This paper discusses Niger’s Second and Third Reviews Under the Extended Credit Facility (ECF) Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and for Extension of the Program Period and Arrangement. Fiscal performance was broadly in line with program targets. The medium-term outlook appears favorable, with robust growth benefiting from important natural resource sector investments. However, the outlook is vulnerable to high domestic and external risks, including potential spillovers from the security situation in the region and climatic shocks. The IMF staff recommends the completion of the second and third reviews under the ECF.

Abstract

This paper discusses Niger’s Second and Third Reviews Under the Extended Credit Facility (ECF) Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and for Extension of the Program Period and Arrangement. Fiscal performance was broadly in line with program targets. The medium-term outlook appears favorable, with robust growth benefiting from important natural resource sector investments. However, the outlook is vulnerable to high domestic and external risks, including potential spillovers from the security situation in the region and climatic shocks. The IMF staff recommends the completion of the second and third reviews under the ECF.

On behalf of my Nigerien authorities, I would like to express my deep appreciation to the Executive Board and Management for the support to their policy efforts in Niger’s current challenging environment. I also wish to thank staff for the constructive policy dialogue they held in Niamey in the context of the second and third reviews of the three year arrangement under the ECF supported program. During these meetings, including with the highest authorities, the commitment of Niger to the ECF-supported program, in particular, to reforms in the area of natural resources, has been reiterated. My authorities also underscored the need to continue benefitting from Fund’s advice, as its effectiveness in helping in the program’s implementation remains critical.

At the outset, I would like to indicate that my authorities have expressed their consent for the publication of all documents related to these reviews, including the staff report, the letter of Intent, as well as the memorandum of economic and financial policies.

Recent Developments, Medium-term Outlook and Risks

Two exogenous shocks, showing once again the vulnerability of the Nigerien economy, have compromised the positive outlook following the 2012 strong economic performance. The first relates to regional security instability with persistent risks of terrorists’ attacks from northern borders of the country, and have led to an unforeseen increase in expenditure to address, security, humanitarian and refugee issues. The second one is in regards to the sharp fall in agriculture production due to poor weather conditions. Both have led to sizeable fluctuations in economic activities in 2013. In this context, real GDP growth fell to 3.6percent of GDP against the initial projection of 6.2 percent of GDP and far below the exceptional level of 11.1 percent recorded in 2012. However, inflation was kept under control at 2.3 percent, thanks to the government successful food program, which helped to contain the strong food demand pressures.

Fiscal developments were broadly satisfactory, posting a reduction of arrears, beyond the program target, as well as an increased level of deposits at the central bank. The level of revenue reached 17.1 percent of GDP in 2013, increasing by 1 percent compared to 2012. This performance reflects the authorities’ revenue- raising efforts along with the successful implementation of policy measures aimed at containing some expenditure in order to accommodate higher security-related spending. An indication of this good fiscal position is the positive response from the regional financial market to the bond issuance which was oversubscribed.

The positive trend noted in recent years with regard to the credit expansion slowed in 2013, owing to the tense security situation, and the poor performance of the agriculture sector. The authorities acknowledged the critical role of financial institutions in helping to achieve their ambitious development program and are undertaking a number of measures to develop the financial sector. These include measures aimed at the expansion of credit to rural area and small sized enterprises.

Medium-Term Outlook and Risks

My Nigerien authorities appreciate the discussions they had with staff last July and December on the medium-term prospects, focused broadly on the government priorities to develop basic infrastructure in the energy and transportation sectors, diversify production and enhance the country’s human and institutional capacities.

They agree that with the coming on stream of the two megaprojects on crude oil and uranium mine, the production and exports of oil and uranium could double as of 2016. As a result, fiscal revenue from natural resources is expected to increase by more than 50 percent. However, significant challenges remain, mainly as regards the risks associated with the regional security situation, as well as that pertaining to weather conditions, with notably its negative impact on agriculture production. As regards the security situation, the Nigerien authorities are fully involved in the regional peace keeping initiatives. To address the impact of the uncertain weather on agriculture, which characterizes all Sahelian countries, including Niger, the authorities have put in place a large program of irrigation projects which are beginning to have a successful outcome. At the same time, my authorities have reactivated existing targeted programs, including food distribution to vulnerable people at moderate prices, free distribution in the lean season, food for work and cash for work, funding and setting up cereal banks and the nutritional programs.

Program implementation

Noticeable progress has been made in the implementation of the ECF-supported program over the two last years. Performance was mixed in 2012. The first review was successfully completed, but the program went off track at the end of the year, but corrective measures were taken. Aside from the corrective measures aimed at strengthening debt management and preventing the recurrence of non concessional borrowing, my authorities abstained from drawing on the two loans until the expected subsidies were granted. The second step in the authorities’ efforts of policy implementation led to significant improvement in the program performance, with revenue collection brought back on track and some performance criteria met with wide margins. The departure is related to an overspending in current expenditures due to the budgetary impact of the country’s involvement in the Malian conflicts. Likewise, the issue of non concessional external debt did not receive an appropriate solution until end June 2013. However, thanks to stepped up efforts, several indicators, including expenditures and revenue collection data improved markedly in 2013, as reported in the indicative targets of end-September2013. Despite some delays, there was progress in the implementation of Structural reforms.

A-Fiscal Policy

The authorities’ conservative approach, which targets a basic fiscal deficit of 2.5 percent of GDP in 2014 with the goal of attaining gradually zero basic balance over the medium-term, is a clear indication of their commitment to fiscal consolidation. In this regard, they are taking steps to raise the total revenue to 18.3 percent of GDP in 2014. The actions underway to set up new VAT thresholds along with the extension of the existing positive experience in tax audits will help attain this objective. On the expenditure side, given the emphasis put on social sectors spending, and taking into account the impact of the lingering regional security, which calls for more attention to the borders, the total expenditure will increase to 26.4 percent of GDP. Building on the significant progress made in the process of enhancing transparency in the extractive sectors, my authorities reached an agreement with staff on the need to ensure an adequate use of natural resources. At the same time, to ensure predictability of public spending over the medium-term, the Nigerien authorities are exploring ways to set up an appropriate fiscal anchor.

B-Financial Sector

My authorities would like to make the financial sector play a deeper role in the development of the economy. Measures underway include steps on the restructuring of some banks experiencing prudential deterioration on one hand, and the reactivation of the process to adopt the new financial sector development strategy on the other. The authorities’ insistence to let the three banks under restructuration continue their activities takes into consideration not only the size and the critical areas of agriculture and small enterprises in which these financial institutions are operating, but also the need to preserve the progress made in recent years notably with regard to credit expansion.

C-Structural Reforms

My authorities recognize the importance that structural reforms will play in the achievement of their macroeconomic objectives, in particular those related to the attainment of a growth rate of 10 percent a year between 2015 and 2018, consistent with the need to build infrastructures, improve social indicators and meet the MDGs. The authorities will continue to implement the public finance management plan, which includes accelerating the pace of budget execution, the drafting of quarterly report on commitment, payment order and payment, the inventory of dormant and irregular banking accounts with the goal of establishing a treasury single account, and the limitation of special procedures to a maximum of 5 percent of total commitments. As regards the natural resources management, a number of actions are being implemented by the authorities with the aim of improving the governance of the companies operating in this sector. With the petroleum company, some audits, which have already revealed inflated and unjustified costs, have been completed, and actions are underway to address these costs. Concerning the uranium area, about which negotiations are still underway, my authorities’ intention goes beyond the replacement of existing mining regime to cover certain aspects of the corporate governance.

Noncomplying Disbursement

On this issue, I would like to reiterate my Nigerien authorities’ explanation that the lack of timely communication with staff concerning the two loans was due to the intent of the authorities to complete the actions undertaken in order to make these loans concessional prior to their implementation. The letter of my authorities in annex to EBS/14/37 explains the steps they have taken to obtain subsidies to make these loans concessional. As of now, the government has not proceeded with any drawings on these two loans. The authorities, with staff’s assistance, have taken steps to ensure that a similar situation does not recur. They have also taken corrective measures to improve the monitoring of loan agreement approval processes.

Conclusion

Niger’s medium and long term outlook have improved significantly. Also important strides have been made over the last decade in macroeconomic stability, revenue mobilization and the restoration of the country’s creditworthiness. However, considerable challenges still lay ahead, in particular, the need to achieve sustained growth, less dependent to weather vagaries and consistent with their poverty reduction strategy and development needs. My authorities are taking steps to address these challenges, in particular, by paying close attention to the implementation of structural reforms in the areas of natural resources management and public finance management.

Based on the strong commitment shown and the corrective actions taken by the authorities, I would request Directors’ support for the requested waivers and the proposed decisions.