Nigeria: Staff Report for the 2011 Article IV Consultation—Debt Sustainability Analysis
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The Nigerian economy remained strong, with a non-oil real GDP of 8.3 percent and an overall real GDP of 6.7 percent. A modest fiscal consolidation took place in 2011 as a response to the substantial monetary tightening by the Central Bank of Nigeria and moderation of food prices. Banks showed continued improvement in financial stability. Executive Directors commended the authorities for countercyclical policies. However, they emphasized the need for policies that safeguard macroeconomic stability and ensure inclusive growth.

Abstract

The Nigerian economy remained strong, with a non-oil real GDP of 8.3 percent and an overall real GDP of 6.7 percent. A modest fiscal consolidation took place in 2011 as a response to the substantial monetary tightening by the Central Bank of Nigeria and moderation of food prices. Banks showed continued improvement in financial stability. Executive Directors commended the authorities for countercyclical policies. However, they emphasized the need for policies that safeguard macroeconomic stability and ensure inclusive growth.

Background

1. The previous DSA for Nigeria was undertaken as part of the 2010 Article IV consultation and published in February 2011.2 Following the final phase of Nigeria’s Paris Club Agreement in 2006, which led to an $18 billion reduction in Nigeria’s external debt, external public debt is estimated at total US$6.3 billion, or 2.7 percent of GDP, at end-2011.3 Approximately $4.8 billion of that total external debt stock is multilateral debt, of which about 85 percent is owed to IDA. The breakdown for external debt by main creditor is as follows:

Nigeria’s External Debt Stock, in millions of US dollars, end-2011

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2. One important limitation of this DSA is that it only applies to debt contracted at the consolidated central government level. Data on state and local governments’ borrowing are currently not available. While sub-national borrowing is currently limited and tightly regulated, there is scope for State Governments to expand their exposure to domestic creditors. Public debt data analysis is also complicated by a multiplicity of off-budget funds. Figures for Nigeria’s debt stock do not include debts contracted by public enterprises.

Macroeconomic Assumptions

3. The assumptions in the baseline scenario for 2011–31 underlying this DSA are as follows:

  • Average GDP growth of 6½ percent over the period 2011–31 (somewhat below the average of 7 percent for 2008–10) reflecting buoyant annual growth of non-oil GDP of around 7.2 percent (on the basis of continued structural reform efforts) and modest growth of oil and gas GDP of 1.8 percent.

  • A recovery in capital inflows, including in foreign direct investment to the oil sector, which would be highly sensitive to political developments and the outcome of the Petroleum Industry Bill. In line with WEO projections, the analysis assumes a Nigerian oil price of US$103.7 per barrel in 2012, moderating to US$88.9 per barrel by 2017, and then increasing ½–1 percent in nominal terms thereafter.4

  • A consolidated government non-oil primary deficit (NOPD) would decline from 34½ percent of non-oil GDP in 2010 to around 18½ percent of non-oil GDP in 2015. It would continue to decline gradually thereafter. This is broadly consistent with the medium-term projections outlined in the government’s medium-term fiscal strategy. Such a stance would also be consistent with preserving the real value of oil and gas wealth for future generations based on estimates derived from a permanent income hypothesis exercise. In addition, it is assumed that the oil-price-based fiscal rule continues to be applied, with a budget oil price assumed to be on average around 20 percent below the projected oil price.5

  • After a strong export growth during 2010-11 driven by a recovery of oil prices, exports are projected to stagnate during 2012–16 and then grow by 5½ percent a year afterwards. Imports are projected to grow strongly during 2012–16, reflecting buoyant economic growth. The current account surplus would continue to decline to about ½ percent of GDP by 2016 because of stagnant oil price and strong imports, and then hover around zero thereafter.

4. At the time of the 2010 DSA, Nigeria’s external public debt was projected to total $4.8 billion, or 2.2 percent of GDP, at end-2010, while domestic public debt was projected to reach 14.1 percent of GDP at end-2010. In the event, external debt totaled 2½ percent of GDP, while domestic public debt was 15½ percent of GDP. The current account surpluses in 2010–11 were significantly lower than forecasted in the 2010 DSA largely due to the change in methodology to estimate imports. The fiscal stance in 2010 was substantially weaker compared with what was envisaged at the time of the previous DSA, reflected in the depletion of the Excess Crude Account. However, the fiscal stance is estimated to have improved moderately in 2011, with an estimated primary surplus in the year being slightly higher than projected in the 2010 DSA. While overall growth in 2010–11 was slightly lower than the level projected at the time of the 2010 DSA, non-oil growth outcomes were better than the projected levels. Finally, oil prices are broadly in line with the levels projected for the 2010 DSA.

5. The assessment makes the assumption that the Nigerian authorities would not issue another Eurobond in the near term, but draw on the infrastructure loan from the Chinese authorities in the amount of about US$ 500 million during 2012–13.6 It also assumes that the China loan would be on concessional terms.

6. It is important to note two issues with the external sector data for Nigeria that complicate the debt sustainability analysis. First, there are still large errors and omissions in the presentation of the balance of payments statistics, which may reflect an underestimation of current account debit transactions, and which lead to the observed large residuals in the DSA presentation. Second, there is also a break in the balance of payments series between 2009 and 2010, given the change in 2010 of the methodology to estimates imports

External Sustainability7

A. Baseline

7. In the baseline scenario (Table 1 and Figure 1), the nominal external debt burden is projected to be broadly unchanged throughout the projection period. The present value (PV) of external debt falls consistently throughout the projection period, while the PV of debt-to-GDP ratio averages less than 2 percent over the period. The debt service to exports and the debt service to revenue ratios also decline gradually throughout the projection period. All debt and debt service indicators remain well below their respective policy-dependent threshold levels throughout the projection period.

Table 1.

Nigeria: External Debt Sustainability Framework: Baseline Scenario, 2008–2031 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes public and publicly guaranteed external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure 1.
Figure 1.
Figure 1.
Figure 1.

Nigeria: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2012, 194; 10.5089/9781475506679.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a shock

B. Stress Tests and Alternative Scenarios

8. Standardized stress tests (Table 2 and Figure 1) were carried out. Under the most extreme case (i.e., export shock), (i) the PV of the debt-to-GDP ratio is not likely to exceed 15 percent of GDP throughout the projection period; and (ii) the PV of debt-to-exports ratio reaches a peak of around 58 percent, far below its indicative policy-dependent debt burden threshold of 150 percent.

Table 2.

Nigeria: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2011–2031

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

9. A country-specific alternative scenario was also examined. This scenario is designed to illustrate the impact on the external accounts and debt dynamics of a prolonged large oil price shock (oil price is assumed to be 30 percent below the baseline during 2012–16 and to go back to the baseline level in 2017). All indicators worsen considerably relative to the baseline but remain within the policy-dependent thresholds relevant for Nigeria.

Fiscal Sustainability

10. Consolidated government gross debt outstanding is estimated at about 18 percent of GDP at end-2011, and is projected to decline to about 3½ percent of GDP by 2031. The current maturity structure of domestic debt is favorable, with the short-term debt accounting for only a quarter of total debt. Under the baseline scenario (Table 3 and Figure 2), consolidated government debt to GDP ratio would steadily increase slightly from 18 percent in 2011 to about 19¾ percent in 2014, because the projected level of accumulated fiscal surpluses during the period would fall short of the accumulation of external assets in the sovereign wealth fund (SWF). After 2015, the public debt to GDP ratio would gradually decline and come down to single digits by 2023. This is largely due to the continued efforts of fiscal consolidation at the general government level and sustained growth assumed under the baseline scenario.

Table 3.

Nigeria: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–2031

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 2.
Figure 2.
Figure 2.
Figure 2.

Nigeria: Indicators of Public Debt Under Alternative Scenarios, 2011-2031 1/

Citation: IMF Staff Country Reports 2012, 194; 10.5089/9781475506679.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021.2/ Revenues are defined inclusive of grants.

11. The standardized stress tests underscore the need for fiscal policy to adjust to the economic environment. In particular, present value of public debt to GDP ratio would creep up to 25 percent throughout the projection period under a permanently lower real GDP growth scenario.8 With oil prices stabilizing over the medium term, public debt dynamics would become more susceptible to negative economic growth shocks. In such an adverse scenario, fiscal policy will need to adjust by about 1 percent of GDP each year to bring the public debt stock path to the same path under the baseline. (Table 4 and Figure 2).

Table 4.

Nigeria: Sensitivity Analysis for Key Indicators of Public Debt 2011–2031

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Conclusion

12. Nigeria is at low risk of external debt distress. In the baseline scenario and in the standardized stress tests, Nigeria’s debt outlook remains robust throughout the projection period. However, the findings from the stress scenarios also show that, without significant compensating policy measures, a prolonged oil price shock or deterioration in the growth could undermine the recent progress made in achieving macroeconomic and public debt sustainability. Nonetheless, given Nigeria’s strong financial starting position, timely policy action should be able to avert future sustainability problems.

Authorities’ Views

13. The authorities were in agreement with the staff’s main conclusions. The staff’s finding of low external debt risk was consistent with their views. In addition, they agreed that timely policy adjustments would need to be made in the event of a prolonged negative oil price shock.

1

Debt data, sustainability issues, and the new debt limit policy were discussed with the authorities in the course of the 2011 Article IV consultation. This DSA follows the IMF and World Bank Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries, January 22, 2010 (available at http://www.imf.org/external/pp/longres.aspx?id=4419).

2

IMF (2011), Country Report for Nigeria 11/57.

3

External debt stock increased by US$1.5 billion during the year of 2011 due to the Euro bond issuance (US$0.5 billion) and infrastructure loans (about US$1 billion).

4

The DSA is based on WEO projections for crude prices as of December, 2011. Nigerian oil price is projected by using the past relationship between the Nigerian crude price and average global oil price.

5

The government is assumed to establish a medium-and long-term sustainable fiscal position. The long-term sustainable fiscal position is calculated on the basis of a constant consumption of oil wealth in real terms. This implies a decline in the consumption of oil wealth (the non-oil fiscal deficit) as a percent of non-oil GDP over time. Oil reserves are sufficient to sustain oil production at or above current levels throughout the projection period. The discount in the budget oil price relative to the actual oil price and prudent expenditure policy provides for overall surpluses and an accumulation in financial assets throughout.

6

As planned, the authorities issued a US$500 million Eurobond in early 2011. The loan from China would be for 20 years with a 2.5 percent interest rate.

7

The LIC debt sustainability framework (DSF) provides a methodology for assessing external debt sustainability which is guided by indicative, country-specific, debt burden thresholds based on the relative strength of a country’s policies and institutions. Given Nigeria’s rating of 3.5 (medium performer), which is the three year average of the World Bank’s Country Policy and Institutional Assessment (CPIA), the relevant country-specific thresholds are a PV of external debt to GDP of 40 percent, a PV of external debt to exports of 150 percent, and an external debt service to exports ratio of 20 percent.

8

Under the alternative scenario in the Staff Report, which assumes that some key fiscal reforms are not implemented during 2012–15, the public debt to GDP ratio would rise to about 24 percent of 2015.

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Nigeria: Staff Report for the 2011 Article IV Consultation
Author:
International Monetary Fund
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