Public Information Notice: IMF Concludes 2001 Article IV Consultation with Nigeria

August 6, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 29, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nigeria.1


Nigeria experienced a rebound in economic activity in 2000, spurred by increased public spending of the windfall gains stemming from higher oil prices and by a buoyant oil sector. Real GDP is estimated to have grown by 3.8 percent in 2000. Notwithstanding a sharp pick-up in activity in the non-oil sector, overall growth is projected to slow to 3.0 percent in 2001 owing in part to a reduction in Nigeria's OPEC oil production quota by more than 9 percent during the first quarter of 2001. At the same time, increased public spending has stoked inflationary pressures. Inflation, measured by the 12-month increase in the consumer price index, rose to 18 percent in March 2001 from 0.2 percent in December 1999.

The inflationary impact of the expansionary fiscal policy led the official exchange rate of the Naira to appreciate in real effective terms by close to 13 percent in 2000. However, at the same time the premium in the parallel exchange market rose significantly. Aided by the increase in the price of oil by about 71 percent, the current account moved to a surplus of 5 percent of GDP in 2000 from a deficit of about 10 percent of GDP in 1999. As a result, gross international reserves increased to US$9.4 billion from US$5.4 billion over the same period.

Fiscal policy, and management of the windfall gains from the substantial oil price increases in particular, is playing a key role in economic developments in 2000 and 2001. These gains-defined as oil revenue in excess of US$20 per barrel (so-called "excess proceeds")-amounted to US$4 billion (10 percent of GDP) in 2000 and are projected at US$3.7 billion (9.6 percent of GDP) in 2001. On account of the constitution adopted in 1999, that gives state and local governments full and automatic right to their shares of oil revenues, almost one half of the excess proceeds which accrued in 2000 was distributed to sub-federal governments in the second half of 2000, and the remainder in the first quarter of 2001.

Against the backdrop of the windfall gains, the 2000 budget envisaged a sharp increase in consolidated government spending to over 43 percent in 2000 from 38 percent of GDP in 1999. The sub-federal levels increased their expenditures by about 6.6 percentage points of GDP, while Federal government expenditures declined by about 1.3 percentage points. This outcome reflected a combination of the elimination of extra-budgetary outlays (3 percent of GDP in 1999) and a sharp increase in personnel costs of 2.4 percent of GDP, following a substantial increase in public service wages in May 2000. Actual spending levels in 2000 were about 6.5 percentage points of GDP greater than they would have been had the government saved all of the windfall gains.

The budget for 2001 envisages a further increase in consolidated government spending, which should rise to about 53 percent of GDP. Federal government capital expenditure accounts for about 40 percent of this increase and spending by sub-federal levels for the rest. In response to concerns that the size of the budget might threaten macroeconomic stability and also compromise the quality of spending, the authorities have decided to limit federal expenditure, thereby bringing projected consolidated government expenditure in 2001 to about 50 percent of GDP. Compliance with due process requirements, which is considered necessary to safeguard the quality of spending, is likely to result in lower levels of capital expenditure than budgeted. Had the government saved all the excess proceeds in 2001 and not distributed the carryover of excess proceeds from 2000, consolidated government spending would have been about 10 percentage points of GDP lower than currently envisaged.

Monetary policy has not offset the liquidity injected by the fiscal stance. On the contrary, the minimum rediscount rate (MRR) was reduced in three steps to 14 percent in December 2000 from 18 percent in December 1999 and the cash reserve requirement was reduced in two steps to 10 percent from 12 percent during the same period. This, in conjunction with the unsterilized increase in foreign reserves by US$ 4 billion-the amount of excess oil proceeds in 2000-resulted in reserve money growth of 40 percent.

Since early 2001, the CBN has tightened its monetary policy stance. The MRR was raised in three steps by 2.5 percentage points to 16.5 percent (accompanied by increases in interest rates on treasury bills and CBN certificates), the cash reserve requirement was raised by 2.5 percentage points to 21.5 percent, and the liquid asset ratio increased to 40 percent from 35 percent. As a result of these measures, market interest rates rose to between 30 and 40 percent in late April and May from about 17-20 percent in early 2001.

In response to the pressures in the exchange market stemming from expansionary fiscal policy, the CBN reverted to the pre-reform (i.e. pre-October 1999) system of selling foreign exchange in the Inter-bank Foreign Exchange Market (IFEM) at a fixed rate, except for step adjustments in mid-December 2000 and early-April 2001 that devalued the Naira by 10 percent. Consequently, the differential widened between the IFEM rate and the open inter-bank market-where banks trade among themselves at freely negotiated exchange rates-and with the parallel rate, and at the time of intensified pressures in April 2001 had reached 15 percent and 20 percent, respectively. In the parallel market, the Naira lost about 30 percent of its value between December 1999 and May 2001. As very large amounts of foreign exchange were sold to deal with these pressures, foreign reserves have increased only modestly during the first five months of 2001, notwithstanding continued high foreign exchange inflows from oil.

On structural reforms, the government successfully sold four Global System for Mobile Communications (GSM) licenses and has brought to the point of sale NITEL/M-Tel and several other public enterprises. However, progress on implementing the appropriate regulatory frameworks for telecommunications and power has been slower than originally envisaged. The Anti-Corruption Commission was inaugurated in September and investigations are now under way on some 20 cases. The Auditor General's report on the 1999 accounts was submitted to the National Assembly in February 2001 while the federal civil service audit was completed in December 2000.

Macroeconomic developments and policies in 2000 and early 2001 were at variance with the program in support of which the Stand-By Arrangement had been approved. In particular, inflation and federal government spending exceeded the program targets by a substantial margin and the CBN's liquidity absorption operations were more limited than expected. While the end-2000 target on net international reserves was met, the CBN's foreign exchange management included some administrative measures that gave rise to a multiple currency practice. In addition, structural reforms fell behind schedule. As a result, the first review under the Stand-By Arrangement could not be completed.

Executive Board Assessment

Executive Directors observed that major macroeconomic imbalances had emerged as a result of the sharp increase in government spending-particularly that of state and local governments-and expressed concern at the risks of a further acceleration of inflation and continuing instability in the exchange market. They regretted that the program implementation had been inadequate during the second half of 2000 and that the Stand-by Arrangement review would not be completed on time, and attached great importance to getting the program back on track as soon as possible. Directors understood the desire of the democratic government to deliver positive results quickly, but cautioned that for most Nigerians, especially the poor, the erosion of living standards from higher inflation could outweigh any gains from increased public spending. Directors stressed the urgent need for strong action by the government to restore macroeconomic stability by containing government spending, and to ensure its quality through implementation of the due process tests.

Directors recognized that the problems that the present government inherited from previous military governments were far greater than anticipated, and made it difficult to achieve rapid progress in economic reforms. They also agreed that effective policy making, especially under a democracy, required institution and consensus building which would take time and involve a process of learning by doing. Directors saw a role for donors and Nigeria's development partners to provide technical assistance in these areas.

Directors stressed that prudent fiscal policy would be critical to assure macroeconomic stability and the sustainability of the fiscal position over the medium term. Most important in this regard was to save the excess oil proceeds. Directors regretted that the objective of saving these excess oil proceeds in 2000 was not realized, and welcomed the intention of the federal government not to spend its share of excess oil proceeds in 2001. They also expressed concern at the failure of the federal government to control the wage bill in 2000, which was largely responsible for the major overruns in spending, and they welcomed the recent progress in reducing the wage bill. They recommended that the authorities work closely with the staff in formulating the 2002 budget, and endorsed the staff's efforts to maintain a dialogue with the National Assembly and officials at the national and sub-national level.

Directors underlined the risks to the economic outlook from rising oil prices. They stressed that it is imperative that state and local governments, in addition to the federal government, contribute to the re-establishment of macroeconomic stability. They endorsed strongly the federal government's intention to reach an understanding with the sub-federal levels to save their share of excess oil proceeds and restrain spending, and to institute due process tests to ensure the quality of public spending. Efforts to strengthen legislation on the accountability of sub-federal levels would also be very helpful. Directors underlined the importance of providing for adequate spending on the priority areas of health and education.

Directors stressed the urgent need to fight inflation through monetary restraint. While recognizing that expansionary fiscal policy had burdened monetary policy, they considered that the shift toward monetary tightening had come too late and was too gradual, so that the resulting large expansion in monetary aggregates had accommodated the upsurge in inflation. They welcomed the recent tightening, but noted with concern that interest rates in the interbank market are now barely positive in real terms. Most Directors thus considered it necessary to maintain tighter monetary conditions for some time, to help re-establish macroeconomic stability while at the same time instituting appropriate measures to safeguard the stability of the banking system.

On exchange rate policy, Directors expressed concern at some recent measures-reverting to selling foreign exchange at a price set by the CBN, eliminating transferability between the official and open interbank markets, and limiting the freedom of banks in setting the price of foreign exchange in the open interbank market-that would impede the development of a market-based exchange system. They underscored the need for exchange rates to reflect market forces, and urged the CBN to reverse these measures, and to move quickly to unify the exchange markets.

Directors strongly recommended that the authorities build on the recent progress on structural reforms. The privatization process had received an impetus with the successful sale of the GSM licenses. They encouraged the authorities to accelerate the preparation of the regulatory frameworks in key infrastructure sectors and welcomed the Privatization Support Credit that had recently been approved by the World Bank. They supported the consultative process initiated by the government aimed at deregulating the petroleum sector. Directors were encouraged by the increasingly effective implementation of the due process tests that had contributed to restraint on capital expenditures. They hoped that this, in conjunction with the near-completion of the value-for-money and civil service audits and the commencement of operations of the Anti-Corruption Commission, would contribute to improved transparency and accountability in the use of public funds.

While encouraged by the government's commitment to fight corruption, Directors observed that, given the deep-rooted problems and firmly entrenched perceptions in this area, the government's anti-corruption measures will need to be particularly strong. They urged appropriate follow-up action on the cases being pursued by the Anti-Corruption Commission. Fostering transparency would assist in improving governance, and Directors encouraged the commission to report regularly on its activities. They noted that the Financial Action Task Force had recently added Nigeria to its list of non-cooperative countries in fighting money laundering, and called on the authorities to improve their anti-money laundering efforts, especially in the context of an FSAP. Directors recommended the speedy publication of the value-for-money and civil service audits and attached great importance to the Attorney General's undertaking to follow up on the results of these audits and to initiate actions where there was evidence of wrongdoing.

Directors underscored the critical importance of capacity building for the successful implementation of the government's economic reforms. They stressed that proper formulation, implementation, and monitoring of economic reforms will require urgent capacity-building efforts for budget formulation and monitoring, as well as substantial improvement of the quality of all key economic statistics in Nigeria. They encouraged the authorities to make greater use of technical assistance, and donors to enhance and coordinate their offers of such assistance.

Directors noted the staff's intention to recommend the completion of the first review and an extension of the current Stand-By Arrangement, provided that certain prior acts are met and a satisfactory program for the second half of 2001 is presented. They thought that successful completion of the current arrangement and adoption of policies that could be supported by the Fund under a successor arrangement, would enhance the prospects for further assistance by the international community to reduce the burden of Nigeria's existing debt to a sustainable level. Directors considered it likely that, over the medium term, Nigeria will need concessional assistance from the international community in order to underpin its own efforts to attain the objectives of higher growth and poverty reduction. It will be equally important to attract private capital. To this end, some Directors noted that maintaining good relations with external creditors, including continued timely payments, is crucial.

In conclusion, Directors commended the government's efforts to lay the foundations for sound policy making, and were encouraged by the easing of ethnic and religious tensions as well as those between the National Assembly and the executive. However, the depth and complexity of Nigeria's economic problems means that the process of transforming the economy will take time, and Directors therefore cautioned against unrealistic expectations. The serious current macroeconomic imbalances make it urgent for the authorities to intensify their efforts to restore macroeconomic stability in the near future and to implement market-based reforms that lay the foundations for growth and poverty reduction in the medium term. Directors called on Nigeria to show continued commitment to pursuit of a strong economic program that could be supported by the Fund.

Nigeria: Selected Economic Indicators

  1997 1998 1999 2000 2001
        Est. 1/ Proj. 2/

Real Economy          
Real GDP (change in percent) 2.7 1.8 1.0 3.8 3.0
Non-oil real GDP (change in percent) 3.4 3.8 3.5 2.2 6.2
GDP per capita (in U.S. dollars) 304 271 278 319 294
Production of crude oil (million barrels per day) 2.27 2.23 2.11 2.26 2.16
Consumer price index (change in percent, end of period) 10.2 11.9 0.2 14.5 9.0
Gross domestic investment (percent of GDP) 20.1 24.1 23.4 22.7 26.8
Gross national savings (percent of GDP) 26.8 14.4 13.5 27.6 24.5
Consolidated government operations (in percent of GDP)          
Total revenues and grants 20.8 29.9 30.7 46.1 47.8
Of which: petroleum revenue 11.5 23.4 22.5 37.9 38.0
Total expenditure and net lending 19.5 43.8 38.0 43.9 49.7
Overall balance (commitment basis) 1.2 -14.0 -7.4 2.2 -1.9
Domestic primary balance 3.8 -5.9 0.8 9.7 5.7
Gross domestic debt 12.1 14.0 28.1 28.0 21.5
Money and Credit          
Net domestic assets 3/ -1.3 20.0 39.5 -41.7 11.7
Net credit to consolidated government 3/ -22.9 17.7 43.1 -35.4 2.1
Credit to the rest of the economy 3/ 22.0 11.0 22.3 19.3 10.3
Broad money (change in percent) 19.7 38.5 35.0 45.3 14.4
Discount rate (percent; end of period) 13.5 13.5 18.0 14.0 ...
External sector          
Current account (in percent of GDP) 6.7 -9.7 -9.9 4.9 -1.2
Export of crude oil (million barrels per day) 2.00 1.96 1.84 1.95 1.79
Price of Nigerian oil (U.S. dollars per barrel) 19.8 12.9 17.0 28.0 25.5
Gross international reserves (in millions of U.S. dollars) 7,222 7,107 5,441 9,400 9,879
(in months of imports of goods and services) 6.6 6.8 4.5 6.7 6.2
External debt service paid (in percent of exports) 11.8 12.3 14.9 8.1 12.7
Real effective exchange rate (change in percent) 4/          
Fund Position (as at May 31, 2001)          
Quota (in millions of SDRs)         1,753.2
Outstanding purchases and loans (in millions of SDRs)         0.0
Exchange Rate (as at May 31, 2001)          
Exchange rate regimeManaged float with no preannounced target
IFEM-rate (official interbank market, naira per U.S. dollar)         113.2
NIFEX-rate (open interbank market, naira per U.S. dollar)         113.5
Parallel market rate (naira per U.S. dollar)         135.5

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

1/ Staff estimates.          
2/ Staff projections.          
3/ Increase as a percent of broad money at the beginning of the period.      
4/ End of period, '-' indicates depreciation.          

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the June 29, 2001 Executive Board discussion based on the staff report.


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