Economic Conditions in 2012 and Outlook

Strong growth underpinned by consistent macroeconomic policies and favorable international fuel prices continued in 2012. In spite of the initial slowdown in the first quarter of the year on account of the negative impact of partial fuel subsidy removal, the economy grew by 6.6 per cent during the year. A tight monetary policy and a broadly prudent fiscal policy ensured that inflation pressures arising partly from adjustments in the energy and import tariffs, heightened domestic liquidity situation, and flooding were kept under control. The year-on-year average headline inflation stood at 12.24 per cent, while that of core and food inflation were 13.87 and 11.32 percent respectively. The financial system has stabilized with continuous improvement in basic financial indicators while the Nigerian Stock Exchange has made a bullish come-back amidst significant gains in 2012. Accretion to external reserves continued to improve with an end year figure of about US$44billion compared with US$33 billion at end 2011.

Overall, the medium-term outlook remains broadly positive on account of the authorities’ perseverance with the implementation of the reform program, and notwithstanding the downside risks to the economy posed by the uncertain external economic environment including a possible fall in international oil prices, and domestic security challenges. These risks are well understood by the authorities and allowance has been made for them in the fiscal plan as indicated in the 2013-2015 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP).

Fiscal Policy

The authorities are resolute with prudent fiscal policy. Fiscal consolidation which began with the 2011 budget and registered significant gains in 2012 would be sustained in 2013 and beyond. A combination of improved non-oil revenue mobilization and public expenditure rationalization is expected to help build fiscal buffers. Steps have been initiated to increase revenues by blocking leakages from various sources, improving corporate tax collection, and boosting internally generated revenue. On the expenditure side, the focus is on freeing resources from recurrent expenditure toward capital spending. This is to be achieved through reduction in overhead spending, elimination of waste, inefficiency, corruption, and duplication. Limiting the fiscal deficit to below 3 percent of GDP and restraint on public borrowing are other important measures.

The authorities are also intensifying efforts to improve on public financial management. To this end, a Treasury Single Account is being established to better manage cash balances, reduce corruption and inefficiency in the allocation of resources. The Government Integrated Financial Management Information System has also been introduced to make the process of budget preparation and execution more efficient and transparent.

Oil-Price Based Fiscal Rule

The Fiscal Responsibility Act (FRA) 2007 provides for the adoption of oil-price based fiscal rule although no specific oil price benchmark is stipulated. In line with this provision, the fiscal authorities often adopt a cautious oil price benchmark based on the model of 10-year and 5-year moving averages with some adjustments in the preparation of the budget. The expectation is that revenues in excess of the benchmark price will be set aside in the Excess Crude Account (ECA)/Sovereign Wealth Fund which by the existing fiscal arrangement belongs to the federal(central) and sub-national governments. However, the Parliament, in approving the MTEF/FSP and the federal budget, often adjusts upward the oil price benchmark based on the argument that there is little sense in keeping the oil price benchmark very low and at the same time running fiscal deficits and stepping up public borrowing. Sub-national governments on their part often argue that they cannot be coerced into the ECA arrangement since the constitution provides that all monies in the Federation Account (ECA inclusive) belong to all levels of government and must be shared on an agreed revenue sharing formula. Thus a sustainable oil-price based fiscal rule has to start with consensus building between the federal and sub-national governments on the one hand, and between the Executive arm of the federal government and the Parliament on the other. The authorities are fully aware of this and are intensifying efforts to arrive at a common ground - inclusive consensus. Once this is done, enactment/amendment of relevant laws to enforce an oil-based fiscal rule including adoption of best international practices would be easy.

Subsidy

One major challenge facing the fiscal authorities is eliminating the huge fuel subsidy (which is currently funded from the ECA) in order to free resources for enhanced social and productive public investment. Attempts at this in early 2012 was vehemently resisted leading to only partial removal of the subsidy and the proceeds invested in viable capital projects and provision of safety nets for the poor and vulnerable groups under the Subsidy Reinvestment and Empowerment Program (SURE-P). The authorities then resorted to a review of the fuel subsidy scheme to enhance greater transparency and accountability. While the ultimate goal of government is to completely eliminate the fuel subsidy, the authorities are currently intensifying consensus building processes through communication and consultation with major stakeholders, improving the local petroleum refining capacity to reduce imports of petroleum products, and successful execution of projects under the SURE-P. In the interim, budgetary provisions would continue to be made for the subsidy.

Monetary Policy

Price and exchange rate stability remain the focus of the monetary authorities. In response to the heightened inflationary pressures, the monetary authorities maintained tight monetary policy stance using appropriate mix of policy instruments in 2012. This policy stance is expected to continue, as the recent decision of the Monetary Policy Committee indicates, until the near term inflation trajectory becomes clearer. The ultimate goal is to achieve single digit inflation. On exchange rate, the authorities have demonstrated strong preference for stability with necessary adjustments to align it to economic fundamentals. So far the existing exchange rate management polices and instruments have achieved the desired objectives and there is no urgent need for a change.

Financial Stability

With the domestic financial sector crisis now over, the attention of the authorities has turned to strengthening the financial system and repositioning it to play a greater role in the transformation of the economy. It is in this sense that the authorities sought an independent external assessment of the financial system to determine additional measures needed. The Financial Sector Assessment Program (FSAP) update was conducted in September, 2012 and the report -The Financial Sector Stability Assessment Report - confirms the recovery and relative stability of the banking system. The authorities’ value the FSAP recommendations some of which have reached advanced stages of implementation.

Going forward, the authorities will continue to strengthen the risk-based and cross border supervision frameworks and ensure transparency in the operation of the financial system. They are also strengthening 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 the Asset Management Corporation of Nigeria (AMCON). The authorities are assiduously working on the appropriate exit strategy for AMCON bearing in mind the potential fiscal and moral hazard risks. They are also seriously addressing the AML/CFT deficiencies. Already the relevant laws on money laundering and terrorism financing are in place.

Structural reforms

The authorities view steadfast implementation of structural reforms encapsulated in the transformation agenda as the most sensible way to diversify the economy and alleviate poverty. The focus is on developing a viable value chain within the agricultural sector, entertainment industry, non-oil minerals, and real estate as well as improvement in power, road and port infrastructure, education, and health. Equally important is enhancement of credit access for agriculture and small and medium scale enterprises.

Power Sector

Remarkable achievements have been recorded in the power sector. Power supply in many parts of the country has improved significantly while sustained efforts at rehabilitation of existing power infrastructure yielded up to 1000 megawatts of additional electricity in 2012. The completion of all projects under the National Integrated Power Project later in the year is expected to add additional 1055 megawatts. This is complemented by enhanced efforts to improve gas supply to the power generating companies as well as upgrading of the transmission and distribution infrastructures. The cost-recovery energy tariff structure is already in place. More importantly, the authorities are in the final stages of the privatization of the generating and distribution companies created from the unbundling of the state-owned Power Holding Company of Nigeria. The successful handing over of these companies to the preferred bidders slated for the second quarter of 2013 will further improve the power supply situation.

Agriculture

Agriculture is regarded as a veritable tool for job creation and poverty alleviation. The authorities’ target is to create 3.5 million jobs in this sector by 2015. Detailed programs of action have been developed for the major crops with significant export potentials such as rice, cassava, sorghum, oil palm, cocoa, and cotton. Implementation of these programs is progressing steadily. This is complemented by a targeted subsidized fertilizer scheme and an agricultural credit insurance scheme.

Oil and gas sector

The key to this sector’s reform is the speedy passage of the revised Petroleum Industry Bill now before the parliament. There is a consensus in the parliament to give it expedited attention this year. The government committee charged with the responsibility of ensuring quick passage of the Bill is actively engaging the parliament and other stakeholders. On the divergence of views related to the fiscal regime, the authorities consider it as normal especially as it involves reining in more revenue for the government. The resistance of the major players in the oil industry is very much expected. The authorities do not see immediate need for contracting “internationally-renowned (and independent) oil experts” to advise on the cost structure informing the fiscal regime as there is no convincing evidence that the committee that prepared the Bill did not do so. The authorities are confident that the gray areas in the Bill will be resolved in the interest of all stakeholders.

Conclusion

In the past year, my Nigerian authorities have recorded milestone achievements in the implementation of structural reforms and in ensuring macroeconomic stability under a volatile external environment. This has resulted in strong growth although unemployment and poverty reduction remain major challenges. Given the authorities’ unswerving commitment to the implementation of the structural reforms, these challenges would be adequately addressed in the medium to long term. Meanwhile, continuous investment in priority areas for job creation and inclusive growth particularly on roads, ports, railways, and airport infrastructure upgrades as well as human capital development including health care and education remain the cornerstone of government polices going forward. My authorities gratefully acknowledge the encouragement received from the Fund through technical assistance and policy advice.