Economic Developments and Outlook

The Nigerian economy posted a 0.8 percent growth in 2017, driven mainly by recovery in oil production and prices as well as rising agricultural performance. With steadfast implementation of the reform efforts under the ERGP, the authorities estimate that growth will reach 3.5 percent in 2018. It is further estimated that growth will rise substantially in the medium term following strong execution of the capital budget, a rebound in private sector investment supported by the implementation of structural reforms, and higher oil production.

Foreign exchange (FX) availability has improved, from $27.0 billion in 2016 to a four-year high of $39.2 billion in 2017, owing to greater exchange rate flexibility and a tighter monetary policy stance, and a rebound in oil exports. That said, the exchange rate has stabilized, and the parallel market premium declined from 60 percent in February 2017 to 20 percent in December 2017. At the same time, financial markets soared, gaining 60 percent in value from end-2016 to mid-January 2018.

On the other hand, inflation declined to 15.4 percent year-on-year by end-December 2017, from 18½ percent at end-2016. It has since moderated to 15.1 percent in January 2018, and maintained the trend indicating twelfth consecutive month of decline, and is expected to reach lower double-digit rates by the end of 2018.

Fiscal Policy

To address the fiscal deterioration occasioned by the sharp fall in oil prices, the authorities are determined to reduce dependence on oil revenue and create space for private sector investment. Going forward, they aim to implement structural fiscal reforms, focusing on increasing non-oil revenue. In this context, the 2018 budget presented to the National Assembly in November 2017 targets a significant fiscal consolidation and a reduction of the overall fiscal deficit from 4.3 percent of GDP in 2017 to 1.4 percent of GDP in 2018. This conforms with plans under the ERGP to progressively cut deficits and contain borrowing.

The authorities are making determined efforts to improve tax collection and strengthen tax administration, including widening the tax base. In this regard, they plan to implement measures to double the tax compliance rate to about 50 percent through undertaking tax audits, using e-filing, conducting data matching exercises to close collection loopholes, strengthening tax enforcement, and combating corruption in tax offices. In addition, the authorities are examining the need to focus on large taxpayers to boost collection and establish a more dependable revenue base. Further, proposals have been tabled in parliament to increase excises on tobacco and alcohol, review stamp duties, and introduce a registration threshold for VAT. Furthermore, the authorities are reviewing the requirements for publication of tax expenditures together with the annual budget as part of an effort to strengthen transparency. In a drive to comprehensively reform tax administration, current efforts would be supplemented by recommendations from the upcoming Tax Administration Diagnostic Assessment Tool (TADAT) exercise.

Implementation of the Voluntary Asset Income Declaration Scheme (VAIDS) is expected to positively impact revenue collections by end-March 2018. Going forward, the authorities plan to table before parliament a Finance Bill containing proposals to increase excise rates, reform the Value Added Tax (VAT) system by introducing registration thresholds and removing exemptions, and introducing stamp duties. Implementation of the Oil Asset Divestment Strategy, together with possible privatization of the Nigeria Petroleum Development Company, is expected to yield additional revenues. The authorities are also advancing efforts to complete the audit of the Nigerian National Petroleum Corporation (NNPC), to determine its financial position in respect of arrears and revenue due to government.

The authorities plan to maintain expenditures at budgeted levels, and savings from recurrent costs will offset the increase in planned capital investment. Further, they have no plans to reintroduce fuel subsidy in the budget. The authorities are also committed to the ongoing rationalization of current expenditures to create space for capital spending to close the infrastructure gap, and remain committed to improving public expenditure efficiency. In addition, they intend to improve public debt management, through closer coordination among the central financial agencies and reinforcing expenditure controls. Furthermore, a strategy to replace a portion of existing T-bills with Eurobonds will be pursued, while plans to strengthen the capital market will be implemented. The authorities have also stepped-up efforts in monitoring fiscal activities, including the identification of arrears and the requirement for state and local governments to provide financial reports regularly. Finally, the authorities are strengthening the implementation of the Treasury Single Account (TSA) mechanism to effectively utilize idle resources, and reduce domestic borrowing.

Monetary Policy

The Central Bank of Nigeria (CBN) has pursued a tight monetary policy stance since July 2016 when the monetary policy rate (MPR) was raised from 12 percent to 14 percent to address inflationary pressures. The CBN will continue to be vigilant, and anticipate any fiscal and liquidity pressures ahead of the 2019 elections. In this regard, the Monetary Policy Committee (MPC) will be proactive in managing liquidity to achieve CBN’s price stability objective, while implementing measures to strengthen financial sector stability and inclusive growth. The CBN will also continue to strengthen the transmission mechanism to enhance monetary policy impulse.

Some areas in the staff assessment need further clarifications. For instance, from its experience, the MPC would emphasize that an increase in the MPR at this stage would be unwarranted since monetary policy tightening has been directed at reducing pressures on the exchange rate, a key factor for Nigeria’s inflation dynamics. This addresses the staff’s recommendation that increasing the MPR to positive real levels would more transparently reflect the CBN’s intentions, help anchor inflation expectations, and signal forward-looking policy. Consistent with CBN’s experience and the staff’s findings on the study to understand monetary policy in Nigeria (SIP: P.86), the MPC would continue to finetune the monetary policy framework while deploying a range of instruments, including the MPR, open market operations (OMO), and cash reserve ratio (CRR), to contain inflationary pressures.

On the CRR, the MPC has restated its position that the rate remains 22.5 percent on eligible deposits as reflected in the latest MPC communique issued in November 2017. Further, the MPC has reiterated that applying CRR on deposit flows has merits for Nigeria, which suffers from structural liquidity surpluses, as opposed to CRR on deposit stocks recommended by staff. Lastly, the CBN would maintain its commitment to the development finance mandate as provided in the Act, and were the change to happen, it will take a medium to long term for a parliamentary approval regarding the divestment of interest in development finance institutions (DFIs) advised by staff.

Exchange Rate

As encapsulated in the ERGP, the authorities are committed to the unification of exchange rates in the medium-term. In this regard, the CBN has started implementing measures to stabilize the exchange rate. These include encouraging increased flows from remittances through licensed international money transfer organizations (IMTOs), more CBN sales in the interbank market, and the establishment of the investor and exporter foreign exchange (IEFX) window. In addition, the CBN is monitoring convergence of the two major FX windows between the forward transactions in the wholesale/retail window and the IEFX rate. Prospects are strengthening and foreign reserves have risen to $42.8 billion as at February 2018 on the back of large rice production capacity promoted by the CBN anchor borrower program. Going forward, the CBN intends to remove restrictions in the FX market for the 40-category products, once reserve buffers improve to comfortable levels.

Financial Sector

Apart from rising non-performing loans (NPLs) in a few sectors, Nigeria’s financial sector remains broadly stable. The banks are adhering to stricter standards for internationally active players than required under Basel II, and balance sheets remain strong. Capital buffers can withstand financial reporting at a more market determined exchange rate, including the January 2018 transition to IFRS9 on which bank examiners are expected to harmonize recommended provisions with bank impairment charge.

In response to the rising NPLs, commercial banks have implemented stricter adherence to revised repayment plans for restructured loans and moved out of the NPL territory, especially for loans to the oil, gas and power sector. The reference to banks resorting to “ever-greening” of potentially problematic loans is unsubstantiated since loan restructuring provides for recognition of macroeconomic effects on expected cash flows.

That said, in line with its guardianship role over the banking system, the CBN is further strengthening its supervisory oversight and deployment of early warning systems to identify vulnerabilities and manage emerging risks in the financial system.

Structural Reforms

Authorities have continued to make progress on implementing structural reforms as envisioned by the ERGP. To this end, they have prioritized the resolution of structural impediments and committed to building on the progress made to improve the business environment, accelerating the power sector reform, strengthening governance, and promoting financial inclusion and gender equality, among others. Progress under the Power Sector Recovery Plan (PSRP) has included increased power supply generation which reached a new peak of 5100MW in the grid in December 2017; appointment of new boards for sector agencies; appropriate budget provisions to ensure government agencies pay their electricity bills and enable the bulk trader to pay in full for generated power; and an off-grid electrification strategy. The ERGP Implementation Unit established in the Vice President’s office is expected to accelerate delivery on policies to develop industrialization, agriculture, and power sectors. In this context, the authorities plan to approach international development partners to secure technical assistance.

One of the targets the government set for gauging its progress in creating an enabling environment for business was to achieve a positive movement in the World Bank Ease of Doing Business. According to a recent World Bank business index ranking, Nigeria moved 24 places to 145^th position in 2017, and was among the top 10 reforming countries in the world.

To pursue a gender-sensitive, pro-poor and inclusive growth, the 2018 Budget appropriation plan has retained the social intervention program noted for creating jobs, supporting small businesses, and providing finance and economic opportunities to the vulnerable people. Relating to governance and transparency, the authorities have adopted the National Anti-Corruption Strategy (NACS) and have committed to digitizing public officials’ asset declarations, and the publication of the first national money laundering and terrorist financing risk assessment report.

Authorities acknowledge the remaining shortcomings in the data and are working to close those gaps, including seeking TA support to state and local governments fiscal data, reduction in the balance of payments errors and emissions, and continuous enhancement of the Debt Management Office to extend coverage to private sector liabilities and foreign investments.

Conclusion

The Nigerian authorities reiterate their commitment to sustain implementation of ongoing reforms and implement urgent comprehensive policies to support durable and inclusive growth. Pursuing a growth-friendly fiscal policy that is complemented by tight monetary and flexible exchange rate policies to contain vulnerabilities in the economy remains the focus. Policies would be anchored on stronger execution of the capital budget, investment-sensitive structural reforms and higher oil production. Additional priorities include actions to boost non-oil sector activity, reduce inflation to the target range, contain emerging banking sector vulnerabilities, and address unemployment. Lastly, the authorities value Fund advice and technical assistance, which have helped shape the policy direction over the years.