Introduction

Our Nigerian authorities appreciate the productive engagement with staff during the 2022 Article IV Consultation. They broadly share the thrust of staff’s assessment of economic developments and key policy priorities.

The Nigerian economy continues to recover from the COVID-19-induced output losses. Nevertheless, spillovers from the Russia-Ukraine war have generated renewed price and currency pressures, as well as elevated food insecurity risks. At the same time, the country experienced devastating floods which weighed on growth in 2022. Notwithstanding the challenging domestic and external environment, the authorities remain committed to prudent policies aimed at steering the economy towards an accelerated growth trajectory. Specifically, they remain committed to prudent fiscal management to place public debt onto a sustainable footing, alongside a tight monetary policy aimed to restore price stability. Moreover, they maintain steadfast structural reform efforts geared to accelerate the post-pandemic recovery by fostering inclusive, diversified, and sustained economic growth, as articulated in the National Development Plan (NDP 2021–2025).

Recent Economic Developments and Outlook

Real GDP growth rebounded from -1.8 percent in 2020 to 3.6 percent in 2021 before moderating to 3.0 percent in 2022. In the main, the economic recovery was driven by higher performance in the non-oil sector, particularly services, agriculture, and manufacturing, and firming international oil prices. The increased value-addition from these sectors offset the setback experienced in the oil sector, including illegal activities such as theft and limited investment which culminated in below OPEC quota oil production. Nevertheless, the authorities are more optimistic on the impact of Dangote’s refinery coming onstream; and given efforts to curb leakages in the oil industry, growth is projected at 3.2 percent in 2023. Meanwhile, the headline inflation rate fell slightly from 21.47 percent in November 2022 to 21.34 percent in December 2022, due to an increase in food supply at the onset of the harvesting season. Looking ahead, inflation is expected to decline to 15.1 percent in 2023 and 11.5 percent in 2024 due to expected easing of food supply constraints. The growth outlook, however, remains challenged by higher international prices of imported commodities and rising global interest rates.

The current account balance improved from -0.4 percent of GDP in 2021 to 0.1 percent of GDP in 2022, supported by favorable terms of trade and improved external demand. Nonetheless, gross official reserves decreased from 6 to 5.7 months of import on the back of net capital outflows. Looking ahead, external sector performance is expected to improve benefitting from the expected improvements in oil production and reduced imports of petroleum products.

Fiscal Policy

The authorities remain committed to strengthening fiscal management and moderating the level of debt related risks. They have made incremental improvements to the fiscal structure through the introduction of yearly Finance Acts to enhance domestic revenue generation. Further, the authorities have prioritized strengthening the non-oil revenues to diversify its revenue sources away from crude oil and control its growing budget deficit. In this regard, the expansion of excise duties in the 2022 Finance Act is aligned with Nigeria’s National Tax Policy, which primarily focuses on indirect taxes, and a concomitant decrease in direct taxes.

Over the medium-term, the authorities intend to increase the more stable non-oil revenues, by improving tax administration and collection efficiency, enhancing compliance, reorganizing the business practices of revenue agencies, and employing appropriate technology. Actions taken as part of the Strategic Revenue Growth Initiative (SRGI) are expected to boost tax collections while eliminating leakages. In addition, the authorities’ plan to bring more businesses in the informal sector into the tax bracket while the Nigeria Customs Service (NCS) will introduce frameworks for recovering duties, uncollected taxes, and appropriate fees from electronic transactions. At the same time, the government is committed to enhancing port efficiency, strengthening anti-smuggling measures, reviewing tariffs and waivers, and issuing more licenses to build modern terminals in existing ports, especially outside Lagos. Concurrent efforts will be directed towards optimizing the operational and collection efficiency of government-owned enterprises (GOEs) to further enhance independent revenue generation and collection, while enforcing existing laws to limit the GOEs’ cost-to-revenue ratio to a maximum of 50 percent. Similarly, Technology and ICT solutions will be effectively deployed to ensure compliance and enhance existing and new revenue streams. Further, the performance of GOEs will be enhanced through the effective implementation of the approved Performance Management Framework.

The authorities plan to gradually remove the Petrol subsidy starting in April 2023, with the goal of eliminating the expenditure line altogether by mid-2023. At the same time, they intend to conduct awareness campaigns on the merits of removing inefficient subsidies, while taking applicable measures to prevent any social unrest considering political economy dynamics of fuel subsidy reforms. In addition, efforts to rationalize expenditures while strengthening social safety nets to cushion the most vulnerable, continue to rank high on the authorities’ agenda. Specifically, they plan to focus more on the efficient utilization of limited resources by implementing additional measures towards reducing the cost of governance. Further, the government has expanded the coverage of the integrated Payroll and Personnel Information System (IPPIS) to include all MDAs to reduce the prevalence of ghost employees and wasteful salary payments.

Our authorities are determined to strike an optimal external/domestic debt mix to mitigate exchange rate risks while shifting the domestic debt portfolio to long-term maturities, and mitigating refinancing risks. Further, the authorities will continue to operate within the Fiscal Responsibility Act of 2007, restricting borrowing to high return capital and human development spending. Furthermore, they will continue to utilize appropriate debt management tools to streamline the cost and risk profile of the debt portfolio.

The authorities are combating illegal activities in the oil industry, including by making substantial investments in pipeline surveillance security through the Armed Forces’ regular budget and making payments to private security companies under unique arrangements. Further, the government has signed into law the Petroleum Industry Act, 2021 (PIA) and have taken other measures to improve the fiscal regime in the oil and gas sector as well as the overall security framework.

Monetary and Exchange Rate Policy

Monetary policy has remained tight to contain inflation, reduce the negative real effective interest margin, boost market sentiment, and restore investor confidence. To this end, the CBN increased the policy rate at its last two MPC meetings in November 2022, and January 2023, by 100 basis points, respectively. Consequently, month-on-month inflation is trending downwards. Going forward, the Bank will sustain disinflationary efforts to consolidate gains made thus far, and anchor inflation expectations and preserve credibility. The CBN expects its monetary tightening to boost domestic yields and moderate foreign exchange (FX) demand. The CBN also remains committed to reviewing the monetary policy program periodically to guarantee consistency with changing global and domestic macroeconomic conditions and ensure the effectiveness of its monetary policy instruments. The CBN will continue to focus on maintaining price stability through its monetary and operational framework.

The CBN phased out the official exchange rate and regards the Nigerian Autonomous Foreign Exchange (NAFEX) market-determined Investor and Exporters (I&E) rate, as the key reference exchange rate. Our authorities remain committed to ultimately permit complete market mechanisms, subject to careful planning and management of such a transition, particularly in light of the ongoing rollout of the eNaira, and associated risks. Further, the CBN is committed to strengthening the exchange rate supply policies and other initiatives to improve foreign exchange (FX) supply in the economy. The Bank considers the “Race to $200 billion in FX Repatriation (RT-200) policy” as useful in moderating pressure in the FX market, given the pass-through to domestic prices. In addition, the “Naira for Dollar Scheme” continues to support the inflow of fx into the economy. The CBN is committed to completing the securitization of its overdraft to the federal government.

Financial Sector Policy

The financial system has remained safe and sound, while strong capital buffers and ample liquidity helped banks to weather the recent shocks. The non-performing loans (NPLs) ratio declined further to 4.8 percent, below the prudential benchmark of 5.0 percent. This reflects improvements in industry risk management practices and the implementation of regulatory policies to manage NPLs, such as the Global Standing Instruction (GSI) Policy. The CBN is also committed to maintaining regulatory vigilance to mitigate crystallization of credit and other risks in the financial system in view of lingering macroeconomic risks. Further, sustained implementation of the Global Standing Instruction (GSI) Policy and effective credit risk management policies by the banks have been useful while recent CBN initiatives such as the Naira redesign, are expected to enhance monetary policy transmission.

To foster financial inclusion, the CBN plans to expand the features and uses of the eNaira to include offline eNaira payment solutions, including cross-border payments, ensuring interoperability with other CBDCs, and supporting multiple signatory wallets, among others. They are also committed to increasing the number of banking agents in underserved regions and providing more targeted training in using financial products. In that context, the government has adopted five key policy frameworks and initiatives, aimed at increasing the adoption and usage of financial services in priority demographics, enabling robust financial services infrastructure, expanding digital financial services and platforms, and improving financial inclusion coordination, capacity, and governance. This will also help meet the government’s target of achieving 95 percent financial inclusion rate by 2024. The CBN continues to keep track of the growing fintech industry, using a regulatory sandbox, increasing the usage of code-based phone transactions, and mandatory data exchange between banks and fintechs to help maintain a secure, sound, and stable financial system. The authorities appreciate the Fund’s continued technical and policy support at different phases of the eNaira initiative.

Structural Reforms

Structural reforms to accelerate the post-COVID economic recovery through the NDP 2021– 2025 ranks high on the authorities’ agenda to promote an inclusive, diversified, and sustained economic growth. To this end, the authorities will continue to create an enabling environment for private sector development, including by promoting competitiveness, enhancing investor appeal, contributing to employment creation, and uplifting living standards. In this context, economic diversification remains a top priority of the government. Broadly, the authorities designed a development plan that includes complementary infrastructure and reforms required to diversify away from oil dependence, reduce inequality and unemployment, build strong and effective institutions, and tackle governance challenges. Further, the government has prioritized investment in public utilities, notably transportation networks, energy supply, and human capital to enhance the business climate and buttress growth objectives.

The government approved a new anti-corruption strategy policy which is an extension of the National Anti-Corruption Strategy Document from 2022–2026, to further address corruption and facilitate investments. The proceeds from the fight against corruption have been ploughed into the nation’s economy as a means of impacting the livelihoods of Nigerians through school feeding programs and the trader money initiative, among others. The Economic and Financial Crimes Commission (EFCC), for example, secured over 3,000 convictions and recovered over $1 billion in 2022. To further improve governance, the authorities will enhance public financial management reforms to reduce revenue leakages and align actual expenditures with revenue performance.

The authorities continue to improve the policies, processes, and controls for an effective AML/CFT framework. They have taken actions in response to the 2021 GIABA Mutual Evaluation Report to address deficiencies identified in Nigeria’s 2nd round of mutual evaluation and lessen the risk of a grey listing by the Financial Action Task Force (FAFT). In this regard, the authorities enacted the Money Laundering (Prevention and Prohibition) Act (MLA), 2022; the Terrorism (Prevention and Prohibition) Act (TPPA), 2022; and the Proceeds of Crime (Recovery and Management) Act, 2022. The enactment of MLA 2022 provides a comprehensive legal and institutional framework for the prevention and prohibition of money laundering in Nigeria, while the TPPA 2022 provides for a unified and comprehensive framework for the detection, prevention, prohibition, and prosecution of acts of terrorism, terrorism financing, and proliferation.

The Nigerian authorities are dedicated to ensuring that the African Continental Free Trade Agreement (AfCFTA) comes into effect by 2023, with implications to boost the country’s non-oil exports while enhancing its global competitiveness to unlock mutual benefits from improved trade. In this context, they plan to remove impediments in accordance with the agreed protocols to facilitate free trade, taking advantage of Nigeria’s advanced banking system, thriving digital economy, and enduring customs reforms.

Conclusion

Our authorities are committed to maintaining macroeconomic stability and addressing structural impediments to spur durable and inclusive growth. They plan to implement an appropriate mix of coordinated macroeconomic policies to foster resilience. Broadly, our authorities are committed to ensuring transparency and accountability across all policy levers. Finally, they appreciate Fund advice and technical support and look forward to Executive Directors’ support in concluding the 2022 Article IV Consultation.