Abstract
The slump in oil prices and production and an inadequate policy response are increasing unemployment and undermining efforts to reduce poverty. The authorities took some steps in 2016 to reduce vulnerabilities, mainly by deregulating fuel prices, increasing the monetary policy rate, and allowing currency depreciation to reduce the exchange rate misalignment. However, further actions are urgently needed to tackle the low revenue effort, large infrastructure deficit, rising debt service, double-digit inflation, and a foreign exchange market marred by restrictions. These actions need to be supported by continued efforts to counter militant activity in the Niger Delta and an insurgency-related humanitarian crisis in the North East.
Our Nigerian authorities appreciate the very productive engagements with the mission team and the candor of the 2017 Article IV report. The authorities agree that despite the steps already taken to tackle vulnerabilities in the economy, further actions are required to restore growth and alleviate poverty rooted over many years.
While we welcome the recommendations to rebuild confidence in the near term and foster recovery over the medium term, the authorities are concerned about staff’s view that policy response has been inadequate. In 2016, the authorities undertook a number of corrective measures to place the economy on track, including an increase in the fuel price by 70 percent, raising the monetary policy rate to 14 percent, and allowing substantial depreciation of the interbank exchange rate to bring the naira more in line with fundamentals. Additional measures are underway including, charting a sustainable fiscal policy, maintaining tight monetary policy to underpin price stability, implementing a more flexible foreign exchange (FX) market, and continuing structural reforms to improve competitiveness and facilitate economic diversification within the context of the new economic recovery plan.
Recent Economic Developments and Outlook
The Nigerian economy was severely impacted by low oil prices and production, which significantly compressed fiscal revenue and export earnings. Growth contracted by 1.5 percent in 2016 and the economy tipped into recession. Inflation remained high and ended the year at 18.6 percent, reflecting hikes in electricity and fuel tariffs, a weak naira, and accommodative monetary policy. Security concerns, especially in the North East region, warranted declaring a state-of-emergency and deployment of the army to maintain peace at significant fiscal costs. At the same time, the government focused on enhancing transparency, fighting corruption and strengthening governance.
In recent months, the economy has gained momentum, mainly reflecting recovery in oil production and strong performance in agriculture. This has been supported by the recovery in the global economy, especially Nigeria’s major trading partners. Prospects are good for 2017 and the medium term, as encapsulated in the government’s medium term Economic Recovery and Growth Plan (ERGP), 2017–20, announced in early March 2017. The plan, aims to reposition the economy by accelerating growth and creating employment through private sector-led economic diversification, investment in growth-enhancing infrastructure and improving the business environment. Full implementation of the plan, together with the current efforts of the government to restore peace in the Niger-Delta region will help revive economic growth and stabilize the economy.
The growth rate for 2017 is projected to be 2.2 percent before accelerating to 4.8 percent and 4.5 percent in 2018 and 2019, respectively, and 7.0 percent in 2020. The positive growth is expected from rigorous implementation of the ERGP and innovative growth stimulating sectoral policies. In addition, greater availability of foreign exchange (FX) arising from renewed confidence in the economy, and reduced financing needs for the government is expected to lead to an improvement in non-oil growth in 2017. Over the medium term, the projected oil production at 2.5 million barrels per day is expected to stimulate non-oil growth to 5 percent. The fiscal multiplier from increased public investment is expected to mitigate the dampening effects of fiscal consolidation on growth. Higher savings and capital inflows will boost investment, while higher retained earnings and less fiscal dominance should stimulate double-digit growth in private sector credit. A strong ownership of the ERGP by respective Ministries, Departments and Agencies (MDAs) supported by a monitoring and delivery-unit in the Presidency will leverage implementation to facilitate the achievement of the plan’s key priorities.
Downside risks may arise from a slower-than-expected rate of global economic activity; tight monetary policy stance by major economies, resulting in strengthening of their currencies; and depressed oil prices. The government acknowledges the enormous challenges faced by the economy and commits to implement policy adjustments to reverse the economic slide and lay the foundation for a strong and diversified economy.
Fiscal Policy
The fiscal consolidation stance outlined in the ERGP targets reducing dependence on oil revenue to achieve a sustainable and growth-friendly fiscal regime by scaling up investment in non-oil activity. The policy anticipates a 1.6 percent of GDP improvement in the non-oil primary balance by 2020. This adjustment will be front-loaded to create space for higher public investment. Increases in non-oil revenues should gradually reduce the ratio of interest payments to government revenue towards a more sustainable level.
The authorities will continue to improve tax administration, through a combination of measures including: the registration of about one thousand new taxpayers, arrears collection, and targeted tax audits. These measures build upon efficiency gains realized from reduced overhead costs, and extension of the Integrated Personnel Payroll Information System (IPPIS) to all government agencies which helped eliminate around 65000 ‘ghost workers’ from the wage bill. Implementation of the Treasury Single Account (TSA) also provided the basis for central liquidity management with respect to availability of resources. In addition, the government has embarked on measures to further strengthen expenditure controls at the subnational level to strengthen fiscal viability.
The 2017 budget under consideration by the National Assembly, has the objective of restoring sustained growth and focuses mainly on infrastructure projects. The budget deficit is projected to average 2.8 percent of GDP in 2017 and will be financed from domestic and external sources, including Eurobond issuances and concessional financing. The government remains committed to reducing the debt service-to revenue ratio close to 30 percent by 2020, and targets increasing the tax-to-GDP ratio from 6 to 15 percent of GDP over the next 5 years. For 2017, further gains are expected from the Voluntary Asset and Income Declaration scheme under the watch of the newly established Asset Tracing Team, which facilitates voluntary declaration and payment of tax liabilities. The non-provision for fuel subsidies in the 2017 budget reinforces the path for the deregulation of fuel prices. Other tax policy measures implemented by the authorities involve changes in excises, reduction of tax exemptions, asset sales and VAT rate increases on telecommunications and luxury items starting from 2018 onwards. Commitment to reduce spending will be sustained through the efficiency unit. The authorities will also step-up efforts to manage fiscal risks from State and Local Governments (SLGs) and State Owned Enterprises (SoEs) through the implementation of the Fiscal Sustainability Program (FSP) and enhanced monitoring.
Monetary and Exchange Rate Policy
The Central Bank of Nigeria (CBN) remains committed to its price stability objective. In 2016, however, monetary policy decisions were impacted by the need to strike an appropriate balance between price stability and growth. With the negative output gap, the Bank took steps to support the economy. Given a slowing inflation momentum and an economy in recovery mode, the CBN is convinced that the current policy rate continues to be appropriate. Going forward, the path toward the medium-term inflation target will be gradual, since a more rapid reduction in inflation could pose undue risks to the economic recovery. On the exchange rate, the authorities favor a gradual evolution of the flexible exchange rate system and are of the view that current FX measures have helped preserve reserves, in the context of dwindling export proceeds, by stimulating some local industries and limiting speculative demand for scarce FX.
The CBN reiterates its commitment to a unified FX market, and emphasizes the need to put in place supportive policies, especially fiscal and structural policies, to address exchange rate misalignments when they emerge. The prioritized FX allocation rule introduced in August 2016 was removed, and the current FX measures which are also temporary will be removed when complementary fiscal and structural measures envisaged under the ERGP are in place and reserves reach appropriate levels. The CBN judges that the value of the naira in the interbank foreign exchange market is in line with the Bank’s estimates of non-speculative demand for FX.
Banking System Stability
The CBN remains vigilant in its oversight of the banking system. Most commercial banks have kept capital buffers above the Basel requirements, and the CBN continues to monitor the risks associated with the adverse macroeconomic environment with a view to maintaining financial system stability. In this regard, the Bank has put in place measures to address the rising NPLs, declining asset quality, credit concentration and high FX exposures. Key measures include intensified monitoring and strengthened compliance and supervisory oversight on the utilization of FX sourced by banks. In addition, banks were required to conduct stress tests and assess the impact of the June 2016 foreign exchange framework on their capital and profitability. Plans are also in place for every bank to be fully capitalized by end-June 2017 and maintain contingency planning scenarios. The CBN is working with the three banks that failed the capital adequacy rule. Given that the current resolution framework and liquidation regime is firm, the CBN has no plans for immediate revisions.
Structural Policies
Our Nigerian authorities agree that removing structural impediments to investment and employment creation remain cardinal for promoting economic diversification and inclusive growth. Crucial are efforts for reducing the infrastructure gap and the urgency of implementing a comprehensive power sector recovery plan. Within the power sector, our authorities are of the view that governance and efficiency improvements as well as power delivery should be prioritized ahead of tariff increases.
The power recovery plan is addressed in the context of an integrated infrastructure development program, covering power, road, rail, water, ports and broadband. Funding for the infrastructure program, estimated at about USD3 trillion and spread over the next 30 years, would be sourced by leveraging on private sector capital in several ways such as public-private partnerships, special purpose vehicles, investment funds, and various guaranty arrangements. In this regard, the government plans to borrow up to $30bn over the Plan period to meet its share of funds to build the Mambilla hydropower plant, and priority segments of the Coastal Railway, the Lagos-Kano Railway and the Abuja Mass Transit Rail line. It will also be making strategic use of the Nigerian Sovereign Investment Authority, which is home to the national sovereign wealth fund. The ERGP also addresses problems in the power value chain, in particular governance, funding, legal, regulatory and pricing constraints across the four main segments in the value chain (gas supply, generation, transmission and distribution). This reform program should address the historic and structural problems to growth.
The newly formed Presidential Enabling Business Environment Council (PEBEC) is tasked to improve Nigeria’s Doing Business (DB) ranking to 100 by 2020 (from 169 currently), starting with a 60-day plan focusing on reforms to facilitate entry/exit of people and goods and simplification of government procurement. Going forward, priorities include fighting corruption to strengthen the business climate, promoting the development of SMEs including access to financing, implementing the social investment program, as well as the conditional cash transfer payment scheme for the most vulnerable and in support of homegrown school feeding program. As part of the effort to fight corruption, in 2016, several high profile cases of corruption were exposed and ill-gotten wealth confiscated.
Conclusion
The Nigerian economy is gaining momentum reflecting higher oil production and strong performance in agriculture. The recent measures to reduce vulnerabilities, including fuel price deregulation, monetary policy tightening, and measures to address possible exchange rate misalignment should sustain this momentum. In the medium term, the authorities’ commitment to implement policies to rebuild confidence and boost economic recovery over the medium term, supported by the ERPG, should result in a sustained turnaround.