Nigeria: 2024 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Nigeria

1. A decade of limited reforms, muted growth, security challenges and now high inflation have contributed to food insecurity, poverty, and macroeconomic weakness (Annex I). Nigeria exited the Covid-19 recession quickly, but per-capita income has stagnated. While non-oil growth averaged 4 percent in 2021/23, the hydrocarbon economy declined by 14 percent. The poverty rate was 46 percent in 2023,1 and estimates show 19 million Nigerians (8 percent of the population) as food insecure (Text Figure 1).2 Social tensions are elevated, and there have been some instances of food warehouses being looted. Kidnapping for ransom is on the rise, including of school children. Nigeria is impacted by climate change with increasing frequency of weather-related events. The challenging macroeconomic environment has triggered the exit of some foreign companies.

Abstract

1. A decade of limited reforms, muted growth, security challenges and now high inflation have contributed to food insecurity, poverty, and macroeconomic weakness (Annex I). Nigeria exited the Covid-19 recession quickly, but per-capita income has stagnated. While non-oil growth averaged 4 percent in 2021/23, the hydrocarbon economy declined by 14 percent. The poverty rate was 46 percent in 2023,1 and estimates show 19 million Nigerians (8 percent of the population) as food insecure (Text Figure 1).2 Social tensions are elevated, and there have been some instances of food warehouses being looted. Kidnapping for ransom is on the rise, including of school children. Nigeria is impacted by climate change with increasing frequency of weather-related events. The challenging macroeconomic environment has triggered the exit of some foreign companies.

Context

1. A decade of limited reforms, muted growth, security challenges and now high inflation have contributed to food insecurity, poverty, and macroeconomic weakness (Annex I). Nigeria exited the Covid-19 recession quickly, but per-capita income has stagnated. While non-oil growth averaged 4 percent in 2021/23, the hydrocarbon economy declined by 14 percent. The poverty rate was 46 percent in 2023,1 and estimates show 19 million Nigerians (8 percent of the population) as food insecure (Text Figure 1).2 Social tensions are elevated, and there have been some instances of food warehouses being looted. Kidnapping for ransom is on the rise, including of school children. Nigeria is impacted by climate change with increasing frequency of weather-related events. The challenging macroeconomic environment has triggered the exit of some foreign companies.

Text Figure 1.
Text Figure 1.

Nigeria: Poverty and Food Insecurity

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: Cadre Harmonisé, WFP; Haver Analytics, National Bureau of Statistics, and IMF World Economic Outlook.1/ The least expensive combination of items that meet the needed requirements for a healthy diet.

2. The external environment remains challenging. With tight global financial conditions, market access is expensive. Global commodity prices have declined but remain high which contributes to food insecurity and inflation. However, elevated oil prices support growth, FX inflows and government revenue.

3. The new administration assumed office in May 2023, aiming to stabilize the economy and raise growth. In their first months in office, the authorities reformed the fuel price subsidies and unified the foreign exchange windows, two long-standing elements of a package of Fund recommendations that also included as essential elements strengthening social protection and tightening macroeconomic policies (Text Table 1).3 The authorities' reform plans are appropriately focused on revenue mobilization, governance, and enhancing the exchange rate and monetary policy frameworks. The authorities have requested CD in these areas (Annex II). Given the acute food insecurity situation combined with large social and development needs, achieving some quick wins that benefit the population and implementing pro-growth reforms is essential for social cohesion.

Text Table 1.

Nigeria: Implementation of Past Policy Advice

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Recent Economic Developments and Outlook

4. Growth slowed to 2.9 percent in 2023. Growth slowed to 2.5 percent in 2023H1, reflecting weakness in agriculture, hydrocarbon, and trade, but improved to 3.2 percent in 2023H2, driven by the financial sector, mining and quarrying, and information technology. For 2024, growth is projected at 3.3 percent, reflecting increased oil production and improved agriculture with better security. Medium-term growth is projected at 3.3 percent, with improvements in agriculture from the introduction of dry season farming and continued steady gains in the non-oil sector.

5. Headline inflation reached 32 percent year-on-year in February 2024. On the supply side, the continuous acceleration since 2022 reflects poor agricultural production (food inflation was 38 percent year-on-year, core inflation 25 percent in February), higher energy and transportation costs following the fuel subsidy reform and pass through from naira depreciation (Text Figure 2). Reacting to accelerating food prices, the authorities are enforcing a food (grains) export ban, a measure that can exacerbate economic distortions. Financial conditions remained loose in 2023, contributing to naira weaknesses and accelerating inflation (Annex IV). With continued monetary tightening, inflation is projected to gradually decline to 24 percent year-on-year at end-2024, helped by base effects.

Text Figure 2.
Text Figure 2.

Nigeria: Inflation and Financial Conditions

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: Bloomberg, Haver Analytics, National Bureau of Statistics, Fund Staff calculations and estimates.

6. Revenue collection strengthened and expenditure leakages were reduced in 2023. As a result, the fiscal deficit fell to 4.8 percent of GDP from 6.7 percent of GDP in 2022 when measured from the financing side. Hydrocarbon revenue was largely driven by the depreciation effect. Enhanced revenue administration and naira depreciation yielded 0.8 percent of GDP increase in nonoil revenues. Expenditure rationalization and restraint allowed for a one-off wage award to buffer the impact of high inflation for civil service staff. The deficit was financed mainly from domestic sources, as anticipated external financing did not materialize. Monetization of the fiscal deficit continued through May 2023 to the tune of 2.6 percent of GDP—before the new government took over—and was reduced by the new economic team to 2.2 percent of GDP for the year as a whole. Government debt rose by 7 percentage points to 46 percent of GDP at end-2023, driven by naira depreciation.

7. Gross international reserves (GIR) declined in 2023 (Text Figure 3). The current account balance is estimated to have improved marginally in 2023 relative to 2022, with oil production recovering towards year-end and import compression in the non-oil and gas sector. The financial account worsened due to persistent capital outflow pressures, while FDI remained subdued. Errors and omissions are estimated at -$7/ billion at end-2023. The CBN-reported 30-day average of GIR declined by $3.6 billion in 2023 to $33 billion at end-December, covering around 5 months of imports and 81 percent of the IMF's ARA metric (61 percent of the ARA metric with oil buffer). Under the IMF's definition, GIR were $8 billion lower at end-October, based on information shared by the authorities at the time. With the $3.3 billion Afrexim Bank loan (Box 1), GIR are projected to stabilize around $33 billion at end-2024 and recover to $38 billion by 2029, with portfolio inflows and FDI gradually improving.

Text Figure 3.
Text Figure 3.

Nigeria: External Sector

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: Central Bank of Nigeria, Fund staff estimates.1Based on the IMF's definition, GIR were $8 billion lower at end-October 2023.

8. Pressures on the naira persist notwithstanding substantial reforms. The new CBN leadership has made wide ranging reforms to the exchange rate regime and the functioning of the FX market to address distortions from a tightly managed exchange rate that was assessed to be overvalued in real effective terms at end-2022. As a result, the naira depreciated by around 100 percent against the U.S. dollar from 461 naira/US dollar in May 2023 to 900 naira/US dollar at end-2023 after the unification of the official foreign exchange windows in June 2023 (Text Figure 4). The exchange rate depreciated by another 40 percent in January/February 2024, while the parallel market premium narrowed to -5 percent at end-February, following further regulatory changes to improve transparency in pricing. In March, the naira strengthened further following the February MPC decision and CBN fx sales to Bureaux de Change operators and banks which the authorities note were intended to inject liquidity.

Text Figure 4.
Text Figure 4.

Nigeria: Exchange Rates and Foreign Exchange Market Turnover

(January 3, 2023, to March 8, 2024)

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: Nigerian authorities and Fund staff calculations

9. The financial sector remains stable, with asset quality expected to deteriorate and pockets of risk emerging. At end-2023, most commercial banks reported profits thanks to FX valuation gains, and banks' capital adequacy ratio (CAR) improved to 13.3 percent.4 Three commercial banks that were unable to meet capital requirements have been placed under a special supervisory regime. Two development finance institutions are severely undercapitalized. Last year, CBN revoked the licenses of 132 insolvent microfinance banks, four mortgage banks, and three finance companies. NPLs stood at 4 percent for commercial banks but are rapidly increasing at microfinance banks (14 percent), development finance institutions (19 percent), and mortgage banks (20 percent). Fund CD has revealed that some commercial banks have delayed NPL recognition by granting bullet loans. Pension fund administrators are the second largest institutional investors after banks and realized negative real rates of return due to high inflation and naira depreciation.

10. Authorities’ Views. The authorities aim for higher growth over the medium-term on the back of reforms under preparation, noting that measures to increase dry-season agriculture and increasing hectares under cultivation will significantly improve output and food security. They also expect further gains in oil production once new investment projects commence. The authorities target a faster pace of disinflation, expecting swift improvements in monetary transmission.

Risks

11. Near-term risks to the outlook are to the downside. The RAM (Annex V) illustrates the challenging environment faced by the authorities.

  • Worsening food insecurity. Continued naira depreciation and food price inflation, weaknesses in the agricultural sector—including from deteriorating security or another weather shock—or a renewed spike in global commodity prices could worsen food insecurity, giving rise to higher social spending needs amidst limited fiscal space.

  • Reform pauses or policy reversals. Sustaining the reform momentum could become challenging if food insecurity becomes worse or growth declines sharply. Rolling out the social protection system can mitigate this risk.

  • Oil production shocks. An adverse oil production—e.g., if onshore security conditions worsen again—or price shock would hit fiscal revenue, inflation, and the exchange rate.

  • External risks. Intensification of regional conflicts such as Russia's war in Ukraine or tensions in the Middle East could disrupt trade flows, affecting critical supply chains, and financial flows. Increases in non-fuel commodity prices could fuel inflation.

12. Governance challenges and AML/CFT deficiencies pose risks to cross-border payments and borrowing costs. Nigeria was listed by the FATF in 2023 for increased monitoring due to strategic AML/CFT deficiencies ("grey listing”). While Nigeria has made progress in addressing identified deficiencies, lack of sustained action could impact correspondent banking relationships and financial flows. Financial integrity events due to weak AML/CFT preventive controls or ineffective risk-based supervision may impact financial stability.

13. Nigeria also faces significant long-term risks. Climate change is already adversely affecting agriculture and could impact coastal areas. Diversification away from the hydrocarbon sector becomes necessary if the global energy transition gathers momentum, though for now, hydrocarbon revenues remain key for fiscal and external sustainability.

14. On the upside, determined and well-sequenced implementation of the authorities’ policy intentions would pave the way for faster, more inclusive, resilient growth. A package of policies that restores macroeconomic stability through a tightening of policies to rein in inflation and reduce naira pressures, combined with structural reforms to ease trade barriers, strengthen the business environment, and support climate resilience will boost confidence, increase investment, and incentivize job creation. Addressing the security challenges in the agriculture and oil sectors is critical. Efforts to strengthen FX inflows from hydrocarbon exports, including by further enhancing transparency, would improve the fiscal and external balances.

15. Authorities’ Views. The authorities broadly agreed with the risk assessment, including the urgency of responding swiftly to food insecurity. They emphasized that policies are already geared towards addressing these risks and restoring macroeconomic stability, while driving a sustained growth acceleration. They emphasized risks to external stability from illicit flows, including through crypto asset platforms, which they are addressing.

Policy Discussions

Acknowledging that the authorities inherited a difficult economic situation marked by deep-rooted imbalances that were built up over years and low growth, discussions focused on how Nigeria can tackle three interlinked macroeconomic policy challenges: acute and rising food insecurity; high and accelerating inflation and naira pressures; and low revenue mobilization.

A. Fiscal Sustainability for Inclusive Growth

16. Fiscal policy needs to support vulnerable households, create space to boost social and development spending, and maintain debt sustainability. Fiscal policy is held back by one of the lowest revenue takes in the world of 9.4 percent of GDP in 2023 (Text Figure 5). As the government finalizes and presents its reform agenda, sequencing will be key to ensure safety nets are in place or strengthened before proceeding with other measures that could adversely impact poor and vulnerable households.

Text Figure 5.
Text Figure 5.

Government Revenue

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

17. Staff welcomed the authorities’ ambitious revenue mobilization strategy under preparation. Nigeria’s Medium Term Economic Framework (MTEF) outlines reforms to improve domestic revenue mobilization and diversify the economy. A Presidential Committee on Fiscal Policy and Tax Reforms is developing a comprehensive revenue mobilization strategy which aims to simplify the tax structure and revamp key tax legislation for which the Fund stands ready to provide CD or desk reviews. Staff notes that achieving fast and large revenue gains as envisaged by the authorities will require determination and political capital. Staff welcomes the authorities’ cautious approach of making additional spending conditional on having achieved revenue gains. Budget credibility can be enhanced through improvements in fiscal reporting and monitoring, and reporting of fiscal risks from PPPs can be enhanced, as identified by Fund CD support.

18. Revenue measures in 2024 focus on revenue administration and base broadening. The authorities aim to ease payment of tax remittances from Ministries, Departments, and Agencies, leverage technology and third-party reporting to broaden the tax net and enhancing excise collections by transferring administrative responsibilities to the Federal Inland Revenue Service. Excises on telecommunications, lotteries, and gambling are under consideration but have been delayed. The authorities' planned reforms in 2025 include raising the VAT rate—while introducing input credits for services and assets—increased excises on tobacco and alcohol, and rationalization of tax incentives accompanied by a reduction of the corporate income tax (CIT) rate to enhance competitiveness. Staff revenue projections reflect these policy intentions of the authorities— estimated gains compare well with what peers have achieved. Staff stressed that it will be important to have these measures finalized, quantified, and adopted with the 2025 budget.

Text Table 2.

Nigeria: Revenue Mobilization, 2024-29

(in percent of GDP)

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Note: The baseline assumes an increase in the VAT rate from 7.5 percent to 10 percent in 2025, and to 15 percent in 2026.

19. Staff proposed targeting a decline in the Federal Government of Nigeria (FGN) interest-to-revenue ratio as a guide to medium-term fiscal policy direction. This would create fiscal space, address a core fiscal vulnerability and is relatively simple to implement. With the authorities' revenue agenda under preparation (Text Table 2), the FGN interest-to-revenue ratio declines from 88 percent in 2022 to 67 percent in 2026 before increasing again in staff's projection. To keep the ratio on a downward trend towards the range achieved by peers, further revenue effort will be needed over the medium-term.

20. Expenditure reprioritization is needed to create space for social protection and other priority spending. The authorities have recently approved an enhanced social transfer mechanism developed with World Bank support, and some initial payments have been made. In response to governance concerns, the authorities automated and digitalized the system to build a robust mechanism that delivers swift and targeted support to vulnerable households—some 15 million households or 60 million Nigerians potentially benefit from the scheme. Once the safety net has been scaled up and inflation subsides, the government should tackle implicit fuel and electricity subsidies. With pump prices and tariffs below cost-recovery, implicit subsidy costs could increase to 3 percent of GDP in 2024 from 1 percent of GDP in 2023. Staff noted that these subsidies are costly and poorly targeted, with higher income groups benefiting more than the vulnerable. Budget credibility can be enhanced through improvements in fiscal reporting and monitoring, including on fiscal risks from PPPs, as identified by Fund CD support.

21. Staff projects a higher fiscal deficit than anticipated in the 2024 budget, but broadly unchanged from 2023 (Text Figure 6). The drivers are: (i) lower oil/gas revenue projections, reflecting IMF oil price forecasts but incorporating recent production gains; (ii) higher implicit fuel and electricity subsidies; (iii) continued suspension of excise measures included in the MTEF; and (iv) higher interest costs. In addition, the authorities noted that a supplementary budget may be needed to accommodate the outcome of the ongoing wage structure negotiations which may exceed what they had included in the 2024 budget. Staff factors in an under-execution of capital expenditure in line with past outcomes and estimates an FGN deficit of 4.5 percent of GDP relative to the 2024 budget target of 3.4 percent of GDP. For the consolidated government, this implies a projected deficit of 4.7 percent of GDP in 2024—compared to 4.8 percent of GDP in 2023 measured from the financing side—which is appropriate given the large social needs and factoring in a realistic pace of revenue mobilization. Over the medium-term, staff projects consolidation in the non-oil primary deficit. With rising interest costs, government debt stabilizes towards the end of the projection period.

Text Figure 6.
Text Figure 6.

Baseline Fiscal Projections and Government Debt

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: Nigerian authorities; and Fund staff calculations and projections.1 Gross debt figures for the Federal Government and the public sector include overdrafts from the Central Bank of Nigeria (CBN).

22. Staff projects that the government’s 2024 net financing needs can be met from the market and external borrowing. Domestic market financing needs increase by 1.5 percent of GDP over 2023. Based on staff’s projections, the authorities must raise the domestic and external borrowing ceilings to prevent renewed recourse to CBN financing. With higher interest rates, banks and nonbanks should have sufficient appetite—as indicated by market sources—conditional on careful management of system liquidity, including a likely reduction in the currently high cash reserve requirement (CRR). In addition, the government wants to retire outstanding ways and means borrowing from the CBN of 2.5 percent of GDP through the issuance of further domestic securities. While staff agrees that ways and means financing should be brought to zero by end-2024 in line with the law, the authorities may need to consider other options to avoid crowding out private sector credit, including drawing down the government's deposits at the CBN built up in 2023 or a second securitization operation to tackle this legacy problem. While external financing is costlier than when Nigeria last accessed Eurobond markets, staff supports an opportunistic issuance, also given upcoming maturities in 2025. A Eurobond issuance and some official financing are factored into staff's projections as an integral part of the 2024 financing mix.

Text Table 3.

Nigeria: Consolidated Government Deficit and Financing

(in percent of GDP)

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Sources: Nigerian authorities; and Fund staff calculations and projections.

23. The debt-to-GDP ratio increased in 2023 but is expected to stabilize in the medium term (Annex VI). The authorities' debt management strategy has maintained an average debt maturity of about 13 years and low gross financing needs which reduces risks. Near-term risks are amplified by global uncertainty and exchange rate depreciation. With monetary tightening and elevated external financing costs, interest expenditures will go up. The authorities are updating their Medium-Term Debt Strategy with IMF/WB CD, seeking to increase issuance of medium-term securities and Eurobonds, while maximizing multilateral and bilateral support. The government plans to issue domestic FX securities to bring onshore dollar liquidity to the official market, which could lead to market fragmentation, increase the cost of naira securities, and add to pressures on the naira.

24. Authorities’ Views. The authorities agreed with the importance of sequencing reforms in a pro-poor manner, emphasizing that strong governance is crucial for spending efficiency. They were confident that their revenue mobilization agenda will lead to significant gains, pointing to what they have already achieved since taking office, and that there is sufficient scope for market financing, noting that they are exploring a Eurobond issuance. The authorities reiterated their commitment to phasing out deficit monetization which they recognized as an inflation driver.

B. Reducing Inflation and Enhancing the Monetary Policy Framework

25. Monetary policy has been tightened. Since late 2023, the CBN has mopped up liquidity through open market operations (OMOs). The new Monetary Policy Committee (MPC) increased the policy rate at its first meeting in February 2024 by 400 basis points and in March by another 200 basis points—a cumulative tightening of 1,325 bps since May 2022—to 24.75 percent, still lower than the February inflation print, but now positive in real terms on an ex-ante basis. In February, the MPC widened the interest rate corridor from +100/-300 to +100/-700, maintaining the standing deposit facility rate constant which in staff's view would increase volatility in the interbank market and is being interpreted as running counter to the overall tightening direction.5 The March MPC appropriately returned the corridor to +100/-300 bps, supporting policy tightening. In a meeting-by-meeting and data dependent approach, the MPC should review and calibrate the pace and extent of further monetary tightening to ensure that inflation is put on a firm downward path. In parallel, the CBN should continue to monitor and manage the liquidity situation to contain excess reserves, using short-term OMO instruments.

26. Going forward, monetary policy can rely increasingly on the policy rate and OMOs. So far, the CBN also relied on the cash reserve requirement (CRR) to manage excess liquidity. The MPC hiked the CRR to 45 percent in February from an already high level of 32.5 percent. With reforms to strengthen the functioning of the domestic securities markets, the CBN can rely on its policy rate and short-term OMOs for monetary policy purposes. The CRR could then be refocused on financial stability considerations, with staff welcoming the removal of the daily CCR debits which facilitates banks' liquidity management. Staff recommended removal of the loan to deposit ratio (LDR) floor of 65 percent—now inconsistent with the CRR—which pushes banks into fixed income instruments over asset quality concerns and exerts downward pressure on yields.

27. The CBN has developed a preliminary roadmap for moving to an inflation targeting framework. Inflation targeting requires fundamental changes at the CBN and would have implications for fiscal policy (Annex VII). These reforms can be implemented independently and concurrently to deliver immediate benefits, particularly, bolstering central bank credibility. The Fund will provide CD on developing the relevant institutional framework and tools and has already supported the development of an empirical model to guide forward-looking policy setting.

28. Authorities’ Views. The authorities agreed with the need to tighten monetary policy and make the policy rate positive in real terms, while staying data dependent. They see the CRR and OMO issuances as the main instruments to manage liquidity.

C. Safeguarding External Stability

29. Nigeria’s external position remains vulnerable. The external position is assessed to be moderately weaker than warranted by fundamentals and desired policy settings (Annex VIII). Modelbased estimates indicate that the real effective exchange rate (REER) was overvalued by 6 percent at end-2023. Nominal depreciation in the second half of 2023 has reduced the REER overvaluation compared to the 2022 assessment (23 percent), and the further nominal depreciation in early 2024 would further reduce the REER overvaluation. Pressures on the naira amidst low foreign exchange market turnover pointed to continued shortages of dollars. Large and persistent net errors and omissions suggest a degree of uncertainty over the assessment. While Nigeria maintains inflation differentials with trading partners, there will be a tendency for the nominal exchange rate to depreciate.

30. The authorities are taking measures to rebuild confidence, strengthen FX liquidity and enhance the functioning of the FX market. Meeting pent-up FX demand to repatriate profits, dividends, management fees or to unwind positions would strengthen investor confidence, and there are anecdotal indications that this demand is now being met. The authorities plan to adopt the FX Global Code, a set of international best practices for the wholesale FX market. Considering exchange rate developments over the last two years, Nigeria's de facto exchange rate arrangement is reclassified to "other managed” from "crawl-like", effective February 1, 2023.6

31. The authorities have lifted the exchange restrictions on 43 import items to source FX in the official market but maintain several capital flow management measures (CFMs). In October 2023, the CBN lifted the exchange restriction that resulted from a list of 43 items that could not source fx in the official market, which also included Eurobonds and foreign currency bonds/shares. Given certain provisions in other CBN FX regulation, staff is seeking additional clarification whether the CFM could be considered fully removed. The payment limits on naira-denominated credit and debit cards for overseas transactions have not been changed and continue to be considered a CFM. The requirement for International Oil Companies (lOCs) to hold a portion of repatriated export proceeds in Nigeria for 90 days before transferring offshore is assessed as an outflow CFM under the Institutional View, and this measure has been tightened (on February 14, 2024) as authorities now allow only 50 percent of export proceeds to be repatriated immediately as opposed to 80 percent previously. The updated limits on the net open positions for banks introduced in January are also assessed to be a CFM. The CBN believes this measure will help minimize the negative impact on the liquidity of the Nigerian fx market due to cash pooling to offshore accounts of these companies.7 Staff recommend the phasing out of CFMs be done in a properly timed and sequenced manner. This would require considering external vulnerability risks and progress made with reforms to foster necessary institutional and financial development and in line with the IMF's Institutional View on Liberalization and Management Capital Flows.

32. Staff welcomes the authorities’ sequential reforms that have strengthened price discovery in the foreign exchange market and reduced distortions, to transition to a market-determined exchange rate. In light of these reforms, staff assessed Nigeria's FX system from an Article VIII perspective (Informational Annex).8

  • Staff concluded that two of the three longstanding exchange restrictions maintained by Nigeria have been eliminated. In discussions with the authorities and with market participants, staff confirmed that (1) the CBN no longer rations or prioritizes access to FX and does not provide guidance to banks on the allocation of FX on a priority basis; and (2) the previous list of items for which FX could not be purchased to pay for imports has been abolished by the CBN.

  • The exchange restriction arising from the absolute limits on the amounts of FX available for traveling abroad (business or personal travel allowances) which cannot be exceeded even upon verification of the bona fide nature of the transaction remain in place. Staff made several new findings of exchange restrictions under Article VIII, Section 2(a) of the Articles, which arise due to limitations or prohibitions on the availability of FX for certain current international transactions.9

  • All multiple currency practices (MCPs) that existed in Nigeria at the time of the 2022 Article IV consultation have been eliminated. Two MCPs were eliminated in June 2023 due to the actions taken by the authorities, and two MCPs were considered eliminated in line with the IMF's new MCP policy (see Informational Annex).

  • The FX landscape continues to evolve rapidly in Nigeria with fast-paced implementation of reforms, and staff will closely monitor developments and assess their implications as appropriate.

Staff recommend eliminating the remaining legacy exchange restrictions on payments and transfers for current international transactions as conditions permit.

33. Rapid growth of transactions on FX trading platforms poses new challenges. At the end of February, the authorities closed the operations of Binance and other crypto-asset trading platforms that were being used by Nigerians to facilitate capital flight—neither the identity of traders nor the origin of their funds could be traced. The authorities also revoked the licenses of 4,173 BDCs that failed to comply with CBN accounting and reporting requirements. Staff recommends that global crypto trading platforms be registered or licensed in Nigeria and subject to the same regulatory requirements applicable to financial intermediaries following the principle of same activity, same risk, and same regulation. Moreover, the authorities should ensure the application of AML/CFT preventive controls by crypto trading platforms and other virtual asset service providers through effective AML/CFT risk-based supervision.

34. The CBN has recently conducted one sided interventions in the FX market to provide liquidity, after a prolonged absence. Staff encourages the CBN to develop an explicit and transparent FXI strategy, which sets out a volatility metric and threshold that would trigger an intervention. Furthermore, FXIs should be conducted through an auction mechanism at marketbased rates, with ex-post announcement of intervention amounts and rates. Such interventions should be symmetrical and temporary, which would also help preserve reserves. Interventions should not be used as a substitute for required macroeconomic policy adjustment needed to restore internal and external stability.

35. There is a risk that ongoing work by members of the legislature to amend the CBN Act could weaken the central bank’s governance and autonomy. Several elements in the current draft Bill as disclosed in the public domain would, if enacted, significantly weaken the institutional framework and its independence, e.g., the envisaged 'Coordinating Committee for Monetary and Fiscal Policies' chaired by the Minister of Finance could undermine the autonomy of the CBN and its Monetary Policy Committee, which is separately chaired by the Governor of the CBN. The draft bill also does not include recommendations by the Safeguards Assessment.

36. Progress on implementing recommendations from the 2021 Safeguards Assessment of the CBN has been limited. While the CBN has published recent annual financial statements and announced plans to phase out development lending and monetary financing, other recommendations remain outstanding. Further the CBN should fully adopt International Financial Reporting Standards to enhance transparency. Staff continues to engage with the authorities on the outstanding recommendations, including on the CBN Act.

37. Authorities’ Views. The authorities agreed with the importance of maintaining external stability and emphasized that the reforms which they have implemented as well as efforts to bring in FX liquidity—including the requirement for international oil companies to hold 50 percent of repatriated oil receipts in Nigeria for 90 days—are geared towards that end. They see pressure on the exchange rate now coming from illicit flows, including through crypto asset platforms, and not being driven by fundamentals, noting that some ceilings on FX access are intended to curb abuse. The authorities disagreed with the proposed reclassification of the de facto exchange rate which they consider backward looking, emphasizing that in their view, the exchange rate is entirely market determined and should be classified as a floating regime.

D. Enhancing Financial Stability and Inclusion

38. The authorities are closely monitoring credit and market risks in financial institutions. The Ministry of Finance, CBN, Securities Commission of Nigeria, Insurance Commission of Nigeria, Pension Commission of Nigeria, and Nigeria Deposit Insurance Corporation meet monthly to examine and mitigate risks across the entire financial system. Banks' lending portfolio accounts for only 30 percent of their assets and is concentrated on large corporate clients and public sector entities. The latest monthly CBN stress tests (January 2024) showed that in the event of a sharp increase in interest rates and further currency depreciation of 50 percent, four commercial banks would face a capital shortfall. These banks have been asked to build additional capital buffers, including from FX gains. Regulatory forbearance introduced during the COVID-19 pandemic, such as light loan classification rules, are still in place and should be phased out. With developments in February similar to the January stress testing parameters, the next exercise is likely to identify further weaknesses. The authorities should continue monitoring banks' ability to manage their interest rate exposure in both the lending and investment portfolio.

39. Staff welcomed the authorities’ intentions to increase banks’ minimum capital. Nigeria is working towards implementation of the CBN's Basel 3 capital framework which will require banks to build additional capital buffers to mitigate credit, market, and operational risks.10 The authorities plan to increase the deposit insurance coverage—currently at a maximum of N500,000 per deposit—to strengthen confidence in the banking system. Nigeria's ambitious goal of reaching a US$ 1 trillion economy by 2030 requires a banking system with higher levels of capital to serve the financing needs of the private and public sector. Financial depth and intermediation remain low with bank assets at 20 percent of GDP (Text Figure 7).

Text Figure 7.
Text Figure 7.

Nigeria: Banking System

Citation: IMF Staff Country Reports 2024, 102; 10.5089/9798400275074.002.A001

Sources: World Bank, Nigerian authorities' data, Fund Staff estimates

40. Improving the functioning of the government securities market will enhance the monetary transmission mechanism and attract foreign investors. The authorities have allowed yields to rise in January and February and should ultimately ensure that the monetary policy rate anchors the yield curve, providing a benchmark for pricing lending products and capital market instruments. Liquidity in the government securities market is limited, with domestic institutional investors—banks and pension funds—typically holding to maturity.11 Foreign participation in the domestic bond market has been marginal due to problems faced by investors to repatriate their capital. Enhanced market liquidity combined with competitive yields and naira stability, will make the domestic government securities market attractive for foreign investors again. This, in turn, would mitigate risks from the sovereign-bank nexus.

41. Financial innovation is a core pillar of the authorities’ strategy to increase financial inclusion. The share of the adult population with a bank account reached 52 percent in December 2023, a large part of the population does not have access to credit nor insurance products. Following the 2004 pension reform, nine million formal sector workers (13 percent of the labor force) have enrolled in the pension system. To enhance financial inclusion, CBN is promoting the use of digital financial services. The authorities are preparing a financial inclusion strategy focusing on increasing the use of credit and adoption of non-bank products, such as life and non-life insurance, and scaling up the micro-pension scheme for self-employed individuals and workers in the informal sector. The revision of the e-naira's features should help increase its use in both retail and wholesale payment transactions (Annex IX), however, ensuring appropriate AML/CFT safeguards continues to be key.

42. The CBN’s decision to phase out its development finance activities is welcome. These activities (5.5 trillion naira) will be transferred to development finance institutions, owned jointly by MOF and CBN, and private financial institutions. An orderly transfer of the portfolio is key to avoiding interruption of credit flows to agriculture and small and medium enterprises. Undercapitalized financial institutions should not be eligible to absorb CBN’s portfolio. The CBN’s lending programs have been traditionally done on concessional terms. The authorities will have to decide if new lending will continue to be concessional and how costs would be accommodated. Staff suggests limiting concessionality to clear areas of market failure.

43. Authorities’ Views. The authorities shared staff’s risk assessment and agreed with the need to increase banks' capital, noting actions already taken. They stressed the importance of growing the banking system to become an engine of growth, and pointed to ongoing work to dismantle controls and regulations that prevented the emergence of a market-based financing in the past.

E. Advancing Governance Reforms

44. Nigeria has made welcomed progress on improving its AML/CFT framework, but further action is needed in line with FATF recommendations. Nigeria has undertaken a series of measures including legislative reform, conducted a money laundering and terrorism financing risk assessment, built awareness for competent authorities and the private sector, and increased investigation and prosecution of money laundering to correct identified deficiencies in the AML/CFT framework. Sustained action is key to exiting the FATF "grey list” and preventing negative repercussions on the economy, including on cross-border payments and costs of borrowing. Continued action to strengthen the AML/CFT framework, such as improved application of key preventive measures (e.g., identification/verification of beneficial ownership information, measures to mitigate risks related to politically exposed persons, and reporting of suspicious transactions), effective AML/CFT risk-based supervision and sustained increase in investigations and prosecutions, can also help improve tax compliance and anti-corruption efforts.

45. Addressing governance weaknesses, corruption vulnerabilities and strengthening the rule of law will help unlock Nigeria’s growth potential (Annex X). The authorities have made progress on strengthening legislation, including the Petroleum Industry Act, AML Act, and Proceeds of Crime and Management of Assets Act, the NFIU Act and amendments to the Companies and Allied Matters Act, as well as the establishment of its beneficial ownership register. Reforms to the mineral mining laws to modernize the industry and introduce stronger governance controls, should be accelerated to strengthen the investment climate in the sector. Reforms to the 2007 NEITI law should include stronger enforcement powers and monitoring compliance. Transparency measures in the revised mineral and NEITI law should be in line with international best practice. Other outstanding reforms, include removing legislative barriers to public access to the asset declarations of public officers, and delayed passage of the Federal Audit Service and the Whistleblower and Witness Protection Bills. Reforms should also enshrine the independence of the Economics and Financial Crimes Commission. Gaps are exacerbated by underfunding of agencies—a reflection of Nigeria’s very constrained fiscal space. Judicial independence is weakened by the terms of appointment and dismissal, poor compensation, and unmanageable caseloads. In response the authorities are encouraging greater use of alternative dispute resolution mechanisms, such as mediation.

46. Authorities’ Views. The authorities recognize the importance of strong governance for inclusive growth and highlight the far-reaching legislative agenda which has been advanced as well as progress on AML/CFT deficiencies. They pointed to automation and digitalization initiatives which they see as key to removing opportunities for corruption, including in the delivery of social transfers. They noted legal action taken to investigate potential corrupt practices, including against high-ranking officials.

F. Revitalizing Growth and Tackling Climate Change

47. Nigeria has an entrepreneurial private sector. The new Dangote refinery—the largest on the African continent—has commenced operations (Annex XI). At full capacity, it is expected to meet Nigeria’s domestic fuel demand, moving value-addition onshore and strengthening the current account. A second refinery in Port Harcourt is restarting production. Nigeria’s vibrant startup ecosystem is one of Africa’s largest funding destinations. Out of the four African fintech companies on CNBC’s top-200 global list, two are Nigerian.

48. Nigeria’s Agenda 2050 aims to raise growth to 7 percent, reduce poverty and inequality, making Nigeria an upper-middle income country by 2050. The Agenda appropriately highlights the importance of enhancing human capital to support the envisaged economic transformation. Staff welcomes the ongoing work to achieve higher and more sustainable growth along with substantial reductions in poverty, through broad based policy interventions including:

  • Improved investment environment in the hydrocarbon sector through greater transparency, continued security improvements, and clarity on the fiscal regime for gas and deep-water projects.

  • Increasing investments in irrigation, reducing high transport losses, and improving supply of inputs to the largely rain-fed agricultural sector.

  • Facilitating investment and activity in the non-oil, non-agriculture economy, including in the dynamic services sector, to promote diversification.

  • Increased investments to support higher electricity production and distribution.

  • Increased financial inclusion and access to credit.

  • Improving trading infrastructure and reducing the excessive regulatory burden.

49. Nigeria is implementing measures to combat the impact of climate change. The National Adaptation Plan aims to build resilience, easing the impact of rising temperatures and moderating the severity of more volatile precipitation on agriculture and essential services. The Climate Change Act, approved two years ago, is playing a key role in promoting a wholistic approach to tackling climate change bringing together the public and private sector in mainstreaming climate actions in economic development. Implementation of mitigation policies to reduce emissions to achieve net zero by 2060, would help spur growth in green technology, increasing employment opportunities and boosting economic growth.

50. Authorities’ Views. The authorities stressed that raising growth was their central policy objective. They highlighted ongoing efforts in the oil, and agriculture sector which they view as critical to reducing food insecurity and increasing growth. They also emphasized efforts to enhance financial inclusion, streamline import and export trade processes, and advance climate resilience.

Staff Appraisal

51. Staff welcomes the authorities’ determination to push ahead with reforms to address distortions and bottlenecks that had been built up over years. Achieving higher, sustainable and more inclusive growth, reducing poverty, and creating opportunities for Nigeria’s growing population is a whole-of-government effort that requires coordinated policy actions across all areas. The government’s initial reform of the fuel subsidy and the unification of the foreign exchange windows were bold steps on this path. The CBN has unequivocally committed to price stability as its core mandate.

52. Monetary policy has appropriately taken the lead in restoring macroeconomic stability. The CBN has decisively mopped up excess liquidity and subsequently raised the policy rate which will help lower inflation, and over time improve confidence in the naira. The CBN should stand ready to tighten further as needed to ensure that inflation is put on a firm downward path. At this juncture, strong communication including forward guidance is important to steer market expectations. Liquidity management should mainly rely on short-term instruments, while the use of the CRR can be redirected towards financial stability objectives. Staff supports the authorities' decision to adopt an inflation targeting regime, noting that this will require deep-seated reforms that take time, but will each enhance the effectiveness of monetary policy already in the process. Any amendments to the CBN Act should preserve the independence of the central bank.

53. Rolling out social protection is a key near-term policy priority. The approval of an improved social protection system developed with World Bank support is welcome, and swift implementation is crucial to mitigate acute food insecurity. This would complement the government releasing grains and fertilizers. As inflation subsides and support for the vulnerable is ramped up, costly and untargeted fuel and electricity subsidies should be removed, while, e.g., retaining a lifeline tariff.

54. Further progress on revenue mobilization will generate fiscal space. The government's work on a comprehensive revenue reform agenda is commendable and essential to create fiscal space for ramping up social and development spending in support of inclusive growth. Staff welcomes the authorities' commitment to meeting the government's financing needs from the market or official support and discontinuing deficit monetization which had been an inflation driver.

Afrexim Bank Loan

The African Export-Import Bank (Afrexim Bank) has arranged a syndicated US$3.3 billion crude oil prepayment facility sponsored by the Nigerian National Petroleum Company Limited (NNPCL). An initial disbursement of US$2.25 billion has been concluded in late December 2023 with funds deposited at the CBN on behalf of the Federal Government. A second tranche of US$1.05 billion is expected to be raised and disbursed in 2024Q1. The objective of the transaction was to bring in dollar liquidity and increase foreign exchange reserves through the forward sale of a specific number of barrels of crude oil (90,000 barrels of crude per day) to an offshore Special Purpose Vehicle (SPV). The loan has a maturity of 5 years with a quarterly debt service for principal and interest repayments. The interest rate is set at 6 percent per annum above the 3-month secured overnight financing rate.

The transaction is structured to ensure that the distribution of the net proceeds (after deducting debt service) from the sale of royalty and tax crude oil barrels accruing to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and FIRS are paid into the Federation Account when such payments are due, as prescribed by the Petroleum Industry Act 2021. The transaction structure has an embedded price balance mechanism where 90 percent of all excess cash from the sale of the committed barrels (after debt service) will be released while the balance of 10 percent will be used to prepay the facility, helping to shorten the final maturity of the facility.

As the debt service of the loan is repaid from the sales proceeds of crude oil accruing to the Federation, the transaction reduces government's future oil revenue. Staff's macroeconomic projections reflect this understanding of the contractual situation and possible repayment modus.

55. Staff assesses Nigeria’s external position to be moderately weaker than warranted by fundamentals and desired policy settings. Tightening macroeconomic policies will help reduce external vulnerabilities, and there is an urgent need to build reserves. Staff welcomes the steps taken to remove foreign exchange market distortions, multiple currency practices, and two exchange restrictions. Staff recommend eliminating the remaining legacy exchange restrictions, for which approval is not being sought, as conditions permit. Increasing dollar liquidity is important to stabilize the exchange rate. Domestic issuance of FX denominated government securities is likely to lead to market fragmentation and weaken the transmission mechanism. The CBN should develop an FXI framework to smooth excess naira volatility, given the shallow nature of the FX market.

56. Nigeria’s financial system remains vulnerable to credit and market risks but can become an engine of growth. To ensure that banks are well-prepared to deal with rising NPLs, it is critical to increase banks’ minimum capital and fully adopt the Basel 3 capital framework. Regulatory forbearance should be phased out, with continued tight supervision to mitigate emerging risks. A well-capitalized and regulated financial system is needed to facilitate a sustained growth acceleration. Staff welcomes the authorities’ focus on increasing the use of credit, adoption of insurance products, and rollout of the pension scheme for self-employed and informal sector workers.

57. Addressing structural issues, including governance, is crucial for inclusive growth. Staff welcomes the progress on resolving AML/CFT weaknesses and stresses the importance of completing these reforms to achieve de-listing by the FATF and avoid any adverse impacts on crossborder payments and the costs of borrowing. Resources available to key anti-corruption bodies and agencies should be strengthened as fiscal space becomes available. The authorities should sustain improvements in security, boost agricultural productivity, improve the business environment including through increase access to credit and focus on building climate resilience.

58. Staff recommend the standard 12-month cycle for the next Article IV Consultations.

Table 1.

Nigeria: Selected Economic and Financial Indicators, 2020-29

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Sources: Nigerian authorities; and IMF staff estimates and projections.1 Fund staff estimate.2 Gross debt figures for the Federal Government and the public sector include overdrafts from the Central Bank of Nigeria (CBN).3 Includes both public and private sector.4 Based on the IMF definition, the gross international reserves were US$8 billion lower in October 2023.
Table 2.

Nigeria: Balance of Payments, 2020-29

(Billions of U.S. dollars, unless otherwise specified)

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Sources: Nigerian authorities; and IMF staff estimates and projections.1 Based on the IMF definition, the gross international reserves were US$8 billion lower in October 2023.2 GDP is measured in US dollars and calculated using the average annual exchange rate.3 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 and includes CBN's debt.
Table 3.

Nigeria: Government Operations, 2020-29

(Percent of GDP)

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Sources: Nigerian authorities; and IMF staff estimates and projections.1 Fund staff estimate.
Table 4.

Nigeria: Federal Government Operations, 2020-29

(Billions of naira)

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Sources: Nigerian authorities; and IMF staff estimates and projections.1 Not including items under the supplementary budget.2 Includes earmarked spending for National Judicial Council, Universal Basic Education, Niger Delta Development Corporation, and Multi-Year Tariff Order subsidy.3 Net transfers to SLGs include Paris Club refunds, Budget Support Facility, and on-lending by the FGN.4 Gross debt figures for the Federal Government and the public sector include overdrafts from the Central Bank of Nigeria (CBN), promissory notes and AMCON debt.
Table 5.

Nigeria: Consolidated Government Operations, 2020-29

(Billions of naira)

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Sources: Nigerian authorities; and IMF staff estimates and projections.1 Fund staff estimate.2 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.