Abstract
Niger: Selected Issues
Background Note: Niger-External Stability Assessment1
Consistent with the findings of the WAEMU external sector assessment, a model based analysis of Niger’s external sector, using EBA-lite, suggests that the real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals. This is also consistent with the findings of the 2014 external sector assessment using both the CGER methodology and EBA-lite. However, broader competitiveness indicators point to important issues, despite some improvement noted in recent years; also the recent depreciation of the Naira suggests some weakening in competitiveness, at least with Nigeria.
A. External Sector Developments
Balance of Payment Development
1. Terms of trade shocks and difficulties in the resource sector resulted in larger current account (CA) deficit in 2015. Many factors contributed to the deterioration of the current account in 2015: (i) economic downturn in Nigeria, the main regional trading partner of Niger; (ii) four-month technical closure of the oil refinery and lower oil prices, leading to a 38.4 percent decline in petroleum exports; and (iii) large government infrastructure projects and increased security needs associated with high level of imports. However, the CA deficit is expected to improve in 2016 because the decline of imports2 will be larger than that arising from exports due to low commodity prices and adverse spillovers from the Nigeria’s economic downturn. Services are still dominated by freight and the primary income balance is largely impacted by interest payments and profit repatriation by foreign investors in the mining and banking sectors. Remittances flows are limited in Niger.
2. The current account deficit is expected to remain elevated over the medium term to accommodate FDI driven investment in the oil and the uranium sectors. Major projects for the construction of pipelines to transport crude and refined oil for export are expected in the medium-term, as well as the construction of the Imouraren uranium mine expected to come on stream in 2021. Those projects will lead to a CA deficit averaging 18.3 percent of GDP between 2017 and 2019, projected to improve later as capital goods imports decline and exports benefit from the completion of those projects.
Niger: Balance of Payment Characteristics 2000, 2005, 2010-16, and 2020
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Sources: Niger authorities; and IMF staff calculations.Niger: Balance of Payment Characteristics 2000, 2005, 2010-16, and 2020
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Sources: Niger authorities; and IMF staff calculations.Niger: Balance of Payment Characteristics 2000, 2005, 2010-16, and 2020
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Sources: Niger authorities; and IMF staff calculations.3. Largely dominated by donor’s support prior to 2010, the financing of the BOP has largely shifted to foreign direct investment (FDI) flows. Over the past ten years, large foreign direct investment flows from important projects in the oil industry have risen. In particular, those from the construction of the SARAZ refinery, which was completed at end 2011. Then the share of FDI declined in 2015 due to heightened security risks from terrorist attacks, combined with the lower commodity prices that delayed major projects in the oil sector. The oil pipeline project is now expected to complete in 2020 and the Imouraren uranium project has been phased out until uranium prices recover. The overall external balance is projected to be in positive territory in 2016, with some reserve accumulation as FDI rises due to less security tensions, and debt flows due to government concessional borrowing to finance infrastructure projects. In the near term, FDIs are expected to remain elevated owing to the financial flows tied to large projects in the extractive industries.
4. Foreign reserves remain adequate with high imports coverage. At end-2015, Niger’s gross official reserve covers 4.6 months of the estimated 2016 imports. Besides, as member of the WAEMU monetary union, Niger could benefit from the pooled regional central bank (BCEAO) foreign reserves to meet external payments needs and therefore sustain large current account deficits.3 The WAEMU pooled reserves represented up to 5 months of regional imports.
Exchange Rate Development
5. Niger’s real effective exchange rate (REER) has been depreciating recently, echoing the fluctuations of the Euro against the US$ (Figure 2). Niger’s REER has been trending downward since 2010, largely following the movement of the WAEMU’s REER, closely linked to the fluctuations of its peg (Euro). Since early 2011, lower inflation on average in Niger relative to WAEMU, and Nigeria (major regional trading partner)—with larger inflation and a relatively stable Naira—resulted in a permanently more depreciated REER in Niger. The subsequent depreciation of the Euro against the US$ since 2014, could be source of the recent depreciation of the REER which has contributed to reverse the competitiveness weakening observed in 2013 due to higher inflation differential (2.3 percent in Niger and 1.3 percent WAEMU’s average) and large CA deficit (15 percent in Niger and 6.8 percent WAEMU’s average).
Niger: Nominal and Real Effective Exchange Rates, 2010-15
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff calculations.Niger: Nominal and Real Effective Exchange Rates, 2010-15
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff calculations.Niger: Nominal and Real Effective Exchange Rates, 2010-15
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff calculations.B. Model-Based External Assessment
6. Based on the current level of policies in Niger, the EBA-lite based-models do not point to significant misalignments of Niger’s real effective exchange rate (Table 1). This result is consistent with the 2014 CGER model based external assessment for Niger and also with the early 2016 WAEMU’s external sector assessment. However, this result should be interpreted with caution, giving the difficulties in assessing external sector competitiveness for small countries with limited data, undergoing structural transformations and heavily dependent on commodity export like Niger. In addition, the recent weakening of the Naira could be source of weakening competitiveness, at least with regard to economic relations with Nigeria.
Niger: Current-Account Norms and Implied REER Misalignment1/
Note:
The current account elasticity used (-0.63) is based on the median trade elasticity for small countries reported in Tokarick (2010).
In the initial estimates, the underlying-CA is the CA in 2015 for the CA-model and the underlying-CA is the CA in 2020 for the ES-model with the objective of stabilizing the NIIP at -79.6 percent of GDP consistent with the CA-norm of -9.4 percent of GDP obtained in the CA-model.
The alternative scenario uses a lower current account that discounts for FDI driven investments and the large public investments.
Niger: Current-Account Norms and Implied REER Misalignment1/
| Initial Estimates | Alternative scenario with an underlying CA level of -10.2 percent of GDP | ||||||
|---|---|---|---|---|---|---|---|
| Current account/GDP | Real exchange rate gap | Current account/GDP | Real exchange rate gap | ||||
| Norm | Underlying | Norm | Underlying | ||||
| CA model | −9.4 | −18.1 | 15.0 | CA model | −9.4 | −10.2 | 2.4 |
| External sustainability | −11.4 | −15.4 | 6.4 | External sustainability | −11.3 | −10.2 | −1.9 |
| IREER | −12.0 | IREER | −12.0 | ||||
Note:
The current account elasticity used (-0.63) is based on the median trade elasticity for small countries reported in Tokarick (2010).
In the initial estimates, the underlying-CA is the CA in 2015 for the CA-model and the underlying-CA is the CA in 2020 for the ES-model with the objective of stabilizing the NIIP at -79.6 percent of GDP consistent with the CA-norm of -9.4 percent of GDP obtained in the CA-model.
The alternative scenario uses a lower current account that discounts for FDI driven investments and the large public investments.
Niger: Current-Account Norms and Implied REER Misalignment1/
| Initial Estimates | Alternative scenario with an underlying CA level of -10.2 percent of GDP | ||||||
|---|---|---|---|---|---|---|---|
| Current account/GDP | Real exchange rate gap | Current account/GDP | Real exchange rate gap | ||||
| Norm | Underlying | Norm | Underlying | ||||
| CA model | −9.4 | −18.1 | 15.0 | CA model | −9.4 | −10.2 | 2.4 |
| External sustainability | −11.4 | −15.4 | 6.4 | External sustainability | −11.3 | −10.2 | −1.9 |
| IREER | −12.0 | IREER | −12.0 | ||||
Note:
The current account elasticity used (-0.63) is based on the median trade elasticity for small countries reported in Tokarick (2010).
In the initial estimates, the underlying-CA is the CA in 2015 for the CA-model and the underlying-CA is the CA in 2020 for the ES-model with the objective of stabilizing the NIIP at -79.6 percent of GDP consistent with the CA-norm of -9.4 percent of GDP obtained in the CA-model.
The alternative scenario uses a lower current account that discounts for FDI driven investments and the large public investments.
7. The CA approach of the EBA-lite indicates an overvaluation of 15 percent at end-2015. The current account approach compares Niger’s actual current account balance in 2015 with the model-prediction based on fundamentals driving saving and investment decisions and the desired policies. If the model prediction and the underlying-CA are far apart, that may suggest a large REER misalignment and require an adjustment. The predicted CA-norm is -9.4 percent with a policy gap4 of 1.4 percent of GDP. The policy gap originates mainly from the fiscal sector (1 percentage point), which calls the need for improving fiscal outcomes. Giving the underlying-CA of -18.1 percent of GDP (the CA in 2015), the CA approach suggests an overvaluation of 15 percent that is larger than what was suggested in the 2014 assessment (6.2 percent overvaluation) with an underlying-CA of -10.2 percent of GDP. However, using the same underlying-CA as in 2014, the overvaluation drops to 2.4 percent, showing some improvement due to the decline in inflation in Niger and the recent depreciation of the Euro. The model predicts well the CA of Niger before the completion point of the highly indebted poor country initiative and the country benefiting from the multilateral debt relief initiative (2006), however with the FDI-driven large CA recorded in recent years, the model prediction became quite poor. This calls for prudence in interpreting the results, giving the limitation of the CA approach in analyzing countries heavily dependent on commodity export, like Niger.
Niger: Results of the EBA-lite Equilibrium Real Exchange Rate Assessment
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff estimates.Niger: Results of the EBA-lite Equilibrium Real Exchange Rate Assessment
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff estimates.Niger: Results of the EBA-lite Equilibrium Real Exchange Rate Assessment
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: IMF staff estimates.8. The external sustainability approach suggests a higher CA-norm and a smaller overvaluation. The external sustainability approach compares the underlying-CA (the CA projected in 2020, -15.4 percent of GDP) with the model predicted CA needed to stabilize the net international financial position (NIIP) to a defined level within a defined period. The NIIP of Niger at the end of 2014 was -64.3 percent. To maintain that level of NIIP, the current account norm is estimated at -10 percent of GDP, resulting in an overvaluation of 8.5 percent. Targeting the NIIP that is compatible with the CA norm predicted by the CA approach of the EBA-lite (-79.3 percent of GDP), the stabilizing CA-norm will be -11.4 percent of GDP, resulting in a lower REER gap 6.5 percent (Table 1). The probability of external crises in Niger provided by the univariate Probit model is very low (0.9 percent), with a ratio of NFA to GDP of 17.5 percent, far from the threshold -49 percent. However, the multivariate Probit model that takes into account more factors, points to a higher probability, 41.2 percent (the threshold being 20 percent).
9. Finally, the index-REER approach point to an undervaluation. This approach is different from the two first approaches because it estimates directly the fitted values of the REER, using a set of fundamentals that cause persistent deviations from the purchasing power parity. The REER norm is calculated based on the fitted value of REER predicted by the model with an adjustment for the policy gaps. The estimation suggests an undervaluation of 12 percent.
C. Broader Competitiveness Indicators
10. Niger’s challenging business environment has been improving in recent years but the country continues to lag behind in some components of the doing business index, hindering the development of a strong private sector. Niger’s ranking in the doing business index has been improving in the last three years. It went from 176th rank out of 189 countries in the 2014 World Bank’s Doing Business Report to 150th rank out of 190 countries in the 2017 Report, increasing by 26 notches. A number of reforms contributed to this improvement, including: reducing the minimum capital requirement for businesses, streamlining procedures to open a business through the operational of a one-stop-shop, reducing the time needed for businesses to access water, improving regulatory framework for credit reporting, reinforcing dialogue between government and the private sector, and creating a court of commerce to settle business disputes. Niger went from being the worst business environment in the WAEMU, excluding Guinea Bissau, to being at the fourth best in WAEMU. However, challenges remain. Nigerien firms face more severe challenges than average WAEMU and SSA in paying taxes, getting electricity, and dealing with construction permits (Figure 4). Also, the 2016 doing business reports that access to electricity remains a major challenge for competiveness in Niger due to limited supply. The reports added that it takes 115 days to have an energy connection that could cost 6,200 percent of income per capita. Furthermore, the 2009 World Bank-International Finance Corporation Enterprise Survey reported that firms identified as main obstacles the presence of a large informal sector that poses competitive challenges to the formal sector, and the difficult access to finance (Figure 5).
Niger: Structural Competitiveness Indicators
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Niger: Structural Competitiveness Indicators
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Niger: Structural Competitiveness Indicators
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Niger: The Main Obstacles for Doing Business
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: The World Bank and International Finance Corporation cooperate survey data of 2009.Niger: The Main Obstacles for Doing Business
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: The World Bank and International Finance Corporation cooperate survey data of 2009.Niger: The Main Obstacles for Doing Business
Citation: IMF Staff Country Reports 2017, 060; 10.5089/9781475582888.002.A001
Source: The World Bank and International Finance Corporation cooperate survey data of 2009.11. Niger ranked in the 2016 Heritage Foundation’s Index of Economic Freedom, 129 out of 178 countries, staying among the countries with constrained economic environments (mostly unfree). In the WAEMU, Niger’s score was only better than Guinea-Bissau and Togo. Niger score better than the average WAEMU and SSA on monetary freedom, but it scored worst in labor freedom, business freedom, and also in government spending, pointing out: (i) rigidities in the labor market with large unemployment and a strong informal sector; (ii) business environment challenges described above; and (iii) the need to reinforce the ongoing reforms aimed at improving PFM.
12. Although being a medium policy performer, Niger ranks low on governance indicators. Niger’s government effectiveness, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) indicators was 3.5 (medium performer) in 2015. Transparency International ranks Niger 99 out of 167 countries in its 2015 Corruption Perception Index, an improvement relative to the 113th position held in 2012. Also, for the Mo Ibrahim overall governance index, Niger scores 48.4 in 2014, declining by 0.6 from 2011 and ranked 33rd of 54 African countries. The new anti-corruption campaign launched by the President after his reelection for a second term earlier this year, could help improve governance and reinforcement accountability in Niger, benefitting economic development, especially by increasing the private sector’s contribution.
D. Conclusion
13. External sector assessment of Niger using EBA-lite suggests that the REER is broadly in line with macroeconomic fundamentals, however broader indicators show serious structural competitiveness issues. The three EBA-lite approaches do not provide a consistent external sector assessment. The current account and external sustainability approaches indicate an overvaluation of the real effective exchange rate, while the index-REER approach indicates an undervaluation of the REER. Given the shortcoming of these approaches in predicting the underlying current account of Niger in a situation of large dominance of commodity exports and the structural transformation experiencing the country, staff assess that the Niger REER appear to be in line with fundamentals. This result is consistent with the external assessment conducted by WAEMU in early 2016. However, the recent weakening of the Naira could be source of weakening competitiveness, at least with regard to economic relations with Nigeria. In addition, in view of Niger’s poor performance in terms of structural competiveness measurement, fast-tracking structural reforms aim at improving the business climate, financial sector deepening, political stability, revenue mobilization, public financial management, and informal sector regulation, will improve productivity and enable Niger achieve faster and inclusive growth. Also, the efforts on fighting corruption and the construction of a 100 MW thermal power plan of Gourou-Banda expected to be completed in 2017, could help improve energy supply and enhance private sector competiveness that is necessary for job creation and reducing poverty.
References
International Monetary Fund (IMF). 2016. Methodology Note On EBA-lite. Washington, DC.
Tokarick, Stephen 2010. “A Method for Calculating Export Supply and Import Demand Elasticities”. IMF Working Paper 10/180, International Monetary Fund, Washington, DC.
This note was prepared by Mamadou D. Barry.
Decline in import will stem from reduced government investment, completion of major projects, and reduced economic activities.
An additional safeguard is represented by the fact that the French Treasury guarantees the convertibility of the CFAF into Euros.
The policy gap is the sum of the deviation of Niger’s actual policy fundamentals from their optimal level.
