IMF Executive Board Concludes Article IV Consultation with Nigeria

Public Information Notice (PIN) No. 09/125
October 28, 2009

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

On October 16, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nigeria.1


Reforms initiated earlier this decade have averted the boom-bust pattern that characterized previous oil price cycles and better prepared the economy to deal with the global financial crisis. Central to this success is the oil-price-based fiscal rule, which broke the link between public spending and oil prices and created a substantial cushion of oil savings. Increased confidence in economic prospects was reflected in improved growth and lower inflation. Non-oil growth averaged 9 percent from 2004 through 2008. Real incomes have risen significantly, suggesting that poverty is likely to have fallen.

The pace of economic activity has nevertheless slowed in 2009, reflecting weaker demand from the public sector and decelerating credit extension to the private sector. However, with a good harvest in prospect, agricultural production, which grew by over 6 percent in 2008, may again do well. Constrained by security issues in the Niger Delta and, more recently, by Organization of the Petroleum Exporting Countries (OPEC) production quotas, oil production has averaged about 2 million barrels a day in recent months, about 20 percent below its 2005 peak.

Lower oil prices have put pressure on the fiscal and external accounts. The overall fiscal balance at the consolidated government level is set to move from a surplus of 4 percent of gross domestic product (GDP) in 2008 to a deficit of 9 percent of GDP in 2009 due to the drop in oil revenue. The non-oil deficit is expected to narrow by about 4 percentage points to 27 percent of non-oil GDP in 2009 as a modest increase in spending at the federal government level is more than offset by spending compression at other levels of government. The balance of payments has also weakened. Net private capital flows turned negative in 2008 when foreign equity investors withdrew from the Nigerian market and Nigerian banks substantially increased their foreign currency positions. Oil exports declined by about half in the first half of 2009. International reserves fell from a peak of $62 billion in September 2008 to $43 billion in July 2009.

The naira has depreciated in nominal terms but is little changed from pre-crisis levels in real terms. Before the global crisis, the naira appreciated sharply, reflecting high oil prices and a close link to the strong dollar. With the onset of the crisis, the naira depreciated against the dollar by 25 percent from December 2008 to January 2009 before the authorities introduced temporary measures to manage the exchange rate within a narrow band around the prevailing dollar exchange rate. A sizeable spread between the parallel market and official rates emerged, peaking at about 25 percent in early May 2009 before falling to 7 percent by July after temporary exchange restrictions were eased.

The banking system has been pressured by deteriorating asset quality. Slower economic growth, falls in equity market indices, a depreciated naira, lower oil prices, and a period of very rapid credit growth in the period before the crisis raised questions about bank asset quality. Signs of stress became evident in the interbank market where activity diminished as the crisis developed. Following special examinations, the central bank intervened in some banks by replacing management and injecting funds. It was learned that governance in some banks had been weak and legal actions are pending.

Monetary conditions have tightened and inflation has decelerated. The growth rate of monetary and credit aggregates has slowed sharply, triggered by the economic slowdown and central bank intervention in some banks. These developments have contributed to a tightening of lending. Inflation has started to moderate, declining from a peak of 15.1 percent in December 2009 to 11 percent in August 2009.

Executive Board Assessment

Executive Directors noted that reforms initiated earlier this decade have done much to soften the impact of the global financial crisis on the Nigerian economy. The substantial cushion of oil savings and foreign reserves built up when oil prices were surging, together with bank consolidation and recapitalization, has enabled policy makers to manage the crisis fallout from a position of strength. The near-term outlook is nevertheless challenging and highly dependent on developments in oil prices. Directors welcomed the authorities’ commitment to a strong macroeconomic and financial policy framework that can support an early recovery and lay the basis for the successful implementation of Nigeria’s Vision 2020 development plan.

Directors agreed that the growth outlook warrants a supportive fiscal stance, while recognizing that financing and administrative capacity constraints limit the scope for such support. They therefore welcomed the authorities’ prudent approach to fiscal policy, and its focus on actions to improve budget execution and enhance public financial management as well as to increase fiscal space. Building on past success with the oil-price-based fiscal rule, fiscal policy over the medium term will need to be more consistently counter-cyclical in order to neutralize the macroeconomic impact of swings in oil prices and support private sector-led growth.

Directors emphasized that consistent implementation of a clearly articulated monetary policy framework, focused on price stability and based on the relationship between monetary aggregates and inflation, is needed to anchor inflation expectations and establish credibility. Effective communication of the framework will also be critical, and Directors welcomed the authorities’ intention to do so. Directors also welcomed the plans to move forward cautiously with the adoption of an inflation-targeting framework, with due attention to the necessary institutional underpinnings for such a regime.

Directors supported the increased flexibility of the exchange rate in recent months, which will support the implementation of monetary policy focused on price stability. They noted the staff’s assessment that the level of the naira is consistent with external stability.

Directors welcomed the measures taken to identify and resolve problems in bank balance sheets. While the system as a whole has significant capital, individual banks that pursued high-risk strategies and allegedly violated governance and prudential regulations during the recent period of rapid credit growth are vulnerable. Directors urged the authorities to press ahead with their efforts to address governance problems and resolve the intervened banks.

Directors observed that a robust financial stability framework will be important for the sustained development of the financial sector. They welcomed the improvements already in train, including steps to improve the credibility of information on bank balance sheets and to establish a macro prudential unit within the central bank. Directors emphasized the urgency of implementing the framework for risk-based and consolidated supervision. It will also be important to develop a clear framework for dealing with bank failures, and to strengthen cross-border supervisory arrangements in view of the rapid expansion of Nigerian banks across borders.

Directors welcomed the proposed overhaul of the framework for the oil and gas sector, noting its critical importance from a macroeconomic perspective. They supported the authorities’ goals of improving governance, enhancing transparency, and creating an efficient fiscal regime that remains attractive to investors. Achieving these improvements will require further detailed quantitative analysis and careful design of transitional arrangements. In parallel with energy reform, Directors welcomed the authorities’ emphasis on structural reforms aimed at diversifying the economy and strengthening infrastructure.

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

Nigeria: Selected Economic and Financial Indicators, 2006–14

  2006 2007 2008 2009 2010 2011 2012 2013 2014
  Act. Act. Act. Est. Proj.

National income and prices (annual percentage change, unless otherwise specified)

Real GDP (at 1990 factor cost)

6.6 6.4 6.0 2.9 5.0 5.2 5.9 6.2 6.3

Oil and Gas GDP

-4.5 -4.5 -6.2 -4.8 6.0 5.4 7.3 6.4 5.4

Non-oil GDP

9.4 9.5 9.0 4.5 4.8 5.2 5.7 6.2 6.5

Production of crude oil (million barrels per day)

2.36 2.21 2.09 2.06 2.11 2.21 2.35 2.49 2.61

Nominal GDP at market prices (trillions of naira)

18.7 20.9 24.6 25.2 30.9 35.6 41.2 47.6 54.9

Nominal non-oil GDP at factor cost (trillions of naira)

11.6 13.1 15.2 17.8 20.4 23.3 26.7 30.8 35.6

Nominal GDP per capita (US$)

1,039 1,153 1,401 1,089 1,191 1,244 1,306 1,375 1,445

GDP deflator

19.5 4.3 11.0 -0.3 16.7 9.7 9.1 8.9 8.5

Non-oil GDP deflator

18.8 3.5 6.3 12.3 9.1 8.6 8.5 8.5 8.5

Consumer price index (annual average)

8.2 5.4 11.6 12.0 8.8 8.5 8.5 8.5 8.5

Consumer price index (end of period)

8.5 6.6 15.1 9.1 8.5 8.5 8.5 8.5 8.5

Consolidated government operations (consists of federal, state, and local governments; percent of GDP)

Total revenues and grants

33.9 28.4 32.8 22.2 28.6 28.8 29.1 29.2 29.1

Of which: oil and gas revenue

29.1 21.9 26.6 15.0 21.6 21.8 22.1 22.1 22.1

Total expenditure and net lending

26.9 29.5 29.2 31.2 28.7 28.1 27.5 27.3 26.8

Overall balance (commitment basis)

7.0 -1.1 3.7 -9.0 -0.1 0.7 1.6 1.9 2.3

Non-oil primary balance (percent of non-oil GDP)

-29.5 -30.3 -30.8 -27.0 -27.0 -26.6 -25.9 -25.7 -25.1

Excess crude account (US$ billions)1

13.2 14.2 18.3 13.6 20.6 21.8 26.2 30.0 33.8

Money and credit (change in percent of broad money at the beginning of the period)

Broad money

53.4 44.2 57.8 19.3 24.8 ... ... ... ...

Net foreign assets

72.5 16.4 26.6 -6.2 8.6 ... ... ... ...

Net domestic assets

-15.7 27.8 31.1 25.5 16.2 ... ... ... ...

Credit to consolidated government

-38.3 -3.5 -15.0 17.0 0.2 ... ... ... ...

Credit to the rest of the economy

22.6 54.8 50.2 11.4 15.2 ... ... ... ...


2.9 2.3 1.7 1.6 1.5 ... ... ... ...

Treasury bill rate (percent; end of period)

7.4 8.7 5.4 ... ... ... ... ... ...

External sector (annual percentage change, unless otherwise specified)

Current account balance (percent of GDP)

26.5 18.8 20.4 6.9 13.8 14.3 14.8 14.7 14.5

Exports, f.o.b.

16.9 15.9 26.3 -39-3 29.5 9.2 9.1 8.6 7.7

Oil and gas export volume

-2.6 4.2 -7.5 -4.9 2.8 5.1 7.2 6.1 5.5

Import, f.o.b.

-7.0 34.5 21.2 -13.2 -0.6 6.2 5.8 7.3 6.4

Terms of trade

9.0 0.3 17.0 -22.7 15.0 1.1 0.4 0.8 0.7

Price of Nigerian oil (US$ per barrel)

64.3 71.1 97.0 61.5 76.5 79.5 81.0 83.0 84.8

Nominal effective exchange rate (end of period)

97.9 99.8 100.6 ... ... ... ... ... ...

Real effective exchange rate (end of period)

104.5 109.5 123.8 ... ... ... ... ... ...

External debt outstanding (US$ billions)

3.5 4.0 4.5 4.9 5.5 6.1 6.7 7.2 7.2

Gross international reserves (US$ billions)2

41.8 51.3 53.0 41.6 44.1 50.0 59.4 71.1 84.6

(equivalent months of imports of goods and services)

11.7 12.1 13.8 10.8 10.7 11.4 12.7 14.3 15.9

Sources: Nigerian authorities and IMF staff estimates and projections.
1 Including the naira-denominated component.
2 Includes $2.6 billion in 2009 on account of the SDR allocation

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. An explanation of any qualifiers used in summing up can be found here:


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