified net debt-creating flows-21.9-22.2-19.9-7.1-10.1-7.3-7.7-7.5-7.9-6.84.3
Non-interest current account deficit-6.8-8.6-9.5-3.28.4-0.9-4.8-2.4-3.1-3.0-3.5-2.68.90.9
Deficit in balance of goods and services-13.0-15.5-14.7-8.9-12.3-8.9-8.3-7.7-8.6-7.64.3
Exports44.446.542.638.738.935.233.632.833.031.221.5
Imports31.431.027.929.726.626.325.425.124.523.625.7
Net current transfers (negative = inflow)-3.2-3.0-2.3-3.40.9-2.0-1.6-1.5-1.3-1.3-1.2-0.9-0.5-0.8
o/w official0.00.00.00.00.00.00.00.00.00.00.0
Other current account flows (negative = net inflow)9.410.07.510.19.17.96.56.06.35.95.2
Net FDI (negative = inflow)-5.5-5.8-6.2-4.61.1-6.2-5.2-4.8-4.6-4.5-4.3-4.2-4.6-4.3
Endogenous debt dynamics2-9.6-7.9-4.20.0-0.1-0.1-0.1-0.1-0.1-0.1-0.1
Contribution from nominal interest rate1.81.50.10.10.10.00.00.10.10.00.0
Contribution from real GDP growth-4.0-1.7-0.9-0.1-0.1-0.1-0.1-0.1-0.2-0.1-0.1
Contribution from price and exchange rate changes-7.4-7.6-3.4
Residual (3-4)314.0-0.94.16.79.77.57.97.88.06.8-4.4
o/w exceptional financing-1.64.40.00.00.00.00.00.00.00.00.0
NPV of external debt44.03.12.42.22.12.01.91.51.1
In percent of exports9.48.16.26.26.26.15.94.95.1
NPV of PPG external debt4.03.12.42.22.12.01.91.51.1
Percent of exports9.48.16.26.26.26.15.94.95.1
Percent of government revenues11.710.57.77.16.96.96.65.75.5
Debt service-to-exports ratio (percent)7.920.827.71.90.70.50.40.40.30.30.3
PPG debt service-to-exports ratio (percent)7.920.827.71.90.70.50.40.40.30.30.3
PPG debt service-to-revenue ratio (percent)9.925.034.62.40.90.60.40.40.40.40.3
Total gross financing need (billions of U.S. dollars)-7.6-5.3-5.8-10.7-20.6-16.8-19.6-20.4-23.3-30.142.7
Non-interest current account deficit that stabilizes debt ratio1.214.56.3-0.5-4.5-2.6-3.3-3.2-3.7-2.59.0
Key macroeconomic assumptions
Real GDP growth (in percent)10.65.46.27.06.36.49.08.37.07.08.17.66.96.96.8
GDP deflator in US dollar terms (change in percent)17.722.523.26.416.56.716.23.52.70.21.15.11.20.91.1
Effective interest rate (percent)54.74.61.05.21.76.14.23.32.92.72.63.62.11.01.7
Growth of exports of G&S (US dollar terms, in percent)33.635.319.918.933.92.927.21.74.94.610.08.56.42.55.0
Growth of imports of G&S (US dollar terms, in percent)-0.327.717.513.315.120.913.111.25.96.26.410.68.19.68.4
Grant element of new public sector borrowing (percent)52.253.855.055.956.356.655.056.930.047.6
Aid flows (in billions of US dollars)70.00.00.00.00.00.00.00.00.00.00.0
o/w Grants0.00.00.00.00.00.00.00.00.00.00.0
o/w Concessional loans222.9264.8499.2453.3510.3564.1640.7730.4720.5711.4700.0
Grant-equivalent financing percent of GDP)80.10.10.10.10.10.10.10.10.1
Grant-equivalent financing (percent of external financing)852.253.855.055.956.356.656.930.047.6
Memorandum items:
Nominal GDP (billions of US dollars)86.9112.2146.9166.6211.0236.5259.9278.7304.6453.4964.8
(NPVt-NPVt-1)/GDPt-1 (percent)-0.5-0.10.00.10.10.10.00.00.10.1
Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. Residual at end of period is driven by financing of the current account deficit by reserve draw down.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. Residual at end of period is driven by financing of the current account deficit by reserve draw down.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Table 1b.Nigeria: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007–27(Percent)
Projections
20072008200920102011201220172027
NPV of debt-to-GDP ratio
Baseline32222221
A. Alternative scenarios
A1. Key variables at their historical averages in 2008–271343211
A2. New public sector loans on less favorable terms in 2008–27232222222
A3. Oil Price Shock (-$19)322222230
A4. Higher Deficit Scenario33222229
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2008–0933322221
B2. Export value growth at historical average minus one standard deviation in 2008–0933916151514115
B3. US dollar GDP deflator at historical average minus one standard deviation in 2008–0933333322
B4. Net non-debt creating flows at historical average minus one standard deviation in 2008–09433333221
B5. Combination of B1-B4 using one-half standard deviation shocks371211111084
B6. One-time 30 percent nominal depreciation relative to the baseline in 2008533333321
NPV of debt-to-exports ratio
Baseline86666655
A. Alternative scenarios
A1. Key variables at their historical averages in 2007–261897643
A2. New public sector loans on less favorable terms in 2007–26286777768
A3. Oil Price Shock (-$19)8668886166
A4. Higher Deficit Scenario866666541
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2008–0986666655
B2. Export value growth at historical average minus one standard deviation in 2008–093834818180766440
B3. US dollar GDP deflator at historical average minus one standard deviation in 2008–0986666655
B4. Net non-debt creating flows at historical average minus one standard deviation in 2008–09487888866
B5. Combination of B1-B4 using one-half standard deviation shocks819303030282416
B6. One-time 30 percent nominal depreciation relative to the baseline in 2008586666655
NPV of debt-to-revenue ratio
Baseline108777766
A. Alternative scenarios
A1. Key variables at their historical averages in 2007–26110118743
A2. New public sector loans on less favorable terms in 2007–262108888878
A3. Oil Price Shock (-$19)10988887196
A4. Higher Deficit Scenario1098888755
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2008–09108888876
B2. Export value growth at historical average minus one standard deviation in 2008–0931028525150484224
B3. US dollar GDP deflator at historical average minus one standard deviation in 2008–0910101110101098
B4. Net non-debt creating flows at historical average minus one standard deviation in 2008–094109999976
B5. Combination of B1-B4 using one-half standard deviation shocks1024383737353119
B6. One-time 30 percent nominal depreciation relative to the baseline in 2008510101099987
Baseline20.70.50.40.40.30.30.3
A. Alternative scenarios
A1. Key variables at their historical averages in 2008–2712110000
A2. New public sector loans on less favorable terms in 2008–27221100001
A3. Oil Price Shock (-$19)21111001
A4. Higher Deficit Scenario21100001
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2008–0921000000
B2. Export value growth at historical average minus one standard deviation in 2008–09321122233
B3. US dollar GDP deflator at historical average minus one standard deviation in 2008–0921000000
B4. Net non-debt creating flows at historical average minus one standard deviation in 2008–09421100000
B5. Combination of B1-B4 using one-half standard deviation shocks21111111
B6. One-time 30 percent nominal depreciation relative to the baseline in 2008521000000
Debt service-to-revenue ratio
Baseline20.90.60.40.40.40.40.3
A. Alternative scenarios
A1. Key variables at their historical averages in 2008–2712110000
A2. New public sector loans on less favorable terms in 2008–27221100011
A3. Oil Price Shock (-$19)21111002
A4. Higher Deficit Scenario21111001
B. Bound tests
B1. Real GDP growth at historical average minus one standard deviation in 2008–0921111000
B2. Export value growth at historical average minus one standard deviation in 2008–09321111122
B3. US dollar GDP deflator at historical average minus one standard deviation in 2008–0921111111
B4. Net non-debt creating flows at historical average minus one standard deviation in 2008–09421100010
B5. Combination of B1-B4 using one-half standard deviation shocks21111122
B6. One-time 30 percent nominal depreciation relative to the baseline in 2008521111011
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline)65050505050505050
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.Nigeria. Country: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2007–27

Source: Staff projections and simulations.

Figure 2.Nigeria: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1

Source: Staff projections and simulations.

1 Most extreme stress test is test that yields highest ratio in 2017.

2 Revenue including grants.

Table 2a.Nigeria: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004–2027(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
200420052006Historical

Average 5/
Standard

Deviation5
2007200820092010201120122007-12

Average
201720272013-27

Average
Public sector debt146.319.9-2.1-1.8-7.6-12.3-16.4-20.2-23.7-35.9-6.4
o/w foreign-currency denominated41.318.22.42.01.61.82.02.22.42.31.4
Change in public sector debt-14.3-26.5-21.90.3-5.8-4.7-4.2-3.8-3.5-1.55.4
Identified debt-creating flows-29.3-7.6-12.1-33.1-6.0-4.1-3.0-1.6-1.02.07.5
Primary deficit-9.2-10.6-8.7-5.55.0-1.9-7.0-5.7-5.4-4.6-4.7-4.9-3.24.7-0.4
Revenue and grants35.438.134.128.231.130.730.930.330.327.320.6
of which: grants0.00.00.00.00.00.00.00.00.00.00.0
Primary (noninterest) expenditure26.127.525.426.324.025.125.625.625.524.126.1
Automatic debt dynamics-13.2-8.2-3.41.11.11.62.43.03.75.22.4
Contribution from interest rate/growth differential-11.3-7.9-3.61.21.01.62.33.03.75.22.4
of which: contribution from average real interest rate-5.5-5.6-2.51.00.91.01.51.92.23.01.4
of which: contribution from real GDP growth-5.8-2.4-1.20.10.10.60.81.11.52.20.9
Contribution from real exchange rate depreciation-2.0-0.30.2-0.10.10.00.10.00.0
Other identified debt-creating flows-6.811.20.0-32.30.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)-6.80.00.0-32.30.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.011.20.00.00.00.00.00.00.00.00.0
Residual, including asset changes15.0-18.8-9.833.40.2-0.6-1.2-2.2-2.5-3.50.3
NPV of public sector debt5.01.6-4.5-0.7-6.8-11.8-16.3-20.4-24.1-36.4-6.7
o/w foreign-currency denominated0.00.00.03.12.42.22.12.01.91.81.1
o/w external 33.12.42.22.12.01.91.81.1
NPV of contingent liabilities (not included in public sector debt)0.00.00.00.00.00.00.00.00.00.00.0
Gross financing need2-4.60.14.0-0.3-6.0-4.7-4.5-3.8-4.0-2.85.9
NPV of public sector debt-to-revenue and grants ratio (in percent)14.14.2-13.2-2.3-21.8-38.5-52.7-67.5-79.7-133.0-32.5
NPV of public sector debt-to-revenue ratio (in percent)14.14.2-13.2-2.3-21.8-38.5-52.7-67.5-79.7-133.0-32.5
o/w external 3/11.07.87.16.76.76.46.55.4
Debt service-to-revenue and grants ratio (in percent)413.328.037.25.63.33.12.82.62.31.51.7
Debt service-to-revenue ratio (in percent)413.328.037.25.63.33.12.82.62.31.51.7
Primary deficit that stabilizes the debt-to-GDP ratio5.015.913.3-2.2-1.3-1.0-1.2-0.8-1.3-1.7-0.7
Key macroeconomic and fiscal assumptions
Average nominal interest rate on forex debt (in percent)4.84.51.05.72.06.04.03.33.02.92.83.72.21.01.8
Average real interest rate on domestic currency debt (in percent)-5.74.440.48.8209.2-25.1-30.4-11.9-11.6-10.8-10.5-16.7-8.7-9.4-8.6
Real exchange rate depreciation (in percent, + indicates depreciation)-5.0-0.81.50.44.1-4.6
Inflation rate (GDP deflator, in percent)20.719.819.513.512.74.89.62.66.47.48.36.58.48.18.3
Growth of real primary spending (deflated by GDP deflator, in percent)-0.911.2-1.917.224.09.9-0.412.99.37.27.77.87.08.07.0
Grant element of new external borrowing (in percent)0.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Sources: Country authorities; and Fund staff estimates and projections.

Gross debt of the consolidated government less gross consolidated government assets.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and Fund staff estimates and projections.

Gross debt of the consolidated government less gross consolidated government assets.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2b.Nigeria: Sensitivity Analysis for Key Indicators of Public Debt 2007–2027
Projections
20072008200920102011201220172027
NPV of Debt-to-GDP Ratio
Baseline-1-7-12-16-20-24-36-7
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages-1-5-10-15-20-25-43-67
A2. Primary balance is unchanged from 2007-1-2-4-5-7-9-15-20
A3. Permanently lower GDP growth1-1-7-11-15-18-21-2448
A4. Oil price shock (-$19 per barrel) 2-1-7-12-11-10-8246
A5. Higher deficit scenario-1-6-11-15-18-20-2412
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008–2009-1-5-7-8-9-10-944
B2. Primary balance is at historical average minus one standard deviations in 2008–2009-1-1-1-6-11-15-28-1
B3. Combination of B1-B2 using one half standard deviation shocks-1-3-6-11-15-19-32-3
B4. One-time 30 percent real depreciation in 2008-1-6-11-16-20-24-36-6
B5. 10 percent of GDP increase in other debt-creating flows in 2008-13-3-8-12-16-30-2
NPV of Debt-to-Revenue Ratio2
Baseline-2-22-39-53-68-80-133-32
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages-2-17-34-49-66-81-158-328
A2. Primary balance is unchanged from 2007-2-6-13-18-25-30-55-98
A3. Permanently lower GDP growth1-2-21-36-48-60-68-86233
A4. Oil price shock (-$19 per barrel) 2-2-22-39-44-40-347258
A5. Higher deficit scenario-2-20-36-47-58-66-8658
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008–2009-2-17-24-27-31-33-32215
B2. Primary balance is at historical average minus one standard deviations in 2008–2009-2-2-5-20-35-49-104-6
B3. Combination of B1-B2 using one half standard deviation shocks-2-10-20-35-50-63-117-15
B4. One-time 30 percent real depreciation in 2008-2-18-36-50-66-78-131-30
B5. 10 percent of GDP increase in other debt-creating flows in 2008-28-10-25-40-54-109-10
Debt Service-to-Revenue Ratio2
Baseline63333222
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages635432-1-32
A2. Primary balance is unchanged from 20076389989-5
A3. Permanently lower GDP growth1634445932
A4. Oil price shock (-$19 per barrel)2633433210
A5. Higher deficit scenario63333226
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008–2009646910111431
B2. Primary balance is at historical average minus one standard deviations in 2008–20096310116536
B3. Combination of B1-B2 using one half standard deviation shocks63886545
B4. One-time 30 percent real depreciation in 200863333222
B5. 10 percent of GDP increase in other debt-creating flows in 2008631375435
Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

B. External Sustainability9

4. Following the final phase of Nigeria’s 2005 Paris Club Agreement in 2006, early repayment of its par bonds in November 2006, and efforts to address related oil warrants in March 2007, Nigeria’s external public debt is projected to total US$3.3 billion, or 2.0 percent of GDP, at end-2007. In the baseline scenario (Table 1a and Figure 1), the nominal external debt burden is projected to be broadly unchanged throughout the projection period.10 The debt-service to export ratio falls from 1.9 percent in 2007 to an average of 0.3 percent throughout the projection period. The grant element of Nigeria’s external debt is projected to decline from over 50 percent, to around 30 percent by 2027, reflecting a shift towards less concessional borrowing (including Nigeria’s graduation to IBRD financing). Hence, the net present value (NPV) of debt-to-GDP ratio would be slightly lower than the nominal external-debt-to-GDP ratio, averaging under 2 percent over the period.

5. Standardized stress tests (Table 1b and Figure 1), even the most extreme, show that the NPV of the debt-to-GDP ratio is not likely to exceed 16 percent of GDP over the projection period, with debt service remaining below 5 percent of exports.

6. However, the country-specific alternative scenarios (Table 1b and Figure 1), illustrate the vulnerability of Nigeria’s public finances, and consequently, its external debt position.

  • In the case of the prolonged oil price shock scenario, Nigeria’s external debt ratio could reach 37 percent of GDP (or 30 percent in NPV terms), and 166 percent of exports, by the end of the projection period, while debt service payments would remain low at around 1 percent of exports. Furthermore, in the oil shock scenario, international reserves would peak in 2009 (at over 17 months of imports), against 2019 in the baseline scenario (at around 32 months).

  • In the case of the higher deficit scenario, Nigeria’s external debt ratio could reach 13 percent of GDP (or 9 percent in NPV terms), and 41 percent of exports, by the end of the projection period, with debt service payments rising to around 1 percent of exports.

7. Nevertheless, Nigeria’s robust starting position in terms of government deposits and international reserves, would enable the authorities to avoid the accumulation of debt projected in either scenario, if fiscal policies are adjusted in time. As such, prudent fiscal and external policies would allow Nigeria to prevent the risks associated with either scenario from materializing.

C. Fiscal Sustainability

8. As a result of the application of a budget reference oil price fiscal rule, government deposits at the central bank are projected to reach around US$23 billion at end-2007. In the baseline scenario (Table 2a and Figure 2) consolidated government deposits continue to accumulate at the central bank, reaching around US$240 billion by 2021. Subsequently, these deposits are assumed to be drawn down gradually as oil revenues decline as a share of GDP, and the overall budget surplus turns into deficit. In light of the accumulation of such significant levels of government deposits, and the low level of gross debt,11 the fiscal debt sustainability exercise for Nigeria utilizes a concept of net debt, defined as gross consolidated government debt (external and domestic) less gross consolidated government assets (specifically, the balance in the excess crude account).12 As a result of the inclusion of these government assets, net debt is projected to be negative throughout the baseline scenario.

9. As is the case with external sustainability, the fiscal sustainability baseline is relatively robust to the standardized stress tests, with public sector net debt becoming positive only towards the end of the projection period. Debt service is projected to average around 2 percent of revenues over the projection period in the baseline, and peak at 31 percent, in the most extreme test (Table 2b and Figure 2).

10. However, as noted above, in the case of the country-specific alternative scenarios (Table 2b and Figure 2), Nigeria’s fiscal position could weaken significantly in the absence of an appropriate fiscal policy response.

  • (a) In the case of the prolonged oil price shock scenario, government deposits at the central bank would be exhausted around 2019, and external and domestic borrowing would be needed to finance the deficit.13 As a result, Nigeria’s public debt to GDP ratio would reach 46 percent, debt to revenue 258 percent, and debt service to revenues 10 percent in NPV terms by the end of the projection period (Table 2b and Figure 2).

  • (b) In the case of the higher deficit scenario, government deposits at the central bank would be exhausted in 2026, just before the end of the projection period, after which external and domestic borrowing would be needed to finance the deficit. As a result, Nigeria’s public debt to GDP ratio would reach 12 percent, debt to revenue 58 percent, and debt service to revenues 6 percent in NPV terms by the end of the projection period.

D. Conclusion

Nigeria is at a low risk of debt distress. In the baseline scenario, and in the case of the standardized stress tests, Nigeria’s debt outlook remains relatively robust throughout the projection period. However, either a prolonged oil price shock or a prolonged loosening of the non-oil primary deficit—without compensating policy measures—would undermine the recent progress made in achieving macroeconomic and debt sustainability. But given Nigeria’s strong financial starting position, timely policy action should be able to avert future sustainability problems.

Annex I. Nigeria: Relations with the Fund

(As of December 31, 2007)

I. Membership Status: Joined: March 30, 1961; Article XIV

II. General Resources Account:

SDR Million%Quota
Quota1,753.20100.00
Fund holdings of currency1,753.11100.00
Reserve Position0.140.01
Holdings Exchange Rate

III. SDR Department:

SDR Million%Allocation
Net cumulative allocation157.16100.00
Holdings0.550.35

IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

TypeDate of

Arrangement
Expiration

Date
Amount Approved

(SDR Million)
Amount Drawn

(SDR Million)
Stand-ByAug 04, 2000Oct 31, 2001788.940.00
Stand-ByJan 09, 1991Apr 08, 1992319.000.00
Stand-ByFeb 03, 1989Apr 30, 1990475.000.00

VI. Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming
20082009201020112012
Principal
Charges/Interest5.515.495.495.495.49
Total5.515.495.495.495.49

VII. Exchange Rate Arrangement

Nigeria’s exchange rate arrangement is classified as a managed float without a predetermined path for the exchange rate of the naira. On February 20, 2006, the CBN executed its first auction under the new wholesale Dutch Auction System (DAS). The introduction of the wholesale DAS with sales direct to interbank market participants was an important step towards unification of the two major foreign exchange markets—the retail market for nonfinancial traders and investors and the interbank market. The naira also continues to be traded in two markets for small-scale cash transactions—the bureau de change market and the curb market. Since May 2006 the exchange rate has effectively been unified. The introduction of the wholesale DAS also represents an important step toward accepting the obligations of Article VIII, sections 2, 3 and 4 of the IMF’s Articles of Agreement, although the multiple prices, which are a technical characteristic of a Dutch Auction system, give rise to a multiple currency practice. A comprehensive assessment by MCM and LEG is needed to identify the extent of remaining restrictions and multiple currency practices.

VIII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Central Bank of Nigeria (CBN) was subject to a full safeguards assessment with respect to the Stand-By Arrangement, which expired on October 31, 2001. The assessment, which included an on-site visit, was completed on November 28, 2001. The assessment concluded that vulnerabilities existed in the areas of financial reporting and legal structure of the Central Bank. Staff findings and proposed recommendations are reported in the Country Report No. 03/3.

IX. Article IV Consultation

Following the expiration of the Policy Support Instrument on October 16, 2007, Nigeria is on the standard 12-month Article IV consultation cycle. The previous Article IV consultation was concluded on July 18, 2005.

X. Technical Assistance (TA) Since 2002:

DepartmentPurpose of TA missionDuration
MAEFSAPFebruary 4–20, 2002
FADPublic expenditure managementJanuary 29–February 8, 2002
STAGovernment finance statisticsFebruary 28–March 13, 20
FADResident budget advisorApril 19 2002–June, 2003
MFDDomestic debt managementFebruary 25–March 5, 2003
STAGeneral data dissemination standardsJuly 2–15, 2003
STANational accountsJuly 24-August 12, 2003
FADBudget process reformsAugust 20–29, 2003
FADPension reformOctober 20–29, 2003
FADPublic expenditure management advisorFebruary–August 2004
MFDDomestic debt managementFebruary 5–17, 2004
LEGFIU creation and organizationMay 31–June 04, 2004
LEGLegislative drafting/FIUJuly 12–16, 2004
FADTax administrationJuly 19–August 3, 2004
MFDMonetary operations/foreign exchangeAugust 26–September 10, 2004
FADPublic expenditure management advisorOctober 2004–June 2005
LEGExchange rates systemsNovember 16–22, 2004
MFDBank supervision/restructuringNovember 16–29, 2004
STABalance of payment statisticsFebruary 2–16, 2005
FADTax administrationFebruary 8–21, 2005
MFDBanking supervision, financial, exchange Market, and currency reformsMarch 9–24, 2005
MFDBanking consolidation and supervision, Currency reformsAugust 29–September 13, 2005
FADTax administration peripatetic advisorJuly–December, 2005 (3 visits)
FADPublic expenditure management advisorOctober 2005–April 2006
MFDBanking consolidation, monetary policyNovember 9–22, 2005
MFDMonetary operations advisorDecember 11–17, 2005
STAMoney and banking statisticsJanuary 26–February 8, 2006
MFDExchange rate management advisorFebruary 13–20, 2006
MFDBanking consolidation, monetary policyFebruary 27–March 10, 2006
STABalance of payment statisticsMarch 15–28, 2006
MCMMonetary policy peripatetic advisorSince May 2006 4 visits (some joint with HQ staff)
MCMFinancial sector developmentNovember 17–24, 2006
MCMMonetary policy long–term advisorsince December 18, 2006
MCMCentral bank accountingSince February 2007 3 visits
FADPublic financial managementFebruary 14–23, 2007
STAMonetary statisticsFebruary 20–27, 2007
FADPublic financial management advisorSince June 3, 2007
MCMFinancial sector strategyJune 17–22, 2007
STANational accounts (GDDS 2 project)June 11–July 6, 2007
MCMBaseline analysis of the financial sectorSeptember 26–October 10, 2007
STABalance of payments (GDDS 2 project)October 2–12, 2007
STABalance of payments, and IIPOctober 17–November 2, 2007
STANational Accounts (GDDS 2 project)October 29–November 16, 2007

XI. Resident Representative:

Mr. Michael Bell entered on duty as Senior Resident Representative in Abuja on August 10, 2006.

Annex II. Nigeria: Relations with the World Bank

Partnership For Development

1. The Nigerian government has been making progress with implementation of the National Economic Empowerment and Development Strategy (NEEDS), a program of reforms aimed at achieving economic and social transformation in Nigeria. President Yar’Adua’s 7-Point Agenda builds on the NEEDS and focuses on the following 7 areas of priority: (i) ensuring sustainable growth in the real sector of the economy; (ii) building physical infrastructure—power, energy and transportation; (iii) supporting agriculture; (iv) enhancing human capital development—education and health; (v) strengthening security, law and order; (vi) combating corruption; and (vii) developing the Niger Delta. These efforts at the Federal level, working in parallel with state development plans, are continuing to improve the environment for development assistance and strengthen the framework for aid effectiveness.

2. The World Bank assistance to Nigeria is based on a joint World Bank/DFID Country Partnership Strategy (CPS) prepared in consultation with government, civil society, private sector and other development partners and approved by the British Government and the Board of the World Bank on June 28, 2005. This strategy, which is guiding the assistance of the Bank and UK’s DFID to Nigeria for the period FY06 to FY09, supports selected priorities under the three broad pillars of the NEEDS/state development plans framework, namely: (i) empowering people through improved service delivery for human development; (ii) promoting private enterprise through improved business environment for non-oil growth and improved access to productive infrastructure; and (iii) changing the way government does its work through improved transparency and accountability.

3. Under the CPS, both the World Bank and UK’s DFID are deepening engagement with Nigeria, in response to the improved policy environment and the importance of Nigeria for meeting the MDGs in Africa. More support is provided to states where constitutional responsibility for most functions related to achievement of the MDGs lies. At the same time, the Bank and DFID are more selective in approach, concentrating assistance at the Federal level and in a set of lead states that are strongly committed to reforms and where development assistance can achieve the greatest impact on growth and poverty reduction. Currently, the Partners have signed State Partnership Agreements with four of such lead states. In the last two years, the partnership has also been extended to include USAID, particularly at the state level, and cooperation with UNDP, EU and the African Development Bank.

4. Under the strategy, IDA expended financial support to Nigeria for FY06 and FY 07 of about US$1.17 billion. Indicative lending plans for the remaining two years of the CPS will be set during the mid-term review of the CPS which will go to the Board in March 2008 (based on an expected increased IDA allocation, as Nigeria’s performance has been improving).

5. The Progress Report assesses progress made to date in supporting Nigeria’s development objectives and makes adjustments to better align partner support to the emerging priorities of the Administration, as articulated in the 7 point agenda. While the strategy and its approaches remain relevant to Nigeria’s needs and the Government program, in the next two years increased emphasis will be placed on supporting the power sector, state governance reforms, and addressing the Niger Delta issues.

World Bank–IMF relations

6. The IMF and World Bank staffs maintain a close collaborative relationship on Nigeria. Both institutions are coordinating their policy advice to the government in several areas (including the financial sector, public financial management, and statistics) through collaboration on analytical work, and through joint technical assistance missions. The Bank staff is regularly invited to join IMF macroeconomic missions. The Bank’s work and support to Government in key structural reform areas informed the PSI program. Nigeria is also a pilot project for enhanced Bank-Fund collaboration in the area of management of natural resources. Efforts under this pilot project have identified a range of joint Bank-Fund activities aimed at strengthening the legal and regulatory framework for the management of natural resources.

7. In 2005, the Bank and the IMF staff collaborated on a Debt Sustainability Analysis for Nigeria and prepared a Joint Staff Assessment Note on the NEEDS which was discussed by both the Boards of the World Bank and the IMF. In 2006 and 2007, the Bank and the IMF staff jointly updated the Debt Sustainability Analysis.

Lending activities

8. The IDA commitment in Nigeria continued to show an upward trend; growing from about US$1.5 billion in FY05, to current US$2.6 billion; out of which only about 16 percent is at risk by amount. This represents a significant improvement compared to 79 percent in FY03 and 43 percent in FY05 respectively. This portfolio comprises 23 IDA projects covering activities in various sectors of the economy. About 41 percent of the portfolio is in infrastructure (water supply, power and transport). About 32 percent is in human development covering health, education and HIV/AIDS. The remaining projects support rural development (10 percent), private sector development (10 percent), and economic management and governance (7 percent)

9. As of December 2007, about US$1.07 billion has been disbursed out of the total IDA commitment of US$2.6 billion. While the disbursement ratio reached 24.5 percent at end FY07, it is currently in FY08 at 8.6 percent. Overall disbursement has gone down somewhat due to the number and volume of projects entering the portfolio at end FY07-08, the new administration, and implementation of new projects. However, efforts are being made to speed up implementation of new projects and improve overall disbursements. The Bank is also continuing to focus on strengthening monitoring and evaluation (M&E) arrangements to ensure that projects in the portfolio achieve their development objectives.

Non-lending activities

10. The World Bank has continued to expand its program of economic and sector analysis as part of its efforts to strengthen policy dialogue and improve on the quality of its investment operations. The current Economic and Sector Work program has a strong focus on public expenditure management, competitiveness and growth, and power. It is also has been paying growing attention to regional integration agenda, poverty analysis, and trends in the social sector. Key proposed analytical pieces include a Fiscal Federalism study (FY08), an Agriculture Financing Review (FY08), an Agriculture PER (FY08), an Employment and Growth study (FY09), a Poverty Assessment (FY10) and a Trade and Regional Integration study (FY10).

International Finance Corporation (IFC) activities

11. Nigeria remains IFC’s largest commitment portfolio in Sub-Sahara Africa with an outstanding portfolio of US$553 million in private sector investments as of November 30, 2007. IFC’s outstanding portfolio in the country represents over 37 percent of the sub-Saharan Africa region’s portfolio, having grown from US$42 million on June 30, 2001. IFC’s strategy for Nigeria involves collaboration with the Bank and UK’s DFID and is driven by both IFC’s Sub-Saharan Africa Strategy and the CPS for Nigeria. The strategy focuses on: (i) proactive project development in the key sectors of financial markets, infrastructure, manufacturing & services, indigenous oil-gas-petrochemicals, agribusiness and healthcare; (ii) diversification within financial markets to include trade finance, housing finance including mortgages and securitizations, insurance, MSME finance, microfinance; (iii) utilizing technical assistance to enhance private sector development in Nigeria such as improving investment climate and developing the local fixed income capital market; and, (iv) designing and implementing select financing and technical assistance pilots to support Bank/DFID initiatives such as exploring the potential of sub-national financing of the four lead states for which the Bank has signed States Partnership Agreements. Further highlights of IFC activities in the various sectors of Nigeria are described below.

12. Financial sector. Over the past five years, IFC has disbursed over US$220 million to five Nigerian banks in terms of long-term credit lines. It also signed on seven Nigerian banks as issuing banks under the IFC Global Trade Finance Program. The total utilization of the trade finance facilities was approximately US$315 million in FY07. In addition, IFC is providing Nigerian banks with specialized financing facilities and technical assistance, to open up financing opportunities in new or untapped markets such as women entrepreneurs, construction finance, retail and consumer banking through assisting with establishment of a private credit bureau, mortgages and securitization, and corporate governance. IFC’s involvement has helped its portfolio banks strengthen their governance and risk management capabilities. Moreover, IFC is increasingly diversifying to finance non-bank financial institutions such as insurance and asset management companies. IFC has been able to provide naira long-term financing to both banks and real sector companies because of the existence of long-term cross-currency swaps from naira into convertible currencies.

13. General manufacturing services. In recent years, IFC has increased its exposure significantly in a variety of general manufacturing projects including a US$75 million investment in the Obajana Cement Company. This is a Greenfield cement plant with an annual capacity of 5 million tons, and includes a 135 MW power plant, a 92km natural gas pipeline, a water supply dam and other support facilities. IFC is also providing technical assistance to design and implement community development programs in the rural Obajana, as well as improve the supply chain management for SME distribution of cement across Nigeria. Other notable investments in the sector include a US$40 million investment in UPDC, a real estate development and management company, and a US$10 million investment in Star Paper Mills Ltd.

14. Oil and gas, mining and petrochemicals. IFC’s strategy in this sector has been to target the services area in linkages to projects with the oil majors, as well as indigenous oil and gas production and services companies. There have also been recent opportunities in the petrochemicals sector as a result of privatizations, such as the Eleme petrochemicals project, where IFC has approved a US$75 million investment for rehabilitation and expansion of capacity, and is providing technical assistance for establishment of a community development program.

15. Advisory and technical assistance projects. Private Enterprise Partnership (PEP) Africa initiative designs and implements programs to support the development of the private sector in three areas: improving the investment climate, proactively identifying investment opportunities, and supporting SME development. In Nigeria, under PEP Africa, the leading projects include the SME Entrepreneurship Development Initiative, the Oil Sector SME Linkages Project in coordination with INSOK from Norway, corporate governance program for banks, and fixed income capital market development. IFC is also the lead adviser to the government for the privatization of Nigeria airports, beginning with the Abuja airport. In the power sector, a joint World Bank/IFC Energy Team is working with the federal government on sector reform and strategies for privatization.

World Bank Institute activities (WBI)

16. Nigeria is a WBI Focus Country. WBI has continued to partner with relevant stakeholders in building capacity for the implementation of programs that will empower communities, improve economic governance and ensure non-oil private sector development. WBI also aims to strengthen the national parliament, increase civil society participation in governance through youth programs, facilitate the development of good quality and pluralistic media, and support science and technology developments by assisting the African Institute of Science and Technology (AIST). A Global Distance Learning Network (GDLN) center is expected to be completed and functional in Abuja before end-2007. WBI cooperates with the Federal Center for Health Systems Studies through its training programs of key managers and decision makers involved in health sector reforms. Other important WBI programs include support for NEEDS Implementation, HIV/AIDS, and building capacity in Nigerian youth organizations.

Multilateral Investment Guarantee Agency (MIGA)

17. MIGA is one of few political risk insurance providers that offers long-term coverage in Nigeria, and is committed to be a productive partner in the government’s NEEDS strategy and assist in its efforts to diversify the economy away from the hydrocarbon sector.

18. Currently, MIGA’s gross exposure in Nigeria is $102.9 million and consists of five projects in support of the country’s manufacturing and services sectors. In its FY08 pipeline, the Agency expects to provide coverage of two additional investments, in the agribusiness, and infrastructure (power) sectors. These projects, to be sponsored by investors from the United Kingdom and Lebanon, have an anticipated combined gross exposure of $106.6 million.

19. MIGA’s online investment promotion services (www.fdi.net and www.pri- center.com) are unique web portals that offer free country analyses and information relating to foreign direct investment (FDI) and political risk management and insurance for 175 countries. These initiatives contribute to MIGA’s mandate of promoting FDI in developing countries as a way to enhance growth and development. At present, these services feature 221 documents on investment opportunities and the related business, legal and regulatory environment in Nigeria.

Table 1.Nigeria: IDA Credit Portfolio(As of December 6, 2007, US$ million)
Project IDProject NameFiscal YearApproved IDA AmountDisbursedUndisbursed
P065301Economic Mgt. Capacity Building200020.019.30.8
P069892Local Empowerment & Environment Management200470.057.422.8
P069901Community-based Urban Development2002110.046.390.6
P0702902nd Health Systems Development2002127.0134.018.3
P070291HIV/AIDS Program Development2002140.3102.354.9
P070293Privatization Support Project2001114.374.562.1
P071075Urban Water Sector Reform I2004120.029.399.0
P072018Transmission Development2002100.098.318.6
P074963Lagos Urban Transport Project2003150.090.774.1
P080295Polio Eradication200380.475.73.5
P083082Micro, Small & Medium Enterp.200432.07.127.9
P063622Fadama2004100.086.717.7
P086716Sustainable Management of Mineral Resources2005120.029.695.8
P088150Economic Reform and Governance2005140.037.8108.1
P071391Urban Water Sector Reform II2006200.017.4193.4
P074447State Governance & Capacity Bldg.200518.11.817.1
P090104National Energy Development Project2006172.018.0160.4
P100122Avian Influenza Control200650.026.127.6
P071340Lagos Metropolitan Development and Governance2007200.016.9201.9
P102966Community-based Poverty Reduction200185.080.713.4
P097921Malaria Control Booster Project2007180.019.7172.4
P096151State Education Sector Project200765.0069.2
P074132Science and Tech. Educ. In Post-Basic2007180.00186.5
Total2,574.11069.61736.3
Table 2.Nigeria: Proposed Lending Summary, FY2008/10(As of December 6, 2007, US$ million)
FY 08Fadama 3250
Community Social Development200
Total450
FY 09State Health50
Federal Roads327
Rural Access and Mobility (RAMP 1)50
Polio Supplement50
Health Systems Development Supplement50
State Education 270
Growth Poles80
HIV/AIDS100
Commercial Agriculture100
Total877
FY 10Commercial Agriculture/Rural Finance100
Federal Roads 2250
RAMP 2100
State and Local Government/Justice50
State Education 350
State Water50
Conditional Cash Transfer/Maternal and Child
Health100
Total700
Table 3.Nigeria: Non-lending Summary, FY2008/10(As of December 6, 2007)
Proposed
FY08Energy Policy Notes
Economic Management and Capacity-building Project (EMCAP) ICR
Agriculture Public Expenditure Review
Fiscal Federalism Study
Niger Delta Social and Conflict Analysis
Financing Agriculture Study
CPS Progress Report
Petroleum Pricing Study
FY 09Governance of Service Delivery Review
Human Development Strategy Note
NEITI Report
Employment and Growth Study
Transport and Economic Growth Study
Health CSR2
Community Based Health and Nutrition Interventions Study
Access to Justice study
FY 10Poverty Assessment
Trade and Regional Integration Study
Non-Bank Financial Institutions Study
Ongoing (IDF/TA/policy dialogue)
FY 08-09Investment Climate Assessment - State
Corruption and Governance Risks Assessment
Nigeria Extractive Industry Transparency Initiative (NEITI)
Legal reforms—Technical Assistance (TA)
Niger Delta Community Foundation
Results Monitoring IDF
Country Portfolio Performance Review (CPPR)
Implementation support—M&E and PFMU
Human Development Outcome Dialogue
Non-oil Growth Outcome Dialogue
Governance Outcome Dialogue
Donor Harmonization
Economic Monitoring
Support to the National Assembly
Civil Society Outreach
Private Sector Outreach
Communication Outreach and Academia
Table 4.Nigeria: International Finance Corporation Statement of IFC’s Held and Disbursed Portfolio at August 31, 2007
Commitment Fiscal YearInstitution Short NameLN Cmtd-IFCET Cmtd-IFCQL+QE Cmtd-IFCGT Cmtd-IFCAll Cmtd-IFCAll Cmtd-PartLN Out-IFCET Out-IFCQL+QE Out-IFCGT Out-IFCAll Out-IFC
2000AEF Global Fabri0.32---0.32-0.32---0.32
2000AEF Hercules1.30---1.30-1.30---1.30
2000/2007AEF Hygeia3.28---3.28-2.02---2.02
1997AEF Mid-East--0.00-0.00---0.00-0.00
2001AEF Oha Motors0.00---0.00-0.00---0.00
2001/2003AEF Safety Center0.300.00--0.30-0.300.00--0.30
1996/1998/2000AEF Vinfesen--1.00-1.00---1.00-1.00
1997Abuja Intl1.750.00--1.75-1.750.00--1.75
2005Accion Nigeria-1.89--1.89--0.57--0.57
2003Adamac11.56---11.566.9411.56---11.56
1964/1967/1970/1990/1992Arewa Textiles-0.00--0.00--0.00--0.00
2000CAPE FUND-0.41--0.41--0.00--0.00
2001/2005/2006/2008Diamond Bank20.00-47.27-67.27---47.27-47.27
2007Eleme54.25-15.00-69.2570.8050.25-9.00-59.25
2001FSB2.10-1.50-3.60-2.10-1.50-3.60
1993FSDH-0.86--0.86--0.86--0.86
2001/2004/2005/2006GTB72.00---72.00-57.00---57.00
2006/2007/2008GTFP Access Bank--15.0028.7843.78---15.0028.6743.67
2006/2007/2008GTFP Diamond---56.1256.12----55.7655.76
Bnk
2006/2007/2008GTFP GTB---6.476.47----6.466.46
Nigeria
2006/2007/2008GTFP IBTC Plc.---1.171.17----1.171.17
2006/2007/2008GTFP Zenith---4.404.40----4.404.40
2001/2006IBTC--14.57-14.57---14.57-14.57
1981/1988/1990/1993Ikeja Hotel-0.07--0.07--0.07--0.07
2007/2008IntCon Bank---39.3239.32----39.3239.32
2007Leadway-13.30--13.30--13.30--13.30
2004/2005/2007MTNN-16.75--16.75--16.32--16.32
2004NTEF---20.0020.00------
2005OCC71.28---71.28-70.74---70.74
2006/2007SOCKETWORKS4.00-2.22-6.22-2.80-2.22-5.02
2007Star Paper10.00---10.00-10.00---10.00
2002/2004/2007UBA--50.00-50.00---50.00-50.00
2007UPDC40.00---40.00-25.00---25.00
2004UPDC Hotels Ltd.10.62---10.62-10.62---10.62
Total Portfolio:302.7633.28146.56156.26638.8777.74245.7631.11140.56135.79553.23
Annex III. Nigeria: Statistical Issues

1. Macroeconomic data are broadly adequate for surveillance; however serious data deficiencies continue to hamper policy design and monitoring. These deficiencies affect the national accounts, government finance, monetary and external accounts—including major inconsistencies between balance of payments and customs data on trade. Numerous problems prevent the compilation of timely and internally consistent data, in particular lack of data sharing between data producing and collecting agencies, and insufficient computerization.

2. Nigeria participates in the Fund’s General Data Dissemination System (GDDS) and as one of 22 participants in the Fund’s GDDS Project for Anglophone African Countries (funded by the U.K. Department for International Development (DFID), it has undertaken to use the GDDS as a framework for the development of its national statistical systems. In phase 2 of the GDDS project Nigeria has joined the external sector statistics and the national accounts modules.

National accounts

3. The national accounts statistics are of poor quality, largely owing to a deterioration in business and household surveys. Estimates of value added for agriculture, mining (oil), industry, transportation, and financial and other services are based on old surveys with extrapolations that use out-of-date ratios and other indicators. Where more recent survey information is used, the survey data suffer from poor response rates. Many sector deflators are not soundly based and have a number of inconsistencies. In the past, the use of the official exchange rate resulted in a gross understatement of value added in the oil and export sectors. The expenditure accounts suffer from unreliable external trade and government budgetary data.

4. A July 2003 mission helped the authorities implement the GDDS recommendations in the area of national accounts and provided guidance on institutional reforms in the statistical system. A new Statistics Act was enacted in 2007, giving autonomy to the National Bureau of Statistics. Results of a 2003 household living standards survey are now available. Moreover, the GDP methodology has been amended for estimates from 2004 onward, and a spliced series constructed back to 1981, in a move toward the SNA 1993 and to incorporate new data sources. The authorities published a revised series dated October 2007, but the estimates continue to be reviewed in the context of the IMF/DFID GDDS Phase 2 Project for Anglophone Africa. The revised estimates of October 2007 resulted in a shift in the level of GDP of over one-third, particularly stemming from GDP estimates for “agriculture and fishing.” However, this increase in agriculture output was inconsistent with available data and inadequately documented. There are also methodological concerns regarding petroleum output, exclusion of natural gas, and deflators. A rebasing of the series (the current base year is 1990) is needed in light of the structural changes in the economy.

Prices

5. The official monthly consumer price index (CPI) is a composite of urban and rural price data, and the consumption weights are based on the 1996/97 National Consumer Expenditure Survey. The weights are price-updated to May 2003 which is the new reference period for the index. Some data on producer prices are collected, but these statistics are not comprehensive and no producer price index is compiled. As a consequence, some sector GDP deflator indices are based not on producer prices, but on consumer price subindices and ad hoc assumptions. Expenditure deflators also suffer from methodological shortcomings.

Government finance

6. Fiscal data have historically been opaque and complicated not only by the federal structure, but also by a multiplicity of off-budget funds and by accounting practices that underestimate the actual size of public expenditure. Most pressing shortcomings are related to inadequate data coverage, the lack of monthly and quarterly compilation, and inadequate timeliness.

7. Despite the creation of a National Committee on Government Finance Statistics (NCGFS), progress has been limited in implementing past technical assistance recommendations notably owing to an unclear institutional arrangement and lack of sufficient staff. In 2002, a STA mission conducted a compilation exercise using data for 2000 that showed substantial room for improvement in the consistency of source data and reconciliation between above- and below-the- line data. This exercise compiled data for the consolidated central government and general government, with special effort to capture the numerous special funds and dedicated accounts that carry out large financial transactions. The mission used the Government Finance Statistics Manual 2001 (GFSM 2001) framework (on a cash basis).

8. The 2002 mission also laid out a detailed 3-stage “action plan” and recommended to expand the NCGFS and increase GFS unit staffing; improve the consistency of OAGF and Central Bank of Nigeria (CBN) source data; expand CBN work to reconcile government financing data (available in-house); and have the GFS unit document an inventory of source data. Also, the action plan suggested that a second step focus on improving the coverage of reporting to include state and local government operations, as well as to ensure adequate dissemination of GFS data. In addition, a subsequent step was to focus on a more complete application of the guidelines contained in GFSM 2001.

9. Annual fiscal data are not reported for inclusion in the GFS Yearbook, but aggregated fiscal data are reported for inclusion in the IFS, although no quarterly or monthly data on financing are reported.

Monetary accounts

10. The reporting of monetary data for IFS was recently interrupted because of major unresolved accounting problems at the CBN. Throughout 2006, the CBN took steps to change its core accounting system, but no provision was made for a transition period in which the old and the new accounting systems would run in parallel to test the operational reliability of the new system. As a result, a number of serious distortions arose in the accounting records of the CBN, including erroneous recording of some asset balances as liabilities and vice versa, and failure to capture a number of large foreign currency transactions. Many of these issues have now been resolved and in June 2007 a new monetary survey was introduced. The most recent central bank data published in the STA database are those for September 2006, while monthly data for the other depository corporations are those for April 2007.

Balance of payments

11. Balance of payments statistics are mostly compiled from the foreign exchange records in the banking system. Private capital movements are under-recorded and the trade data reported by the NBS (based on customs data) sharply differ from those reported by the CBN (based on banking data). Based on comparisons with counterparty data, both sets of statistics appear to significantly understate imports. Oil and gas exports are estimated by the CBN based on information provided by the Nigeria National Petroleum Company (NNPC).

12. After a hiatus of several years, the CBN has recently resumed submitting balance of payments data to STA; however, the balance of payments include large negative errors of omissions, which probably reflect an underestimation of current account debit transactions.

13. An October 2007 technical assistance mission guided the CBN compilers in developing new methodologies for external sector statistics, including for the estimation of oil and gas exports and for the recording of private capital flows and stocks. Revised balance of payments data were constructed for 2006 and a partial international investment position statement was developed for end-2005 and end-2006. Both sets of statistics can be further improved in the short-term with the processing of information from the financial statements of oil and gas, and the telecommunications sectors, and with the implementation of other key recommendations of the mission.

14. The authorities have not yet initiated compilation of international reserves data in line with the Data Template on International Reserves and Foreign Currency Liquidity. Moreover, the staff has been unable to assess whether data on official reserve assets are in principle consistent with the template; the data may not adequately reflect foreign currency liabilities or distinguish other foreign currency assets.

External debt

15. Following its establishment in August 2000 the Debt Management Office (DMO) has made significant progress in collecting, recording, reconciling, and disseminating public external debt data. This facilitated the recent Paris Club and London Club debt operations.

16. The DMO does not collect data on private sector external debt, and should work to extend the coverage of their database to include private sector liabilities and foreign investment in domestically issued debt securities.

Nigeria: Table of Common Indicators Required for SurveillanceAs of December 19, 2007
Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of publication6
Exchange RatesDec 2007Dec 2007DMD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities1Nov 2007Dec 2007MMM
Reserve/Base MoneyOct 2007Dec 2007MMM
Broad MoneyOct 2007Dec 2007MMM
Central Bank Balance SheetOct 2007Dec 2007MMM
Consolidated Balance Sheet of the Banking SystemOct 2007Dec 2007MMM
Interest Rates2Oct 2007Dec 2007DDD
Consumer Price IndexNov 2007Dec 2007MMM
Revenue, Expenditure, Balance and Composition of Financing3 - General Government4Sept 2007Nov 2007MMM
Revenue, Expenditure, Balance and Composition of Financing3- Central GovernmentSept 2007Nov 2007MMM
Stocks of Central Government and Central Government-Guaranteed Debt5Dec 2006Nov 2007AAA
External Current Account BalanceDec 2006Nov 2007AAA
Exports and Imports of GoodsJun 2007Nov 2007QQA
GDP/GNP2006Nov 2007AAA
Gross External DebtDec 2006Nov 2007AAA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA)

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA)

Discussions were held November 7-20, 2007. The staff team comprised Mr. Nellor (Head), Ms. Roehler, and Mr. Steinberg (all AFR), Mr. Kelmanson (PDR), Mr. Ramírez (FAD), and Mr. Swaray (MCM). Mr. Bell (senior resident representative) and Ms. Nnaji, of the resident representative office, participated.

The last Article IV consultation was concluded on July 18, 2005 (IMF Country Report No. 05/302). A PSI was approved on October 17, 2005 and expired on October 16, 2007. Developments from mid-2005 to mid-2007—the period covered by the PSI—were reviewed in detail at the fourth review under the PSI (IMF Country Report No. 07/353).

At current extraction rates proven and probable oil and gas reserves would last more than 50 years, and possible reserves well above 100 years. Reflecting these levels of resources, a fiscal path in line with the MTFS is sustainable, as is also evident in the debt sustainability analysis (see footnote 4), and means the policy focus is on the macroeconomic stability implications of the spending of oil revenues.

The updated debt sustainability analysis (see Appendix I) concludes that Nigeria has a low risk of debt distress. In the baseline scenario, and in the case of the standardized stress tests, Nigeria’s debt outlook remains robust, while offsetting policy measures would be required in the medium term to keep debt sustainable in the event of a prolonged oil price shock or sustained higher non-oil primary deficit. The authorities own DSA, based also on the low-income country template, reaches similar conclusions. Informed by their own DSA, the authorities are in the process of finalizing a comprehensive debt management framework.

This DSA updates the analysis presented in the Country Report 07/20 and utilizes the updated Bank-Fund debt template for low-income countries.

This DSA is based on new estimates for the GDP time series provided by the authorities in November 2007. Compared to GDP estimates previously used by the IMF, 2006 nominal GDP is higher by 26.1 percent for overall GDP and 57.7 percent for non-oil GDP. Based on the revised GDP series, historical averages for real growth over the previous 10 years were 7.0 percent for overall GDP and 9.2 percent for non-oil GDP respectively.

The DSA is based on WEO oil price projections as of December 7, 2007

The government is assumed to resist pressures to loosen the current fiscal policy stance and establish a medium- and long-term sustainable fiscal position. This implies large but declining overall surpluses until 2020. At that time, deficits appear and are financed by previously accumulated financial assets.

In 2006, oil revenue accounted for 78 percent of the consolidated government’s revenue base and oil-related export proceeds for over 95 percent of Nigeria’s export earnings.

The impact of a two standard deviation shock to oil prices is discussed in footnote 11.

The LIC debt sustainability framework (DSF) provides a methodology for assessing external debt sustainability which is guided by indicative, country-specific, debt burden thresholds based on the relative strength of a country’s policies and institutions. Given Nigeria’s rating of 3.07, which is the three year average of the World Bank’s Country Policy and Institutional Assessment (CPIA), the relevant country-specific thresholds are an NPV of debt to GDP of 30 percent, an NPV of debt to exports of 100 percent, and a debt service to exports ratio of 15 percent.

Given Nigeria’s federal structure, sub-national borrowing is possible but is constrained by various regulations. While at present such borrowing is limited, careful management and monitoring at the sub-national level will be crucial to support future debt sustainability. In this regard, inclusion of a sub-national debt strategy in the national Debt Management Framework is welcome.

The NPV of the public sector’s gross debt burden would decline through the medium term, before rising towards the end of the projection period.

For illustrative purposes, Figure 1 also traces the evolution of gross debt in the baseline scenario

For illustrative purposes, assuming an oil price shock of two standard deviations—thereby reducing prices to around US$43 per barrel in 2007 prices—and the current baseline fiscal deficit, government deposits at the central bank would be exhausted by 2011.

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