Nigeria
Fourth Review Under the Policy Support Instrument: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Nigeria

The staff report for the Fourth Review on Nigeria highlights developments under the Policy Support Instrument (PSI). Robust non-oil sector growth significantly strengthened fiscal and external positions, reducing inflation that surpassed the original program goals. Fiscal risks have increased in the short term because recent practices on the use of an oil price rule and oil savings, which have been important to macroeconomic performance, are being revisited. The government’s consensual approach within the framework of the constitution offers the prospect of a lasting solution.

Abstract

The staff report for the Fourth Review on Nigeria highlights developments under the Policy Support Instrument (PSI). Robust non-oil sector growth significantly strengthened fiscal and external positions, reducing inflation that surpassed the original program goals. Fiscal risks have increased in the short term because recent practices on the use of an oil price rule and oil savings, which have been important to macroeconomic performance, are being revisited. The government’s consensual approach within the framework of the constitution offers the prospect of a lasting solution.

I. Introduction

1. The fourth and final review concludes Nigeria’s two-year Policy Support Instrument (PSI). Discussions covered:

  • A review of developments under the PSI (Section II),

  • An assessment of program performance based on end-June 2007 targets and the short-term outlook (Section III), and

  • A discussion of policy plans concerning macroeconomic stability and safeguarding Nigeria’s wealth (Section IV).

The scope of discussions will be broadened during the upcoming Article IV consultation.

2. Discussions were held with the new administration of President Yar’Adua. The administration shares the economic and social objectives of its predecessor and is expected to outline a strategy for accomplishing the President’s Seven Point reform agenda in a new Nigeria Economic Empowerment and Development Strategy (NEEDS 2) by year-end.1 The government has been challenged immediately by several issues, including the states’ renewed claims to access their oil savings. On this and other issues, the hallmark of the administration is the application of the rule of law and constitutionality, offering the prospect of long-lasting solutions.

II. Developments under the PSI: 2005-07

3. The PSI supported the reform program set out in the homegrown NEEDS 2004-07. Improved macroeconomic policies and wide-ranging structural reforms strengthened economic performance that benefited also from favorable external conditions (Figures 1-5).

Figure 1.
Figure 1.

Nigeria: Real Developments

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities; World Bank, Doing Business Database; Business Monitor International; and IMF staff estimates.
Figure 2.
Figure 2.

Nigeria: External Developments

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities and IMF staff estimates
Figure 3.
Figure 3.

Nigeria: Fiscal Developments (Consolidated General Government)

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities and IMF staff estimates.
Figure 4.
Figure 4.

Nigeria: Monetary Developments

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities and IMF staff estimates.
Figure 5.
Figure 5.

Nigeria: Social Indicators and Economic Well-being

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities.

4. Macroeconomic performance and sustainability improved in accordance with the objectives under the PSI (Text Table 1). Non-oil sector growth was high, particularly in services, while oil production stagnated. Inflation—both headline and core—declined to single digits. The external and fiscal positions strengthened significantly with the reduction of Paris and London Club debt, and the accumulation of public savings and international reserves. Debt-service savings were directed to poverty spending. A majority of households saw their economic situation improve or stay the same, but poverty remains high and progress toward the Millennium Development Goals (MDGs) needs to accelerate.

Text Table 1.

Comparison of PSI and Actual, 2005-07

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PSI projections are the October 2005 request for the PSI (IMF Country Report No. 05/432). Current projections are used for 2007 “actual” data.

5. A favorable external environment and weather conditions were supportive of the outcomes. Increased oil prices boosted government oil revenue and reserves, even though unrest in the Niger Delta curtailed oil production.2 Agriculture grew robustly—benefiting from good weather and government agricultural programs—which helped reduce food price inflation.

6. While benefiting from a positive external environment, a stronger policy framework was pivotal in delivering improved macroeconomic performance. Nigeria has experienced several episodes of high oil prices, yet in recent years the outcomes were far more positive (Text Figure 1).3 Securing these gains is an accomplishment in light of the tremendous needs for spending on infrastructure and poverty reduction, while having to contain domestic demand to levels consistent with macroeconomic stability. Even then, capital spending more than doubled in three years and about $1 billion of debt relief gains was allocated to a Virtual Poverty Fund in both 2006 and 2007.

Text Figure 1.
Text Figure 1.

Nigeria: Economic Developments during the Current and Past Oil Booms

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Sources: Nigerian authorities and IMF staff estimates.

7. The comprehensive structural reform program aimed to strengthen economic governance and the private sector environment. Reforms in government management, trade and market liberalization, privatization, and banking and financial sector reforms have led to important gains (Text Table 2). A World Bank survey found increased transparency and fairness in procurement, and the World Bank Doing Business indicators show some improvements.

Text Table 2.

Main Accomplishments of the Structural Reform Program under the PSI, 2005-07

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Sources: Nigerian authorities and IMF staff.

8. The improved policies and good macroeconomic performance increased confidence, thereby creating a virtuous cycle. Buoyant financial market sentiment is reflected in a sovereign rating of BB- and the success of several Nigerian banks in raising capital on international markets. Rising confidence led to increased money demand, reinforcing efforts to bring down inflation despite the challenges for monetary policy in managing the significant liquidity injections from the budget.

9. Yet institutions to safeguard the past gains are only at an early stage. Legislation enacted at the end of the Obasanjo administration strengthened the legal framework. Nonetheless, the reform gains, particularly on macro-fiscal management, need to be entrenched. The mechanism for determining the use of oil receipts and savings needs to be tied effectively to macroeconomic considerations. Institutions for managing oil savings need to be clarified especially in light of large development needs, Nigeria’s federal structure, and continuous regional pressures owing to uneven resource endowments. The civil service is only at the early stages of reform. The CBN has yet to establish a track record of consistent monetary policy implementation, and the capacity of the new financial sector needs to be enhanced.

III. Program Performance

10. Program performance has been satisfactory. Quantitative assessment criteria were met except for one minor deviation on reserve money. Structural reforms are well advanced but two were not completed for which waivers are requested. The 2007 reserve money path is modified to reflect recent developments in the money multiplier.

Fiscal policy

11. Capital spending was above program levels in the first half of 2007 reflecting efforts by the outgoing administration to accelerate investment projects (Text Table 3 and Tables 2a-2c). At the federal level, a longer-than-anticipated carryover of capital spending from the 2006 capital budget increased spending significantly (about 1¾ percent of non-oil GDP). The new government has stopped this spending and intends to eliminate the practice of carryover in the future. Nonetheless, the end-June 2007 federal government fiscal assessment criterion was met because the higher capital spending was offset by an unanticipated pick up in non-oil revenues, including license fees for GSM. At the consolidated level, the higher capital spending reflected in particular a pick up in outlays on the National Integrated Power Project. The consolidated non-oil primary balance target was exceeded by 1.5 percent of non-oil GDP.

Text Table 3.

Consolidated Government (non-oil), 2005-07

(Percent of non-oil GDP)

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Sources: Nigerian authorities and IMF staff estimates and projections.
Table 1.

Nigeria: Selected Economic and Financial Indicators, 2004-09

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Sources: Nigerian authorities and IMF staff estimates and projections.
Table 2a.

Nigeria: Consolidated Government (Cash Basis), 2004-09

(Billions of naira)

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Sources: Nigerian authorities, and IMF staff estimates and projections.

Includes capital contributions to joint venture projects with oil companies for power plants.

Actual cash spending

Table 2b.

Nigeria: Federal Government Budget, 2004-08

(Billions of naira)

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Sources: Nigerian authorities, and IMF staff estimates and projections.

Oil revenue net of cash call payments.

Excluding transfer to the NNPC for cash call payments. Includes fuel subsidy payments to independent marketers.

Table 2c.

Nigeria: Consolidated and Federal Government, 2004-09

(Percent of GDP, unless otherwise specified)

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Sources: Nigerian authorities, and IMF staff estimates and projections.

Excluding oil revenue, cash call payments, and cash interest payments. Projections from 2007 reflect revised nominal GDP.

Estimates domestic demand impact of fiscal stance. Defined as non-oil balance (excluding fuel subsidy) less estimated foreign content of large infrastructure projects and foreign interest.

Excluding the transfers to NNPC for cash call payments.

12. The authorities proposed a 2007 supplementary budget which reprioritizes and increases spending, and have identified compensatory measures to meet the end-2007 federal government non-oil primary deficit target. An already planned 15 percent civil service salary adjustment, which initially applied to government agencies that completed the civil service reform program, was broadened to all agencies, and was made retroactive to the beginning of the year. Offsetting these outlays, the authorities have adopted measures to increase non-oil revenues, including through freezing of waivers and exemptions largely under customs, and have put on hold several large infrastructure and other capital projects while they are being reassessed. In the event that these measures are inadequate to meet the fiscal targets, the authorities have contingent measures in place. Extra distributions from oil savings to states (0.9 percent of non-oil GDP) in July and August increased state spending, but for the remainder of the year, allocation of oil revenues will be limited to the budgeted amounts.

13. Oil revenues fell short of projections by about 40 percent in the first half of 2007, narrowing the current account surplus and reducing the accumulation of oil savings and international reserves. The revenue reduction is caused by overall lower production due to the Niger Delta unrest combined with a consequent shift of production to newer offshore fields that reduce the revenue ratio in the near term.4 In addition, cost deductions are increasing from higher operating and capital costs and investments in gas projects. A recovery of the revenue ratio seems likely in the medium term and oil revenues are still sufficient to meet budget needs.5

Monetary policy

14. Inflation continues to perform better than expected. While the headline inflation rate is benefiting from strong agricultural production and favorable food prices, core inflation is also below programmed rates averaging 5.8 percent and on a declining trend in the first seven months of the year. The staff believes that lower inflation expectations, a more robust banking sector following its consolidation, and unification of the foreign exchange markets increased confidence and money demand.6

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Inflation was in single digits.

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

15. The monetary program has been broadly on track, but is being adjusted to reflect recent macroeconomic developments. Broad money remains within the program path projected at the third review, and has been supportive of the improved inflation performance. At the same time, reserve money was above the program path on average, implying that the programmed multiplier for 2007 was too restrictive. The staff proposes increasing the indicative path for reserve money by about 5 percent. The availability of daily balance sheets since mid-June will allow the CBN to monitor compliance with the revised target more effectively. In the context of the work on strengthening monetary data, the CBN adopted a definition of reserve money that excluded a newly-established bank-settlement account. The end-June reserve money target was met on this definition. In staff’s view, the account falls within the definition of reserve money in the TMU and, on this basis, the target was missed by a small margin. The staff recommends a waiver for the missed assessment criterion because of the small magnitude of the overrun (2 percent) and, in any event, the conclusion that the target itself had been unduly restrictive.

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Broad money was on track and reserve money on average exceeded program targets.

Citation: IMF Staff Country Reports 2007, 353; 10.5089/9781451829051.002.A001

Structural reforms

16. Three of the five structural targets for the fourth review were observed. Of the two requiring waivers, one is delayed temporarily and the other is being reassessed in the context of a broader review by the new government (Text Table 4, and Table 8a). All structural benchmarks for the fourth review have been completed on time.

Text Table 4.

Nigeria: Structural Assessment Criteria for the 4th Review

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Sources: Nigerian authorities and IMF staff assessment.
Table 3a.

Nigeria: Central Bank of Nigeria (CBN) Analytical Quarterly Balance Sheet, 2004-08

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Sources: Nigerian authorities, and IMF staff estimates and projections.

CBN presents long-term liabilities in other items net.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

States and Local Governments (SLGs).

Table 3b.

Nigeria: Monetary Survey, 2004-08

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Sources: Nigerian authorities, and IMF staff estimates and projections.

Includes the windfall oil revenue savings by subnational governments and extrabudgetary funds.

Table 4.

Nigeria: Balance of Payments, 2004-10 (Billions of U.S. dollars, unless otherwise specified)

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Sources: Nigerian authorities, and IMF staff estimates and projections.

Includes capital transfers.

In 2006, the prepayment of post-cutoff Paris Club debt ($0.3 billion) and the cost of the buy-back of remaining Paris Club debt ($4.3 billion).

In 2002 debt buy-back, in 2003-05 recovery of looted funds.

Nominal public sector short- and long-term debt, end of period.

In 2005 (2006) reflecting also a $7.1 billion ($7.2 billion) write-off of Paris Club debt, and in 2006, reflecting the discount ($2.7 billion) on the $7.0 billion buy-back of remaining Paris Club debt.

Percent of general government fiscal revenues.