Abstract
KEY ISSUES Context. Nigeria has a large and diverse economy that has achieved a decade of strong growth, averaging 6.8 percent a year. However, Nigeria still lags peers in critical infrastructure and has high rates of poverty and income inequality. The sharp decline in oil prices in the second half of 2014 underscores the challenging but compelling need to address remaining development challenges. Outlook and Risks. In 2015, oil exports are projected to decline by 6 percentage points (ppts) of GDP and oil revenue by 2.4 ppts of GDP from 2014 levels, with a reduction in the current account balance and loss in international reserves. A sharp contraction in public investment and domestic demand is projected to reduce growth to 4¾ percent, with inflation increasing to 11½ percent from the effects of exchange rate depreciation. These developments also increase risks to the banking sector, given its significant exposure to the oil industry and the potential for capital outflows. The outlook is subject to significant risks, both external (changes in oil market developments and investor sentiment) and domestic (uncertainty from the election outcome and security situation). Managing adjustment. The authorities adopted bold policy actions in November 2014— an adjustment in the official foreign exchange rate and band, tightening of monetary policy rates, and spending cuts totaling 1.7 ppts of GDP in the proposed 2015 budget. As the oil price fall appears more permanent than temporary, additional policies will be needed, including greater flexibility in the exchange rate and further fiscal adjustment, particularly in state and local governments. It will be essential to ensure that fiscal adjustment is achieved without endangering the delivery of critical public services. Boosting inclusive growth. The authorities have a comprehensive economic transformation agenda, designed to boost growth, create new job opportunities, and reduce poverty. With recent oil market developments, however, non-oil revenue mobilization (including an increase in VAT rate) is more urgent than ever and is critical for creating the fiscal space necessary to implement the transformation agenda. Further, the national infrastructure investment plan needs careful prioritization, as financing the entire plan would be a challenge, even with more supportive financial conditions and good progress in financial inclusion.
On February 27, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nigeria.
Nigeria has a large and diverse economy that has achieved a decade of strong growth, averaging 6.8 percent a year, and now accounts for 35 percent of Sub-Saharan Africa’s gross domestic product (GDP). Inflation has remained in single digits for two years, and the banking sector, which has a strong capital base, is expanding credit. The trade surplus has been declining since the second quarter of 2013 on lower oil exports and continued strong growth of imports, and gross international reserves have been falling. Meanwhile, the general government fiscal deficit and public debt have been kept low. However, Nigeria still lags its peers in critical infrastructure and has high rates of poverty and income inequality. While the economy is diverse, with services accounting for over 50 percent of GDP in 2013, and oil only 13 percent, the oil sector remains a critical source for revenue and foreign exchange. With limited fiscal and external buffers ($2 billion in the excess crude account and $34.25 billion in gross international reserves, respectively at the end of 2014), the sharp decline of oil prices in the second half of 2014 underscores the challenging but compelling need to address remaining development challenges.
The authorities have responded to a sharp decline in oil prices. On February 18, 2015, the Central Bank of Nigeria closed the Dutch Auction System (rDAS) window, unifying the rDAS rate with interbank foreign exchange market rate. On February 25, 2015, the Senate approved the third revision to the 2015 budget, tightening the fiscal envelope by lowering the budget benchmark oil price to $52/barrel.
In 2015, oil exports are projected to decline by 6 percent of GDP from the 2014 level, and oil revenue by 2 percent. A sharp contraction of public investment and domestic demand is projected to reduce growth to 4.75 percent in 2015 from 6.3 percent in 2014. Inflation is projected to rise to 11.5 percent by the end of 2015 from 8 percent at end 2014, reflecting the pass through from exchange rate depreciation. The outlook is subject to downside risks, both external (changes in oil market developments and investor sentiment) and domestic (uncertainty over the election outcome and the security situation).
Executive Board Assessment2
Executive Directors commended the authorities for progress in promoting Nigeria’s economic diversification and for their macroeconomic response to collapsing export prices. Directors noted, however, that vulnerabilities remain high in view of the uncertainties about oil price, security, and the political situation, and concurred that additional policy adjustments and broader structural reforms will be necessary in the period ahead to reconstitute buffers, mitigate risks, and meet pressing development needs.
Directors agreed that tightening fiscal policy and allowing the exchange rate to depreciate while using some of the reserve buffer were appropriate responses to the recent fall in oil prices. Nonetheless, Directors stressed that achieving the authorities’ fiscal targets will require a careful prioritization of public spending and a cautious implementation of capital projects. They also highlighted the importance of improved budgeting at the level of state and local governments to help better manage their fiscal adjustment.
Directors agreed that mobilizing additional non oil revenues is critical to open up fiscal space and improve public service delivery over the medium term. They welcomed ongoing initiatives to strengthen tax administration, and encouraged the authorities to also rein in exemptions, keep tax rates under review, persevere with subsidy reform, and improve the management of oil revenue. Furthermore, Directors saw merit in reviewing the current revenue sharing arrangements to help address regional disparities over the longer term and ensure that social and development needs are addressed.
Directors welcomed the recent unification of the foreign exchange rates, noting that greater exchange rate flexibility could help cushion external shocks. As the largest single supplier of foreign exchange, it will be important for the central bank to intermediate this supply in a transparent, efficient, and fair manner.
Directors noted that financial soundness indicators remain above prudential norms, but the concentration of credit risks and foreign currency exposures call for continued close oversight. They welcomed progress in strengthening supervision and regulation, including of cross border activities, and encouraged additional initiatives to foster financial market development, including of hedging instruments, and improve financial inclusion.
Directors emphasized that Nigeria’s longer term prospects rest on lowering oil dependency and strengthening private sector’s participation in economic activity. Lasting and more inclusive growth calls for improving the business environment, promoting youth and female employment, and advancing human capital development.
Directors noted that Nigeria’s economic data are broadly adequate for surveillance. Nonetheless, they encouraged the authorities to further improve statistics, in particular as regards the balance of payments.
Nigeria: Selected Economic and Financial Indicators, 2012–2015
Consists of federal, state, and local governments.
Nigeria: Selected Economic and Financial Indicators, 2012–2015
| Nominal GDP (2013, billion U.S. dollars) | 521.8 | Quota (million SDR) | 1,753.2 |
| GNI per capita, Atlas method (2013, US$) | 2,710 | Population (2012, million) | 168.8 |
| Poverty headcount ratio (adult equivalent, 2009–10) | 46.0 | GINI index (2010) | 48.8 |
| Life expectancy at birth (2011, years) | 52 |
| 2012 | 2013 | 2014 | 2015 | |||
|---|---|---|---|---|---|---|
| Prel. | Proj. | |||||
| National income and prices | (Annual percentage change, unless otherwise specified) | |||||
| Real GDP (at 2010 Basic Prices) | 4.3 | 5.4 | 6.3 | 4.8 | ||
| Oil and Gas GDP | −4.9 | −13.1 | −1.3 | −1.6 | ||
| Non-oil GDP | 5.9 | 8.3 | 7.3 | 5.5 | ||
| Production of crude oil (million barrels per day) | 2.3 | 2.2 | 2.2 | 2.3 | ||
| Consumer price index (end of period) | 12.0 | 7.9 | 7.9 | 11.5 | ||
| Consolidated government operations1 | (Percent of GDP) | |||||
| Total revenues and grants | 14.3 | 11.0 | 9.9 | 7.7 | ||
| Of which: oil and gas revenue | 10.4 | 7.1 | 5.8 | 3.4 | ||
| Total expenditure and net lending | 14.7 | 13.4 | 12.3 | 10.6 | ||
| Overall balance | −0.3 | −2.4 | −2.5 | −2.8 | ||
| Non-oil primary balance (percent of non-oil GDP) | −11.6 | −9.7 | −8.1 | −5.5 | ||
| Excess Crude Account / SWF (billions of US$) | 11.0 | 3.8 | 3.6 | 1.5 | ||
| Money and credit | (Contribution to broad money growth, unless otherwise specified) | |||||
| Broad money (percentage change; end of period) | 29.1 | 0.9 | 7.3 | 10.8 | ||
| Net foreign assets | 15.9 | −3.4 | −7.4 | −0.1 | ||
| Net domestic assets | 2.3 | 4.3 | 14.6 | 10.9 | ||
| Treasury bill rate (percent; end of period) | 13.3 | 11.5 | 13.0 | … | ||
| External sector | (Annual percentage change, unless otherwise specified) | |||||
| Exports of goods and services | 1.8 | −0.9 | −5.1 | −37.4 | ||
| Imports of goods and services | −10.6 | −4.9 | 9.7 | −16.6 | ||
| Current account balance (percent of GDP)2 | 4.4 | 3.9 | 2.2 | 0.2 | ||
| Terms of trade | 1.0 | 0.4 | −2.6 | −25.6 | ||
| Price of Nigerian oil (US$ per barrel) | 110.0 | 109.0 | 100.6 | 52.8 | ||
| Nominal effective exchange rate (end of period) | 95.9 | 96.7 | 99.0 | … | ||
| Real effective exchange rate (end of period) | 111.3 | 118.8 | 128.4 | … | ||
| Gross international reserves (US$ billions) | 43.8 | 42.8 | 34.3 | 28.4 | ||
| (Equivalent months of next year’s imports) | 7.1 | 6.3 | 6.1 | 4.7 | ||
Consists of federal, state, and local governments.
Nigeria: Selected Economic and Financial Indicators, 2012–2015
| Nominal GDP (2013, billion U.S. dollars) | 521.8 | Quota (million SDR) | 1,753.2 |
| GNI per capita, Atlas method (2013, US$) | 2,710 | Population (2012, million) | 168.8 |
| Poverty headcount ratio (adult equivalent, 2009–10) | 46.0 | GINI index (2010) | 48.8 |
| Life expectancy at birth (2011, years) | 52 |
| 2012 | 2013 | 2014 | 2015 | |||
|---|---|---|---|---|---|---|
| Prel. | Proj. | |||||
| National income and prices | (Annual percentage change, unless otherwise specified) | |||||
| Real GDP (at 2010 Basic Prices) | 4.3 | 5.4 | 6.3 | 4.8 | ||
| Oil and Gas GDP | −4.9 | −13.1 | −1.3 | −1.6 | ||
| Non-oil GDP | 5.9 | 8.3 | 7.3 | 5.5 | ||
| Production of crude oil (million barrels per day) | 2.3 | 2.2 | 2.2 | 2.3 | ||
| Consumer price index (end of period) | 12.0 | 7.9 | 7.9 | 11.5 | ||
| Consolidated government operations1 | (Percent of GDP) | |||||
| Total revenues and grants | 14.3 | 11.0 | 9.9 | 7.7 | ||
| Of which: oil and gas revenue | 10.4 | 7.1 | 5.8 | 3.4 | ||
| Total expenditure and net lending | 14.7 | 13.4 | 12.3 | 10.6 | ||
| Overall balance | −0.3 | −2.4 | −2.5 | −2.8 | ||
| Non-oil primary balance (percent of non-oil GDP) | −11.6 | −9.7 | −8.1 | −5.5 | ||
| Excess Crude Account / SWF (billions of US$) | 11.0 | 3.8 | 3.6 | 1.5 | ||
| Money and credit | (Contribution to broad money growth, unless otherwise specified) | |||||
| Broad money (percentage change; end of period) | 29.1 | 0.9 | 7.3 | 10.8 | ||
| Net foreign assets | 15.9 | −3.4 | −7.4 | −0.1 | ||
| Net domestic assets | 2.3 | 4.3 | 14.6 | 10.9 | ||
| Treasury bill rate (percent; end of period) | 13.3 | 11.5 | 13.0 | … | ||
| External sector | (Annual percentage change, unless otherwise specified) | |||||
| Exports of goods and services | 1.8 | −0.9 | −5.1 | −37.4 | ||
| Imports of goods and services | −10.6 | −4.9 | 9.7 | −16.6 | ||
| Current account balance (percent of GDP)2 | 4.4 | 3.9 | 2.2 | 0.2 | ||
| Terms of trade | 1.0 | 0.4 | −2.6 | −25.6 | ||
| Price of Nigerian oil (US$ per barrel) | 110.0 | 109.0 | 100.6 | 52.8 | ||
| Nominal effective exchange rate (end of period) | 95.9 | 96.7 | 99.0 | … | ||
| Real effective exchange rate (end of period) | 111.3 | 118.8 | 128.4 | … | ||
| Gross international reserves (US$ billions) | 43.8 | 42.8 | 34.3 | 28.4 | ||
| (Equivalent months of next year’s imports) | 7.1 | 6.3 | 6.1 | 4.7 | ||
Consists of federal, state, and local governments.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.