Abstract
This paper presents Nigeria’s Request for a Two-Year Policy Support Instrument to support its reform efforts. All three tiers of government have adhered to a conservative oil price-based fiscal rule, resulting in large overall budget surpluses and a significant buildup of international reserves. The authorities have also initiated a broad structural reform program. GDP growth has been robust, benefiting from the improved macroeconomic environment and policy initiatives to spur agricultural production; and the medium-term growth outlook is favorable.
1. The following information has become available since the issuance of the staff report to the Board on October 7, 2005. The thrust of the staff appraisal remains unchanged.
2. The Federal Executive Council (FEC) approved a draft 2006 budget on October 12, 2005. The approved budget is in line with the understandings reached with the staff as described in the staff report. The draft budget will be submitted to the National Assembly for its consideration before end-December. The FEC also approved the tariff reform as described in the staff report. Implementation does not require parliamentary approval
3. Preliminary data indicate that there has been a decline in base money growth in September, although not as strong as expected. Reserve money declined, in both unadjusted and seasonally adjusted terms, although it is likely to have exceeded the end-September indicative target by some N 50 billion.
4. Both management and staff have been engaged in intensive discussions with the authorities in recent weeks. The authorities are fully aware of the risks to their program, including from expansionary fiscal policies, the ambitious bank restructuring exercise, and the resistance against reforms by vested interests. They have repeatedly demonstrated their commitment to take bold action and management and staff are therefore confident that program risks are manageable. To further reduce the growth of monetary aggregates, the CBN has taken additional measures after the staff report was circulated, including a requirement that banks keep the N 40 billion capital that they have raised in the market in an escrow account at the CBN; N 22 billion has already been transferred and the remaining N 18 billion is expected in the coming days. The CBN intends to intensify open market operations during the fourth quarter of 2005. To facilitate this, the Minister of Finance signed an agreement in early October to provide the CBN with N 70 billion in treasury bills to be used for monetary policy purposes. These would be supplemented with CBN bills, as necessary.