IMF Executive Board Concludes 2011 Article IV Consultation with NigeriaPublic Information Notice (PIN) No. 12/20
February 28, 2012
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 February 22, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2011 Article IV consultation with Nigeria.1
Economic growth remains strong in Nigeria, with non-oil real gross domestic product (GDP) estimated to have grown at 8.3 percent in 2011 and overall real GDP at about 6.7 percent. Inflation slightly declined to 10.3 percent in December 2011 (year-on-year) from 11.7 percent a year earlier, in response to monetary tightening by the Central Bank of Nigeria (CBN) and moderation of food prices.
A modest fiscal consolidation took place in 2011. The non-oil primary deficit (NOPD) of the consolidated government is estimated to have narrowed slightly from about 34.6 percent of non-oil GDP in 2010 to 32.9 percent in 2011, mainly due to expenditure restraint at the federal government level. Higher oil prices helped shrink the overall fiscal deficit from 7.7 percent of GDP in 2010 to about 0.2 percent of GDP in 2011. Monetary policy was tightened substantially in 2011 in response to high inflation and strong foreign exchange demand. The central bank has gradually increased its overnight deposit rate by 900 basis points since September 2010 and tightened regulatory requirements. In November, it adjusted downward its soft band around the naira-US dollar exchange rate, and depreciation pressures on the naira have since abated. Financial soundness indicators point to continued improvements in the health of the banking system.
Growth is projected to remain robust in 2012 and inflation is projected to increase temporarily as a result of the increase in gasoline prices. The main downside risks to the short-term outlook are a further deterioration in the global environment and an exacerbation of current violence in northern Nigeria.
Executive Board Assessment
Executive Directors commended the authorities for countercyclical policies that have supported economic activity in challenging circumstances. Directors considered that the medium-term growth outlook remains favorable, although subject to external downside risks. Accordingly, they emphasized the continued need for policies to safeguard macroeconomic stability, diversify the economy, and make growth more inclusive.
Directors supported the authorities’ strategy to rebuild fiscal buffers through a better prioritization of public expenditure, continued subsidy reform, and improved tax administration. Efforts in these areas will also provide the necessary resources for targeted social programs and needed infrastructure. Directors endorsed the use of conservative oil price assumptions in the preparation of the budget but noted that only a comprehensive tax reform will reduce the budget’s dependence on oil revenues over the medium term.
Directors highlighted the importance of improving public financial management, including a stronger framework for managing Nigeria’s oil wealth. They welcomed the establishment of a Sovereign Wealth Fund (SWF) and underscored that a rules-based approach to setting the budget reference oil price would strengthen the budgetary process and the operations of the SWF. In this regard, Directors recommended that outlays from the SWF’s infrastructure fund be integrated into the budget and medium-term expenditure plans.
Directors noted the monetary authorities’ commitment to further reduce inflation but considered that a pause in the tightening cycle is at present warranted. More broadly, they agreed that a monetary framework better focused on a clear inflation objective should help anchor inflation expectations and support disinflation. Greater exchange rate flexibility will also facilitate the pursuit of price stability.
Directors commended the authorities for their actions to resolve the recent banking crisis. The modalities of operation of the asset management corporation should continue to make sure that fiscal risks and moral hazard are minimized. Directors supported the central bank’s focus on strengthening supervision and the regulatory framework, including by addressing remaining deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism regime. They also agreed that a Financial Sector Assessment Program update will help take stock of the progress so far and provide a road map for remaining reforms in the financial sector.
Directors concurred that wide-ranging reforms are needed to make growth more inclusive. They welcomed the authorities’ initiatives to improve the business climate and reform sectors with high employment potential, particularly agriculture. Directors encouraged the authorities to persevere with planned reforms in the energy sector under appropriate social safeguards.