Press Release: IMF Executive Board Approves a Two-Year Policy Support Instrument for Nigeria
October 17, 2005
The Executive Board of the International Monetary Fund (IMF) today approved a two-year Policy Support Instrument (PSI) for Nigeria under the IMF's newly created PSI framework, and which is intended to support the nation's economic reform efforts.
Nigeria's PSI is based on the National Economic Empowerment and Development Strategy (NEEDS), Nigeria's Poverty Reduction Strategy, and focuses on rapid and sustainable non-oil growth and poverty reduction. The PSI will assist Nigeria to develop a well-articulated and sound policy framework, including prudent macroeconomic policies, a strengthening of institutions, and ensure a governance structure conducive to private sector activity. Approval of a PSI for Nigeria signifies IMF endorsement of the policies outlined in the program.
The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program. (see Public Information Notice No. 05/145).
In commenting on the Executive Board decision, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, stated:
"Over the past 18 months, Nigeria has made commendable progress in implementing its economic reform program, aimed at accelerating economic growth, reducing poverty, and meeting the Millennium Development Goals. More recently, the authorities requested a Policy Support Instrument in support of a comprehensive reform program based on their National Economic Empowerment and Development Strategy.
" The authorities' program is designed to sustain and strengthen macroeconomic performance and encourage economic growth and diversification with front-loaded structural reforms. The program emphasizes pro-growth and export-oriented reforms that-along with prudent fiscal, exchange rate, and monetary management-will boost external competitiveness over the medium term. It is formulated with quantitative and structural assessment criteria that reflect policies meeting the IMF's standard of upper credit tranche conditionality-the same policy standard that would warrant IMF financial support beyond the first credit tranche. The continuing close relationship with the Fund envisaged under the PSI approved today should support Nigeria in developing a well-articulated and sound policy framework and implementing the next phase of reforms, and promote and facilitate private sector activity and debt relief.
"A key challenge going forward will be to maintain an appropriate stance and mix of fiscal and monetary policies, in view of the importance of reversing the upsurge in inflation that was associated with the expansionary monetary and fiscal policies in early 2005. While the government is committed to containing spending in 2005 below budget appropriations, the projected increase in spending is still large, and the resulting fiscal expansion will place more of the burden of controlling inflation on the central bank. Following the failure to sterilize the buildup of excess liquidity in the first half of the year, the Central Bank of Nigeria (CBN) has recently taken stronger measures to reduce money growth-including increased sales of foreign exchange, more aggressive open market operations, and a further increase in cash reserve requirements-which have put the year-end monetary targets within reach. In addition, the prospective adoption of a 2006 budget that reduces the primary non-oil deficit well below the projected outturn for 2005 will further improve the policy mix. At the same time, the government aims to strengthen expenditures on poverty-related programs, allocating an extra US$1 billion to well-defined programs related to the Millennium Development Goals.
"The authorities have initiated a broad and ambitious structural reform program aimed at improving public service delivery and the business environment. The program includes measures to strengthen budget procedures, advance civil service reforms, restructure the banking system, unify foreign exchange markets, rationalize the external tariff system, and improve governance and transparency. The authorities' recent decision to allow oil marketers to increase gasoline prices by about 25 percent will help reduce allocation distortions and implicit subsidies.
"Implementation of the agreement in principle that Nigeria has reached with Paris Club creditor countries should improve investor confidence and free up resources for poverty reduction. Negotiations on a comprehensive debt treatment are expected to take place in the near future.
"The authorities' homegrown program supported by the PSI provides an important opportunity for Nigeria to consolidate the gains achieved so far and address the significant remaining challenges stemming from past economic mismanagement and resistance to reform from vested interests. Achievement of the program objectives hinges on timely and rigorous implementation of the envisaged polices. The authorities fully recognize these challenges and are firmly committed to strict adherence to the program. The broad domestic ownership and support at all levels of government bode well for the success of the program. The continued provision of technical assistance will be essential for bolstering implementation capacity. More generally, the support of the international community for Nigeria's economic reform program is crucial at this juncture," Ms. Krueger said.
Recent Economic Developments
Over the past 18 months, Nigeria has made commendable progress in implementing its homegrown economic reform program, aimed at accelerating economic growth, reducing poverty, and meeting the Millennium Development Goals. Macroeconomic policies were broadly consistent with the objectives of achieving macroeconomic stability and reducing the economy's vulnerability to oil shocks. Since early 2004, all three tiers of government have adhered to a conservative oil price-based fiscal rule, resulting in large overall budget surpluses and a significant build-up in international reserves. GDP growth has been robust, benefiting from the improved macroeconomic environment and policy initiatives to spur agricultural production.
Developments in the first half of 2005 were dominated by a continued rise in gross international reserves and a sharp increase in broad money. The Central Bank failed to sterilize the build-up of liquidity in the banking system that stems in part from larger private capital inflows and looser fiscal policy, but took decisive action to tighten policy starting in August. Expansionary macroeconomic policies, combined with a sharp increase in food prices related to the food crisis in neighboring countries, pushed the 12-month consumer price inflation to 26 percent in July. Fiscal policy evolved broadly in line with the government's plan to contain spending below that implied by the highly expansionary 2005 budget passed by the National Assembly in April. Under this plan, however, the increase in spending is still large and the non-oil primary deficit is projected to widen by 5 percent of non-oil GDP. In August 2005, domestic fuel prices were increased by about 25 percent to reduce implicit subsidies.
Nigeria's program under the PSI meets the Fund's standards for upper credit tranche conditionality. The program has been developed in the context of a positive medium-term macroeconomic outlook characterized by continued high oil prices, rising oil production and robust non-oil growth. A main pillar of the PSI is a tightening of macroeconomic policy and improvement of the mix of fiscal and monetary policies to achieve single digit inflation from 2006. The medium-term fiscal program aims at a gradual reduction of the consolidated non-oil primary balance from 41 percent of non-oil GDP in 2005 to 35 percent in 2008. The program under the PSI also targets a strong accumulation of international reserves (to reach US$26 billion at end-2005), and tight reserve money growth of 4 percent in 2005. Formulation of the 2006 budget has begun with the aim of strengthening expenditures on poverty-related programs. An extra allocation of US$1 billion has been made to well-defined programs related to the Millennium Developments Goals. This allocation represents the expected saving in debt service in light of the proposed restructuring of Nigeria's Paris Club debt.
The authorities have also initiated a broad and ambitious structural reform program to improve public service delivery and the business environment. This program includes measures to strengthen budgetary procedures, advance civil service reforms, restructure the banking system, unify the foreign exchange markets, rationalize the external tariff system, and improve governance and transparency.