Abstract
The success of Nigeria’s reforms brings new policy challenges for preserving and building on the reform gains. The immediate challenge is to enshrine a fiscal institution that ensures that fiscal policy is consistent with macroeconomic stability. Nigeria’s integration into the global economy brings new challenges for ensuring financial stability. Monetary policy has strengthened. The balance of payments outlook is consistent with external stability. Non-oil sector growth can only be sustained with supportive macroeconomic policies and a resolution of the infrastructure gap.
February 13, 2008
1. This statement reports on developments since the staff report for the Article IV was issued to the Board on January 22, 2008. Some of these developments confirm the spending pressures highlighted in the staff appraisal. The thrust of the staff appraisal remains unchanged.
2. The external position remains robust. International reserves stood at US$54.2 billion (equivalent to about 10 months of imports) at end-January 2008.
3. Nigeria has not been affected by the recent volatility in financial markets. Capital inflows into the domestic bond and stock markets are reported to have continued. The stock market was up by 1 percent in January having traded in a fairly narrow range. The naira appreciated by 0.3 percent with respect to the U.S. dollar in January on the interbank market.
4. Headline inflation increased to 6.6 percent year-on-year in December due to food price inflation. Core inflation (less food and energy) was negative as tradable prices declined further on the strength of the naira. The increase in food price inflation largely reflects the impact of regional droughts and a stronger than normal seasonal pick up in prices. November monetary aggregates indicate a slight pick up in broad money as the expansion in private sector credit continued.
5. The National Assembly has yet to approve the 2008 federal budget. It appears likely that the budget oil price will be increased to US$59 (from the proposed US$53.83) per barrel. The federal government plans to use about one half of the additional oil revenue disbursements to reduce domestic debt financing and the remainder on infrastructure projects. The higher budget oil price is expected to result in higher oil revenue allocations to state and local government. Implications for the fiscal balance cannot be assessed until the budget details are issued following parliamentary passage.
6. Additional allocations from oil savings (the excess crude account) have been made. An amount of US$1.8 billion (0.9 percent of GDP) was allocated to a number of states to compensate them for their financing of the Paris Club debt settlement in excess of their own state debt obligations. The allocations were made in foreign currency accounts that can be drawn upon either by conversion to naira through the interbank foreign exchange market or by direct import spending. Hence, these allocations will not inject naira liquidity into the economy. It is reported that in early February, the various tiers of government reached understandings on an additional distribution of US$4 billion (1.9 percent of GDP) from the excess crude account. This amount will also be allocated in foreign currency and released in three separate installments. While it is understood that subnational governments are being encouraged to use the funds for budgeted investment, staff does not have sufficient detail to determine the impact on fiscal balances.
7. The government has authorized the national oil company to seek commercial financing for its investment needs in joint venture oil and gas projects. This financing would be tied to the project and be non-recourse to both the government and the national oil company.