Public Information Notices
Nigeria and the IMF
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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.
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.
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|
|Est. 1/||Proj. 2/|
|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||...|
|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.
IMF EXTERNAL RELATIONS DEPARTMENT