A retrospective on policies and performance under Fund-supported programs

3. The second chapter presents an assessment of past economic reform efforts—in particular the program supported by the 2000-01 Stand-By Arrangement (SBA). At the time, expectations ran high that the emphasis on improved governance as well as stabilization and pro-growth policies would deliver a quick turnaround in economic performance and improved living standards. Yet, macroeconomic performance and reform implementation proved disappointing, notwithstanding some encouraging developments—including higher non-oil GDP growth and the strengthening of the due process underlying the capital budget. As valuable lessons from reviewing performance under the Fund-supported SBA, the chapter highlights the importance of (i) institutional and policy formulation foundations, (ii) broad domestic ownership, (iii) consistent and coordinated formulation and implementation of policies, and (iv) prioritization and sequencing of reforms.

Fiscal management capacity—issues and options for reform

4. The third chapter reviews weaknesses in the current fiscal management framework in Nigeria and proposes reforms to further strengthen the budget process. The main challenges continue to be lowering the consolidated non-oil deficit down to a more sustainable level and reducing the vulnerability of fiscal policy to oil market volatility. This is made harder by weak technical capacity across the three tiers of government, and the federal system, with a large share of the oil revenue allocated to the subnational governments. The chapter reviews shortcomings in the current budget process, including budget preparation and execution, fiscal reporting, and the public expenditure system. It also discusses recent reform efforts to strengthen the budget process.

Federal government debt management reforms

5. Over the past two decades, public debt management in Nigeria has not been effective. It has suffered primarily from the absence of a sound fiscal framework, which has led to excessive debt levels and debt servicing difficulties. The government’s large borrowing needs have been poorly managed. The fourth chapter describes weaknesses in the current public debt management framework and the government’s reform strategy, and reviews the reform implication and addresses further actions that will be needed to put the government’s domestic debt reform strategy on a solid foundation.

6. The chapter points out that the reforms will only be successful and sustainable if accompanied by responsible fiscal and monetary policy. The undersubscription in longer-dated bonds in the October 2003 auction was a good indication that in the absence of credible fiscal and monetary policies, investments in longer-dated fixed income products will be highly unlikely. The reform success will also critically hinge on improving cash management capabilities and coordination between the monetary and fiscal authorities, and improving transparency in fiscal and monetary operations.

Improving transparency in the oil sector

7. Improving transparency and good governance in Nigeria has to start in the oil sector because of its dominance in public revenue and exports. Recognizing this, Nigeria was one of the first oil producing countries to commit to improving transparency in the oil sector under the Extractive Industries Transparency Initiative (EITI). The fifth chapter introduces the EITI, and describes the Nigerian authorities’ efforts to operationalize the guidelines of the initiative. It then discusses the challenges the authorities are likely to encounter in making good on their commitment. The chapter argues that making information available according to the EITI guidelines would not be sufficient to fulfill the government’s own information requirements. More detailed knowledge of the oil sector is needed for the Nigerian authorities to maintain effective oversight of the oil sector and make informed policy decisions.

Exchange rate regime—experiences and options for further reform

8. Notwithstanding changes in the formal exchange rate regime and supporting institutional structures over the past 20 years, Nigeria’s foreign exchange market has been characterized by: (i) a relatively inflexible official nominal exchange rate; and (ii) a high degree of market segmentation. Chapter VI focuses on establishing a market structure that allows for the flexible determination of the exchange rate and unification of the foreign exchange market. The chapter argues that the introduction of the Dutch auction system in July 2002 was, in principle, a step in the right direction. Yet, in practice, the first 18 months of its operation witnessed limited success in facilitating greater market determination, stemming the loss of foreign exchange reserves, and reducing market segmentation.

The petroleum products market

9. One of the most useful and at the same time most difficult reforms undertaken by the new economic team was the removal of subsidies from retail petroleum products. Chapter VII describes the downstream petroleum sector in Nigeria, starting with the Nigerian National Petroleum Company’s (NNPC) refineries, pipelines, and depots; the regulation in the recent past with a de facto import monopoly for the NNPC, fixed retail margins and administered retail prices; and the liberalization steps taken in September 2003, with the government’s announcement that retailers were henceforth free to set prices. The chapter describes the economic effects of price fixing in the recent past, and looks ahead at the policies needed for the sector’s revival under a new liberal regime.

Natural gas prospects

10. Chapter VIII gives an overview of the natural gas sector in Nigeria with a focus on the impact on government revenue and the balance of payments from existing and planned gas production. It presents the two existing natural gas export projects in detail, following an overview of reserves and production, looks at the impact of the gas sector on government revenue and the balance of payments, and discusses possibilities for expanding the domestic market for natural gas.