Nigeria: Selected Issues

Abstract

Nigeria: Selected Issues

Enhancing the Effectiveness of Monetary Policy in Nigeria1

1. Two episodes of a boom and a bust since early 2000 have highlighted the challenges in the current monetary policy framework. In particular, the sharp decline in oil production in 2013, followed by a sharp decline in oil prices in 2014, have severely tested the current framework. This paper reviews the effectiveness of the current framework and makes a number of policy recommendations to enhance the resilience of Nigeria to future shocks of a similar nature.

A. Recent Episodes and Key Policy Responses

Monetary policy framework

2. The Central Bank of Nigeria (CBN) has been operating a de jure monetary targeting regime since 1974. Price stability is the primary objective (CBN Act 2007) and communiqués of the Monetary Policy Committee (MPC) frequently refer to target range for inflation, most recently set at 6-9 percent. Financial system stability and promoting growth are also considered important.2 Since 2006, price stability is achieved through stability in short-term interest rates around an “operating target” interest rate, Monetary Policy Rate (MPR) (p. 19; Modeling the Monetary Sector of the Nigerian Economy). The MPR is the nominal anchor for monetary policy in Nigeria and influences the level and direction of other interest rates in the domestic market. The MPR signals the monetary policy stance of the CBN to market operators hence guiding the way the CBN policy rate influences credit availability.

3. The CBN also has the scope to use other intervention instruments. The CBN uses Open Market Operations (OMO), Discount Window Operations, Cash Reserve Ratio (CRR) and foreign exchange Net Open Position (NOP) (CBN, 2014) to effect changes in monetary conditions. Market interest rates generally follow movements in the MPR, but “structural” liquidity cycles can lead to occasional points of diversion (Figure 1). Spikes occur, for example, when a large amount of the oil receipts of the Nigerian National Petroleum Corporation (NNPC) held at deposit money banks (DMBs) are transferred to the CBN.3 Since the beginning of 2015, however, maintaining the stability of money market rates around the corridor has become a challenge.

Figure 1.
Figure 1.

Nigeria: MPR and Other Interest Rates, 2008-16

(Percent)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: CBN.

4. The CBN has not always adjusted the MPR when broad money has deviated from the benchmark. This has been the case even where the deviations are significant. For instance, since March 2015, broad money has been growing much slower than the 2015 benchmark of 15.24 percent, and yet the monetary policy committee has not changed the MPR.

5. The CRR has been used to manage liquidity since mid-2013. For instance, in the absence of a functioning Treasury Single Account (TSA), the CBN introduced a separate CRR on public sector deposits in mid-2013, increasing the rate from the general 12 to 50 percent, to help manage this source of monetary expansion and tighten liquidity conditions in the face of downward pressure on the exchange rate. This was further tightened to 75 percent in January 2014. In parallel, the CRR on private sector deposits was tightened from 12 to 15 percent in March 2014 and further to 20 percent in November 2014. These changes seem to have changed the relationship between the operating target (MPR) and intermediate target (Broad money) (Figure 2). The steady and predictable relationship between broad money and inflation (ultimate objective) also seems to have broken down in this more recent period (Figure 3).

Figure 2.
Figure 2.

Nigeria: MPR and Broad Money, 2008-15

(Percent, y.o.y growth)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Sources: CBN; and IMF staff estimates.
Figure 3.
Figure 3.

Nigeria: Broad Money and CPI, 2008-15

(Percent, y.o.y growth)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: CBN.

6. Other competing objectives deter the CBN from focusing on its price stability objective. There are a number of competing objectives, for example, promoting growth and maintaining external reserves to safeguard the value of the naira. Many of the schemes were introduced during 2006-12 and are aimed at intervening in various sectors on a short- to medium term basis; some are designed as credit guarantee schemes while others involve providing subsidized funding for on-lending.4 Those schemes involving funding for on-lending have a monetary impact through their impact on net domestic asset (NDA) of the CBN.

7. These interventions weaken the signaling effect of changes in the MPR. The CBN’s desire to make credit for the real economy available at relatively low interest rates—both in statement and fact through these intervention schemes—confuse a clear assessment of the monetary policy stance. In particular, the effectiveness of actions to tighten liquidity conditions only serves to increase the scale of subsidy available through these schemes and make the overall impact of monetary policy operations on the real economy more difficult to assess.

Recent episodes

8. The current monetary policy framework has managed upside shocks. Nigeria faced a sharp increase in export receipts during 2004-08 and a sharp increase in capital inflows in 2012. The increase in external receipts helped boost the stabilization fund (established in 2004) and reserves. This rapid increase in net foreign assets (NFA) of the banking sector could have led to a monetary expansion and pressure on inflation, but was managed successfully through sterilization (Figure 4). Reserve accumulation and prevention of “Dutch Disease” and exchange rate overshooting were consistent with macroeconomic policy recommendations for the resource-rich economies (IMF 2012).

Figure 4.
Figure 4.

Nigeria: NFA and CBN Bills Outstanding, 2008-15

(Trillion naira)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: CBN.

9. In contrast, back-to-back shocks in oil production (2013), then in oil prices (2014), depleted the buffers and challenged the current framework. Nigeria sailed through the 2008-09 crisis with ample buffers: the balance on the ECA was at $22 billion (8 percent of GDP), while gross international reserves (GIR) stood at $62 billion (equivalent to 16 months of imports). In contrast, given the sharp fall in oil production relative to the budget and a reversal of capital flows in 2013 (Figure 5), both fiscal and external buffers were much lower going into the 2014 crisis: the ECA had been depleted to $4 billion (½ percent of GDP) and GIR has fallen to $40 billion (about 8½ months of imports) (Figure 6). With reserves approaching historical lows, the CBN devalued the Naira in November 2014 and February 2015, and raised the MPR by 100 basis points (see Box 1 for the key policy actions taken since mid-2013). In February 2015, it closed the Dutch Auction System window, the mechanism through which it had previously channeled the government’s foreign exchange (FX) proceeds into the market, and started intervening (almost daily) in the interbank FX market, meeting legitimate demand at a pre-announced rate. The frequency and the volume of intervention declined overtime as GIR fell below $30 billion.

Figure 5.
Figure 5.

Nigeria: Oil Production, 2012-15

(Million barrels per day)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: FGN.
Figure 6.
Figure 6.

Nigeria: ECA and GIR, 2008-15

(Billion U.S. dollars)

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: CBN.

10. The CBN’s monetary stance has eased since September 2015. In May 2015, it harmonized the CRR for both public and private sector deposits at 31 percent, representing a slight tightening of liquidity. The recent implementation of the TSA also tightened liquidity conditions temporarily; however, the CBN subsequently cut the CRR to 25 percent in September neutralizing the impact. However, once the use of OMOs is taken into account, the actual monetary policy stance has been less clear. For instance, the CBN provided liquidity to the system in the first quarter of the year; this is not surprising given the uncertainty surrounding the election. It then sought to tighten conditions again through the summer, but has recently reversed this trend.

11. With pressures still elevated, the CBN introduced various exchange restrictions to prevent a further decline in GIR. These efforts are aimed at influencing the demand for FX through administrative measures.

12. Against this background, this paper reviews the effectiveness of monetary policy transmission channels and options for strengthening monetary policy effectiveness going forward.

Nigeria: Chronology of Key Monetary Policy Actions, 2013-15

  • July 23, 2013. The Monetary Policy Committee (MPC) raises the Cash Reserve Requirement (CRR) on public sector deposits from 12 percent to 50 percent.

  • January 21, 2014. The MPC raises the CRR on public sector deposits from 50 percent to 75 percent.

  • March 25, 2014. The MPC raises the CRR on private sector deposits from 12 percent to 15 percent. No changes to the CRR on public sector deposits.

  • November 25, 2014. The MPC raises Monetary Policy Rate by 100 bps (to 13 percent); increases CRR on private sector deposits by 500 bps (to 20 percent); widen band around official exchange rate to +/- 8 percent (from +/- 5 percent); depreciate official FX rate by 8 percent from N155/$ to N168/$.

  • February 18, 2015. The official foreign exchange window was closed and all foreign exchange demand is now being met via the interbank market, with the move implying an additional 18 percent downward adjustment in the official exchange rate from N168/$ to N199/$.

  • May 19, 2015. The MPC harmonized the CRR on public and private sector deposits at 31 percent (down from 75 percent for the public sector deposits and up from 20 percent for the private sector deposits.

  • September 22, 2015. The MPC reduces the harmonized rate of CRR from 31 percent to 25 percent.

  • November 24, 2015. The MPC reduced the CRR from 25 percent to 20 percent; the MPR from 13 percent to 11 percent; and changed the symmetric corridor of +/- 200 basis points (bps) to +200 bps and -700 bps.

B. Effectiveness of Monetary Policy Transmission Channels

13. This section analyzes the effectiveness of monetary policy instruments in transmitting policy objectives. This section first reviews a number of structural impediments to the transmission of policy rate impulses. It then examines the effectiveness of monetary policy instruments, namely the MPR and the CRR. This section also looks at the nature of the exchange rate pass-through on inflation. The exchange rate is not a nominal anchor of monetary policy in Nigeria but the monetary policy communiqué of the monetary policy committee meetings have started including explicit exchange rate target with a band since the end of 2011 (CBN, Monetary Policy Communiqué No. 80, November 21, 2011).

Structural impediments

14. Both direct and indirect interest rate channels, as well as the credit channel of the monetary transmission mechanism are limited by the overall financial depth of Nigeria. Assets of the banking sector are only about 30 percent of GDP in Nigeria, compared to 80 − 200+ in the BRICS (Figure 7). The exposure of the banking sector to the sovereign is high, at about 20 percent in Nigeria, while credit to the private sector is low (13 percent of GDP). The Nigerian Stock Exchange has about 200 listed companies, with a total market capitalization of about NGN11.5 trillion (about 12 percent of GDP). Other constraining factors include low banking penetration and the fact that many foreign owned corporations manage their financial activities at the group level.

Figure 7.
Figure 7.

Nigeria: Structural Impediments, 2014

Citation: IMF Staff Country Reports 2016, 102; 10.5089/9781475550559.002.A002

Source: International Financial Statistics.

15. The exchange rate channel of monetary policy transmission is circumscribed, given the preference for a relatively stable exchange rate. While Nigeria has an open capital account, as is common with other oil exporters, the exchange rate is tightly managed. This limits the effectiveness of the exchange rate channel as the exchange rate is not allowed to respond to changes in monetary policy stance. For instance, all 29 WEO fuel exporters, except Colombia, are currently classified as other managed, stabilized or more fixed (e.g., “conventional peg” or “no separate legal tender”). However, experience has clearly demonstrated that the volatility of oil (commodity) prices can transmit shocks to both fiscal and monetary policy, and influence the stability of the relationships between monetary instruments, targets, and ultimate objectives, often leading to failure in meeting targets.

16. The composition of the consumer basket makes inflation dynamics largely beyond the direct control or influence of monetary policy actions. A high share of the consumer basket is in items (e.g., food) that tend to be volatile, either from domestic (e.g., weather) or external factors (foreign price of imports). For example, the share of food items in the CPI basket exceeds 50 percent in Nigeria.

17. Potential fiscal dominance could also constrain the conduct of monetary policy. High rising public domestic debt could reduce the central bank’s ability to raise the interest rate in the face of rising inflationary pressures to prevent further worsening in the public debt and debt service. In the case of Nigeria, while the debt-to-GDP ratio is only about 14 percent, interest payments-to-revenue ratio is above 30 percent and is projected to increase in the medium term. The use of the central bank overdraft facility has been growing in recent months, but the Federal Government of Nigeria (FGN) does not generally rely on overdrafts from the central bank, and in net terms, the FGN is still a net creditor to the banking sector.

18. Lumpy oil-related and fiscal flows make liquidity management a challenge. Monthly transfers of oil funds from the Nigerian National Petroleum Corporation held at Deposit Money Banks (DMBs) to the Federation Account of the CBN and subsequent transfers to states and local government (SLGs) generate significant intra-month volatility in reserves balances and consequently interest rates. As export receipts are sizeable relative to banking sector assets, the timing of their tax or wage payments (and their cash management more generally) can cause liquidity fluctuations in the foreign exchange and interbank markets and occasional spikes in short-term interest rates.

19. Moreover, the absence (until now) of fully functioning and comprehensive coverage of Treasury Single Account (TSA) has also been a source of liquidity fluctuations. The absence of the full coverage and functioning of the treasury single account (TSA) for all ministries, departments and agencies (MDAs) of the FGN, has made managing liquidity a challenge at times. For example, between 2013M6 and 2013M8, federal government of Nigeria (FGN) deposits held in DMBs increased by N1.2 trillion. The Monetary Policy Committee “expressed concern over the rising cost of liquidity management as well as the sluggish growth in private sector credit, which was traced to DMB’s appetite for government securities. This situation is made more serious by the perverse incentive structure under which banks source huge amounts of public sector deposits and lend same to the Government (through securities) and the CBN (via OMO bills) at high rates of interest.”

20. The lending-deposit rate spread is stubbornly high in Nigeria, making real cost of borrowing high. A key factor underpinning this spread is likely to be banks’ operating costs; in addition to the general challenges in the business environment that face all companies, banks are also likely to face higher security costs. Funding costs as reflected in the return on equity also seem relatively high, while there is some clear differentiation across banks in terms of deposit funding, with some banks having to offer relatively high time deposit rates. Alongside efforts to strengthen the overall macroeconomic policy framework and reduce the risk premium, and continued efforts to ensure all banks are resilient, the authorities’ plans to address key security and governance concerns in the economy should help this spread to narrow over time.

Monetary policy transmission on inflation

21. Staff examined the relationship between monetary policy instruments and its intermediate and ultimate targets.5 The CBN Working Paper “Monetary Growth and Inflation Dynamics in Nigeria” looks at the relationship between money, inflation, and output. It suggests: (i) a long-run cointegrating relationship between money and inflation exists but not between money with output; and (ii) the long-run relationship is found in the full sample (1982-13), but not in the more recent sub-sample period (1996-13). This study looks at multiple monetary policy instruments simultaneously using more recent time period (2008-15). More specifically, a 5-variable Vector Auto Regression (VAR) analysis was conducted to investigate whether there exists a long-run stable relationship between the three key monetary policy instruments, its intermediate target (broad money), and the inflation rate (ultimate target). Policy instruments included are the MPR and CRR. The net domestic asset (NDA) of the CBN is also included to capture the role of the CBN interventions through CBN schemes as well overdrafts to the federal government. The role of tightly managed exchange rate in managing the inflationary pressure is examined in the next subsection.

22. The Johansen test of cointegration suggests that there exist long-run cointegrating relationships between not all five variables but following three variables.6 For example, one of the cointegrating relationships is expressed as follows:

cpit10.648mt10.021ndat1~I(0)

where cpi is the natural logarithm of consumer price index, nda is the natural logarithm of the net domestic asset of the central bank, and m is the natural logarithm of broad money. The VEC ECM estimated includes the following equation for cpi:

Dcpit=0.070(cpit10.648mt10.021ndat1)+differenceinlags+εt.

23. Note that neither MPR nor CRR enter these long-run relationships, implying empirical irrelevance of these variables in explaining movements in the price level or the inflation rate. Instead, this relationship suggests that there is a long-run cointegrating relationship between cpi, m, and the net domestic asset of the central bank and the signs of the cointegrating vector are as expected: the cointegrating vector suggests that an increase in the price level is associated with an increase in broad money and the net domestic asset of the central bank. More specifically, in the long run, a 1 percent increase in the growth of broad money is associated with an increase in the inflation rate by 0.65 percent. Similarly, a 1 percent increase in the growth of NDA is associated an increase in the inflation rate 0.02 percent.

24. The impulse response analysis, which takes the short-run feedback effects of the VEC ECM estimated, suggests that the impact of recent changes in nda is limited. The NDA of the CBN increased significantly in the past year, by about N1.8 trillion between 2014M8 and 2015M8. Part of this increase by due to the federal government’s drawdown on deposits and not necessarily a result of active monetary policy. That said, if the NDA were to increase by N 1.8 trillion from the current level (about 25 percent increase in NDA), the likely increase in the inflation rate is only about 0.05 percent within a 12-month period.

25. On the other hand, the transmission of an expansion in broad money and inflation is non-trivial, highlighting the importance of managing the broad money growth. Broad money growth was limited in the past year, about y-o-y 3 percent, partly due to a rapid drawdown gross international reserves and net foreign asset of the central bank and the banking sector. The impulse response analysis suggests that this increase would have increased the headline inflation by 0.5 percent within a year.

Exchange rate pass-through on inflation

26. In parallel to the conduct of monetary policy through monetary policy instruments, exchange rate targets with a band have been used to anchor inflation expectations. One of the most important reasons provided for keeping the exchange rate stable, in particular in resisting downward movements, is its potential impact on inflation rate. When the economy has little social safety net, and a large fraction of population is living below the poverty line or is vulnerable to poverty (i.e., a small shock can put them back in poverty), avoiding a sudden increase in the inflation rate is an important consideration.

27. Empirical analysis suggests that the exchange rate pass-through on headline inflation has been statistically insignificant. Lariau, El Said and Takebe (2015) investigate the magnitude of the exchange rate pass-through on inflation. They find that there is no stable long run relationship between CPI, the nominal effective exchange rate (NEER) and the price of imports (Pm) for the period from January 2000 to April 2015.

28. Changes in the NEER, however, seem to have a significant (but short-lived) pass-through effect on core inflation. In the short-run, headline inflation is not responsive to changes in NEER. Impulse response functions obtained from the estimation of a Vector Autoregressive model are not statistically significantly different from zero within a year following the shock. The point estimates for the pass-through are small, of less than 10 percent even 6 months after the shock occurs.

29. Evidence also indicates that this relationship has not changed over time. Core inflation displays a lagged and short-lived response to changes in NEER. Changes in NEER do not have a contemporaneous effect on core inflation. The impact becomes statistically significant 4 months after the shock occurs, but only lasts for 2 months, becoming statistically insignificant afterwards. The pass-through elasticity to core inflation half a year after the shock occurs is around 32 percent.

30. A key factor behind the low pass-through from exchange rate to headline inflation is that food prices are not affected by changes in NEER. The results indicate that devaluations of the naira only have a short-lived effect on non-food inflation. Food prices do not react to changes in the exchange rate because most of the food is locally produced. That is food prices are to respond more strongly to local market supply and demand developments to foreign exchange market developments. More than 90 percent of product lines (at SITC 5-digit classifications) and more than 96 of food imports are subject to tariff rates ranging between 5 percent and 35 percent. This factor limits the potential negative impact of an exchange-rate devaluation on the poor.

C. Options for Strengthening Monetary Policy Effectiveness

Adopting the monetary policy framework to changes environment

31. Absent other policies to address structural FX demand-supply mismatches, maintaining the current monetary policy framework with a tightly managed exchange rate will be difficult. With low fiscal buffers, the public sector is relying on financing from the banking sector, potentially crowding out the private sector. Without fiscal adjustment to reflect the decline in oil revenue, monetary expansion may be inevitable, leading to further pressures on the naira, inflation, and GIR (at $31.5 billion, GIR is 12 percent below the adequacy level). Staff’s medium-term macroeconomic framework indicates that the level of GIR will recover but not sufficient enough to reach what is considered adequate for countries with a fixed exchange rate regime. More generally, the combination of the current monetary policy regime (monetary targeting) with a tightly managed exchange rate with an open capital account will face more challenges ahead.

32. Nigeria envisions itself to become a less oil dependent economy, and the monetary policy framework needs to be able to accommodate this objective. The economy is already diversified (the oil sector is already less than 10 percent of GDP) but the external and fiscal sectors are still highly dependent on oil. While fiscal revenue remains highly dependent on oil revenue, accumulating oil savings during a boom time and using it in a downturn may remain an appropriate policy choice given the volatility in oil prices. However, the impotence of monetary policy (by preventing exchange rate movements in an open capital account environment) becomes more costly as fiscal revenue becomes more diversified since (i) tapping into the stabilization fund becomes less important; and (ii) being able to stimulate non-oil GDP growth in a downturn becomes more important.

The role of financial sector policies

33. Financial deepening efforts need to be sustained to strengthen key channels of monetary policy transmission. The authorities have made major strides in increasing banking penetration and facilitating other channels for savings to move from the informal to informal sectors (e.g., innovative insurance products distributed through mobile distribution channels) (see IMF Article IV 2014).

34. However, to ensure clarity of monetary policy signaling, CBN interventions in the real sector should be minimized. Overall, these schemes should be reviewed to determine whether they have proved cost effective and to determine whether there is a continued need for them (see IMF Article IV 2014). If the authorities deem it necessary to continue with some targeted schemes, these should be transferred to other agencies.

35. When setting the MPR and CRR, the CBN should clearly take account of the impact of these schemes on NDA. And to ensure there is a comprehensive picture of effective liquidity conditions, the impact of OMOs should be more clearly incorporated. These factors should be more clearly discussed in the communiqué, including setting out the links with broad money growth and inflation.

36. The authorities also need to work with the banking sector on ways to reduce the deposit-lending spread. This could involve broader efforts in the economy to improve the business environment.

Role of the exchange rate

37. The authorities should take steps towards greater exchange rate flexibility. As economic diversification efforts deepen, the export sector is likely to also become more diversified. That would support greater exchange rate flexibility as potential gains and losses from exchange rate movements are more broadly distributed.

38. Overall, allowing the exchange rate to absorb more of future shocks would reduce the burden on other policies. In a more fixed regime, fiscal policy typically has to carry the burden of adjustment to shocks. However, fiscal policy can have limited scope to be “nimble” when a tightening is required. Capital expenditures are often the buffer, but this could have significant effects on long-run growth prospects and is limited if it is small in the first place (e.g., in Nigeria capital expenditure was less than planned in the 2015; though there is a plan to rectify this going forward, implementation may still pose a challenge) Experience shows that, when shocks are largely external in nature, i.e., a shock to oil prices, a more flexible regime proves more resilient. For instance, that would facilitate the use of counter-cyclical fiscal policy (assuming there are sufficient buffers in place—ref to fiscal SIP) without risking the goal of price stability. It would also provide scope for a relatively looser monetary policy.

39. Other countries’ experiences of transitioning to greater flexibility can provide important insights.7 In particular, they point to the benefits of a “planned” transition (e.g., Chile, Russia) relative to a “forced” transition (e.g., Mexico, Thailand, Russia), which can entail some large short-run costs. In many cases, transition to greater flexibility came as a result of a general recognition of the challenge of addressing large and volatile capital flows; these often revealed weaknesses in monetary / fiscal policy mix (Chile, Mexico, and Thailand). The need to address large external imbalances was also a contributing factor in some cases so as to preserve reserves (Mexico, Thailand). Finally, in some instances, a move to greater flexibility was driven by a desire to protect economic growth by avoiding large increases in interest rates (Mexico, Thailand). All these drivers are relevant for Nigeria at the current conjuncture.

40. Reverting to the previous framework of a central parity rate within a band would be a first step. However, further consideration could be given to the width of the band to increase the shock absorption capacity. A wider band could also increase the imperative for the private sector to seek out hedging instruments, potentially stimulating further market development. In addition, taking a more rules based approach to determining the central parity could minimize the future risk that the central parity rate becomes “too sticky”. Having a clear objective framework that links the central parity rate to key economic variables (e.g., Chile) would also reduce the political challenges associated with changes and would provide a clear platform to communicate updates to the rate.

41. A strong communications policy would also be required to minimize the negative connotation of greater flexibility. Nigerians set great store in a stable exchange rate so the benefits of greater flexibility would need to be carefully communicated. For instance, the limited pass through to food prices, which limits the negative impact on the poor, should be emphasized. Similarly, the general empirical findings that there is a strong negative link between the flexibility of the exchange rate and the volatility of output and employment (Ghosh, et al, 1997) could be leveraged. Finally, given the increased financial access of the corporate sector, a more credible exchange rate framework should be reflected in lower risk premiums, thereby creating a more supportive financing environment. The consequent reduction in pressure on GIR would also contribute to a more positive investment environment.

42. Broader efforts to improve communications could also pay dividends. In particular, there could be more discussion of forward looking factors and the implications for future inflation in the communiqué. The communiqué is a key channel through which expectations are managed and which can influence the effectiveness of the transmission mechanism.

43. That said, the recent experiences of oil exporters such as Russia and Azerbaijan, highlight the fact that sustaining a managed floating arrangements may not be feasible in the long-run. For instance, the recent experience of Russia highlighted the vulnerabilities associated with excessive reliance on the oil and gas sector in both the fiscal and export sectors, coupled with structural bottlenecks and limited labor mobility. This illustrates that resilience will require a multi-pronged approach to not only establish an overall monetary and fiscal framework is both robust and credible, but also to progress the economic diversification agenda and address key infrastructure gaps.

1

Prepared by Allison Holland, Mika Saito and Miriam Tamene.

2

The 2014 Monetary Policy Review (March 2015) describes the CBN’s vision as “By 2015, be the model central bank delivering price and financial system stability and promoting sustainable economic development” and the document on monetary policy framework (CBN, 2011) states that the major objectives of monetary policy include the attainment of price stability and sustainable economic growth.

3

The sources of these structural liquidity cycles (which are generally uncertain) include but are not limited to the monthly disbursements by the Federation Account Allocation Committee (FAAC).

4

Several major credit schemes are active: Agricultural Credit Guarantee Scheme Fund (ACGS, NGN3 billion, 1977, CBN), Agricultural Credit Support Scheme (ACSS, 2006, NGN50 billion, implemented by commercial banks, state governments, and others), Commercial Agriculture Credit Scheme (CACS, NGN200 billion, 2009, CBN), Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL, N75 billion guarantee fund 2012); Power and Aviation Intervention Fund (PAIF, NGN300 billion, 2010, implemented by BoI), Restructuring and Refinancing Facilities for the manufacturing sector (RRF, NGN300 billion, 2010, implemented by BOI), and SME Credit Guarantee Scheme (SME CGS, NGN200 billion, 2010, administered by CBN).

5

The transmission of changes in monetary policy instruments on deposit and lending rates were conducted. There is no evidence of transmission.

6

Empirical results of this section are available upon request.

7

From Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility Rupa Duttagupta, Gilda Fernandez, and Cem Karacadag (IMF Working Paper 2004, WP/04/126).

Nigeria: Selected Issues
Author: International Monetary Fund. African Dept.