IMF Executive Board Completes the Third Review Under the Policy Support Instrument for Nigeria

Press Release No. 07/146
June 28, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the third review under a two-year Policy Support Instrument (PSI) for Nigeria. The PSI was approved on October 17, 2005 (see Press Release No. 05/229). The completion of this review will support Nigeria's efforts to entrench macroeconomic stability and pursue ongoing strong structural reforms.

In completing the review, on June 27, 2007, the Executive Board agreed to the waivers of nonobservance of five structural assessment criteria and two quantitative assessment criteria on reserve money and nonconcessional borrowing.

The IMF's framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners. 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 reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).

In commenting on the Executive Board decision, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, made the following statement:

"The third scheduled review under Nigeria's Policy Support Instrument is completed. The authorities' program, which meets upper credit tranche conditionality and is guided by the National Economic Empowerment and Development Strategy, aims to balance spending needs with maintaining macroeconomic stability.

"The Nigerian authorities are to be commended for implementing their reform program in recent years. The improved policy framework, strengthened institutions and macroeconomic policies, and major progress with wide-ranging structural reforms led to impressive macroeconomic outcomes—notably robust growth and low inflation—as well as improved investor confidence. This is a strong legacy for the new government.

"The recent performance under the program was uneven. The fiscal expansion at the consolidated government level in late 2006 resulted from a regrettable deviation from the oil price fiscal rule and led to an unanticipated liquidity injection. This did not result in excessive inflationary pressures, due largely to increased confidence and higher money demand.

"While significant progress was achieved in structural reforms over the course of the PSI, the delays in completing the final steps of several measures are regrettable. The progress in the long awaited legislative actions intended to help institutionalize the reforms under the PSI is welcome. In particular, the parliamentary passage of the Fiscal Responsibility Bill is a key step in supporting prudent management of oil revenues. Stronger bank supervision is important, including on a consolidated basis, to sustain the gains of the recent bank consolidation and recapitalization.

"The 2007 program adequately addresses the recent slippages in policy implementation by reconfirming the 2007 fiscal targets set at the second review, and maintaining a monetary program that targets single-digit inflation by partly reversing the broad money acceleration. The inflation objective should be supported by the overall fiscal contraction and a more flexible exchange rate policy going forward. Ensuring good quality of monetary data will be essential.

"Maintaining the reform momentum and safeguarding economic gains of recent years will be necessary to realize Nigeria's growth potential, which is important for Nigeria's fight against poverty. Fiscal policy should remain consistent with macroeconomic stability, and reaffirming the political agreement on the use of oil revenues among all levels of government will be important in this regard. It will be crucial to continue recent efforts to develop guidelines on the effective use of oil savings, ensure good quality of capital spending, and take forward structural reforms including trade liberalization.

"The authorities failed to ensure the accuracy of information provided to the Board on nonconcessional borrowing in the context of the completion of previous reviews under the PSI. The borrowing did not significantly undermine Nigeria's debt sustainability. In light of this, and the authorities' ongoing efforts to strengthen debt management, the Board decided to maintain a positive assessment of Nigeria's past program performance under the PSI," Mr. Lipsky said.



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