Statement by the IMF Staff Representative June 29, 2001

Nigeria showed serious macroeconomic imbalances under the Stand-By Arrangement. Executive Directors observed that this had emerged as a result of the sharp increase in government spending, and expressed concern at the risks of a further acceleration of inflation and instability in the exchange market. They stressed the need to implement prudent fiscal and monetary policies for macroeconomic stability, and accelerate structural reforms. They called on Nigeria to show continued commitment toward a strong economic program that could be supported by the IMF.

Abstract

Nigeria showed serious macroeconomic imbalances under the Stand-By Arrangement. Executive Directors observed that this had emerged as a result of the sharp increase in government spending, and expressed concern at the risks of a further acceleration of inflation and instability in the exchange market. They stressed the need to implement prudent fiscal and monetary policies for macroeconomic stability, and accelerate structural reforms. They called on Nigeria to show continued commitment toward a strong economic program that could be supported by the IMF.

1. This statement provides information on economic developments that became available after the staff report (SM/01/171) was circulated to the Executive Board.

2. Data for April indicate that the 12-month inflation rate rose from 18.2 percent in March 2001 to 23.2 percent in April. The non-food inflation rate declined from 21.4 percent in March to 17.4 percent in April. The objective of attaining single-digit inflation by year-end therefore looks increasingly difficult. In the exchange markets, the naira has appreciated by about 2.5 percent in the official interbank and parallel markets since the bout of intensified pressures in April. The two rates currently stand at ₦112.2 and ₦134, respectively per U.S. dollar, a differential of about 19.5 percent. In mid-June, the Central Bank of Nigeria issued a circular requiring banks to use the rate on all their transactions that does not diverge from the official (CBN) rate by more than 0.5 percent. The Financial Action Task Force has recently added Nigeria to the list of countries that do not cooperate with international anti-money laundering efforts.

3. Preliminary fiscal data indicate that warrant releases for capital expenditures for the first half of the financial year (January-June 2001) was limited to ₦170 billion while cash spending from these releases was ₦100 billion through May. Total cash spending (including appropriations from the previous year) during January-May was N143 billion. Personnel costs for the first five months was ₦123 billion compared with the target of ₦121 billion. Discrepancies between provisional fiscal and monetary data preclude a definitive assessment at this stage as to whether overall federal spending is in line with the targets agreed with the staff.

4. The government is implementing the due process tests with increasing effectiveness. This has helped restrain capital spending and provide assurances about its quality. With the help of the World Bank, the necessary technical assistance to complete the due process tests for the 2001 capital budget is now in place. Moreover, strengthened procurement regulations have now become effective and circulated to all ministries and agencies.

5. In response to demands for additional spending, the federal government has submitted a supplementary budget amounting to ₦137 billion of which ₦21.5 billion has been earmarked for recurrent expenditures and ₦115 billion for capital expenditures. The government has stated that the latter will be subject to the due process tests. Further, notwithstanding the supplementary budget, it has reiterated its commitment to contain overall federal government spending for 2001 within the limits agreed earlier with the staff, namely, ₦718 billion and ₦250 billion for overall and capital spending, respectively.

6. Data through May indicate that foreign exchange reserves amounted to US$10.4 billion, exceeding the programmed floor by about US$0.4 billion, reflecting larger petroleum revenues. The CBN absorbed ₦12 billion of liquidity in May compared with a target of ₦40 billion. Nevertheless, net domestic assets performed better than expected, allowing reserve money to grow broadly in line with the target. Average interbank interest rates have declined from about 30-35 percent in May to about 25 percent in late June.

7. The value-for-money audits of certain federal government expenditures in the third and fourth quarters of 2000 have been completed. These audits and the procedures for checking compliance with the due process tests are likely to be published in the next few weeks. The audit of the civil service wage bill has been done for about 80 percent of the total payroll, with the military, universities, and the judiciary to be completed in the next two months.

8. Recognizing the severity of the macroeconomic imbalances and the additional risks to the outlook for the rest of the year, the government has undertaken to secure understandings with the state and local governments so that they could contribute to macroeconomic stability. The federal government would urge the sub-federal governments to restrain expenditure and establish due process tests along the lines of those used for evaluating federal government capital expenditure. The federal government will also seek to strengthen existing legislation that would establish accountability of, and financial reporting requirements for, the federal, state and local governments.

9. The CBN’s recent circular has eliminated the multiple currency practice but in a manner that moves away from the development of a market-based system of exchange rate determination. The CBN is currently finalizing a study on the parallel exchange market, following which it will discuss with the staff the modalities for achieving unification of the exchange markets.

10. In the staff report (SM/01/171), it was noted that the staff would recommend that the Board consider, in early August 2001, the authorities’ request for completion of the first review and an extension of the current arrangement by six months, provided certain prior actions were completed and satisfactory understandings were reached on an economic program for the second half of the year. Conditional on Board endorsement of the staff’s proposed strategy, the staff would, at the end of July, seek a technical extension of the current arrangement until end-October, provided there were clear indications that the prior actions would be met. The staff would seek to complete the discussions in August with a view to possible Board consideration in October. This schedule would also allow the second stage of the safeguard assessment to be completed prior to the Board meeting.

11. While the developments reported above do not alter the staff appraisal, the staff would highlight the significant risks to the economic outlook in the months ahead and hence to the prospects for bringing the economic program back on course unless resolute action is taken. With the WEO oil price having been revised upwards from US$25.5 per barrel to US$26.8 per barrel, macroeconomic pressures could be further exacerbated if the higher oil revenues lead to increased spending by state and local governments. This development only heightens the need for them to contribute to restoring macroeconomic stability. In this regard, and as noted in the staff appraisal, a pact between them and the federal government would be critical.

Nigeria: Staff Report for the 2001 Article IV Consultation
Author: International Monetary Fund