Nigeria’s 2002 Article IV Consultation highlights that major macroeconomic imbalances had emerged as a result of sharp increases in government spending and expressed concern at the risks of a further acceleration of inflation and continuing instability in the exchange market. The overall fiscal balance deteriorated sharply in 2001, the external accounts worsened, and inflation accelerated. The overall stance of fiscal policy remains highly expansionary in 2002, notwithstanding efforts by the authorities to contain capital spending. Lax financial policies have led to a sharp fall in international reserves.
1. This statement provides additional information that has become available since the issuance of the staff report (SM/02/361) on November 25, 2002. This information does not alter the thrust of the staff appraisal.
2. A Supplementary Appropriations Bill for 2002 of about N 89.5 billion (1.7 percent of GDP) has been passed by the National Assembly and signed by the President. The major components include about N 28 billion for the Independent National Electoral Commission, N 24 billion for military pensions and N 12.5 billion for foreign embassies. Given that the recurrent expenditure authority will expire at end-year, it is unclear how much of these expenditures will be spent or how they will be financed in 2002. The capital component, however, which is estimated at about N 46 billion (0.9 percent of GDP) can be committed and carried over to next year. In the event that a significant portion of the appropriations is spent in 2002 without offsetting cuts elsewhere, the fiscal outcome will be worse than the staff projections contained in the staff report.
3. President Obasanjo has submitted the 2003 Appropriations Bill to the National Assembly. The Bill is ambitious, targeting an overall deficit of 0.6 percent of GDP, implying a sizeable tightening of the fiscal stance relative to the projected outturn for 2002, and a stronger adjustment than envisaged in the staff report. Total consolidated expenditure is envisaged to decline by 7.6 percentage points of GDP, with major expenditure cuts in the payroll, capital spending and domestic interest payments. However, the underlying policy changes to support the expenditure cuts are yet to be elaborated. The budget proposal assumes an oil price of US$21 per barrel, compared to the current price of about US$25–26 per barrel. The President also announced that the government will seek to establish a fiscal rule to stabilize the levels of both capital and recurrent expenditure.
4. On November 26, the Federal Government announced a buyback auction for the government’s par Brady bonds, and associated oil warrants, on a voluntary basis. The par bonds have a face value of about US$2 billion, and mature in 2020. The expiration date of the buyback offer has been extended from December 6 to December 20, 2002 to allow time for several large bond holders to consider the offer, and because of a U.K. court ruling that associates of the former head of state Sani Abacha could tender their holdings. The floor price for the offer is approximately US$660 for each US$1,000 of principal, of which approximately US$430 is principal and interest collateral. The government has not indicated the amount or average price of the bonds which they expect to buy back. In the short term, the cost of the buyback would have a modest effect on the level of reserves. If all the bonds were bought back at the floor price, the cash payment would be around US$470 million.
5. On December 14, 2002, the President signed the anti-money laundering legislation into law immediately following the adoption of the bill by the Senate. The House of Representatives had earlier approved the bill on December 11, 2002.