For more information, see Nigeria and the IMF

The following item is a Letter of Intent of the government of Nigeria, which describes the policies that Nigeria intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Nigeria, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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Abuja, July 20, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

In support of our economic reform programme for July 2000-June 2001, as set out in the attached Memorandum on Economic and Financial Policies (MEFP), we request a 12-month Stand-By Arrangement (SBA) in an amount equivalent to SDR 788.94 million (45 percent of quota). In the light of Nigeria’s external position, and given the terms for the use of Fund resources, we intent to treat the SBA as precautionary and do not intend to make purchases under the arrangement. Nevertheless, we hope that approval of this arrangement will provide a tangible sign of confidence in our programme and catalyze additional donor support from the international community for significant debt reduction to enable us to meet the deep seated need for poverty reduction. We are consulting with the leadership of the National Assembly to obtain their endorsement of the programme and we will publish our Memorandum on Economic and Financial Policies.

We propose that implementation of the programme be monitored against the monthly financial targets and quarterly financial performance criteria listed in Table 1 of the attached MEFP. As described in Table 1, some of these targets will be subject to adjustment in the event that the price of oil exceeds or is lower than that assumed under the programme. In addition, it is proposed that implementation of the structural elements of the programme be monitored against the structural performance criteria and benchmarks presented in Table 2 of the attached MEFP.

We propose that the International Monetary Fund carry out reviews of the program in December 2000, March 2001, June 2001, and early-August 2001 and complete these reviews based on observance of quarterly quantitative and structural performance criteria for September 30, 2000, December 31, 2000, March 31, 2001, and June 30, 2001, respectively. The first of these reviews will also focus on the budget and macro-framework for 2001; the focus of subsequent reviews will be determined during the course of the first review. Quantitative performance criteria for March 31, 2001, and June 30, 2001, will be established at the time of the first program review.

The Federal Government of Nigeria believes that the policies and measures described in our Memorandum on Economic and Financial Policies are adequate to achieve the objectives of the programme, but stands ready to take additional measures, if necessary to keep the programme on track, consulting regularly with the Fund. The Federal Government of Nigeria will provide the Fund with information that may be requested for the purpose of monitoring progress under the program. Following successful implementation of this program, we shall seek support for a comprehensive medium-term reform programme as well as a significant reduction in our external debt.

Separately, we have communicated to you our intention to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement of the International Monetary Fund at the time of the IMF Executive Board’s approval of Nigeria’s Stand-By Arrangement.

Yours sincerely,

Dr. J.O. Sanusi
Central Bank of Nigeria
Federal Republic of Nigeria
              Honorable Martins-Kuye
Minister of State for Finance
Federal Ministry of Finance
Federal Republic of Nigeria



Attachment I: Table 1. Quantitative Performance Criteria and Benchmarks.
Table 2. Structural Benchmarks.
Attachment II: Memorandum on Economic and Financial Policies of the Federal
Government for 2000

Memorandum on Economic and Financial Policies
of the Federal Government for 2000

I. Introduction and Economic Developments in 1999

1. Nigeria possesses abundant natural and human resources, including large reserves of oil and gas, fertile agricultural land, talented and well educated entrepreneurs, a skilled labor force, and a domestic market of 120 million people. Nevertheless, its role in the world economy has diminished since the late 1970s and its economic performance has fallen far short of its potential. This has primarily been due to frequent changes of government and policies as well as poor economic policy implementation that resulted in slow output growth, a lower standard of living, greater income inequality, and increased poverty. In particular, economic growth has been inhibited by the neglect of the non-oil export sector, high, inconsistent and dispersed rates of import tariffs, exchange market controls, large and inefficient state owned enterprises, and weak fiscal and monetary discipline. These factors have been aggravated by a demoralized bureaucracy, a weakened judicial system, and pervasive corruption. Political instability, the high cost of doing business and a lack of confidence have made it extremely difficult for the private sector to operate efficiently, discouraged domestic and foreign investment and encouraged capital flight.

2. The government that took office at end-May 1999, moved decisively and quickly toward restoring macroeconomic stability, adopting steps to reduce corruption, and initiating structural change. The economic policy implemented during June-December 1999 was monitored by IMF staff and included the passage of the budget for that period as well as the establishment of monthly quantitative performance targets in the fiscal, monetary and external areas and qualitative performance benchmarks in the structural areas. Most of the financial targets were met, although the implementation of structural reforms was delayed. Excessive budgetary and extra-budgetary spending by the previous administration was brought under control, especially through the halting of payments on large and wasteful projects. In the area of monetary policy, temporary measures were implemented to limit bank liquidity, and a market determined exchange rate system was introduced in late October. These measures, together with favorable agricultural output and the curtailment of fuel shortages, contributed to a sharp fall in the rate of inflation. In addition, the new democracy has begun to improve governance, and other major initiatives were announced to promote structural change and build institutional capacity.

3. The consolidated overall fiscal position, including state and local governments, was in balance in the period June-December 1999. However, the greater than expected proceeds from oil exports and royalties due to higher world oil prices, were largely offset by shortfalls from petroleum profit tax (PPT) receipts and from payments by the Nigerian National Petroleum Corporation (NNPC) for crude oil it receives, as well as from the transfer of theconsumption tax on petroleum products. Consequently, the target on domestic financing of the budget, adjusted for the higher oil revenue, was missed. The shortfall in PPT receipts appears to have resulted primarily from weaknesses in tax administration as various technical factors which reduced the tax liability, and which could have been known at the time of the preparation of the Budget and the Supplementary Budget, were not properly reflected in the budgeted amounts.1 All major categories of current and capital expenditure were broadly held within the agreed limits, with the exception of budgetary capital spending which was above the program target. External debt payments amounted to US$1.9 billion in 1999,2 exceeding the level expected under the informal monitoring.

4. Monetary and exchange rate policies were also in line with the understandings that had been reached with IMF staff. The net domestic assets (NDA) of the Central Bank of Nigeria (CBN) were held below the ceiling, notwithstanding the successive elimination of several temporary measures which had earlier been imposed to regain control over liquidity in the banking system. The prudent fiscal stance facilitated a steady reduction in the central bank’s minimum rediscount rate to 18 percent in November 1999. Net international reserves amounted to US$5.4 billion (equivalent to 4.5 months of imports) at end-December 1999, exceeding the agreed target. A market-based exchange system was introduced on October 25, 1999 as the CBN shifted its sales and purchases to the daily interbank market (IFEM) and discontinued the weekly Autonomous Foreign Exchange Market (AFEM) on October 28, 1999. This eliminated a multiple currency practice arising from the spread between the AFEM rate (set by the CBN on a weekly basis) and the freely-determined interbank market rate. The naira was also made convertible for current transactions as the two remaining exchange restrictions, arising from restrictions on remittances under the Nigerian Debt Conversion Programme, and a foreign exchange embargo on exporters who failed to repatriate export proceeds, were eliminated on October 15, and December 7, 1999, respectively. In reaction to increased pressures in the foreign exchange market in the second half of January 2000, the CBN prohibited the transfer between banks of foreign exchange purchased from the CBN in the IFEM. No new exchange restrictions on current international transactions will be introduced.

5. The progress in strengthening economic policies has not yet secured a sustained recovery in output and a resurgence in private investment, although price stability has been restored. Real per capita GDP is estimated to have continued to fall, with population growth remaining at 2.8 percent per annum. While favorable weather boosted agricultural production, oil production (which accounts for about one-third of GDP) declined by about 4 percent and the industrial sector continued to stagnate.

6. In the structural areas, the targets under the informally monitored program were met, albeit with an extended delay, with the exception of the completion of the investigations into financial malfeasance under previous administrations which are ongoing. The Anti-Corruption Bill was finally adopted by the National Assembly in early June 2000. The CBN commenced monthly publication of key financial statistics in March 2000, and the NNPC began monthly publication of key data in May 2000. A comprehensive privatization program for the years 2000-01 was announced by the Vice President in his capacity as Chairman of the National Privatization Council. The audit of the foreign exchange transactions of the CBN for 1998 was completed as scheduled and the statutory external audits of the accounts of the Nigerian National Petroleum Corporation for 1997 and 1998 were also completed and have been published.

II. Economic Program for 2000

7. The government has prepared a comprehensive economic program for the year 2000, that is designed to reduce poverty, achieve faster sustainable growth, and raise living standards. Our strategy focuses on the encouragement of the private sector to lead this process and comprises the following major elements:

  • Maintenance of sound macroeconomic policies, including the adoption of a prudent budget, the implementation of a conservative monetary program, and the maintenance of a market determined exchange rate;

  • Better utilization of resources, including strengthening the fiscal regime for the oil and gas sector, following a review of existing oil and gas tax arrangements and incentives, as well as tax administration capacity;

  • Deregulation and privatization, with emphasis on speedy actions in the power, telecommunications, and downstream petroleum sectors, and steps to develop an improved regulatory framework in these and other sectors;

  • Improving governance, increasing transparency, reducing corruption, reforming the judiciary and the civil service, and building capacity in order to deliver efficiently basic public services;

  • Reducing poverty and reallocating public spending in favor of the social sectors, especially health, education, and essential infrastructure, while reducing expenditure on large and wasteful investments;

  • Normalization of relations with external and domestic creditors on equitable and comparable terms.

  • Preparation of a comprehensive trade liberalization program within the context of the WTO prescriptions.

  • Preparation of an action plan for the implementation of fiscal federalism, including improving state and local government financial and accounting systems.

8. The main macroeconomic objectives for 2000 are to: (a) increase real GDP by 3½ percent; (b) contain the inflation rate to single digits during the year ending December 2000; and (c) reduce the external current account deficit from 11 percent of GDP in 1999 to less than 1 percent of GDP in 2000. In view of the projected fall in the oil price over the medium term, the program will aim to rebuild net international reserves by US$2.4 billion to US$7.8 billion by end-2000 (equivalent to 5.5 months of imports). These projections are based on the assumption that the world oil price averages US$24.5 per barrel in 2000.

9. Program implementation will be carefully supervised by the Economic Policy Coordinating Committee (EPCC) which is chaired by the Vice-President and includes key economic ministers. A small permanent staff will be established to monitor implementation with the assistance of a working group with representatives of all the relevant ministries and agencies. The Secretary to the Committee will head this unit and report to the Vice-President on program implementation.

A. Fiscal Policy

10. The 2000 Budget amended by the National Assembly in June 2000, calls for a deficit of 95 billion or 2.7 percent of GDP at the level of the federal government, compared with a deficit of more than 8 percent of GDP in 1999. The budget includes a substantially higher revenue allocation for state and local governments, including the payment for the first time of 13 percent of oil-based revenues to oil-producing states. The budget is based on an international oil price of US$20 per barrel and a level of oil production of 2.33 million barrels per day, reflecting the increase in OPEC quotas announced at end-March and higher production of OSO condensate (which is outside the OPEC quota).3

11. During the first half of the year the realized price of crude oil was higher than assumed in the budget and 75 billion of “excess proceeds” is included in the budget as revenue. However, if the oil price continues to be higher than US$20 per barrel, the government intends to save the additional excess oil revenues for “a rainy day” and to reduce the deficit as well as support poverty alleviation programs in the future; if the oil price is lower, fiscal policy will be reviewed accordingly. If the price of crude oil is to average US$24.5 per barrel in 2000 (as some agencies including the IMF and World Bank projected when this document was prepared), savings of some US$2.0 billion of oil earnings are expected. This will consist of (i) excess proceeds over and above the 75 billion already earmarked for distribution to the three tiers of government (projected savings: 116 billion); (ii) setting aside the off-shore portion of the 13 percent of natural resources based revenues earmarked for the oil-producing states, for distribution after the formal adoption of the new revenue sharing formula (projected savings: 46 billion); and (iii) the portion of Federation revenue earmarked for the Oil and Mineral Producing Development Commission, which will also be set aside pending the adoption of the revenue sharing formula (projected savings: 38 billion).

12. The Federal Government announced, in its 2000 Budget proposal, its policy to deregulate petroleum prices, charge the NNPC the export parity price for crude oil it uses for refining, and thus eliminate the subsidy on petroleum consumption. As a first step, the retail prices of gasoline were increased by 10 percent on June 1 and a committee including representatives of all interest groups and the Federal Government has been formed to review all aspects of the petroleum products supply and distribution sector of the Nigerian economy and make recommendations. In the meantime, petroleum consumption will continue to be subsidized by charging NNPC 5 per liter (compared with export parity of 20 per liter) for crude oil it receives. The budget assumes that unlike last year, the NNPC will pay in full what is due for the crude oil it receives (at 5 per liter), inter alia through reducing inefficiencies of its operations. Given the importance of safeguarding the budget and reducing the inefficiencies in the operations of the NNPC, the program includes a quantitative performance criterion on NNPC’s payment for crude oil it receives (5 per liter or 104 billion in 2000) and petroleum tax it collects (30 billion in 2000) by the end of each quarter, allowing for two months credit in effecting the payments to the Treasury.

13. The amended 2000 Budget envisages an increase in federal government spending to 653 billion (20.3 percent of GDP), up from 524 billion (16.9 percent of GDP) in 1999. In addition, in May, the National Assembly approved a supplementary budget for 1999 of 49 billion (1.4 percent of GDP), raising the total appropriation in 2000 to 702 billion. The Government shall fulfill the requirements in law to honor the provisions of the 2000 Appropriations Act, implementing the Act in full compliance with the legal obligations; in particular, ensuring that all appropriated expenditures are subject to due process. With less than six months remaining in the year, and given the time it takes to observe the procedures for appraisal and procurement in full, it is unlikely that the allocations will be fully utilized by end-December 2000. Thus, it is expected that there will be an under-spending at the Federal Government level in 2000 of some 150 billion. While the Government may have to initiate some requests for additional supplementary appropriations this year to meet unforeseen requirements, it will ensure that any payments for such appropriations in 2000 will be covered by additional resources, that may be available, as discussed below in paragraph 15. The government will also ensure that a programming exercise is undertaken for the new projects introduced into the 2000 budget, which can be expected to impact on spending in future years.

14. To ensure the quality and effectiveness of federal expenditure, the government will strictly adhere to the procurement and spending procedures that have been reinstated, pending the adoption and implementation of new procedures which have been developed with the assistance from the World Bank (see paragraph 46, below). In addition, in order to underscore it’s commitment to fiscal prudence and transparency, the Government will contract a firm of external auditors to carry out “value-for-money” audits of randomly selected Federal Government expenditures. The audit will check if expenditure was duly authorized, if procedures were correctly followed, and whether the expenditure represented value for money. These audits will begin with a report on selected expenditures in the third quarter of 2000. The audit reports will be published within three months of the end of the relevant quarter. The timely completion and publication of the audit reports will constitute a performance criterion. Finally, the Federal Government, with the assistance of the World Bank, will carry out a public expenditure review in support of the 2001 and subsequent budgets.

15. Consistent with the expectation of under-spending arising from due process being applied to the implementation of the 2000 Appropriations Act, the Government will not incur expenditure in excess of the revenues estimated at 551 billion in the 2000 Budget approved by the National Assembly, except as specified in this paragraph. Federal Government spending in 2000 could exceed the above level only to the extent that due process is followed, and that (i) non-oil revenue exceeds the present estimate in the 2000 Appropriations Act (330 billion),4 or (ii) to the extent that budgetary funding is received through the IDA Economic Reconstruction Credit, a similar loan from the African Development Fund (ADF), and/or grants or highly concessional donor funds, all to support poverty reduction programs. The Federal government is committed: (a) not to borrow from any sources to finance expenditures, except from the IDA, ADF, and other donor sources referred to above; (b) not to use oil excess proceeds—beyond the 75 billion already included in the 2000 budget revenue estimates—to finance any Federal Government expenditures (in the event that there are further distributions of excess proceeds); and (c) not to issue warrants without cash backing. These commitments will constitute performance criteria. Furthermore, the government will not accumulate new domestic arrears. If claims are submitted under the National Priority Projects for which work had been concluded prior to September 15, 1999 such claims will not be considered as constituting new domestic arrears.5

16. The budget envisages containing the wage bill to 173 billion (4.9 percent of GDP) in 2000.6 This should accommodate the doubling of wages in the public service, brought about by the introduction of the new salary structure effective May 1. The 1999 wage bill included a sizable amount of payments on arrears, “ghost workers,” and underpayment of benefits. Following the completion, by end-September 2000, of an inventory of federal civil servants, payments to line ministries and public institutions will be made on the basis of staff strength, rather than the number of positions or other criteria. In addition, measures are being taken to eliminate ghost workers and to “right size” the civil service (see section on governance). The hike in civil service wages should offset, in part, the decline in real wages experienced by the Federal Civil Service over the past decade and lay the foundation for the development of a professional, results-oriented civil service that would be less susceptible to corruption.

17. Nonwage recurrent expenditure is envisaged to rise somewhat, reflecting a 16 billion (0.5 percent of GDP) increase in domestic interest payments as well as a 9 billion (0.3 percent of GDP) increase in outlays for overhead .

18. Total federal government capital spending is expected to be 200 billion (5.7 percent of GDP) in 2000. Unproductive investment spending will be minimized. Specifically, (a) there will be no extrabudgetary outlays, and no new commitments on the national priority projects; and (b) the Petroleum (Special) Trust Fund (PSTF), which received 21 billion in transfers from the federal government budget, will be dissolved during the course of the year as its projects are shifted to the spending ministries for implementation. These reductions in unproductive spending will make room for a significant increase in “core” Federal Government capital expenditure. Consistent with the government’s commitment to poverty alleviation, a minimum of 65 billion will be earmarked for projects specifically designed to address poverty.

19. The budget also envisages improvements in tax policy and tax administration. We anticipate that the revenue from the PPT will be at least 240 billion.7 This reflects, in part, the new Memorandum of Understanding (MOU), regulating the operations of the Joint Venture Companies (JVC) in the oil and gas sector that, de facto, became effective January 1, 2000. The new MOU incorporates a cost control mechanism which penalizes excessive operating costs by means of a tax inversion mechanism and discontinues the Reserve Addition Bonus, a tax credit for JVC that hitherto had been given for an increase in the proven or probable oil reserves. In addition, in December 1999 the Government commissioned a review of existing petroleum taxation and fiscal incentives granted to the oil and gas companies. This review has now been substantially completed. It revealed that the MOU provides a tax regime which is broadly appropriate. However, there are weaknesses in tax administration that need to be addressed urgently and oil companies should no longer be allowed to offset the costs of new gas and power projects against their PPT liabilities. Measures to strengthen tax administration will be in place by end-December 2000, and a new tax regime for gas and power projects will be adopted by end-March 2001. Natural resource revenues in 2000 will also be augmented by further growth in receipts from upstream gas sales.

20. The Government has earlier expressed its intention to stop, by 2008, all flaring of gas which is produced as a by-product when crude oil is produced (“associated gas”). Large upfront investments have already been made to create the infrastructure required to transport, liquefy, and export this gas. In order to make these investments attractive for the oil companies operating in Nigeria, tax incentives have been granted for these projects (see previous paragraph). This means that Nigerian taxpayers are largely paying for the termination of gas flaring. However, the world at large will benefit from the elimination of the environmental burden posed by the flaring of Nigeria’s associated gas. In view of this, the Government will seek access to financing from multilateral sources, including the World Bank’s Global Environment Facility and other funding facilities for environmentally friendly technologies, to help finance the gas projects.

21. The Government will continue to broaden the domestic revenue base and strengthen tax administration. We have begun to expand the coverage and strengthen the enforcement of the VAT. Specifically, we have opened 17 new VAT offices and intend to commence operations of 33 more by end-September 2000. In addition, VAT Tribunals have been established in 3 zones of the Federal Inland Revenue Service. The Tribunals in the other 5 zones will be established by end-September 2000 and all Tribunals will start functioning by the same date. This will assist in the overall administration of the VAT and ensure early payment of the tax. The government will submit to the National Assembly a proposal to eliminate imported food items from the list of exempted items under the VAT Law. Our intention is to continue to broaden the VAT base, and begin raising the VAT rate with a view to doubling it to 10 percent over the medium term. In addition, the collection of nontax revenues in 2000 is expected to be more than doubled to some 50 billion, bolstered by a sharp increase in profit transfers from the CBN and other parastatals.

22. Discussions will be initiated, by end-September 2000, with creditors on the modalities for an orderly and equitable settlement of domestic arrears, based on the inventory of outstanding claims to be completed by the Ministry of Finance. The amounts to be paid will be settled on a bilateral basis with individual creditors. Priorities in payments are being established based on clear principles—comparability, transparency, and consistency with available budgetary resources—and the payments schedules will be published.

B. Poverty Reduction

23. Federal budgetary spending is being reoriented away from wasteful outlays, and greater allocations have been made for social sectors in the 2000 budget. We intend to greatly increase the access of the population in rural areas to potable water; promote Universal Basic Education (UBE); encourage gender equality; reduce maternal, infant and child mortality; improve reproductive health and ensure environmentally friendly policies. As a first step towards this end, we intend to ensure that water, health, education and other poverty programs will receive highest priority, and this spending will be protected even in the event that cutbacks need to be made in other areas because of unforeseen adverse circumstances.

24. Poverty Reduction Programs will be carried out within the framework of a Poverty Reduction Initiative (PRI). The main objective of the PRI is to ensure that (a) resources are used productively and directed to community based initiatives; (b) projects are executed effectively under professional supervision; (c) strict guidelines regarding transparency and accountability are adhered to; and (d) that donor participation is encouraged. The activities under the PRI will be reported quarterly with full accounts and reports on physical monitoring of outputs by a central monitoring unit. The development of the modus operandi of the PRI commenced in April. The operations of the PRI will be fully assessed during the third review of the program. As the capacity of federal government agencies to supervise and monitor poverty reduction programs in a professional, efficient, and transparent manner improves, the role of the PRI will gradually be subsumed into relevant ministries and agencies.

25. The Federal Government budget allocates 65 billion (1.8 percent of GDP) of its capital budget to expenditures directly aimed at poverty reduction such as outlays on education, health, and water supply, up from 27 billion (0.9 percent of GDP) in 1999. The intention is to start channeling the funding for these spending items through the PRI, at which time additional funding will be sought from bilateral and multilateral donors, to be complemented by co-financing of state and local governments.

26. The Government will initiate in 2000 the formulation of a comprehensive poverty reduction strategy with the participation of international donor agencies, and local institutions (that is intended to be developed into an interim “Poverty Reduction Strategy Paper” (PRSP) by the end of 2000). In this regard, good progress has already been made in the context of the preparation of the Vision 2010 report. In this report the Government spelled out its intention to reduce the incidence of poverty to below 20 percent of the population by the year 2010. This was to be achieved by boosting economic growth to at least 7 percent per annum, reducing population growth to 2 percent, and directing investment towards education, health, housing, water supply, transportation, electricity, agriculture and micro-credit.

C. Fiscal Federalism

27. The new federation revenue-sharing formula, including the minimum13 percent derivation of natural resource-based revenue net of the government funding required for maintenance and investment in oil and gas sectors stipulated in the new constitution, substantially increases the share of revenue going to the oil producing areas. In all, the total revenue of the state and local governments in 2000 could increase by 8 percentage points, to over 18 percent of GDP. As the revenue shares of sub-Federal governments rise, it is expected that a number of functions presently performed by the Federal Government will be devolved. Hence, state and local governments are expected to become primarily responsible for additional public services in health care, primary and secondary education, and other basic social services.

28. The Revenue Mobilization Commission is now preparing the implementation of this fiscal federalism. It is necessary to raise the institutional capacity of state and local governments to match the sharp increase in the financial resources channeled to them. To the extent that higher revenues might exceed the capacity to spend effectively and productively, consideration will be given to the possibility of saving part of the higher proceeds. As part of the second review of the program an assessment will be made of progress in establishing a system to gather information on and monitor fiscal operations of state and local governments.

D. Monetary and Exchange Rate Policy

29. The monetary program for 2000 has been formulated to be consistent with the targets for growth, inflation, and the build-up of net international reserves outlined above. Broad money is projected to grow by 13½ percent (down from 37 percent in 1999), compared with a 13 percent expansion of nominal GDP, based on the assumption that the velocity of money would remain broadly unchanged from the 1999 level.8 With the strict implementation of the program, interest rates, which have already begun to fall, are expected to decline further in real terms over the course of 2000.

30. A further easing is envisaged in the temporary monetary measures introduced in 1999. The cash reserve requirement (the cash ratio) is scheduled to be reduced from 12 percent to 8 percent during 2000, and the liquid asset ratio—defined to continue to include eligible collateralized private instruments—is scheduled to be reduced from 40 percent to 30 percent. As a first step in this process, in April 2000, the cash ratio was lowered to 11.5 percent and the liquid assets ratio was reduced to 35 percent. Monetary policy will be mainly conducted by open market transactions with treasury bills. Taking into account the increase in the money multiplier resulting from the lower cash ratio, the expansion of reserve money will be limited to 9 percent in 2000, so as to limit the broad money growth to 13½ percent as indicated above.

31. Central Bank intervention in the recently introduced interbank market will be guided by the objectives of increasing net international reserves (NIR) as targeted under the program and of preserving orderly market conditions, with the interbank rate not deviating significantly from the parallel market rate. Apart from such intervention, the CBN will allow the market to determine the exchange rate. The interbank foreign exchange market will be further developed and deepened step-by-step, including, inter alia, through the elimination of the maximum spread of 1 between buying and selling rates during 2000.

32. Further strengthening of regulatory and supervisory services is crucial to improve the soundness of the financial system and to enhance the effectiveness of monetary policy. The recapitalization of five of the ten banks in distress at end-December has been completed. The decision to sell the remaining five banks has been taken, and the sale will be completed once background checks on the prospective buyers and other legal formalities are concluded. In the event that the banks are not sold their licenses will be revoked. The thrust of government policy in this sector will be to enforce rigorously the country’s banking supervision laws, including the eight (8) percent risk-weighted capital adequacy ratio and the minimum capital requirement for new banks, which was increased from 500 million to 1,000 million, effective January 1, 2000. Furthermore, the CBN will (a) move towards adopting the Basel Core Principles, including by familiarizing its staff with the methodology for assessing compliance with the core principles; (b) increase the frequency of on-site inspection of banks; (c) promote loan recovery; and (d) require banks to submit their monthly returns with a lag of only two weeks. The CBN, in collaboration with the Nigeria Deposit Insurance Corporation, will roll out a Credit Risk Management System and an automated Bank Analysis System, which will assist banks in carrying out their assessments of the creditworthiness of potential borrowers, and provide early warning signals for enhanced supervision of weak financial institutions, respectively. In addition, the CBN is establishing a new department which will be responsible for the off-site and on-site supervision of the nonbank financial institutions, and will strengthen the in-house capacity to supervise the nonbank financial sector. Over the medium term, the government aims to reform the financial sector with a view to improve intermediation, encourage savings and make domestic financial facilities better available to investors, including small-and medium-size enterprises.

E. Deregulation and Privatization

33. The Government has assigned high priority in its economic program to deregulation and privatization. At present, some 600 public enterprises are involved in almost all aspects of the economy and dominate activity in the power, telecommunications, petroleum, and steel sectors. Most, if not all, operate inefficiently and many require direct subsidization from their sponsoring ministries and/or indirect subsidization from other public enterprises through the accumulation of payments arrears. Their inefficiencies act as a constraint on economic growth and, in the case of the public utilities and oil refineries, have led to widespread losses of production and increased the cost of doing business. The elimination of these structural obstacles is therefore crucial to improve the efficiency and competitiveness of the Nigerian economy. Furthermore, the dominance of the public sector has resulted in ill-conceived investments and poor use of financial resources, and has encouraged corruption.

34. We are therefore determined to establish appropriate regulatory frameworks and regulatory bodies for each of the key sectors—power, telecommunications, oil and gas—and then to liberalize each of the sectors. We then intend to pursue vigorously the privatization of these and other sectors in a clear, fair, and transparently administered manner. In order to ensure close coordination and assure consistency of the actions of the National Council on Privatization and the relevant line Ministries, the Vice-President, in his capacity as Chairman of the National Council on Privatization (NCP), has inaugurated Steering Committees for aviation, oil and gas, power, and telecommunications. Each Committee consists of some 20 members, is chaired by the Minister responsible for the relevant sector, and coordinates activities of the NCP and the line ministries in their respective sectors.

35. In the power sector, we have retained the services of an expert to develop a national power policy whose objective is to ensure the efficient provision of reliable, low cost power supply to the domestic market. The policy statement has now been completed and formally adopted by the government. The government is also developing a new Electricity Law and Regulatory Framework Law, which will be approved by the Council of Ministers by end-December 2000 for subsequent submission to the National Assembly. The new regulatory body for the power sector will be established by end-March 2001. To address the immediate need to reduce serious power shortages, the government has developed an emergency power program that includes inviting independent power producers (IPPs) to tender to supply short-term emergency power to the national grid, so that the power shortages will be reduced by 75 percent within 12 months, and fully eliminated within 24 months. The tariff structure will be adjusted so as to remove the electricity subsidy in urban areas within three years. Finally, with the assistance of the World Bank, by end-June 2001, the national power company (NEPA) will be restructured to create self standing companies; these will subsequently be privatized.

36. The Government has now brought its policy for the telecommunications sector up to international standards. We will also develop a new telecommunications law which will be approved by the Council of Ministers by end-December 2000 for subsequent submission to the National Assembly. Once approved by the National Assembly, we will then complete the reform of the legal and regulatory framework, with a view to finalizing it by January 2001. We are also strengthening the telecommunication regulatory authority (NCC) by providing enhanced autonomy, appropriate human resources, and necessary equipment to enable it to conduct its functions efficiently and effectively. We will retain the services of a merchant bank for the privatization of the national telecommunication companies (NITEL/M-TEL) and intend to bring them to the point of sale9 by end-March 2001 (a strategic investor will be allowed to purchase up to 40 percent of the shares).

37. Following the completion of a petroleum sector review by the World Bank, the Government will adopt, by end-January 2001, an action plan for the reform of the petroleum sector, including privatization of the refineries. We intend to bring the refineries to the point of sale by end-October 2001.

38. The government is also sharply reducing its involvement in other sectors of the economy. In the year since taking office, the government has privatized four cement companies (Ashaka Cement, Benue Cement, the Cement Company of Northern Nigeria, and West African Portland Cement). Together, these four cement companies account for 90 percent of domestic production. The government has also sold its shareholding in the FSB International Bank and Unipetrol. Together with the sale, by end-September, of government’s share in African Petroleum and NOLCHEM—which will take place in conjunction with Shell’s sale of its share in the latter company—the government will have ended its ownership of companies involved in the downstream marketing of petroleum products. We will also issue a call for competitive bids for the sale of the fertilizer company (NAFCON), by end-December 2000, pending resolution of legal action; complete the ongoing sale of 5 banks by end-September 2000; bring to the point of sale the government shareholdings in NICON Insurance, Nigerian Reinsurance, the Nicon Hilton Hotel, and Nigeria Hotel Ltd. by end-December 2000; and finalize the divestiture of another three hotels by March-2001. The issuance of calls for competitive bids for the privatization of Nigerian Airways will be made by end-March 2001.

39. The restructuring and injection of new capital into corporations slated for privatization will be minimized, because such actions can be carried out more cost-effectively by potential investors. The Government will inject no new public money into the Ajaokuta and Aladja steel complexes in 2000. By that time a technical audit to study options for both complexes will be in place. Immediately thereafter, the complexes will be prepared for privatization, in accordance with best practice and on the basis of the study’s recommendations, in consultation with the World Bank.

F. Regulatory Framework

40. The process for the incorporation of a business in Nigeria is cumbersome and expensive. Businesses have to comply with a wide range of regulations, and have to obtain numerous permits, either prior to investment or during operations, which require voluminous documentation, and take a long time to be granted, as well as offering substantial scope for rent-seeking through discretion. Part of the delays involved in securing permits arise from over-lapping functions across different institutions. The process of issuing permits and licenses is now being streamlined by eliminating all excess paperwork and requirements. The information requirement for business permits will be limited to the minimum needed for statistical purposes; a “one-stop shop” (The Nigeria Investment Promotion Commission) has been established where licenses will be issued on demand, with a minimum of paperwork; the fees charged will be strictly limited to the operational costs for the issue of licenses.

41. There are at least 25 different investment promotion incentives which relate to domestic taxes, import taxes, or guarantees relating to repatriation of imported capital, the payment of technology fees and foreign currency domicilliary accounts. Many of these incentive schemes are either unnecessary or only partially effective. The Government intends to eliminate all scope for discretionary exemptions, waivers or incentives, and will instead ensure that the tax system is fair, equitably administered, and provides strong incentives for investment and growth to everyone, on a transparent basis. With regard to the taxation of trade, the government’s objective is to move rapidly to a system that no longer discriminates against export-oriented activities, and which ensures a level playing field for all, with no scope for discretion, waivers or exemptions.

G. Trade Liberalization

42. The Government is of the view that trade liberalization is essential to strengthen the international competitiveness of the Nigerian economy. Policies adopted in the past, designed to insulate the domestic economy from international competition, contributed to economic decline. The import tariff regime had a strong bias against export-oriented activities, and by adversely affecting agricultural exports contributed to increased rural poverty; non-oil exports now amount to only 2 percent of GDP. The cushion from international competition enjoyed by this protection enabled both public and private sector enterprises to operate inefficiently, charging unduly high prices to the population, and encouraged corrupt practices. While Nigeria’s fledgling industries will not be over-protected, they will also not be allowed to be smothered to death with dumping and other unfair practices at the expense of Nigerian employees.

43. A major reduction of import duty rates has been announced. Such reductions were effected mostly on raw materials and intermediate imports, although tariffs were lowered also on some finished goods. Tariff rates were raised substantially for several items. The average tariff has now been reduced from 24 percent to about 12 percent bringing our system into closer harmonization with the ECOWAS region. A full scale review of the tariff structure is being undertaken, with assistance to be provided by IMF staff and a bilateral donor, for completion by December 2000. This is expected to result in proposals for the rationalization of the tariff structure, including the elimination of duties on many items. Import bans on maize, gypsum, millet, sorghum and wheat flour, and barytes and bentonites were removed in January 2000 . This will leave only bans on imports for health and safety (mosquito repellant coils and retreaded/used tires) or moral reasons (gaming machines). Also, we no longer grant ad hoc exemptions of import duties.

44. Action is being taken to improve customs administration and enhance the efficiency of administrative procedures in the ports, which should substantially reduce the costs of doing business. We have appointed a high level committee to report on how to tackle corruption in the customs service and to make recommendations on how to create a more streamlined and efficient administration. Efforts will continue to be made to limit the delay in clearance at ports to 48 hours; this will be facilitated by the installation of the ASYCUDA system at Lagos and other ports. We plan to privatize the management of the major ports, and with the assistance of the World Bank, we are preparing an action plan to this effect which is to be completed by end-December 2000.

45. The Government will complete, by end-2000, a comprehensive review of the level of real effective protection and the value added created in a range of industries. It is recognized that import liberalization could threaten the financial viability of certain manufacturers, including state-owned enterprises. However, we cannot afford to continue subsidizing indefinitely firms whose costs of production are not internationally competitive. While this policy reform will free scarce resources for deployment on more productive activities, there will be transitional difficulties for displaced industries. We are determined to diminish the consequent hardships. We have, therefore, established a high-level committee to examine the possibility of providing carefully targeted temporary assistance for some unviable firms to allow the gradual phasing out of their activities and to provide, by end-2001, concrete recommendations for the retraining of workers. The social safety net will be strengthened for those workers whose prospects for reemployment are poor, in accordance with the poverty reduction program outlined above. To help ensure that viable firms are not disadvantaged by the reforms, an antidumping mechanism is being created in the context of our WTO commitments.

H. Openness, Governance, and Institution-Building

46. The government attaches the highest priority to strengthening the rule of law in Nigeria, including by taking significant steps to bring about a material decrease in official corruption. The government is aware that only by doing so will the public confidence in institutions and the efficient use of Nigeria’s resources, as well as confidence of investors, both foreign and domestic, be satisfactorily built up. To this end, a number of policy initiatives have already begun and we are determined that these be carried through with vigorous implementation of appropriate measures. Key measures shall include:

  • The creation of a new independent Anti-Corruption Commission under legislation which was given Presidential assent on June 13, 2000. The Commission will be established and its head nominated by end-September 2000. The Commission will have primary jurisdiction over the investigation and prosecution of all forms of official corruption, including the recovery of misappropriated public property whether held domestically or abroad.

  • The rigorous investigation and prosecution of past official corruption, including recovery of misappropriated public property. These actions will continue to be pursued by the Attorney General and others who are responsible for law enforcement until the Anti-Corruption Commission begins operations and exercises its primary jurisdiction over such matters. A comprehensive progress report on the Government’s anti-corruption campaign, including investigations of past abuses, has been prepared. In a related matter, it should be noted that a special panel appointed by the President has completed a review of approximately 4,000 public contracts awarded during previous administrations and has recommended the cancellation of some 1,700 contracts, worth about US$1 billion, and the renegotiation of other contracts valued at US$ 4.6 billion. In particular, all 31 oil exploration and production licenses awarded in early 1999 have been withdrawn. We are confident that the international community, including the multilateral financial institutions, will provide the necessary support to the Commission, especially in its efforts to recover misappropriated funds held abroad.

  • Firm action to combat transnational bribery. To this end, among the first measures to be taken by the government will be to initiate discussions with the OECD to include Nigeria in the OECD Working Group on Bribery in International Business Transactions, which preparatory phase is a prerequisite for accession by nonOECD countries to the OECD Convention on combating Bribery of Foreign Public Officials. Following inclusion in the working group, and implementation of the policies and institutional arrangements that are the prior conditions for accession to the convention, the government will promptly propose the adoption by the National Assembly of the necessary legislation to bring Nigeria into conformity with the requirements of the Convention.

  • Prevention of money laundering. The 1995 Anti-Money Laundering Decree has been ratified as an Act, effective under the 1999 Constitution. In our view, this law is adequate for combating money laundering. Nevertheless, the government will approach the Financial Action Task Force (FATF), which is hosted by the OECD, to ensure that this legislation is in conformity with international standards; we will also strengthen the enforcement of this legislation. By end-June 2000, the FATF’s Forty Recommendations on anti-money laundering will be adopted, and the government will request the FATF to coordinate Nigerian participation in peer reviews of implementation of anti-money laundering efforts.

  • Establishment and implementation of institutional safeguards against future misappropriation of public property, including by improving fiscal transparency and accountability. The Central Bank of Nigeria and the NNPC will be subject to annual independent audits by reputable private firms. The CBN has also started the monthly publication of foreign exchange inflows and outflows through the CBN, providing the public with, inter alia, information on the government’s earnings from the oil sector. As regards the oil sector in particular, (a) a team of experts contracted by the World Bank has completed a flow of funds analysis and an NNPC management audit during the first half of this year; (b) following a period of 12 years during which only scant information about the NNPC was made available, monthly publication of comprehensive data on the financial operations of NNPC has been resumed; and (c) the publication has been strengthened by including additional information and made more user friendly and is now published on a monthly basis with a one-month lag. Comprehensive data on the oil sector has been issued in annual publications for 1997 and 1998 and in monthly publications from January through June 1999. By end-June 2000, the monthly publication on the Nigerian oil sector will contain up to date data through December 1999 and from December 2000 it will be published with a three month lag.

  • Implementation of procedures to ensure that all public sector contracts above 20,000,000 be awarded only through public tender in accordance with international bidding rules. Such rules, including that all such contracts be advertised publicly and be subject to open competitive tendering and the public opening of tenders, have already been, and will be vigorously enforced. The Government has also been working with the World Bank to review public procurement practices. Based on the results of the reviews, new procurement procedures will be published, and instituted from end-March 2001 to help ensure that procedures are in accordance with best international practices.

  • Improvement of the federal budgetary process. This will include the strict observance of the statutory timetable for the submission of public accounts to the office of the Auditor General from the Accountant General of the Federation and for the submission of the audited reports from the Auditor General to the National Assembly. Other improvements will include: (a) the feasibility and efficiency of major new capital projects will be assessed, with assistance to be provided by the World Bank under its Economic Management Capacity Building Project (EMCAP), and existing (or suitably revised, as agreed with the World bank) procurement and spending procedures will be strictly enforced; (b) a circular has been issued which reiterates that line ministries are prohibited from incurring commitments in excess of warrant releases; (c) warrants will be released only in conjunction with the release of funding mandates and warrants for capital expenditures will be phased so that they are released only for those projects that have already satisfactorily passed the appraisal test and are in line with established procurement practices; (d) line ministries will submit data on commitments and payments basis to the Accountant General of the Federation; (e) the remaining extrabudgetary expenditure and funds (e.g., those relating to the Special Funds, the Education Trust Fund, and the now defunct Petroleum Special Trust Fund) will be brought into the budget; (f) the Office of the Auditor General and the Accountant General of the Federation will be provided with the necessary budgetary and human resources so that government accounts can be compiled and audited on a timely basis; and (g) treasury and budget management will be strengthened, with technical assistance to be provided by Fund staff. We have also commenced the publication of key financial statistics of the NNPC and the CBN.

  • Civil service reform. To this end, we will develop an action plan. In line with recommendations made in the Vision 2010 report, this will incorporate firm proposals for right-sizing the Federal Civil Service, concomitant with the proposed shift in responsibilities from federal to state and local governments under fiscal federalism. Procedures are being established for close scrutiny of the public sector payroll, including centralization of administration and control, with precise steps to eliminate ghost workers. On May 1, the government announced an increase in civil service salaries by about 100 percent. In addition, consideration is being given to monetizing all public service benefits and make necessary adjustments to the personal income tax rates to cushion the tax effects of monetization. In the medium term, a system to periodically review the conditions of service will be established.

  • Material improvement in the administration of justice. To this end, we are undertaking a number of steps. First, the authority to nominate judges for appointment or removal is vested in the National Judicial Council. The President has submitted to the National Assembly the nominations of members of the Council to the Senate, which have been approved . The government shall ensure the de facto independence of the National Judicial Council. The National Judicial Council is expected to act quickly to increase the number of judges, and if appropriate, make recommendations for removal of judges. Second, special tribunals have been abolished, and pending cases have been transferred to Federal High Courts. Third, sovereign immunities previously enjoyed by certain public agencies have been removed and these agencies may now be sued in regular courts of law. Fourth, the government will seek new legislation to create a specialized court for commercial crimes and related offences. In the interim, an “in house” arrangement has been made within the Federal High Court to provide a cadre of judges specializing in cases concerning narcotics, corruption in banks, and other economic crimes. This is expected to ensure speedy resolution of the affected cases. The government is well aware of the damage caused by advance fee fraud and vigorously pursues all cases that come to its attention. Fifth, greater guarantees will be provided for effective implementation of property rights, including trademarks and patents, by, inter alia, strengthening provisions for recovery of damages in the event of a breach of those rights. To this end, the government has instructed the adoption of standard binding arbitration provisions in public contracts, and will encourage their adoption in private contracts. Sixth, the government will vigorously implement a policy of noninterference in judicial decision making. Finally, by end-December 2000, we will prepare a comprehensive action plan to strengthen the judiciary and improve the operation of civil process. The plan will include provisions to improve remuneration of judges, increase the number of judges and supporting judicial personnel, expand and upgrade court facilities, and improve the administration of case management.

47. The reform program contains major initiatives to strengthen institutional capacity, with technical assistance being provided under the UNDP/IMF-supported program, the World Bank and other bilateral and multilateral agencies. An action plan has also been instigated to address serious deficiencies in economic statistics that impede timely and accurate monitoring both of economic developments and program implementation. The IMF/UNDP technical assistance program at the Federal Ministry of Finance and the Central Bank of Nigeria will also facilitate program implementation.

I. External Debt Management

48. The Government is committed to regularizing relations with all creditors on equitable and comparable terms. To initiate this process, we paid over US$1.9 billion in debt service to our creditors in 1999 (15 percent of exports of goods and nonfactor services), which included a carry-over of an unused budgetary provision in 1998 of US$0.4 billion. Of this amount, we paid about US$0.7 billion to our Paris Club creditors, substantially reducing arrears on post-cutoff-date debt. The budget makes provision for further debt repayments in 2000, although our present circumstances do not permit us to meet all our outstanding obligations. We are, therefore, actively seeking relief from the Paris Club and other creditors. Debt negotiations are being conducted in a spirit of close cooperation and we do not intend to make any unilateral decisions.

49. The gross external financing requirement for 2000 is projected at about US$26 billion. Private capital inflows and project disbursements from the World Bank and other multilateral agencies are expected to be around US$1.7 billion. If the Paris Club reschedules arrears outstanding on pre-cutoff-date debt at end-1999 and the current maturities on pre-cutoff-date debt due in 2000 on nonconcessional terms, the residual financing gap is estimated at about US$1.7 billion. The above estimates do not include US$250 million of the initial disbursements of IDA and ADF credits which are currently under discussion and which would be used to finance poverty reduction programs. We are also seeking to restructure outstanding Brady bonds and promissory notes by exchanging these two instruments for a single new debt instrument, which would be relatively liquid. By end-July, we will retain through a transparent process, the services of reputable financial and legal advisors subject to our being convinced of significant benefits, without damage to our credibility, from a possible debt exchange. A successful exchange of private debt would both reduce payments in 2000 and help ensure comparability with official creditors.

50. The program provides for total debt service payments of US$1.5 billion in 2000. Even so, this provision is three times the federal government’s budgetary provision for education and nine times the provision for health. We trust that the international community will understand that public expenditures to alleviate poverty are urgently needed to help preserve social stability, and that concessional new financing from official creditors that could be used to meet these needs is currently projected to be only US$250 million in 2000. It is the hope of the government that, with strong implementation of the economic program and an improvement of our payments record, debt reduction can be effected in the context of a follow-up Fund arrangement.

51. In view of Nigeria’s very difficult external debt position, the government will not contract or guarantee any nonconcessional borrowing during the program. Similarly, no financial obligations will be incurred within the public sector using natural resources, or future earnings from their extraction or processing, as a form of collateral or guarantee.

52. Living up to these benchmarks and performance criteria should lead to Nigeria’s negotiation of a medium term arrangement with the IMF.

1 These technical factors include offsets of overpayment of PPT in 1998 and Reserve Addition Bonus against the payment of PPT in 1999, as well as concessions granted for oil companies’ investments in natural gas development projects and increased costs of production associated with disturbances in the Niger Delta.
2 Of this amount,US$0.4 billion represents delayed payments authorised under the 1998 budgetary provisions.
3 Nigeria’s OPEC quota was increased from 1.885 to 2.033 million barrels per day. Production of OSO condensate was increased from 250,000 to 300,000 barrels per day.
4 Conversely, spending will be lower to the extent that non-oil revenue falls short of the above estimates.
5 The Federal Government had earlier announced a closing date of September 15, 1999 for the submission of outstanding claims relating to these projects.
6 This includes some 3 billion of supplementary appropriations for wages and pensions.
7 If the oil price averages US$24.50, or higher, in 2000, the PPT collection should exceed this estimate. However, the timing of receipts of higher collection is uncertain. We thus intend to review the collection of the PPT and the appropriateness of the revenue estimate at the time of the first review of the programme.
8 The velocity of money, calculated as the ratio of nominal GDP to the stock of broad money, is projected to remain broadly constant. The projected 13.1 percent nominal GDP growth is based on the increase in the GDP deflator (at market prices) of 9.3 percent, and the real GDP growth of 3.5 percent. The former results from the combination of the assumed annual average consumer price inflation of 5.1 percent, and the large improvement in the terms of trade projected for 2000 as a result of higher oil prices.
9 Bringing to the point of sale is defined as announcing the request for bids for the acquisition of government shares in the companies in both domestic and international newspapers and/or magazines.