Public Information Notice: IMF Concludes 2002 Article IV Consultation with Nigeria

January 2, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Nigeria is also available.

On December 18, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nigeria.1


A 12-month Stand-By Arrangement for the period July 2000-June 2001 was approved on August 4, 2000. The first review was initially postponed as the program went off track. Directors agreed to a three-month extension of the program until end-October 2001. A staff visit in September to complete the first review under the arrangement found that key program objectives for end-June 2001 had been missed, including lowering inflation to single digits, establishing fiscal discipline, and maintaining a market-based exchange system. The Stand-by Arrangement lapsed at end-October 2001.

The Stand-by Arrangement was replaced by an informal staff-monitored program for a six-month period between October 2001 and March 2002. Targets were set, including the passage of a satisfactory budget for 2002, the containment of reserve money growth, and the narrowing of the differential between the official and parallel foreign exchange rates. A staff review of developments carried out in February-March 2002 found that key end-December 2001 targets had not been met. The authorities and the staff agreed to end the informal staff-monitored program, citing the risk that appropriate macroeconomic polices might not be implemented in 2002, particularly in light of the upcoming presidential elections.

Overall economic performance in 2001 was marked by macroeconomic imbalances. The overall fiscal balance turned from a surplus of 3 percent in 2000 to a deficit of 2.5 percent of GDP in 2001, the external account deteriorated by 8 percentage points of GDP, and inflation accelerated from an average rate of 6.9 percent in 2000 to 18.9 percent in 2001. As fiscal policies became expansionary, the authorities were faced with several policy options. These included implementing offsetting monetary policies, allowing the exchange rate to devalue, or accepting a loss in international reserves. In the event, the authorities continued to implement an inflexible exchange rate policy, which led to a sharp widening in the differential between the official and parallel rates. There was some tightening in monetary policy in the second half of 2001 and early 2002. Real GDP is estimated to have increased by 2.9 percent in 2001, driven largely by the non-oil producing sector, which grew by 4.1 percent, as the agriculture sector performed well and public spending increased rapidly.

In 2002, the staff projects non-oil GDP to grow by over 5.3 percent, in part reflecting a strong agricultural output, boosted by good rains. Overall GDP is expected to decline by about 0.9 percent, largely owing to lower oil production occasioned by the smaller OPEC oil quota. As a result of the tightening of monetary policy in late 2001 and early 2002, the inflation rate declined in the first eight months and is expected to fall eventually to 13.8 percent by end-2002.

The overall expansionary fiscal policy stance remains highly expansionary in 2002, notwithstanding efforts by the executive to contain capital spending. The consolidated cash fiscal deficit of the three tiers of government is expected to reach 4.9 percent of GDP in 2002 (5.8 percent on a commitment basis). The deficit is projected to be financed by a drawdown in government deposits in the banking system and the issuance of short-term debt.

Monetary policy has accommodated the fiscal stance, thereby risking a reversal of the recent gains in lowering inflation. Broad money rose by 17½ percent during the first nine months of the year, compared with a targeted rate of 11½ percent for the same period. Aggregate bank credit to the federal government increased ten-fold during that period, in part because the banking sector's treasury bill holdings rose sharply as the Central Bank of Nigeria (CBN) sold most of its holdings to mop up excess liquidity.

The lax financial policies led to a steep loss of international reserves in the first half of 2002. In view of the rapid reserve loss, the authorities undertook a series of small devaluations during June and July and introduced on July 22 a Dutch auction system. In a contradictory move, the CBN eased monetary policy by lowering the minimum rediscount rate by 200 basis points to 18½ percent and lowered the cash reserve requirement by 300 basis points to 9½ percent but only to those banks that had increased their credit to the real sector by at least 20 percent over the level at end-June. In any event, the new auction system for foreign exchange has helped slow reserve loss while allowing the exchange rate to be more market determined. Overall, international reserves are projected to decline from US$10.4 billion in 2001 to about US$7.2 billion in 2002. The spread between the official and parallel market rate has narrowed to below 10 percent.

Progress on structural reforms has been mixed. On the positive side, the authorities on January 1, 2002, adjusted the maximum retail price of gasoline above import parity and began charging the Nigeria National Petroleum Corporation US$18 per barrel for crude oil used for domestic consumption compared with the US$9.5 charged in 2001. The hike in the retail price of petroleum is a step forward in the deregulation of the downstream petroleum sector. However, the regulatory agency in charge of evaluating the appropriate retail price level every quarter has left retail prices unchanged since April 2002. As a result, domestic gasoline prices have fallen below import parity.

The trade and tariff policies adopted in 2002 suggest an increase in overall tariff and nontariff protection of domestic producers of finished goods, and, therefore, a setback to the government's liberalization efforts. Furthermore, the results on public enterprise reform have been mixed. While the privatization of enterprises in the early phases of the program is all but complete, there have been setbacks in recent privatization efforts, especially with regard to privatizing public utilities, such as the Nigeria Telecommunications Company (NITEL), and the rehabilitation and privatization of the electricity company, NEPA.

The Financial System Stability Assessment (FSSA) concluded that the Nigerian financial system was vulnerable to a number of risks, such as fiscal indiscipline, the economy's high dependence on volatile oil prices, and financial abuse. The report noted that there were serious concerns about the soundness and stability of the banking system, and that the current Nigeria anti-money-laundering framework and enforcement were inadequate. The inefficiencies in the court system, such as delays and backlogs, are also major impediments to the smooth functioning of the financial system.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal. They considered that the Nigerian economy faces enormous challenges, including in particular the recent legacy of weak policies and institutions, which the authorities have only begun to address. Encouraging aspects of macroeconomic developments since 2001 include a pick-up in non-oil GDP growth, a fall in inflation, and the introduction of a more market-oriented exchange rate policy. Also, progress is being made in institution building, legal reforms, and privatization.

Notwithstanding these encouraging signs, Directors expressed concern that progress has been sporadic, and consequently, macroeconomic imbalances remain large and persistent, and poverty and social indicators are declining. Directors considered that the authorities face a double challenge. In the period to the upcoming elections in March-April 2003, it will be critical to strengthen economic policy management and avoid macroeconomic and financial instability by containing the fiscal deficit and implementing a prudent monetary policy and more flexible exchange rate policy, while moving forward with greater transparency and improved governance. For the medium term, it will be critical to put in place a coherent plan of action to realize Nigeria's considerable growth potential and to reduce poverty. The plan of action will need to be far-reaching, and include: a credible fiscal framework; measures to strengthen institutional capacity, the financial sector, and external and domestic debt management; reform of the civil service; and rebuilding of the physical infrastructure. Also, going forward, good governance will be crucial for strengthening domestic ownership and investor confidence, especially given the key role of Nigeria in the peer review mechanism envisaged under NEPAD. In that regard, Directors urged the authorities to build on the progress achieved by the creation of the Anti-Corruption Commission.

Directors expressed concern that the overall stance of fiscal policy remains highly expansionary—despite efforts to contain capital spending at the executive level—and that the external sector has seen a sharp deterioration in the current account, along with significant foreign exchange reserve losses. These developments are particularly worrisome given the recent relatively high oil prices and the fact that mechanisms for saving excess oil proceeds have not been put in place. Together with a smaller external reserve cushion and a weak banking system, the current fiscal policy stance heightens Nigeria's vulnerability to an oil price downturn. Accordingly, fiscal consolidation remains a priority, and Directors urged the authorities to strengthen expenditure control, especially with regard to the wage bill, while providing for adequate social spending, reprioritizing the capital budget, and ensuring that no new arrears are accumulated.

Directors agreed that a core challenge facing the government in 2003 and beyond is to address the boom-and-bust cycles that have characterized fiscal policies in Nigeria. In this context, they considered that the adoption of policy-based rules, in particular an oil price-based fiscal rule cast in a medium-term context, will contribute to ensuring greater fiscal discipline. While acknowledging that the application of a fiscal rule at the sub-national level will be difficult and time-consuming, Directors urged the authorities to work actively to secure the support and cooperation of state governments, so that it can be applied on a consolidated basis and be effective. In this context, Directors welcomed the draft Fiscal Responsibility Bill, which aims at establishing a framework for fiscal policy rules and harmonizing fiscal relations among all levels of government, and urged the authorities to mobilize broad support for its early enactment. Directors also encouraged the authorities to publish annual audited reports and accounts of the national oil company in order to allow a more effective and transparent monitoring of the receipt of oil revenue.

Directors commended the CBN for actions taken during the course of 2001 and early 2002 to contain inflation. For the period ahead, however, they saw a need for the CBN to stand ready to tighten monetary policy and to use available monetary instruments more actively. To improve the effectiveness of monetary policy, Directors encouraged the authorities to consider developing open market operations further, tightening access for banks to the discount window, and lowering gradually the high mandatory liquidity reserve requirement. Directors also urged the authorities to review their domestic debt management policy with the aim, among other things, of lengthening the maturity structure of treasury bills.

Directors welcomed the introduction of the Dutch auction exchange rate system, which is a key first step in promoting increased flexibility in the management of the exchange rate. They noted that the spread between the official rate and the parallel rate has narrowed and that the real exchange rate has depreciated modestly, but emphasized that further exchange rate flexibility will be required to safeguard Nigeria's external reserves. Directors also urged the authorities to eliminate the multiple currency practices and take further steps to establish a single, unified foreign exchange market.

Directors commended the authorities' participation in the Financial Sector Assessment Program, and welcomed the authorities' commitment to make concerted efforts to address weaknesses identified in the Financial System Stability Assessment report, particularly with respect to banking supervision, anti-money laundering, and upgrading of the payment system. They urged speedy passage and effective implementation of the proposed amendment of the Banks and Other Financial Institutions Act, which will help promote banks' compliance with the Basel Core Principles. In light of the vulnerability of the financial system to criminal abuse, Directors welcomed the authorities' determination to fight money-laundering and the financing of terrorism, and encouraged them to implement rigorously the financial crime legislation recently signed by the President.

Directors regretted the recent increase in Nigeria's tariff and nontariff protection, which can act as a brake on the development of the non-oil sector. They urged the authorities to renew their commitment to trade liberalization by simplifying the tariff regime, lowering the peak and average tariffs, and avoiding ad hoc changes, consistent with the objective of convergence with the ECOWAS common external tariff by 2006-07.

Directors were of the view that a firm political resolve to implement far-reaching reforms designed to promote financial stability and encourage growth will be crucial in helping Nigeria strengthen its international credibility and re-establish confidence. Establishing a track record of sound performance in the context of a comprehensive program will also be helpful in preparing the way for negotiations on a possible medium-term debt restructuring. Directors noted with concern the build-up of arrears to bilateral official creditors, and urged the authorities to aim to ensure prompt, timely, and equitable repayment of debt obligations. They took note of the announced intention to make small payments to these creditors this year, and urged the authorities to conclude the remaining Paris Club bilateral agreements as soon as possible.

Directors commended the authorities on the progress made with privatization, and urged them to pursue this path drawing on the lessons from some recent setbacks. They agreed with the view that privatization of the national telecommunications and power companies, as well as the commercialization of the national oil company, may be critical for boosting private sector growth. Directors noted that investor interest in the enterprises concerned will be heightened if the privatization process is seen to be pursued in a transparent and professional manner, without actual or perceived political interference.

Directors were of the view that the preparation of an Interim Poverty Reduction Strategy Paper (I-PRSP) should play a key role in helping the authorities develop policy reforms aimed at reducing poverty and enhancing sustainable growth. To be effective, the participatory process underlying the I-PRSP should be broad, and based on policy coordination among government agencies. Federal and sub-national government spending priorities should be reoriented toward raising the long-term growth prospects of the economy, with targeted social policies and structural reforms aimed at developing the non-oil producing sectors—and in particular, agriculture—which will foster employment creation and help with poverty alleviation. Directors welcomed the publication of the government's homegrown medium-term economic framework, and expressed the hope that it can be speedily integrated into the PRSP process, which is designed to help frame the authorities' medium-term policy objectives and strengthen public expenditure management and overall transparency and accountability.

Directors emphasized that the technical support of the Fund and other development partners will continue to have a crucial role in helping the authorities to build institutional capacity and follow through effectively on reforms. They expressed disappointment at the limited impact thus far of technical assistance in Nigeria, and urged the authorities to take steps to enhance ownership and ensure adequate follow-up on recommendations. Improved coordination among providers and recipients, and better understanding of the capacity constraints facing Nigeria, along with prioritization of technical assistance projects, will be helpful in this respect. In this context, Directors welcomed the establishment of the Economic Technical Committee to improve policy coordination among the various government agencies.

Directors noted that the ability of Nigeria's statistical agencies to compile statistics on fiscal operations, national accounts, and the balance of payments is seriously impaired. They urged the authorities to provide the necessary funding for statistical agencies on a priority basis, to lay the groundwork for effective monitoring of macroeconomic developments and policy formulation. Directors welcomed the authorities' agreement to accept technical assistance, including from the Fund, to rebuild the country's economic database.

It is expected that the next Article IV consultation with Nigeria will be held on the standard 12-month cycle.

Nigeria: Selected Economic Indicators





2002 1/

Real economy


Real GDP (at 1990 factor cost, change in percent)





Non-oil real GDP (change in percent)





GDP per capita (in U.S. dollars)





Production of crude oil (million barrels per day)





Consumer price index (change in percent; end of period)





Gross domestic investment (percent of GDP)






Consolidated government operations (in percent of GDP)


Total revenues and grants





Of which: petroleum revenue





Total expenditure and net lending





Overall balance (commitment basis)





Primary balance





Gross domestic debt






Money and credit


Net domestic assets 2/





Net credit to consolidated government 2/





Credit to the rest of the economy 2/





Broad money (change in percent)





Discount rate (percent; end of period) 3/






External sector


Current account balance (in percent of GDP)





External debt service due after rescheduling 2000-01

(In percent of GNFS exports)





Export of crude oil (million barrels per day)





Price of Nigerian oil (U.S. dollars per barrel)





Real effective exchange rate





(End of period; `-` indicates depreciation) 4/


Fund Position (as at October 31, 2002)


Quota (in millions of SDRs)



Outstanding purchases and loans (in millions of SDRs)




Exchange rate (as at October 31, 2002)


Exchange rate regime

Managed float with no pre-announced target

DAS rate (Dutch auction, ex-IFEM, naira per U.S. dollar)



NIFEX rate (open interbank market, naira per U.S. dollar)



Parallel market rate (naira per U.S. dollar)



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

1/ Staff projections.

2/ In percent of broad money at the beginning of the period.

3/ 2002 data is based on latest observation, that is, October 31, 2002 (for DAS exchange rate, the mid-point between lowest and highest bid rates is reported).

4/ 2002 data is based on latest observation, that is, July 2002.

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.


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