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.
On behalf of my Nigerian authorities, I would like to thank the mission team for the focused, open, frank, and constructive discussions on macroeconomic development and policy issues in Nigeria. The team visited Nigeria at the time the country was finalizing her policies and programs geared towards transforming the economy and their inputs were quite valuable. The visit of the Managing Director, Ms Largarde shortly after the mission further enhanced policy dialogue between the authorities and the Fund. My authorities are in broad agreement with the analysis and policy thrust in the staff papers.
Economic Conditions in 2011
The economy continued its growth momentum in the fourth quarter of 2011 driven mainly by non-oil production activities including agriculture and services sectors. Besides the extra-budgetary spending on petroleum products subsidy, fiscal activities remained largely on track with modest consolidation achieved and the deficit within target. Public debt level remained low and sustainable while monetary policy was generally tight. Consequently, inflationary pressures eased with headline inflation closing at 10.3 per cent in December, 2011. Lending and money market real interest rates turned positive in response to upward adjustments in policy rate and lower inflation.
Financial stability was restored following the resolution of the banking crisis through the purchase of non-performing loans (NPLs) of banks by the Asset Management Company of Nigeria (AMCON), mergers and acquisition of the ailing banks as well as recapitalization of some banks. Credit to the economy including to the private sector increased while growth in aggregate money supply hovered around the indicative growth benchmark of 13.75 percent. External sector performed well due largely to improved domestic oil production and favorable international oil prices. In spite of these, accretion to external reserves was minimal due to high demand for foreign exchange and the need to stabilize the exchange rate. However, reserves remained adequate to cover at least four months of imports of goods and services.
Outlook for 2012 and beyond
Developments in the advanced economies, particularly the demand for crude oil, crude oil prices as well as international food and commodity prices are key to Nigeria’s medium-term economic performance. Political instability arising from various social tensions could also pose some threats. Despite the downside risks associated with these developments, the medium-term economic outlook is quite positive on account of expected increase in domestic oil production, fairly high international oil prices, and improved performance of the non-oil sector. The authorities’ economic diversification strategy which focuses on agriculture, entertainment industry, non-oil minerals, and real estate (growth drivers), and infrastructure, power, roads, ports, education, and health (enablers), will drive and sustain robust GDP growth going forward. The initial uptick in inflation due to partial removal of subsidy on petroleum products and the expected hike in electricity tariff would eventually moderate.
Policies going forward
The overall policy objective is to ensure a stable macroeconomic environment through a strong and prudent fiscal policy anchored on an oil-price-based fiscal rule, manageable deficits, sustainable debt-GDP ratio of no more than 30%, and a proactive monetary policy. These measures would constrain inflation to single digit, engender a stable and competitive exchange rate, build foreign reserves, and promote inclusive growth.
Fiscal Policy
The authorities have expressed strong commitment to fiscal consolidation that began in 2011. The objective is to increase non-oil revenue, reduce recurrent expenditure, increase the effectiveness of capital expenditure, and build fiscal buffers. This rebalancing of the distribution of government spending also includes reduction in overhead expenditure and government borrowing, and limiting fiscal deficit to below 3 percent of GDP in line with the Fiscal Responsibility Act (FRA).
Steps have been initiated to increase revenues by blocking leakages from various sources, improving corporate tax collection, and boosting internally generated revenue. Reducing recurrent expenditure to sustainable level through elimination of waste, inefficiency, corruption and duplication is receiving attention. Additionally, capital expenditures are being prioritized to ensure appropriate funding and completion of the large portfolio of on-going projects while also taking on flagship projects already identified in the Transformation Agenda.
A key policy stance of the government is the removal of the remaining subsidy on petroleum products and eventual deregulation of the downstream sector of the oil industry. The saving from the subsidy removal is expected to be invested in viable capital projects and provision of safety nets for the poor and vulnerable groups as stated in the Subsidy Reinvestment and Empowerment (SURE) program.
Monetary Policy
Price stability remains a major challenge to monetary authorities, particularly in an import dependent economy with low non-oil exports, high government spending, and huge demand for foreign exchange. In spite of this, the monetary authorities continue to focus on maintaining price and exchange rate stability. While no specific rate of inflation is targeted, there is a common understanding that a single digit rate is appropriate for the economy. On exchange rate, the authorities have demonstrated strong preference for stability with necessary adjustments to align to economic fundamentals.
Financial Stability
The monetary authorities are also focusing on the health of the financial sector. Owing to various policy actions taken, the banking sector is now more stable and healthier than in the pre-crisis period with non-performing loans (NPL) reduced significantly while system-wide capital adequacy ratio (CAR) is at a comfortable level. The risk to the financial system of the Euro crisis so far is minimal. Recapitalization of the remaining banks would be completed while all mergers/acquisition arrangements will be fully consummated.
Both risk-based and cross border supervision have been instituted with reasonable micro-and macro- prudential policies. Going forward, the authorities intend to continue to pay attention to supervision, prudential issues, sectoral exposure of banks, transparency and disclosure, as well as strengthening of the legal and institutional frameworks for financial sector regulation and crisis resolution, particularly the Financial Stability Committee within the central bank, Financial Services Regulation Coordinating Committee (FSRCC), and AMCON. More agreements with regulatory/supervisory agencies in countries with Nigerian banks will be signed for effective cross-border supervision.
An important element of the financial sector reforms is the abolition of the universal banking system and the categorization of banking operations into commercial, merchant and specialized banks with the latter including non-interest banks (islamic banking), microfinance banks, development banks and mortgage banks. The commercial banks are authorized to carry on banking business on a regional, national or international basis while the non-interest banks will carry on banking business on regional or national basis. Already two banks – JAIZ bank and Stanbic bank – have been licensed to operate the non-interest bank window. The new banking model which is expected to take effect this year is not designed to restrict banking activities. Rather it is intended to reposition the banking sector for effective contribution to the Nigerian economy. The possible supervisory challenges will be promptly addressed.
Structural reforms
At the center of the economic transformation agenda are structural reforms. The major programs either undertaken or proposed include the following:
Liberalization and privatization of the power sector based on the Power Sector Roadmap. The state power company – Power Holding Company of Nigeria, PHCN - has been unbundled into eleven distribution companies, six generation companies and a transmission company. The distribution and generating companies are earmarked for privatization. Upward adjustment in electricity tariff is also expected to take effect shortly.
Ports and customs reforms to reduce the cost of doing business and shorten the time for goods clearance. The overall goal is to ensure 48 hours cargo clearance. Already the number of agencies at the port has been reduced from 14 to 6, and the 24 hours operation at the ports has commenced.
Speedy passage of the Petroleum Industry Bill (PIB). A special task force and a technical sub-committee on PIB are already in place to interface with the parliament in this regard. The passage of the bill will pave the way for full deregulation of the oil sector and is expected to increase private investment.
Improving governance and building institutions. The major actions include promotion of transparency and accountability in the management of public funds, implementation of the Freedom of Information Act, fight against corruption through strengthening of anticorruption agencies (the Independent Corrupt Practices Commission, ICPC, and the Economic and Financial Crimes Commission, EFCC), and reform of the public service for optimal service delivery.
Investing in priority areas for job creation and inclusive growth. This cuts across security including more support for the police, defense and counterterrorism operations; critical infrastructure including power, roads and railways; and human capital development particularly health care and education. Government will continue with its multifaceted National Job Creation Scheme including the Youth Enterprise With Innovation in Nigeria (YouWin) and Public Works and Women/Youth Employment (PW/WYE) programs.
Of particular interest is agriculture which is undergoing transformation from traditional farming to modern commercial agriculture for both small and large scale farmers. The objectives are to ensure food security and promote exports of commodities such as rice, cassava, sorghum, oil palm, cocoa, and cotton where there is comparative advantage. Already a risk sharing arrangement where the government guarantees 70% of bank loans to the private sector for agricultural activities is in place. Other measures include, development of private sector-driven marketing institutions, substitution of high quality cassava flour for wheat flour in bread baking, and zero import duty on machinery and specified equipment for agricultural activities effective January 31st 2012.
Conclusion
In the past year, my Nigerian authorities have shown tremendous commitment towards developing the Nigerian economy and ensuring macroeconomic stability. The economic transformation agenda has been put in place and an Economic Management Team (EMT) chaired by the President, and an Economic Management Implementation Team (EMIT) have been established to drive the process. The authorities are confident that the policies implemented so far and those proposed are generally in the right direction. This has resulted in the recent upgrade of Nigeria by Fitch Ratings and Standard & Poor’s. No doubt the challenges are enormous but the authorities would persevere. The Fund’s role in the transformation process especially through policy advice is highly appreciated by my authorities.