Real Sector

The medium term growth would be achieved through increased focus on the agriculture. A key element of this is the shift to higher value crops in addition to new lands under cultivation in order to increase yield and productivity. Also, the Central Bank of Nigeria (CBN)’s Agricultural Credit Scheme of N200 billion, and the massive investment in irrigation facilities and storage facilities, including silos for storing surplus grains would further boost productivity in this sector.

The crude oil production expected in 2011 could be slightly less than the 2.36 million barrels per day (mbpd) as reported by staff. However, recent estimates by the Nigerian National Petroleum Corporation (NNPC) indicated that crude oil production capacity is between 2.71 and 3.0 mbpd. This indicates that there is still a substantial margin to be exploited before reaching capacity.

To address the infrastructural needs of Nigeria, it is noteworthy that one of the many independent power projects (IPPs) has been completed and has injected 250MW into the national grid while quite a number of others are nearing completion and will soon feed the national grid. This would significantly boost prospects for growth in the medium term.

Fiscal Consolidation

In the last two years, my authorities have played an active role in providing stimulus to the economy as necessary. The surge in government spending, particularly in 2010, was occasioned by the unanticipated expenditure on wage increase for civil servants, medical personnel, university lecturers, etc. In realization of this, the Federal Government took proactive step to set up a special committee to review the recurrent spending in the budget in September 2010. Additionally, my authorities are optimistic that the Legislature would not pass a budget that is significantly expansionary.

In the medium term, my authorities intend to continue with direct spending on priority projects, particularly in the area of critical infrastructure taking into consideration the need for fiscal consolidation. The authorities’ fiscal consolidation has commenced with the 2011 budget. In this regard, the fiscal consolidation efforts of the authorities are expected to reduce the budget deficit from the envisaged 6.1 percent of GDP in 2010 to 2.7 percent in 2013. This is very much in line with the fiscal deficit of 3 percent of GDP provided for in the 2007 Fiscal Responsibility Act (FRA). Although the deficit is expected to be financed largely by borrowing, this does not pose any risk as the debt-sustainability analysis conducted independently by my authorities and the joint Bank-Fund team shows that the debt level will remain sustainable under a number of unfavorable economic scenarios in the medium to long term.

The focus of fiscal policy will be to foster inclusive growth and job creation; optimize capital spending by rationalizing recurrent expenditure and maximizing government’s revenues; accelerate the implementation of reforms to enhance the quality and efficiency of public expenditure; and reinstate greater prudence in the management of the nation’s financial resources.

Going forward, the overall fiscal strategy will seek to: (i) promote fiscal discipline and diversification in revenue sources, (ii) outline fiscal policy which will work in consonance with monetary policies to create an environment of macroeconomic stability, (iii) adhere to prudent limits for expenditure to ensure relatively low fiscal deficits with little public sector borrowing and sustainable levels of public debt; and (iv) create a framework within which public funds can be allocated optimally.

On the revenue side, the authorities are fully committed to expand the revenue base and improve the efficiency of revenue collection. Measures are already in place to accelerate the identification and resolution of revenue leakages. These include the strengthening of pre-shipment inspection for crude oil and gas; conducting audits of all revenue generating agencies and those required to remit internally generated revenue to the treasury; and fast-tracking the implementation of key reforms by the Federal Inland Revenue Service and the Nigerian Customs Service.

Oil Revenue-Based Fiscal Rule

The authorities have resolved to adhere to a strong oil revenue-based fiscal rule, which is already embedded in the Fiscal Responsibility Act (FRA) 2007. The rule allows the Minister of Finance to modify the benchmark depending on utilization. The essence is to ensure that any excess accruals provide an avenue to leverage other public private partnership funding partners to participate in any identified investment program of government.

With regard to the infrastructural component of the proposed sovereign wealth fund, the model to be used by the Federal Government within the Medium Term Fiscal Framework would involve the private sector such that any additional expenditure would not impair macroeconomic stability. In this regard, the Fiscal Responsibility Act (FRA) and the Procurement Act enacted in 2007 would be strictly adhered to by the Federal Government. Furthermore, once the Nigerian Sovereign Investment Authority (NSIA) bill is passed, the three components of stabilization, infrastructure and savings for future generation would be properly ring fenced with no cross funding from each other. Additionally, the governance structure being proposed would ensure that the activities of the NSIA comply with the highest standard of accountability and transparency. Moreover, in view of the joint ownership of the proposed sovereign wealth fund by the three tiers of government, the investment activities of the NSIA would be properly discussed and agreed.

To further protect government earnings against the volatilities in the oil market, my authorities intend to adopt an oil price hedging strategy which will provide the option of transferring the risks associated with downside movement in the oil price to a third party.

Monetary and Financial Sector Policies

The primary objective of monetary policy in Nigeria is the maintenance of price stability. The CBN is committed to lowering inflation which is essential for sustainable growth in the economy. After periods of accommodative monetary policy in the aftermath of the global financial crisis and domestic banking crisis to address financial stability concerns, the recognition of inflationary pressures on the system led to monetary tightening starting with the monetary policy decision of September 2010, which raised Monetary Policy Rate (MPR) by 25 basis points from 6 to 6.25 percent. The recent monetary policy committee meeting of January 25, 2011 further increased the MPR to 6.5 percent. Cash Reserve Requirement (CRR) was also raised by 100 basis points and Liquidity Raito (LR) increased from 25 to 30 percent.

CBN remains committed to the goal of single digit inflation. However, since inflation in Nigeria is significantly influenced by structural factors and not monetary policy alone, adopting inflation targeting now will not be feasible. The focus is on addressing the structural impediments that influence inflation in Nigeria, and once those are addressed, inflation targeting can be considered. Furthermore, the National Bureau of Statistics (NBS) made adjustments to the CPI calculation in which reduced weights were assigned to local food production and higher weights assigned to other factors including imports. This change will increase the impact of imports on the inflation.

Concerning exchange rate, the management of exchange rate volatility by the CBN is critical to achieving price stability, being an import dependent economy. The speed and degree of exchange rate pass-through in Nigeria is relatively high; therefore, the management of exchange rate volatility is necessary to achieve price stability. In this regard, the CBN will only intervene in the foreign exchange market to minimize speculative demand and smoothen market volatilities.

In the aftermath of the global financial crisis, pressure was put on reserves as foreign investors divested in Nigeria to meet financial obligations at home. While the CBN stands committed to meeting all legitimate foreign exchange demand, it is taking steps to curtail sources of leakages in the system. For example, licenses to category “A” bureau de change were revoked and reserve build-up has commenced, starting November 2010. In addition, CBN will soon commence foreign exchange forward sales to reduce the pressure on spot demand and to cut down on speculative demand.

Credit growth to the private sector after the banking crisis dried up as banks struggled to keep afloat. The intervention by the Central Bank in the credit market is to achieve two broad objectives: to encourage credit market to function properly and to increase access to finance to the private sector. Following the Central Bank intervention in the banking sector, growth in credit to the private sector slowed, affecting economic activities and access to credit for business and households. Many sectors, firms, and households that depend on bank financing resorted to costly alternative avenues for financing, as commercial banks scaled back their lending. Noting that the slowdown in credit growth was constraining recovery in the short run, in addition to limiting prospects for longer-term growth, the CBN intervened.

The intervention in the credit market was targeted at areas of the economy with the most spillover effect on the rest of the economy, such as power, small businesses and agriculture. These are sectors that have the potential to increase employment and contribute to long-run growth. Furthermore, the consequences of not intervening would have been more costly to long-term growth as credit and economic activities almost came to a standstill. While preliminary data indicates that the intervention contributed positively to growth in economic activities, a full assessment of the impact of the intervention on CBN balance sheet is currently being undertaken. In addition, the CBN is working on other targeted reforms aimed at strengthening access to credit to the private sector.

The various monetary and financial sector policies adopted since 2009 have ensured a return of financial system stability as the banking system no longer poses any systemic risk to the nation’s economy. My authorities are fully committed to continue adjusting these policies where necessary, to take care of any downside risks that may arise. Accordingly, ongoing reforms at creating commercial, merchant and specialized banks that will enhance the funding of productive activities will be vigorously pursued. My authorities are also committed to reforms in the capital market as an alternative source of funding to the private sector.

Banking Crisis Resolution

My authorities are committed to quick resolution of the banking sector crisis. In the past two years, the authorities through the CBN have carried out comprehensive reforms of the banking system. It is expected that these reforms would be completed in 2011, given the critical role the banking sector plays in achieving the economic growth objectives. One notable channel for the resolution is the establishment of the Asset Management Company of Nigeria (AMCON) in 2010 which has successfully issued N1.03 trillion (US$ 10 billion) worth of consideration bonds to 21 banks in exchange for non-performing loans (NPLs) and intends to absorb all the bad loans by end of March and resolve the banking crisis by end-June 2011. The successful disposal of these risky assets will leave the banks with cleaner balance sheets that will facilitate their access to credit markets for raising capital and enable them to carry out their traditional role of financial intermediation. Furthermore, the authorities will strengthen macro-prudential regulation and supervision and ensure good governance in the banking system.

Structural Reforms

My authorities have shown their increasing commitment to far reaching structural reforms that will reposition the economy on the path of sustainable growth. This year marks the commencement of the implementation of the First National Implementation Plan (NIP) under the Vision 20:2020 economic blueprint. One key area of considerable emphasis is public financial management (PFM).

In this regard, the implementation of wide-ranging PFM reforms to (i) improve the quality and efficiency of spending; (ii) maximize, protect and diversify government revenues, and (iii) instill greater fiscal prudence in the management of the nation’s financial resources have commenced. A high-level Expenditure Review Committee has been established to work out practical measures to rationalize recurrent expenditure without compromising the quality of service delivery capacities. Furthermore, the Integrated Pay-roll and Personnel Information System has been introduced in sixteen Ministries, Departments and Agencies (MDAs) which have so far saved government over 12 billion naira (about USD80 million) in personnel cost. In 2011, the system will be extended to the remaining MDAs.

While increasing the quantum of capital outlays is important, my authorities feel that enhancing the quality and efficiency of public expenditure is more critical. As a result, they intend to engage global project management firms to enhance capital project management and delivery. This will complement the Construction Sector Transparency Initiative governance structure which has been introduced to enhance transparency and accountability in the execution of capital projects. Also the deployment of the Government Integrated Financial Management Information System and a revised chart of accounts will facilitate the tracking of the tangible deliverables achieved by MDAs in terms of measurable outputs and outcomes.

Conclusion

I would like to reiterate my authorities’ commitment to the design and implementation of good macroeconomic policies. In this regard, the continuous dialogue with and assistance of the Fund is highly appreciated.