Statement by Ms. Kapwepwe, Executive Director for Nigeria and Mr. Odonye, Senior Advisor to the Executive Director, March 30, 2016

The Nigerian economy is facing substantial challenges. Low oil prices, a lengthy period of policy uncertainty, and ongoing security concerns, have produced: a widening fiscal gap with salary arrears at state and local governments; a weaker external current account and the introduction of exchange restrictions as international reserves declined; lower financial sector resilience; and sharply slower growth. These shocks have compounded an already challenging development environment-inadequate infrastructure, high unemployment (9.9 percent) and a high poverty rate (above 50 percent in the northern states).


The Nigerian economy is facing substantial challenges. Low oil prices, a lengthy period of policy uncertainty, and ongoing security concerns, have produced: a widening fiscal gap with salary arrears at state and local governments; a weaker external current account and the introduction of exchange restrictions as international reserves declined; lower financial sector resilience; and sharply slower growth. These shocks have compounded an already challenging development environment-inadequate infrastructure, high unemployment (9.9 percent) and a high poverty rate (above 50 percent in the northern states).

We thank staff for their constructive engagement with the authorities and the comprehensive Article IV and related reports. Our Nigerian authorities highly appreciate the quality of advice they have received from staff, which has supported their efforts to enhance and maintain macroeconomic stability and growth. Over the last decade, Nigeria has enjoyed strong growth averaging about 7 percent of GDP, prior to the recent collapse in the oil price. Nigeria is facing substantial challenges from a number of major global developments namely, slowdown and rebalancing of the Chinese economy, lower commodity prices, and tightening international financial conditions and the increase in the risk aversion of international investors, as well as regional security concerns. The authorities note the staff analysis, and broadly agree with the recommendations, in particular the need to implement an overall policy mix that ensures resilience against ongoing domestic and external challenges.

Nigeria has made significant progress on its development agenda. Against the backdrop of a maturing political system, the country recorded peaceful general elections last year, which for the first time in its history resulted in a democratic transition between two civilian governments. Nigeria’s economy is large and diversified with the oil sector currently less than 10 percent of GDP. The oil sector, which accounts for 75 percent of the total export basket, however, collapsed in the wake of major decline in oil prices with significant negative consequences for the fiscal and current accounts position and a decline in reserves.

Against this mixed background, we welcome staff analysis of the urgency in dealing with the impact of the oil price shock. The authorities fully recognize the large permanent terms-of- trade shock and are in the process of initiating a mix of policies to address the situation. As part of the immediate policy action to revamp the economy, the authorities have approved injection of N350 billion budgeted expenditure in the next few months. Authorities at federal level are also working in collaboration with the state governments to adopt a plan for the gradual increase of the Value Added Tax (VAT) on goods and services. These actions are part of a package of decisions taken at a recent 2-day retreat of the governors in the 36 states of the federation and members of the National Economic Council in Abuja.

Recent Economic Developments and Outlook

Economic performance was weaker in 2015, with growth slowing to 2.7 percent from 6.3 percent in 2014. This was largely driven by the collapse in oil prices and lower economic activity in the non-oil sector mainly, services, agriculture and trade. Recently, inflation has exceeded the central bank’s medium term target band of 6 to 9 percent, up at 11.4 percent in February 2016 and 9.6 percent in December 2015. The rising inflationary pressure was traced to the subsisting shortage of fuel, exchange rate pass-through from imported goods, seasonal factors and higher electricity tariff.

Exports have dropped, pushing the current account to a deficit of 2.4 percent of GDP in 2015 from a surplus of 0.2 percent in 2014. Portfolio inflows also slowed, while foreign exchange shortage, fuel scarcity, and security concerns affected private sector activity. Unlike the global crisis in 2008-09, the non-oil corporate sector entered the crisis in 2014-15 with weaker performance and more leveraged balance sheets. A further deterioration of the corporate sector could weaken bank resilience and extension of credit to the economy.

Economic activity is expected to slow in 2016 before a moderate recovery in 2017 and thereafter. Improvement in the terms of trade, strengthened governance in the oil sector anchored on the revised Petroleum Industry Bill (PIB), and further improvements in electricity and energy sectors are expected to drive growth in the immediate to medium term. However, there are significant downside risks related to uncertainty about the path of oil prices, tighter financing conditions, and a delay in access to planned external financing.

Macroeconomic Policies and Reforms

The economy is confronting substantial challenges and the authorities are implementing policy measures to address the drop in revenue and revamp the economy. Considering the multiple challenges facing the economy, the authorities have firmly resolved to collaborate and undertake complementary policies to reinvigorate growth.

Fiscal Policy

Mindful of the lower oil price environment, the authorities have pursued prudent fiscal policies that have sought to mobilize non-oil revenue, contain recurrent expenditure, and ensure debt sustainability. The 2016 budget proposes raising non-oil revenue by 0.4 percent, and further enhancing resources through more efficiency in the sector, including improvement in tax compliance, broadening the base, closing loopholes, and reducing tax exemptions. The authorities are also seriously considering increasing the VAT rate over the medium term as mentioned earlier. Enhancing capital expenditure is aimed at propelling growth to significantly narrow the gap in infrastructure spending going forward. Further, the authorities remain committed to improve value for money on capital spending. At the same time, efforts are focused on streamlining the cost of government and improve the efficiency of public service as highlighted by establishing the efficiency unit. This will reduce gross financing needs.

The authorities are also planning on accessing both market and multilateral external financing going forward as proposed in the 2016 budget.

Monetary and Exchange Rate Policy

The primary objective of monetary policy is price stability. Given Nigeria’s developmental needs, price stability aims to support growth and employment creation. Monetary policy continues to play an important role in supporting economic activity in Nigeria. The CBN maintained accommodative monetary policy since July 2015 so as to boost financing in the real sector. Over the period, the authorities freed more funds to Deposit Money Banks (DMBs) by lowering both Cash Reserve Ratio (CRR) and Monetary Policy Rate (MPR). However, as the balance of risks tilted against price stability, the recent decision in March 2016 increased the MPR and the CRR to 11 percent by 100 basis points and 22.50 percent by 250 basis points, respectively.

The Monetary Policy Committee (MPC) continues efforts to convey its decisions transparently to gauge markets expectations. In 2016, the Committee expects to do more through greater collaboration with the fiscal authorities, and by communicating more frequently with the relevant players, including the media, academics and the trade unions. The actual path that MPR will follow over the next few years will depend on the speed of implementation of the structural reforms in the country and the economic circumstances.

The authorities envision Nigeria to become a less oil dependent economy in the medium term and in tandem with the transformation, the CBN is gradually shifting from monetary targeting to a more price-based monetary policy. The CBN continues to provide FX to the interbank foreign exchange market for approved transactions. The foreign exchange measures recently introduced by the Bank are temporary, and remain in force to moderate impact of the declining oil prices by slowing the loss of reserves. The measures have stimulated production and employment in some sectors. Nonetheless, the authorities are evaluating the modalities of a gradual unwinding from the measures while strengthening policies to restore reserves to adequate levels.

Banking and Financial System Stability

Safeguarding banking system stability remains a key priority. Risk-Based Supervision (RBS) remains the cornerstone of supervision and regulation in Nigeria. The CBN has kept an eye on all DMBs and rates them as sound and resilient amidst headwinds from the global economy. The Financial System Stability Committee (FSSC) established last year, has identified risks to financial stability through bank supervisors/examiners. The CBN has taken action by assigning exposure limits to mitigate risks emanating from different sectors especially oil and gas, a high source of vulnerability to the Nigerian banking system, and a focus of the 2014 Article IV Consultations.

Although the FSSC judges that oil and gas sector indebtedness does not pose an imminent threat to stability, the CBN remains vigilant, ready to tackle risks that might still arise from the sector. In addition, the CBN also continues to monitor the health of the banking system and has taken proactive measures, including increasing the general provisions for non performing loans to 2 percent from 1 percent, and introducing regulation on capital distribution. Overall, the banking system liquidity remains above threshold and increased from 45.68 percent in December 2014 to 48.63 percent in December 2015.

Structural Reforms

The authorities remain committed to advancing structural reforms to smooth transition to a lower oil-dependent, competitive, investment-driven economy. Efforts are geared to strengthen anti-money laundering and financial sector supervision. The strategies include promoting targeted and core infrastructure; integrated transport network; housing; reducing business environment costs through greater transparency and accountability; encouraging value-chain sector linkages; and promoting employment of youth and women.

They remain focused on ongoing improvement of efficiency of the public sector service delivery, acceleration and broadening of public financial management reforms, and improvement of capacity at sub-national levels as well as creation of enabling environment to attract investment. Adopting a sound Petroleum Industry Bill (PIB) is being emphasized to strengthen the regulatory framework for the oil sector and enhance its transparency and integrity.

Infrastructure particularly, energy, power and transportation need to be improved to support industries. The authorities are prioritizing near-completed and high-impact projects that are consistent with the government development strategy, and implementing complementary measures to create an enabling environment for businesses. They are also reviewing projects suitable for Public Private Partnership (PPPs), and have completed some feasibility studies. In addition, the authorities have set up the monitoring and evaluation (M&E) framework for the assessment of projects and will periodically publish the assessment to enhance transparency and regain confidence in the government.

In the policy discussion series (see selected issues SM/16/70), staff presents the results of three studies to strengthen the economy and achieve a sustainable growth path. The Nigerian authorities welcome these studies, and are evaluating the scope of the analysis and feasibility of the proposed recommendations with a view to informing future policy decision.


Nigeria is facing substantial, though not insurmountable, economic challenges. Lower oil prices have significantly affected the fiscal and external accounts decimating government revenue. The Government’s strategy for rebuilding key infrastructure resonates well as a testimony of the authorities’ commitment. In an environment where the global risks are increasing, the authorities remain focused to continue to work through plans to build on the current momentum, strengthen resilience and prepare the country for challenges ahead both externally and domestically