Recent Macroeconomic Developments and Performance.

2. The strong commitment of the authorities to sustaining macroeconomic stability and implementation of structural reforms, as well as a generally favorable external environment, including Fund TA support, have underpinned the program achievements under the PSI which include: robust growth; lower inflation; a decline in debt; and accumulation of substantial reserves. Overall real GDP growth will rise from an estimated 5.2 percent in 2006 to a projected 8.2 percent in 2007, as the corresponding slight fall in non-oil GDP from 8.9 percent to 7.5 percent is more than compensated for by the rise in oil GDP from -2.8 percent to a projected 9.9 percent. High agricultural output, induced largely by good weather conditions and supportive policies, and strong performance of communications, construction and service sectors contributed to the relatively high real GDP growth. The inflation rate, estimated at 8.2 percent in 2006, is projected to decline to 7.8 percent in 2007 in line with the single-digit inflation objective of the authorities, as monetary policy is tightened. The tempo of structural reforms has remained very high, especially regarding the speed and breadth of privatization. Government’s fiscal operations, anchored on oil price-based fiscal rule, have continued to result in overall budget surplus. Investors’ confidence has risen, resulting in favorable sovereign ratings of BB-.

Performance under the PSI

3. Alongside a relatively robust macroeconomic performance the authorities have also successfully continued with the implementation of structural reforms under the PSI. In order to ensure policy continuity, the outgoing government prepared policy strategy documents, which have been handed to the new administration, which took office on May 29, 2007. The final steps in completing some of the structural measures were unavoidably delayed. Some of the delays arose from expanded scope of work related to what was originally envisaged, but most of the delayed measures have either been completed or are well advanced, and the authorities are pressing ahead toward their completion. In general, remedial measures have been taken in all cases. Notably, as assessed by staff, the missed quantitative and structural criteria do not undermine the thrust of policy framework under the PSI to which the authorities remain firmly committed.

4. On the issue of misreporting, related to the government contracting a US$200 million non-concessional loan, signed on January 12, 2006, the authorities agree with the concern raised by the Fund. They have, therefore responded to Management’s letter on the subject and provided relevant documentation to assist clarify matters relating to the loan. As indicated in the authorities’ letter to Management and in the staff report, the loan arrangement was part of a supplier’s contract agreement executed on December 15, 2004 when the PSI had not come into effect and was subjected to protracted negotiations which carried through 2005 to improve its terms. The authorities have regretted the oversight in not providing information on the loan during the first and second reviews of the PSI, which was also attributable to changes in key personnel in the Ministry of Finance, poor debt database and weak debt management capacity at the time. Given this experience, the authorities have now strengthened their debt management practices.

Macroeconomic Policies for 2007/08 and the Medium-term

5. Notwithstanding the significant achievements and progress made, the Nigerian authorities recognize that many challenges still remain to further economic advancement. However, the authorities are already adopting and implementing a wide range of strong policy measures to help deal with these challenges. In this regard, a significant supply-side constraint to increased economic activity and growth, i.e. unstable electricity supply, is being addressed, as several new power plants have been brought into operation and are helping to stabilize and enhance electricity production and reduce costs. In addition, sustained actions being taken by the monetary authority, TA on Statistics, and data reconciliation are contributing to effective refinement of monetary data. Furthermore, key legislations have been enacted into law to institutionalize reforms, while a high-level national conference is being convened to address the Niger Delta problem.

6. Real GDP growth is projected to increase by 8.2 and 6.7 percent in 2007 and 2008 respectively, with rising gas production, expected recovery in oil output to 2005 levels, improved infrastructure and robust non-oil sector performance contributing to high real GDP growth. Inflationary pressures would be contained and inflation kept at single digits as the 2007 macroeconomic program targets stronger fiscal position and monetary growth that is lower than non-oil sector growth.

Fiscal Policy

7. Although the overall fiscal balance was in surplus in 2006, and allowed for further accumulation of savings, the larger-than-projected expansion in the consolidated government level largely added to domestic demand. The authorities have, therefore, reaffirmed their commitment to 2007 fiscal program (which relies on the MTEF), set during the second review. This involves a reduction in fiscal impulse, by envisaging a reduction in non-oil primary deficit of the consolidated government spending by about 3 percent of non-oil GDP. Capital spending on key infrastructure, including projects with high import content, is expected to increase, while other spending would be contained. Achievement of the consolidated government target would mainly depend on adherence to the oil-price fiscal rule which is already being implemented. The authorities have also prepared a comprehensive Debt Management Framework to help preserve gains made recently in debt sustainability. The DSF is providing guidance on the borrowing strategy, procedures, and acceptable terms and conditions of loans, their disposition and servicing.

Monetary Policy

8. Monetary policy partially succeeded in offsetting the unexpected fiscal stimulus of late 2006, as problems with monetary data impeded a more effective analysis of monetary conditions, thus limiting the Central Bank’s ability to respond more promptly to liquidity situations. Thus, monetary aggregates grew higher than programmed. The monetary authority attributes the rise in reserve money in December 2006 to a surge in currency arising from demands associated with political campaigns, while large credits to the private sector, including for investment in the oil sector, mainly explain the rise in broad money in mid 2006. Against this background, the 2007 monetary program targets the Central Bank’s single-digit inflation objective by reversing, in part, the acceleration in broad money, targeted to grow by about 12 percent (below nominal non-oil GDP growth). The Central Bank’s sterilization efforts would rely on foreign exchange sales, in addition to other monetary policy instruments. The Bank would also continue to improve on prudential standards and more effective supervision to further enhance soundness of the banking and financial industry. The Central Bank of Nigeria (CBN) is refining a Financial Sector Strategy 2020 (FSS 2020) which was recently articulated for enhanced support toward further development of the Nigerian financial sector and markets.

Other Structural Reforms

9. Nigeria has significantly strengthened the management of its oil wealth in the last few years through adoption of the oil-price fiscal rule and participation in the Extractive Industries Transparency Initiative (EITI). The fiscal Responsibility and NEITI Bills have been enacted into law to institutionalize these reforms. Having states pass their respective fiscal responsibility bills is a near-term priority of government.

10. The introduction and implementation of guidelines on the use of Nigeria’s oil savings and management of the economy and the policy framework through the political transition are a key challenges going forward. The authorities are committed to meeting both challenges. Indeed, they are already doing so as reputable domestic and foreign asset management institutions are involved in managing Nigerian oil savings, while the oil-price fiscal rule is now considered a welcome and transparent budget management tool. Similarly, the political transition has largely been successfully concluded, with the completion of national elections in April and inauguration on May 29, 2007 of the new President, who has reaffirmed his commitment to ongoing economic policies and reforms, improved governance, and fight against corruption. The new government counts on the continued support of development partners to complement its structural reform efforts.

Conclusion

The Nigerian authorities continue to be strongly committed to effective implementation of sound macroeconomic and structural reform policies to further consolidate and safeguard economic gains made under the PSI, including macro stability, high sustainable GDP growth for poverty reduction, and progress towards attainment of the MDGs. They are also committed to taking additional measures to address other challenges and risks. They welcome the Fund’s engagement with the country, including through policy dialogue, advice and TA. They therefore, count on the Fund’s continued support, and request for the granting of waivers for the missed quantitative and structural assessment criteria and approval for modification of the end-June 2007 monetary targets, and completion of the third review of performance under the PSI.