Nigeria: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Nigeria

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Nigeria


2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Nigeria

Background: Recovering but not Fast Enough

1. Nigeria’s economy is recovering. Recovery from the massive oil price shock which started in mid-2014 and the subsequent 2016 recession—the country’s first since 1991—is continuing and has accelerated in the latter part of 2018. In addition to oil prices averaging about double their 2016 trough, a tight monetary policy, greater convergence towards a unified exchange rate, increased access to international markets, and strides in improving the business climate have helped support the economic recovery, reduce inflation, and strengthen external buffers.

2. However, persisting structural and policy challenges continue to constrain Nigeria’s economic performance to levels below what is necessary to improve development outcomes. A large infrastructure gap, low revenue mobilization, governance and institutional weaknesses, continued foreign exchange (FX) market restrictions, and banking sector vulnerabilities are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production. This combination of factors is contributing to keeping growth rates below historical trends, falling real GDP per capita, and weak human development outcomes. More recently, hot money inflows into Nigeria also increased vulnerabilities.


Nigeria and Comparator Income Groups: Real GDP Growth


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: World Economic Outlook.

Nigeria and Comparator Income Groups

(Percent; and number of years)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: World Bank World Development Indicators, and Human Capital Project.

3. Policy action to address these challenges is urgent and should not be delayed. Current demographic trends suggest that Nigeria could be the third most populous country in the world by 2050, highlighting the importance of faster per capita growth. This will be necessary to reduce high unemployment and poverty and transform Nigeria into a diversified and more inclusive economy, including through financing the growing need for education and health services that are already under strain at current population levels (Selected Issues Paper V).


Population in 2018 and Forecast 2050

(Number of persons)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: United Nations Population Division.

4. The reelection of President Buhari to another four-year term should provide new impetus to faster implementation of the authorities’ Economic Recovery and Growth Plan (ERGP). Key priorities under the ERGP— including advancing on revenue mobilization, power sector reforms, and accelerating anti-corruption efforts—remain consistent with staff’s past recommendations (Annex I) and should be accelerated now and not await the appointment of a new Cabinet (expected to be sworn in by late May 2019). The parliamentary majority obtained by the governing All Progressives Congress (APC) party should also help the government advance more forcefully the key legislative reforms—notably in taxation and the oil sector—currently underpinning the ERGP.

Recent Macroeconomic Developments

5. Growth has picked up but remains low (Figure 1). Output increased by 1.9 percent in 2018—up from 0.8 percent in 2017 and accelerating rapidly in the last quarter of 2018—driven by improvements in manufacturing and services, which also benefited from spillovers from a higher oil price. Growth in the agricultural sector—about 47 percent of the workforce and 25 percent of GDP— remained below the historical trend of 3–4 percent because of floods and farmers/herders’ clashes. Unemployment continued to increase, reaching 23.1 percent in the third quarter of 2018, up from 20.4 percent the fourth quarter of 2017, with the labor force growing by 4½ percent over the same period.

Figure 1.
Figure 1.

Nigeria: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria, National Bureau of Statistics, Nigerian National Petroleum Corporation, World Economic Outlook and IMF staff calculations.

6. Inflation has fallen significantly but remains above the Central Bank of Nigeria’s (CBN) target of 6–9 percent (Figure 2). Headline inflation fell to 11.4 percent at end-2018, from 18½ percent at end-2016, reflecting declining food price inflation, weak consumer demand, a relatively stable exchange rate and tight monetary policy during most of 2018. Core inflation has also declined in 2018 to 10.4 percent. Credit to the private sector continued to contract amidst tight monetary policy, banks’ risk aversion and preference for high-yield risk-free fixed income securities, despite reduced government domestic bond issuance and lower lending rates.

Figure 2.
Figure 2.

Nigeria: Inflation and Monetary Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Central Bank of Nigeria.

Factors Contributing to Changes in Credit Availability, 2018Q3

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: CBN Credit Conditions Survey Report 2018Q3.

Credit Concentration by Sector, 2018


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Central Bank of Nigeria

7. Recovering oil prices, Eurobond issuances and hot money inflows have contributed to a modest increase in external buffers in 2018 (Figure 3). Record holdings of mostly short-term local debt and equity (about $30 billion at end-March 2018) and a current account surplus driven by recovering oil prices lifted gross international reserves to a peak of $47.5 billion in April 2018. A sell-off during the emerging market turmoil—which coincided with dividend repatriation—along with investors’ concerns about FX repatriation following the fine imposed on MTN (South African telecom company) in September 2018 and some pre-election jitters resulted in outflows of about $9 billion during April-November 2018. The impact on reserves was cushioned by the three-times oversubscribed November 2018 $2.86 billion Eurobond issuance, which helped gross reserves close the year at $42.5 billion.

Figure 3.
Figure 3.

Nigeria: External Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria, custodian data, and IMF staff calculations.

Foreign Portfolio Investment Stock, 2012–2018M12

(Billions of U.S. dollars)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Stanbic.

Sub-Saharan Africa Bond Issuance, 2014–18

(Millions of U.S. dollars)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Note: Excludes Issuances by Ivory Cost and South Africa in Euro, in 2017 (Euro 625mn) and 2014 (Euro 500mn), respectively.

8. The CBN allowed greater convergence in FX windows and used FX interventions to limit exchange rate movements. The convergence of FX windows accelerated in the latter part of the year as outflows increased, which resulted in moving the retail and wholesale rate closer to the rate in the Investor and Exporter (IEFX) window. This window represents 70–80 percent of the transactions and stayed relatively stable at around N/$360–365. The CBN’s increasing intervention in the market—effectively moving from being a net purchaser earlier in the year to selling in the latter part of 2018 about 35–40 percent of the FX traded in the IEFX window—helped keep the rate in check. However, market segmentation remains through the CBN’s official window of N/$305 (mainly for petroleum imports and in limited predetermined quantities for some banks), increased sales to invisibles, SMEs, and Bureau de Change (BDCs) (mainly at N/$360) and the retail SMIS window (N/$330–345), distorting economic decision making.


Exchange Rates, 2016–2019M1

(Naira per U.S. dollar)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria arid Bloomberg

Outlook and Risks

9. Under current policies, the outlook remains muted. Over the medium term, absent strong structural reforms, growth would hover around 2½ percent, implying no per capita growth as the economy faces limited increases in oil production and insufficient adjustment four years after the oil price shock. Non-oil non-agricultural growth is projected to remain sluggish, with a modest pick-up reflecting current trends of accelerated growth in the non-oil non-agriculture sectors (2.7 percent y-o-y in the second half of 2018), backed-up by a large oil refinery becoming operational (Box 1). The CBN’s monetary policy focus on exchange rate stability would help contain inflation in the medium term but worsen competitiveness as the exchange rate becomes more overvalued. High financing costs would continue to constrain private sector credit.

Selected Economic Indicators Summary

(Annual percentage change, unless otherwise specified)

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

10. Risks are moderately tilted downwards (Annex II). On the upside, oil prices could rise, prompted by global political disruptions or supply bottlenecks. Bold reform efforts, following the election cycle, could boost confidence and investments, especially given relatively conservative baseline projections. Increased investments in the oil sector could boost oil production and subsiding farmer/herder clashes would leave room for faster expansion of agricultural production. On the downside, additional delays in reform implementation, a persistent fall in oil prices, reduced oil production, increased security tensions, or tighter global financial market conditions could undermine growth, provoke a market sell-off, and put additional pressure on reserves and/or the exchange rate. Fiscal sustainability would be at risk if interest rate costs rise further.

11. Strong macro-financial linkages would magnify risks. Banks’ vulnerability to oil price and production shocks is high given their large exposure to the sector (about one third of their loan book). In response to shocks, NPLs in the sector would increase further, worsening banks’ risk aversion and shrinking private sector credit, thus constraining non-oil growth. The resulting decrease in oil and non-oil revenues would reduce liquidity in the system, put pressure on FX availability, and worsen fiscal outcomes, resulting in lower fiscal space for priority expenditures and increased government borrowing. This would exacerbate the crowding-out effect experienced over the past two years as increased risk aversion and rising exposure of banks to zero-risk weighted government bonds diverts much-needed funds from the private sector.


Macro-Financial Linkages

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Refined Oil Production—A Potential Game Changer for Nigeria

Despite being a longtime crude oil exporter, Nigeria continues to import refined oil to meet domestic demand. A refinery project under construction near Lagos—likely to become operational in the next 2–3 years—could transform the country’s petroleum industry, boost growth, turn the country into an exporter of refined products, improve the balance of payments, and transform regional trade patterns.

Potential to refine oil in Nigeria. With a crude oil production of almost 2 million barrels per day (mbpd), Nigeria is Africa’s biggest oil producer and one of the largest oil exporters globally. Yet, only a small fraction of Nigeria’s crude oil production is refined domestically—on average only about 0.08 mbpd have been delivered to local refineries between 2008 and 2017, just a fraction of the theoretical refining capacity of 0.445 mbpd (broadly covering domestic demand) including due to under-investment into the refinery. This leaves a substantial opportunity for value added to meet domestic demand for Gasoline, Kerosene, Jet, and Diesel, and thus to reduce the import bill while diversifying exports. A new oil refinery constructed by the Dangote Group in the Lagos State promises to double Nigeria’s refining capacity and boost activities in the downstream sector.

Getting more from oil. Once operational, with a maximum refining capacity of 0.65 mbpd, the privately-operated Dangote refinery could meet all domestic demand for liquid products and still have sufficient surplus for exports. In particular, this would translate into reduced imports of refined products by 0.45 mbpd and increasing exports of refined products by 0.2 mbpd, while decreasing net exports of crude oil to refine oil by 0.65 mbpd. Under the currently envisaged mix of refined products, this would boost the country’s growth by 0.3–0.4 percentage points in 2022, and improve the trade balance by $2 billion per year (net after reducing both net crude exports and refined oil imports). These benefits could materialize as soon as 2020, the current target year to make the refinery operational, but are included from 2022 onwards in staff estimates, thus providing upside potential to current projections.


Refined Products and Local Demand vs. Exports

(Million Liters per Day)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Additional economic benefits could be significant. At the current construction stage, the refinery is directly or indirectly employing over 180,000 people including through on-site contractors. Once operational, additional job opportunities would materialize, e.g., through indirect employment through retail outlets, filling stations, and in transport. Potential positive spillover effects to West and Central Africa include increased supply and reduced costs for refined products.

12. Spillovers from links between Nigeria and neighboring countries will likely be contained. The CBN’s continued preference for naira stability will help sustain partners’ exports, which is particularly important as Nigeria accounts for 70 percent of Economic Community of West African States (ECOWAS) exports. Current growth projections for Nigeria imply neither a shock to Nigeria’s neighbors nor a lift (1 ppt increase in Nigeria’s growth is estimated to increase regional growth by 1/3 ppt). Remaining FX restrictions continue to increase food imports in neighboring countries, a good part of which is reportedly smuggled into Nigeria.

Authorities’ Views

13. The authorities considered the significant decline in inflation, the gradual convergence of FX windows, and improved external buffers as important policy successes. They expect consumption and investment to pick up further following the elections, boosting growth to 3 percent in 2019, and close to 4 percent in 2020, while recognizing that the initial 7 percent target in the ERGP may have been too ambitious. They agreed that growth prospects would remain subdued due to the slow implementation of measures to strengthen the business climate, reform the power sector, accelerate anti-corruption efforts, and without new capital investment to boost oil production. They considered softening oil prices, geopolitical trade tensions, delays in budget execution, persistent security challenges arising from insurgency in the Northeast and farmer/herder clashes in some parts of the country and tightening global conditions as the main risks to the near-term outlook. The authorities highlighted they will back their efforts on structural reforms by adequate legislative provisions to guarantee continuity and consistency of reform implementation.

Policy Discussions: An Urgent Reform Package

14. A comprehensive package of urgent policy reforms is required to address vulnerabilities and raise growth over the medium term. The proposed reform scenario includes revenue-based fiscal consolidation while increasing social and capital spending that is aligned with improved spending efficiency and strengthened governance, tight monetary policy while improving the CBN’s policy framework, a unified and more flexible exchange rate, and a stronger banking sector. In parallel, structural reforms will be needed to tackle longstanding weaknesses that inhibit economic diversification. These policies, which are consistent with the authorities’ ERGP, could boost growth to about 4.5 percent within a five-year period—with about +1 ppt from appropriate macroeconomic policies in a context of reduced vulnerabilities (Annex III).

A. Fiscal Policy: Increase Non-Oil Revenue and Make Room for Priority Expenditures

15. Oil revenue helped improve the overall fiscal position while debt servicing costs remain high (Figure 4). The provisional federal government (FG) deficit remained flat at 4 percent of GDP in 2018, as higher oil and gas revenue helped offset a 35 percent year-on-year increase in capital expenditures. Non-oil revenue collection was lower than budgeted for all items and did not improve further—despite continuing improvements in tax administration—as planned increases in excises (alcohol, tobacco) have not been fully implemented and the tax base continues to narrow (e.g., new VAT exemption for airlines). Low revenues and relatively high domestic yields have kept interest payments-to-FG revenue ratio high at 60 percent in 2018 (Annex IV). Meanwhile, state and local governments’ incomes benefited from higher oil revenues and Paris Club refunds from the FG, reducing their estimated combined deficit. Amidst a generally comparatively small government size, priority expenditure, such as on health and education, remains among the lowest worldwide.

Figure 4.
Figure 4.

Nigeria: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria, Debt Management Office, OAGF, and IMF staff calculations.

Debt-to-GDP and Interest-to-Revenue Ratios, 2011–18


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Debt Management Office; IMF staff calculations.

16. The revised medium-term fiscal framework (MTFF) rightly targets considerable fiscal improvement in 2019 but relies on optimistic revenue targets. The MTFF projects the FG’s overall fiscal deficit declining by 2.3 percent of GDP in 2019. This consolidation assumes revenue increasing to 4.8 percent of GDP, mainly driven by oil revenues (+1 ppt) and one-off gains (domestic recoveries; proceeds from oil assets divestments) that are unlikely to materialize in the given timeframe. Budgeted spending would remain relatively flat, with lower recurrent spending offset by higher capital spending. The impact of the proposed minimum wage—an increase from N 18,000 to N30,000—if passed on moderately to other salary grades as currently planned—would be contained and is largely accounted for in the budget. Absent major revenue reforms, and accounting for non-budgeted expenditures such as electricity subsidies, the overall FG deficit-to-GDP ratio would expand to 4.7 percent in 2019 and hover around just below 4 percent in the medium term. This would increase the consolidated government debt-to-GDP ratio to almost 36 percent by 2024 and the interest payments-to-FG revenue ratio to 74.6 percent. Fiscal space is at risk (Annex IV).

Federal Government: MTFF vs. Projections

(Percent of GDP)

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

Excludes revenues from government-owned entities (GOE) presented in MTFF

Includes domestic recoveries, proceeds of oil asset, ownership restructuring, signature bonus etc.

Excludes GOE spending presented in MTFF

17. Fiscal consolidation—based on front-loaded non-oil revenue mobilization as envisaged in the ERGP—is needed to foster inclusive growth. Staff’s proposed adjustment scenario—starting fully in 2020—is anchored on reducing the overall consolidated government non-oil primary deficit from 7.4 percent of GDP in 2018 to 4.1 percent of GDP by 2024, consistent with ensuring sustainability by containing interest payments to below one-third of FG revenue (the 2015 level and in line with the authorities’ target). The non-oil revenue-to-GDP ratio would improve significantly, by an ambitious +8 ppt, while capacity improvements would allow higher capital (+4½ ppt) and recurrent spending (+½ ppt), including on health and education, appropriately timed and calibrated once revenue measures have been secured.


Nigeria and Selected Emerging Markets: Revenue, 2018

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Country authorities and World Economic Outlook.

Adjustment Scenario: Fiscal Aggregates

(Percent of GDP and FG Revenue)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001


Adjustment Scenario: Revenue and Expenditure Aggregates

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

18. A comprehensive tax reform to sustainably increase non-oil revenue is urgently needed. The authorities’ recently-launched Strategic Revenue Growth Initiative (SRGI) that calls for the appointment of a high-powered steering committee to guide reforms and monitor progress through the office of the Minister of Finance covers several welcome initiatives. Staff’s proposal to increase the non-oil revenue ratio by 8 percent of GDP by 2024 through a comprehensive policy package in its adjustment scenario is ambitious, yet feasible given that other countries (such as Georgia, Ukraine, and Liberia) did achieve it over a relatively short period and that Nigeria’s initial non-oil revenue (3.4 percent of GDP for the consolidated government) is one of the lowest worldwide. Building revenues would mitigate the risks of necessary abrupt spending adjustments and requires high political commitment to succeed and help reduce revenue leakages through:

  • Tax policy. A move towards a VAT with full crediting of input tax, increased compliance monitoring of tax incentives, and broad-based use of excises, are welcome initiatives. Additional measures to be considered include a comprehensive VAT reform in line with technical assistance advice, additional excises (broader scope of products beyond luxury; higher rates increasing to at least ECOWAS levels), an aggressive removal of tax exemptions/incentives, which instead should be rules based, an increase in the telecom airtime fee (while protecting initial usage for vulnerable households) and removing customs duty waivers. New tax exemptions—such as the recently introduced exemption on airlines—narrow the tax base and should be avoided. Reforms to ensure the capital gains tax is implemented are also needed.

  • Tax administration. Welcome measures include educating taxpayers, increased use of ITAS, more tax audits, and greater use of technology to improve the collection process, including through data matching, and the new Action plan to address the weaknesses identified in the recent Tax Administration Diagnostic Assessment Tools (TADAT). A focus of the plan would be on developing an appropriate taxpayer register, filing system and arrears management. Additional reforms include putting in place a risk-based compliance improvement plan and implementing an automated interface between the tax agency (FIRS) and the Treasury Single Account (TSA).

Set of Possible Tax Policy and Administration Measures

(Cumulative Impact of Reforms 2019–24, Percent of GDP)

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Source: TADAT (2018), IMF (2018), IMF staff calculations.

19. Reforms to secure oil revenues—including through improved oversight and monitoring of State-Owned Enterprises (SOEs)—are also necessary to improve governance (Selected Issues Paper I). The implementation throughout 2018 of new funding requirements (cash calls) for joint ventures in the oil sector are welcome as they ensured on-time payments for cost recovery and help avoid new government arrears. Key priorities also include:

  • Ensuring that the ongoing work on new petroleum legislation brings an appropriate government take while not discouraging foreign investment. The proposed incremental royalty linked to the daily production rate, with royalty payments starting on the first day production, is therefore welcome. To avoid loss in revenue, any sales of oil assets should be preceded by changes in legislation (Petroleum Profit Tax Act, PPTA) to ensure revenues of the new operator are not exempted.

  • Passing legislative reforms to strengthen the SOE framework, including through information sharing and coordination among revenue collecting institutions, establishing a clear mandate to fund the national oil company’s (NNPC) operations, and creating a binding budgetary process for NNPC. The creation of an oversight unit for SOEs to monitor fiscal risks would be important. Improving the transparency for NNPC’s joint venture operations, including through clear information on revenue flows and transfers, will also be important.

20. Increasing public investment and shifting the expenditure mix towards priority areas is critical. Public spending levels in Nigeria are low, and staff’s adjustment scenario is based on a broad-based expenditure increase and a shift from non-priority to priority spending. To that end, the increase in public investment over the past year is welcome, albeit greater efficiency is needed to strengthen governance (¶47). An automatic fuel price-setting mechanism would sustainably remove inefficiencies from implicit fuel subsidies (0.5 percent of GDP in 2018). Compensating the poor for the negative impact of this reform would require only a fraction of the revenue gain but requires a significant scale up and strengthening of social safety nets (Selected Issues Paper II), including through building the capacity to deliver at scale. Meanwhile, explicitly budgeting the loss due to retail fuel distribution would increase fiscal transparency and consistency.


Nigeria and Selected Emerging Markets: Expenditure, 2018

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Nigerian authorities and World Economic Outlook.

21. Stronger coordination between the Office of the Accountant General of the Federation, the Debt Management Office and the CBN is necessary for more effective cash management. In view of idle cash balances at the TSA, staff encourages the authorities to use more forcefully the cash released to government agencies that remains unused, which would ensure a more effective use of the TSA and be closely coordinated with debt issuances. Improvements in cash flow forecasting and better coordination between CBN bills and T- bill issuances would also help.

22. The government’s strategy to use Eurobond proceeds to retire maturing T-Bills is welcome. As a result, domestic yields were significantly reduced earlier in 2018, but increased issuance of CBN bills and turmoil in emerging markets reversed this trend. Staff supports the authorities’ strategy to move towards a 60:40 domestic/external debt mix (from 70:30 currently), in view of the relatively lower external borrowing cost, lengthened maturity, and rising domestic yields, but cautions that careful monitoring of the associated exchange rate risk is needed (Selected Issues Paper III). Staff welcomes the authorities’ plans to clear the outstanding stock of domestic arrears (N.2.7 trillion), of which N1 trillion through promissory notes was already approved by Parliament (Annex IV).


Domestic Yield Curves


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Central Bank of Nigeria.

23. Monitoring of State and Local Governments (SLGs) should be intensified. Lower oil prices and increased minimum wages are expected to affect the fiscal space of SLGs, increasing the risk of arrears accumulation. Enforcing an accountability and results framework—including by ensuring better compliance with the 22-point Fiscal Sustainability Plan prior to states receiving any additional budget support— would help maintain budget discipline and better monitor risks. SLGs would contribute through automatic revenue increases which should be complemented by increased SLG internal revenue generation (e.g., property tax).

Authorities’ Views

24. The authorities broadly agreed with the proposed reforms. They indicated that the recently-launched SRGI and revenue proposals from the recently formed Committee on Minimum wages will help generate sustainable revenues, optimize capital and recurrent expenditures, and properly manage global and domestic risks. To generate additional revenue within 2019, they plan to introduce measures that do not require new legislation (e.g., higher rates on excises or broaden the list of products subject to excises). More transformative reforms—such as on VAT, the capital gains tax, or removing exemptions—are on the agenda but could only come into effect in 2020 after amendments to existing legislation are passed. The authorities plan to amend the PPTA to ensure that sales of oil assets do not generate new tax exemptions. They welcomed staff’s analysis on the benefits and costs of increasing the ratio of external-to-domestic debt. They plan to strengthen their cash management approach to reduce idle cash balances held in the CBN’s Treasury Single Account.

B. Monetary and Exchange Rate Policies: Toward an Integrated Framework and Unified Rate

25. Monetary and exchange rate policies can be better aligned to reach the desired inflation target range. The primacy of price stability should be clearly communicated, including through a transparent and functioning policy instrument. While inflation and exchange rate objectives may sometimes be attained simultaneously if reserves are allowed to move, the attempt to also stimulate growth—including through targeted interventions—reduces policy effectiveness as multiple instruments pull in different directions.

Monetary Policy: Keep Tight and Increase Framework Transparency

26. Monetary policy has remained relatively tight, despite an unchanged monetary policy rate (MPR) and cash reserve requirements (CRRs). This materialized using an overnight rate that is often above the MPR (despite some accommodation mid-year), and increased liquidity draining operations through issuance of CBN Bills at increasing maturities (365 days) and costing N1.5 trillion in 2018. The CBN supplemented those policies through non-traditional methods that included: (i) re-introducing special Open Market Operations (OMOs)—on average, twice per month in December-January, all of which were unannounced and not conducted through auctions albeit at the market rate of the day’s auction; and (ii) a CRR for banks applied using an asymmetric rule (regulatory CRR of 22.5 percent when deposits increase, but no cash is released when deposits fall), which effectively reached 50–60 percent for certain well-capitalized banks.

27. Raising the MPR would re-establish the rate as the anchor for managing inflation and improve signaling. This measure would be essential to strengthen the monetary policy framework by re-establishing the policy rate as the anchor for managing inflation that remains stuck above the CBN’s target range, improve signaling, and support the move towards a more flexible exchange rate. Signaling would also be improved by adopting a higher and symmetrically applied CRR to all banks. Pending a decision on the MPR or CRR, a temporary widening of the interest rate corridor (e.g., to a symmetrical +/-5 percent to replace the current -5/+2 percent corridor) would help accommodate an adjustment of market rates to the upper band of the corridor, which could be narrowed once money market rates are better aligned with the policy rate.


MPR and Other Interest Rates, 2016M1–2019M1


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Central Bank of Nigeria.Note: The wide lending-deposit rates spread is mainly explained by high non-interest cost (please see AIV and SIP 2016 for details).

28. The transparency of monetary operations should be strengthened further by:

  • Strengthening CBN’s communication policy. The appointment in 2018 of new CBN Board and Monetary Policy Committee (MPC) members helped strengthen CBN independence, which can be used to restore the full implementation of the monetary policy framework. Staff also urged more discussion of forward looking indicators in the MPC communiqué, which should reemphasize that the CBN’s objective is to reach its inflation target range and explain how the pursuit of multiple objectives remains consistent with that target. Analysis by staff suggests that inflation levels above the CBN’s single digit target hurt growth (Annex V).

  • Ending the recently resumed practice of unannounced OMOs, as such operations increase uncertainty in banks’ behavior and distort their liquidity management operations.

  • Discontinuing development financing through the central bank, including those targeted to the agriculture and power sectors and by owning financial institutions such as Bank of Agriculture and Bank of Industry. Instead, if such development interventions are warranted, they should be undertaken by the federal government and be transparently costed and budgeted. The CBN can then better focus on its price stability mandate and on its supervisory role in ensuring appropriate regulation and financial stability. The use of overdrafts should be limited to unplanned and unexpected cash shortfalls.

29. Using CBN bills to manage structural liquidity exacerbates vulnerabilities to capital flows. The large share of CBN bills held by non-residents (27 percent, about $10 billion at end-2018) has increased the vulnerability to capital flight. Transparently-conducted OMOs should be used to remove excess naira liquidity, and not to support external reserve accumulation. As is typical for liquidity management, limiting OMOs tenors to typical shorter maturities (e.g., 14 days), to not compete with the government NTB space, while using other measures to remove excess liquidity would be more appropriate. The implementation of these changes should be carefully managed to avoid short-term adverse effects on reserves and investor confidence.

Measures to address Excess Liqudity

- Selling government assets on the CBN balance sheet: converted bonds (N 1.6 trillion) and AMCON bonds (N 4.2 trillion)

- Issue long-term bonds only if excess liquidity persists

- Remove the N 7.5 billion placement limit on the Standing Deposit Facility

Authorities’ Views

30. The authorities argued that CBN policies succeeded in achieving the bank’s mandate to contain inflation but also promote growth, ensure exchange rate stability, and safeguard financial stability. They noted that their heterodox policies—which do not rely on changes in the policy rate or the regulatory CRR—are appropriate to keep liquidity tight and successfully control pressures on the exchange rate. They acknowledged the dual role of OMOs in both attracting portfolio investment and managing liquidity and saw special OMOs as necessary to keep costs of liquidity management in check. While acknowledging that current CBN financing for the power or agricultural sector are outside the CBN’s core mandate, they saw such practices as necessary to maintain proper electricity generation and boost agricultural production.

Exchange Rate Policy: Move toward a Market-Based Exchange Rate

31. The continued convergence of exchange rate windows is welcome, but greater exchange rate flexibility at a unified rate should be allowed to respond to shocks. The retail and wholesale rates have been gradually closing the gap with the IEFX rate, which is now close to the parallel market rate. To help increase confidence and transparency for all market participants, staff urged removing Multiple Currency Practices (MCPs) and unifying the multiple exchange rates around the market-based IEFX rate while allowing it to move as appropriate to reflect fundamentals. Staff suggested that FX interventions should be limited to containing excessive fluctuations to safeguard reserves. The recent CBN decision to reduce the $500,000 daily sales to banks to $100,000 at the 305N/$ rate is welcome, and staff recommends stopping it altogether as it is not used for any market transactions except for fuel imports and the budget.


Potential Gains from Convergence in Exchange Rates, 2017

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: IMF staff estimates.Note: Results reflect a simulation without parallel market spread in 2017. Based on 2017 averages for official, retail, I&E and parallel rate and redistribution from government revenues associated with exchange rate convergence to the 35 percent of the poorest population.

32. Staff’s assessment suggests that Nigeria’s overall external position in 2018 is moderately weak. The assessment is subject to some uncertainty due to the presence of FX restrictions and the multiplicity of exchange rates at which transactions occur (Annex VI).


Reserve Adequacy Measures

(Billions of U.S. dollars)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria, and IMF staff estimates.*Note: Oil price gap multiplied by oil exports, following 2016 ARA paper.

33. Eliminating restrictions to FX access and other capital flow management (CFM) measures remains important to remove distortions. The restriction in late December 2018 on FX access for fertilizer products expanded FX restrictions to 42 categories of products (more than 741 items). Removing these restrictions would help eliminate the parallel market premium in a more sustained manner, even in periods of oil price collapses/outflows, and help limit vulnerabilities to corruption. This would encourage investments in certain industries, particularly where banned items are used as intermediate goods. Distortions from recently introduced or tightened CFM measures—such as payment limits on naira-denominated credit cards for overseas transactions, and the prohibition of FX purchases in the official market for foreign currency bond and equity investments—should be removed in line with the IMF’s Institutional View on capital flows,1 and in view of the substantial room available for implementing warranted changes in macroeconomic policies.

34. Strengthening external buffers would help mitigate increasing risks from capital flow reversals. At end 2018, reserves excluding FX swaps and forwards are estimated at 70 percent of the ARA metric adjusted for an oil buffer, below the suggested adequacy range of 100–150 percent, with adequacy expected to decline over the medium term (Annex VI). Portfolio inflows have supported reserves but are susceptible to a sudden stop driven by global and/or domestic factors (Figure 5). Stronger policies can aid reserve accumulation and reduce vulnerabilities to capital flight (Annex VI).

Figure 5.
Figure 5.

Non-Resident Holdings in Nigeria: Internal or External Driven?

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Authorities’ Views

35. The authorities feel vindicated by their successful approach towards a gradual convergence of the exchange rate windows, which they consider less disruptive to macroeconomic stability than immediately moving towards a unified rate. That said, barring an unforeseen exogenous shock, they remain optimistic all exchange rates could soon be unified around the market driven I&E FX rate. The authorities agreed on the need to accumulate external buffers and argued that recent increases in FX sales were necessary to limit excessive fluctuations and were not an attempt to fix the exchange rate. The authorities also emphasized that, while FX restrictions are not expected to subsist on a permanent basis, they see no merit in removing the restrictions at this time, while the diversification of the real sector remains work in progress and as the strategy proved successful in almost achieving “self-sufficiency” in rice production. The authorities remain skeptical on removing CFM measures (e.g., payment limits on naira-denominated credit cards), which have been longstanding measures in Nigeria, which has a non-convertible currency, and whose removal would add undue pressure on reserves and the exchange rate. The authorities are not requesting Board approval of the FX restrictions and MCPs.

C. Macro-Financial: Contain Banking Sector Risks

36. Prudential ratios are improving, but undercapitalized banks continue to weigh on banking sector performance (Figures 68). NPLs have fallen to 11.7 percent at end-2018, helped by higher oil prices and the sale of NPLs to private asset management companies (AMCs). However, restructured loans—particularly in the oil and gas sector—reportedly average 3 to 30 percent of total loans, possibly masking further asset quality deterioration. Solvency ratios improved markedly by 5 percentage points to 15.3 percent by end-2018, with the introduction of three-year transitional arrangements for IFRS9 reducing the need for the additional provisioning costs expected by end-2018. Bank profitability has remained relatively flat as fees offset declining net interest margins that used to be propped up by higher yields on government securities. Stress tests indicate that large banks’ resilience to credit and concentration risks have improved, while small and medium-sized banks remain vulnerable.

Figure 6.
Figure 6.

Nigeria: Financial Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Bloomberg, Central Bank of Nigeria, and IMF staff calculations.
Figure 7.
Figure 7.

Nigeria: Banking Sector Developments

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Central Bank of Nigeria and Financial Soundness Indicators.
Figure 8.
Figure 8.

Nigeria: Performance of the Five Largest Banks Through September 2018

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: Bloomberg and IMF staff calculations.

Nigeria and Peers: NPLs to Total Loans, 2018Q4


Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: CBN, and IMF FSI database.Note: Nigeria’s data is as of Dec. 2018. 2018Q2 latest available for China, Ghana, Kenya, Uganda.

Banking Sector NPL Sensitivity Stress Test: Capital Adequacy Ratio

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Central Bank of Nigeria.

37. The CBN intervened in one private bank and continues to allow regulatory forbearance for others. Making shareholders of Skye bank bear the full losses before the CBN intervened is welcome. However, the CBN’s capital injection into Skye Bank through AMCON makes the CBN the formal owner of a non-systemic bank that has been intervened in the past. This conflicts with the CBN’s regulatory role. Moral hazard also persists, as three other insolvent banks and one undercapitalized bank (less than 5 percent of assets) continue to depend on CBN’s liquidity support and regulatory forbearance (solvency ratios for the banking system would improve by 350 basis points after exclusion of the four undercapitalized banks). In addition, the use of AMCON to bail out banks contributes to increased moral hazard, exposes the CBN to credit risk (as it is its main creditor), and creates additional contingent liabilities for the federal government.

38. The CBN is working on several initiatives to support financial stability. These include the completion of IFRS 9 implementation and a move by most banks to reflect an exchange rate closer to market transactions in their books. Both operations have led to increased provisions. The CBN also took initiatives to improve risk-based supervision through onsite risk-based reviews and the initiation of Basel’s Internal Capital Adequacy Assessment Program (ICAAP), which would allow a comprehensive assessment of banks’ capital needs and risk profiles. The mission welcomes the CBN’s recent announcement to start enforcing Basel III requirements—such as liquidity and leverage ratios—by 2019Q2 and urges strict adherence to that deadline.

39. Staff suggested that strengthening banking sector resilience requires increasing capital buffers. This includes extending the no dividend distribution rule to all banks with high restructured loans (not just those with NPLs above 5 percent). Staff also recommended that the 5 percent profit tax imposed by the CBN on banks be retained as capital instead of being earmarked for agricultural or manufacturing sector lending. Finally, staff reiterated its urgent call for an Asset Quality Review of the 10 largest banks (84 percent of banking assets) to help identify the true potential capital needs of banks.

40. Supervision and monitoring of the banking system should be further strengthened. The establishment of the early warning system for banks is welcome, and staff encouraged its full integration with the supervisory and early intervention frameworks. The CBN should also expand the scope of monitoring and stress testing to monitor macro-financial linkages and test against banking sector resilience to macroeconomic shocks. Greater transparency around all regulatory forbearance, including on loan restructuring (where a reasonable probation period must be applied before the loans are considered performing), depleted capital, and net open positions, is needed, with staff calling for a quick phasing out.

41. The framework for banking resolution should be enhanced. This includes enhancing the operational and legal frameworks allowing powers to write down capital, overriding shareholders’ rights, and amending the bank liquidation regime. The CBN should also reduce its exposure to banks’ balance sheets through unsecured lending, and act only as a Lender of Last Resort. Credible time-bound recapitalization plans for weak banks and the liquidation of small insolvent non-viable banks that have been perennial users of central bank liquidity should be implemented. The use of bridge banks owned by the CBN to resolve banks in difficulties should be avoided as it creates a conflict of interest with the CBN’s role as supervisor and provider of emergency liquidity support. Stronger coordination among relevant supervisory authorities (including CBN, NDIC, and the Ministry of Finance) in the resolution framework—including in defining roles and objectives—is vital.

42. An exit strategy for the state-backed asset management company (AMCON) is urgently needed. AMCON, which poses high contingent liability risk (around 4.8 percent of GDP), was established to resolve stressed banks during the 2008/09 crisis, with its mandate limited to that purpose. Staff recommended that AMCON stops the purchase of distressed assets, formally sets a sunset to its existence, earmarks its cash flows to buy back bonds, sets annual disposal targets, implements a plan to divest AMCON’s interests in companies and banks, improves its legal power to recover assets and is gradually phased out. It is also important that the CBN withdraws its ownership in AMCON—including by transferring it to the fiscal authorities—to avoid conflicts with its mandate of supervising AMCON and the banking system (Selected Issues Paper IV). In line with international standards, staff also recommended that AMCON liabilities be recognized as public sector government domestic debt (Annex IV).

Authorities’ Views

43. The authorities noted that NPLs and solvency ratios have improved markedly, with large banks with capital requirements comfortably above Basel regulatory requirements. They believe their recent intervention in bailing out one weak bank and an upcoming merger of two other banks will help increase buffers in the system, and do not see a need for an asset quality review for the largest banks given their close monitoring. As for restructured loans, they do not consider them as regulatory forbearance as they believe those loans are now performing. On continued liquidity injections to insolvent and undercapitalized banks, the CBN believes it is playing its role of lender of last resort to avoid contagion to the banking sector, considering all banks in question systemic because of the importance of their deposit base and employment impact. With regards to AMCON, the authorities agreed that an exit strategy is necessary but that this would require time.

D. Structural Reforms to Support Diversification and Inclusive Growth, and Achieve the SDGs

44. Longstanding structural constraints continue to hamper growth and economic diversification (Figures 911). Every third Nigerian reports having paid bribes. The infrastructure gap is 35 percent of GDP compared to emerging market economies, with major challenges in the electricity sector, low and inefficient capital spending, and road and port infrastructure constraining transport and trade. Financial access is one of the main constraints to businesses’ activity (Annex VII).

Figure 9.
Figure 9.

Nigeria: Diversification

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: IMF (2017).
Figure 10.
Figure 10.

Human Development Indicators

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: Nigeria National Bureau of Statistics; World Bank Human Capital Project.
Figure 11.
Figure 11.

Nigeria: Governance and Transparency

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: National Bureau of Statistics; UNODC (2017); Transparency International.1 Note: Use of these indicators should be considered carefully, as they reflect perceptions-based data.2 BPP = Bureau of Public Procurement, CCB = Code of Conduct Bureau, CCT = Code of Conduct Tribunal, EFCC = Economic and Financial Crimes Commission, FHC = Federal High Court, FMoJ = Federal Ministry of Justice, HC FCT = High Court of the Federal Capital Territory, ICPC = Independent Corrupt Practices Commission, NEITI = Nigeria Extractive Industries Transparency Initiative, NFIU = Nigeria Financial Intelligence Unit, NPF = Nigeria Police Force, PCC = Public Complaints Commission, SCUML = Special Control Unit Against Money Laundering, TUGAR = Technical Unit on Governance and Anti-Corruption Reform.

45. Human capital accumulation poses a severe challenge. At 0.5 and 1.7 percent of GDP, spending on health and education are among the lowest worldwide. Education and health outcomes are among the worst globally, with Nigeria ranking among the bottom six countries according to the World Bank’s Human Capital Index. Nigeria hosts the largest number of out-of-school children (about 13–15 million) of primary age worldwide. Access to education is particularly difficult for the poor, and for girls, resulting in large GDP losses (Selected Issues Paper V). On average, one in nine children dies before reaching the age of five (750,000 deaths each year)—most from conditions that are treatable. At current population growth rates, the strain on public services will likely increase further in the next decades.

46. Recognizing weaknesses, the Nigerian government initiated several reforms. Structural reforms efforts in line with the ERGP’s objectives are continuing and include the following welcome initiatives:

  • Improvements in the business environment through the Presidential Enabling Business Environment Council (PEBEC). Nigeria has implemented 140 reforms and improved its Ease of Doing Business score over the past three years. Some of the reforms include the introduction of a collateral and credit registry and of PEBEC terminals, and simplification of procedures/regulations through several 60-day action plans.

  • Progress in deepening financial inclusion. The update of the government’s financial inclusion strategy rightly points to priorities in the sector, and the new payment service regulation that allows telecom companies to acquire licenses for mobile payments operations is expected to contribute to the expansion of mobile payment services (Annex VII).

  • Efforts to improve healthcare and education. Plans for the universal health care fund and the launch of the Second National Strategic Health Development Plan for 2018–22 that rightly identifies challenges, priorities and financing requirements for the sector are welcome, as are ongoing programs to improve access to education, such as through the school feeding program.

  • Continued steps towards improved governance. The NFIU Act, additional resources for the EFCC and initiatives, such as the Whistle-blower policy and the open government initiative are welcome steps towards improving governance. The 2019 Extractive Industry Transparency Initiative (EITI) Board found that Nigeria has fully addressed the corrective actions from the its first validation and made overall satisfactory progress with implementing the EITI Standard.


Indicators of Diversification and Inclusive Growth

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: IMF (2017), IMF diversification toolkit, NBS survey; World Bank Human Capital Project; World Bank Enterprise Survey.1Note: Left hand side: Public education infrastructure (secondary teachers per 1,000 persons); electricity production per capita (thousands of kWh per person); roads (per capita as km per 1,000 persons); and public health infrastructure (hospital beds per 1,000 persons). Right hand axis: Access to treated water (percent of population).

47. Overcoming constraints to economic diversification requires efforts in several dimensions. Staff highlighted the need to:

  • Strengthen the business environment. The authorities’ objective is to reach top 100 in the World Bank’s Doing Business index. Associated reforms would include passing the Companies and Allied Matters Act (CAMA) and the Omnibus bill that combine a range of reforms, including in the area of creditor and insolvency rights, deepening the Subnational Ease of Doing Business project, “naming and shaming” agencies that have not met targets, and mainstreaming PEBEC terminals to gather information on service delivery.

  • Increase public investment efficiency, including through improved procurement and fiscal transparency, and increasing fiscal spending on education and health is essential to achieve the SDGs. Improved information sharing and continued development of the GIFMIS-based database to include all FGN projects would strengthen coordination of national planning of capital investment of states. Establishing a comprehensive single pipeline of appraised projects as the only basis for new project selection would strengthen project prioritization.

  • Accelerate the implementation of the Power Sector Recovery Plan (Box 2), including through reforms necessary to meet financing shortfalls for the power sector, pending a review of the multi-year tariff schedule. To maintain the sustainability of the sector, government agencies must continue paying their bills regularly.

  • Implement the government’s updated financial inclusion strategy, by reforming the regulatory framework, strengthening consumer protection, targeting women to improve financial inclusion, and continued implementation of the registry for movable property.

  • Step up efforts to improve education and health outcomes, including by increasing the budget allocation and regularly releasing funds to ensure predicable program implementation. Pursuing a comprehensive reform to strengthen service delivery, including to improve access for poorer families and for girls, would also be important (Selected Issues Paper V).


Efficiency of Public Investment

(Outcome per one-unit input)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Sources: IMF (2015); 2018 PIMA.Note: The blue area represents the inter-quartile range.

Power Sector Reforms—Where Does the Sector Stand?

Unreliable power supply is hindering economic development and the sector is increasingly a source of fiscal burden, including because of tariff shortfalls. The implementation of the authorities’ Power Sector Recovery Plan (PSRP) remains key to addressing the sector’s financial viability and improving power delivery.

Context. While the installed electricity generation capacity is about 13,000MW, electricity service delivery in Nigeria remains poor, with energy sent out often below 4000 MW/hour. Lack of access to electricity and unreliable electricity supply are key constraints to Doing Business in Nigeria, estimated to result in economic losses of about $29 billion annually (PSRP estimate).

Challenges/Issues. The privatization of the generation and distribution segments in 2013 did not succeed in using the efficiency of the private sector to narrow the infrastructure financing gap and improve service delivery. Distribution companies (DISCOS) were unable to make investments and meet their payment obligations, resulting in insufficient payment to generation companies, which, in turn, were not able to pay their gas suppliers. Main reasons include:

  • Insufficient tariffs for cost-recovery after the naira depreciation in 2016. Tariff shortfalls, estimated at $2.4 billion in 2015–17, would need to be addressed through a combination of cost reduction and a tariff adjustment (of at least a 50 percent rate increase according to some industry analysts).

  • Underperformance. DISCOS did not reduce the high technical, commercial, and collections losses and did not invest in distribution infrastructure update and expansion. Inadequate enforcement of contracts and government agencies not paying their electricity bills also contributed to the underperformance.

Authorities’ initiatives. Cognizant of these weaknesses, the authorities have prepared a comprehensive package of policy, legal and regulatory reforms under the PSRP, approved by the Federal Executive Council in March 2017. The PSRP envisaged clearing the historical shortfalls while ensuring that new “tariff shortfalls” will be fully funded by the government during the transition period while costs are reduced, service delivery is improved, and tariffs are gradually adjusted. However, the financing plan (text chart) has only been partially implemented, as accompanying actions—including implementation of Performance Improvement Plans for DISCOs—have not started. Instead, the government has pursued other initiatives—such as the “eligible customer” policy and the meter asset provider program—which may not be enough to ensure sector sustainability and would need to be harmonized with PSRP implementation. In the meantime, the sector depends on CBN financing (N701 billion approved to date) to meet existing shortfalls.

Urgent reform priorities under the PSRP include securing funding for tariff shortfalls. This should be budgeted, not financed through the CBN, and disbursed conditional upon PSRP implementation. With tariffs below cost recovery, a sustainable solution to reduce the contribution of the government will require improving DISCOs’ performance on the basis of Performance Improvements Plans and tariff adjustments. Governance in the sector would also be improved by the appointment of the Boards of Directors for key sector companies.


PRSP: Financing Plan vs. Actual Funding

(Billions of Naira)

Citation: IMF Staff Country Reports 2019, 092; 10.5089/9781498306140.002.A001

Source: World Bank

48. Addressing gender gaps is critical to boost human capital and generate more inclusive growth (Selected Issues Paper V). This could be achieved by moving ahead with passing and enforcing a number of initiatives, some of which are already under consideration by the authorities, including: (i) passing the “Gender and Equal Opportunities Bill” into law at national and state levels; (ii) enforcing civil and criminal law, e.g. by working with traditional leaders and providing paralegal services for women; (iii) providing adequate and safe access to water and sanitation facilities the lack of which poses a disproportional risk to women and girls, including when attending school; and (iv) ensuring gender-responsive health services.

49. Strengthening governance, transparency and anti-corruption initiatives is also essential (Selected Issues Paper I). Recommendations include: (i) reforming the legal and institutional framework to improve accountability in the public sector, especially the extractive industry as NNPC should work further towards disclosing all revenue transfers and its remittances to the Federation Account; (ii) ensuring transparency (e.g., on beneficial ownership); (iii) more consistently and comprehensively addressing the risks posed by politically exposed persons and reinforcing the asset declaration regime; and (iv) strengthening AML/CFT supervision. Broader governance reforms proposed elsewhere in this report to strengthen tax administration, procurement, market regulation, central bank governance, FX policies, and financial sector oversight would further reduce vulnerabilities to corruption.

Authorities’ Views

50. The authorities reiterated that they are fully cognizant of Nigeria’s structural impediments including inadequate infrastructure, bottlenecks in improving the business environment, and governance weaknesses. They remain committed to implementing the ERGP’s diversification agenda, including through developing industrialization, agriculture, and the power sector, and strengthening anti-corruption efforts. They noted that reforms in the power sector are ongoing, with increased electricity generation, ongoing initiatives to improve metering and through the eligible customer program able to sustain the viability of the sector. The authorities emphasized their commitment to improving health and education outcomes, including through allocating 1 percent of consolidated revenues to the universal health care fund and continuing efforts towards universal basic education.

Other Surveillance Issues

51. Data provided to the Fund are assessed to be broadly adequate for surveillance. Efforts to improve statistical data are welcome. Further improvements in national accounts, CPI, BOP, and cross-border banking statistics are ongoing with help from Fund technical assistance. Further improvements are needed in SLG fiscal data, SOE fiscal operations, and domestic arrears monitoring. Continuing to adhere to a regular schedule to produce high frequency statistics is important for continued credibility of statistics, which require consistent funding.

52. Technical assistance (Annex VIII)—including through AFRITAC West—is expected to support the authorities’ key policy objectives highlighted in Fund surveillance. Capacity development focuses on key policy areas including non-oil revenue mobilization, PFM, debt management and statistics. While these focal areas are appropriate, further commitment to achieving the authorities’ objectives is needed, particularly as regards to non-oil revenue mobilization. The authorities agree with the priorities identified and value the importance of Fund technical assistance and training— including on tax policy and on DSA/PPP training. They suggested that results could be further enhanced through better delivery methods focused on a limited number of key areas and more training being held in Nigeria.

Staff Appraisal

53. Nigeria’s economic recovery is ongoing but remains insufficient to reduce vulnerabilities and poverty. Non-oil growth is picking up, inflation has fallen significantly, exchange rate windows are converging, and reserve buffers have strengthened. However, inflation remains high, non-oil revenue mobilization is low, foreign exchange markets are still segmented, and reserves are highly dependent on hot money. A combination of factors—including a large infrastructure gap and governance weaknesses—are also contributing to keeping growth rates below historical trends, per capita growth negative, and human development outcomes weak.

54. The outlook remains challenging. Under current policies, overall growth would hover around 2½ percent over the medium term—implying no progress in per capita growth—as the economy continues to be hampered by insufficient policy adjustment and progress in structural reforms. Risks to the outlook are moderately tilted downwards, reflecting additional delays in policy and reform implementation, falling oil prices and tighter global financial market conditions.

55. The priorities of the government’s Economic Recovery and Growth Plan (ERGP) remain valid and should be implemented. There has been some progress in foreign exchange market reforms, increasing external buffers, keeping a tight monetary policy to reduce inflation, stronger tax administration, strengthening the business climate and implementing part of the anti-corruption strategy. However, the pace of reforms still falls short of the ERGP objectives, particularly in increasing revenue, reducing unemployment, or reforming the power/petroleum industries.

56. A set of comprehensive and coherent policy actions—most of them in line with the ERGP—is urgently needed to address existing vulnerabilities and raise growth. This includes critical actions on a revenue-based fiscal consolidation while increasing social and capital spending, maintaining a tight monetary policy with an improved policy framework and a unified market determined exchange rate, and faster implementation of the structural reform agenda to tackle longstanding weaknesses inhibiting economic diversification. Delays in policy and reform implementation could make the inevitable adjustment more difficult and costlier, particularly in view of Nigeria’s current demographic trends.

57. The authorities are encouraged to pursue a revenue-based fiscal consolidation. Staff agrees with the MTFF’s focus on fiscal consolidation and welcomes the authorities’ plans to increase non-oil revenue through tax policy and administration measures. Achieving an increase in non-oil revenue of 8 percentage points of GDP by 2024 would require additional excises, and implementing a comprehensive VAT reform (e.g., through an annual registration threshold and a rate increase). Staff regrets the introduction last year of new tax incentives and VAT exemptions, which have not been costed and narrow the tax base. A fiscal adjustment of about 3 percent of GDP based on revenue mobilization is needed over the medium term to ensure an interest payment-to-FG revenue ratio that is sustainable and in line with the authorities’ own target, while creating space for priority spending.

58. Shifting the expenditure mix towards priority areas is critical to achieve the SDGs and diversification. The full implementation of the automatic fuel price-setting mechanism would remove inefficiencies and generate additional space for priority spending, even after scaling up social safety nets to mitigate the impact on the most vulnerable. Staff welcomes the significant increase in public investment last year, but this needs to be accompanied by improved public investment efficiency—including through improved procurement and fiscal transparency. Increasing the budget allocation and regular release of funds for health and education will be essential to allow for predictable implementation of programs in these sectors.

59. Stronger coordination is needed to increase the efficiency of public debt management and improve cash management. This includes making more effective use of the Treasury Single Account, while ensuring greater coordination of open market operations and T-bill issuances. The strategy aimed at increasing the share of external debt to 40 percent of total debt remains appropriate but will require careful monitoring of the associated exchange rate risk.

60. With inflation still above target, maintaining a tight monetary policy remains appropriate. Staff welcomes the CBN’s tightening bias in 2018. However, it recommends that existing heterodox policies be replaced by more traditional methods, such as raising the MPR or CRR. Unannounced special OMOs, asymmetric application of CRR, and direct central bank interventions in the economy should be ended as they complicate liquidity management and the conduct of monetary policy. CBN bills, to be issued at shorter maturities, should be used to manage liquidity only.

61. Moving towards a unified market-based exchange rate would support diversification and inclusive growth and reduce vulnerabilities. Nigeria’s external position was moderately weaker in 2018 than implied by medium-term fundamentals and desirable policies. The progress towards convergence of exchange rate windows is welcome and should be pursued towards full unification around the market-based rate. Removing FX restrictions, including restrictions to FX access for 42 categories of products, and other capital flow management measures would remove distortions in private and public decision making, increase transparency, and facilitate the move towards a more diversified economy. At the same time, continuing to strengthen external buffers would mitigate risks from capital flow reversals.

62. Banking sector resilience should be strengthened and the framework for banking resolution enhanced. Improved prudential ratios are welcome. However, restructured loans and undercapitalized banks continue to weigh on financial sector performance. This needs to be addressed through strengthened capital buffers, risk-based supervision, no more regulatory forbearance, and credible time-bound recapitalization plans for weak banks. To help contain risks, better coordination amongst supervising authorities and a revamped banking resolution framework are necessary, including through establishing a timeline for phasing out AMCON, which should no longer purchase distressed assets. To ensure potential capital needs in the banking sector are adequately assessed, the authorities are encouraged to conduct an Asset Quality Review of the ten largest banks.

63. Supporting economic diversification and SDGs requires improved infrastructure, a better business climate, stronger governance, and addressing gender inequality. Urgently implementing the power sector recovery program, adopting the Petroleum Industry Governance Bill, strengthening governance and transparency initiatives, and reforms within the health and education sectors are essential to increase human and physical capital, boost productivity and diversify the economy. These initiatives—which are all part of the ERGP priorities—should be complemented by the implementation of the government’s financial inclusion strategy and policies to reduce gender inequities, particularly in access to education and health services.

64. Staff does not support the exchange measures that have given rise to the exchange restrictions and multiple currency practices. In the absence of a clear timetable for their removal, staff is not in a position to recommend approval of the exchange restrictions and MCPs. Staff urges the authorities to articulate a speedy and monitorable strategy for their removal to help strengthen the functioning of the foreign exchange market and allow further convergence of the multiple exchange rates.

65. The quality and availability of economic statistics continue to improve, including through technical assistance. Efforts should continue to strengthen data quality further, by addressing remaining gaps, notably in national accounts, BOP, and fiscal statistics including SLG and SOE operations. Regular funding is essential for ensuring high frequency and regular publication of statistics, which is key for its continued credibility.

66. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Nigeria: Selected Economic and Financial Indicators, 2016–24

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

Gross debt figures for the Federal Government and the public sector include overdrafts from the Central Bank of Nigeria (CBN) and AMCON bonds (N 4.1 trillion). On a net basis, the overdrafts and government deposits at the CBN almost cancel out, and AMCON net debt reduces to N 2.4 trillion.

Includes both public and private sector.

Table 2.

Nigeria: Balance of Payments, 2016–24

(Billions of U.S. dollars)

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

The 2018 number reflects the outturn and a zero forecast for the remaining quarters.

Nominal public short- and long-term debt, end of period. Guaranteed external debt not included. External public debt for the purpose of BoP is based on a residency definition.

Table 3.

Nigeria: Federal Government Operations, 2016–24

(Billions of Naira)

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

Includes earmarked spending for National Judicial Council, Universal Basic Education, Niger Delta Development Corporation, and Multi-Year Tariff Order

Gross debt figures for the Federal Government and the public sector include overdrafts from the Central Bank of Nigeria (CBN). Please see footnote 1 of SEI

Net transfers to SLGs include Paris Club refunds, Budget Support Facility, and on-lending by the FGN.

Table 4.

Nigeria: Consolidated (General) Government, 2016–24

(Billions of Naira)

article image
Sources: Nigerian authorities; and IMF staff estimates and projections.

Includes spending of customs levies and education tax; transfers to FIRS and NCS; spending from the ecology, stabilization, development of natural resources accounts; and FCT spending.

Includes projects not included in the FGN budget, even though funds are on lent by FGN.