Making Reforms Work for Nigeria, A Commentary by Abdoulaye Bio-Tchané, Director, African Department, IMF
May 18, 2006A Commentary by Abdoulaye Bio-Tchané
Director, African Department
International Monetary Fund
Published in This Day (Nigeria)
May 18, 2006
Nigeria's recent experience shows that difficult economic reforms do yield results. It has made remarkable progress implementing its home-grown economic reform program over the last few years. Last week, Nigeria paid off its multi-billion dollar Paris Club debt, by becoming the first African nation to settle its debts to its official lenders.
With its National Economic Empowerment and Development Strategy, (NEEDS) as a driver, the government remains focused on accelerating economic growth, reducing poverty and ultimately meeting the Millennium Development Goals.
The government has been pragmatic in its approach. Last year, it sought support for its policy framework from the International Monetary Fund through the Policy Support Instrument (PSI). This arrangement is designed for low-income countries that may not need IMF financial assistance, but which still seek close cooperation with the Fund in preparation and endorsement of their economic policies. Nigeria is the first and currently one of two African countries-the other being Uganda-that are availing themselves of this arrangement.
By putting strong macroeconomic policies in place and carrying out an ambitious reform agenda under the PSI, Nigeria has been able to strengthen its growth outlook, reduce inflationary pressures, and secure its international credit rating, thus improving investor confidence. The facts speak for themselves. Economic growth accelerated to almost 7 percent in 2005, driven by strong growth in the country's non-oil sector. The agricultural sector alone, which accounts for more than half of non-oil GDP and is key for employment, grew by 7 percent. In addition, various services, including retail and wholesale trade and communication, registered double digit growth rates. Inflation in now at 11 percent, down from 28 percent in August 2005.
The government also launched a formidable bank reform program designed to consolidate Nigeria's overcrowded banking sector and strengthen its ability to provide credit to the private sector. Last December it finally consolidated the plethora of previously existing banks to 25 banks or bank groupings, allowing for a stronger, leaner and more effective banking system.
Other major changes have similarly enhanced economic conditions and improved the country's business climate-like the adoption of a common external tariff of the Economic Community of African States (ECOWAS), the regional economic community. The first major tariff reform in a decade, this was an important step towards liberalizing import protection.
Private sector development has also been gaining momentum, including through the government's divestiture program. A number of large state-owned enterprises have been divested to strategic investors, concessions for three ports have been issued, and two non-viable companies have been liquidated. Much success is attributable, among other factors, to following better procedures to ensure greater transparency and investor confidence, and more effective program planning.
The Nigerian authorities have made good progress in their efforts to improve governance and reduce corruption. In particular, the Nigeria Extractive Industries Transparency Initiative (NEITI) report prepared by an international auditor and published in April 2006, analyzes physical and financial flows concerning the oil and gas industry. This report is the first of its kind in that it goes well beyond the principles of the more internationally known Extractive Industries Transparency Initiative (EITI), in the amount of detailed information made available to the public.
The macroeconomic outlook for 2006 is positive. Fiscal policy is on a good track. The government's focus is now to further strengthen macroeconomic stability, improve public financial management, and further reduce the costs of doing business. But a number of challenges remain. More spending on social services and infrastructure is needed to support medium-term growth. In this regard, the authorities have established a "virtual poverty fund" to track specific program spending towards achieving the Millennium Development Goals. To ensure that spending at all levels of government is well targeted, several state governments are initiating reforms to strengthen their public financial management systems and align their budgets with the country's development requirements.
Further structural reforms are also needed to help remove impediments to growth, promote private sector development and job creation, especially in the non-oil sector, and strengthen institutions. Key avenues for further efforts include planned civil service reform, a strengthening of public financial management, and the elimination of import bans. In addition, despite progress already made, the government still needs to broach the divestiture of various public enterprises-particularly in the power sector.
To consolidate the past reform efforts, the government has submitted to the National Assembly for approval key pieces of legislation, including the Fiscal Responsibility Bill, the Procurement Bill, the Tax Reform Bill, and the Nigeria Extractive Industries Transparency Initiative Bill. The fight against corruption and improvements in governance must also remain a top priority of the government.
The IMF remains a steadfast partner of Nigeria in its quest to reduce poverty and accelerate development. Nigeria's successful use of the PSI is a good indicator that countries can successfully avail themselves of the IMF's resources without necessarily borrowing from the institution. Clearly, Nigeria has made good progress, and there is every indication that as these reforms continue to take root, they will enhance the country's growth and improve the quality of life for all Nigerians.