This First Review Under the Policy Support Instrument (PSI) for Nigeria reports that structural reforms are proceeding in line with the National Economic Empowerment and Development Strategy. The authorities’ commitments under the PSI primary objectives of the economic reform program include entrenching macroeconomic stability, strengthening public financial management, and reducing the costs of doing business. The Central Bank of Nigeria has developed plans to invest some of its international reserves in higher yield financial assets, and allow domestic banks to bid to be custodians for the investments.

Abstract

This First Review Under the Policy Support Instrument (PSI) for Nigeria reports that structural reforms are proceeding in line with the National Economic Empowerment and Development Strategy. The authorities’ commitments under the PSI primary objectives of the economic reform program include entrenching macroeconomic stability, strengthening public financial management, and reducing the costs of doing business. The Central Bank of Nigeria has developed plans to invest some of its international reserves in higher yield financial assets, and allow domestic banks to bid to be custodians for the investments.

1. This statement contains information that has become available since the staff report for the first review under the Policy Support Instrument was issued to the Board on April 3, 2006 (EBS/06/45). The thrust of the staff appraisal remains unchanged.

2. Economic developments and policy implementation have continued the trend of the last quarter of 2005 during the first months of 2006. International reserves rose to US$34 billion at end-February, while inflation stabilized at about 11 percent year-on-year. The exchange rate appreciated to 127.3 naira per U.S. dollar by early April from N129 at end-2005. Implementation of the authorities’ fiscal and monetary programs was in line with program projections.

3. Recent data show that crude oil production fell short by about 550,000 barrels per day on average in the past two months. The authorities believe that it should be possible to bring this production back onstream, and they have so far not revised their estimates of oil production in 2006.

4. In late March, the Central Bank of Nigeria (CBN) initiated a number of actions to reduce the spread between official and parallel foreign exchange markets. In particular, in recognition that the recent increase in the spread was partly due to a reduction in supply of foreign exchange to the parallel market, the CBN now allows licensed bureaux de change to buy foreign exchange in the official market to supply to retail clients. On the demand side, some steps towards easing of administrative requirements and limits on currency purchases were also introduced.

5. To underscore its commitment to more market-based implementation of its monetary program, the CBN has converted at market interest rates the December 2005 placement of freed bank reserves into treasury bonds. Following an agreement with the Minister of Finance, the CBN used 91-day treasury bills at 6 percent to buy back the bonds.

6. The final Nigeria EITI audit report for 1999-2004 was published on April 10, 2006, in compliance with an end-June 2006 structural assessment criterion under the PSI. The report shows discrepancies between payments reported by international oil companies and receipts reported by the government, describes weaknesses in accounting and data management, and suggests that the government and oil companies continue their efforts to reconcile mutual accounts.

7. The last three outstanding bilateral agreements with Paris Club creditors (Austria, Denmark, and Russia) have been signed. Nigeria therefore stands ready to conclude the debt buy back operation agreed with its Paris Club creditors in October 2005.

8. The 2007 budget formulation process has begun with the issuance of guidelines for the preparation of medium-term sector strategies (MTSS) in late March. These guidelines extend the coverage of MTSS to line ministries representing about 80 percent of total line ministries’ outlays.