## The Economic Recovery and Growth Plan (ERGP), 2017-20

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### Background and challenges
- Nigerian economy hit by an accumulation of shocks: low oil prices, a significant fall in oil production owing to sabotage of infrastructure, and inadequate policy implementation.
- Resulting macro conditions: inflation doubling, domestic arrears mounting, borrowing costs rising, FX market distortions, and growing banking sector risks.
- Structural challenges: large infrastructure deficit, weak business environment, strictures of fiscal federalism, high unemployment and poverty rates, regional inequities, militant tensions in the Niger Delta, and an insurgency-related humanitarian crisis in the North East.
- Political/implementation risks: perceptions of policy ineffectiveness, yet-to-be fulfilled election promises, political uncertainty about the President’s health, inadequate coordination among economic policymakers and across tiers of government, more inward policies, and political maneuvering ahead of the 2019 elections.

### Macroeconomic developments (2015–2016) — key facts
- Growth: -1.5 percent in 2016 (from 2.7 percent in 2015), driven by a sharp slowdown in oil production owing to sabotage.
- Non-oil output: contracted by 0.3 percent in 2016; agriculture performed strongly while manufacturing, construction, and trade slowed.
- Annual inflation: 18.6 percent in 2016 (double that for 2015 and twice the CBN’s medium-term target of 6-9 percent).
- Contributing price effects: electricity tariff hike 45 percent; fuel tariff hikes 68 percent; naira depreciation of 55 percent in the interbank market and 84 percent for inputs priced at the parallel market.
- Fiscal deficit (consolidated government): 4.7 percent of GDP in 2016 (from 3.5 percent in 2015).
- Federal government revenue: underperformed at 50 percent of budget; FG interest payments-to-revenue ratio doubled to 66 percent at end-2016.
- Capital expenditure in 2016: budgeted N1.8 trillion, only N596 billion spent.
- Financing: bank financing through December amounted to 1.7 percent of GDP; first tranche ($600 million) of AfDB budget loan recorded in January 2017.
- State and local governments (SLG): distributions averaged N216 billion (0.2 percent of GDP), about 25 percent lower than projected for 2016; SLGs accumulated salary, pension, and contractor arrears.
- Monetary aggregates: policy rate increased from 11 percent (Dec. 2015) to 14 percent (July 2016); reserve money expanded by 33 percent; broad money expanded by 19 percent.
- Banking sector: NPLs doubled to 13 percent by end-2016. CAR fell from 17.7 percent (Dec. 2015) to 14.8 percent in 2016. Three banks (about 5 percent of assets) had CARs below 8 percent as of December 2016.
- External current account: from a deficit of 3.1 percent of GDP in 2015 to a surplus of 0.6 percent of GDP in 2016.
- Gross reserves: $28.3 billion at end-2015 → below $24 billion in Sept. 2016 → recovered to $28.6 billion at end-Jan. 2017 (about 120 percent of the IMF reserve adequacy metric). Underlying reserves at end-Jan. 2017 were $23.4 billion (97 percent of the metric), excluding FX swaps and forward sales.
- FX market distortions: parallel-interbank exchange rate premium averaged about 50 percent; unmet FX orders estimated at about $4 billion. CBN limited FX sales to about $7.5 million a week.
- International issuance: new $1 billion 15-year Eurobond issued Feb. 2017 at 7.875 percent (almost 8 times oversubscribed); another $500 million issuance planned.

### ERGP objectives and focus areas
- Overall aim: structural transformation toward a more diversified and inclusive economy for 2017-2020.
- Key priorities:
  - Food security via agriculture and agro-related manufacturing.
  - Sufficiency in energy via oil, gas, and renewables.
  - Promoting industrialization.
- Macroeconomic stability measures:
  - Align monetary, fiscal and trade policies.
  - Accelerate non-oil revenue generation.
  - Rationalize recurrent expenditure (SLG finances not incorporated under ERGP).
  - Promote price stability and a market-determined exchange rate regime.
  - Promote expenditure switching to support local production.
  - Enable private sector investment via policy/regulatory reforms.
- Social infrastructure: conditional cash transfers, school feeding, public work programs, improved health care and education access.
- Global competitiveness: develop power, integrated transport and IT networks; improve business environment.
- Governance: fight corruption, reinforce security, reform public service, strengthen coordination at regional/local levels.

### ERGP selected official projections (2017–2020)
- Growth: 2.2 (2017), 4.8 (2018), 4.5 (2019), 7.0 (2020)
- Oil Production (million barrels per day): 2.2 (2017), 2.3 (2018), 2.4 (2019), 2.5 (2020)
- Inflation (annual average): 15.8 (2017), 12.4 (2018), 13.4 (2019), 9.9 (2020)
- Fiscal Deficit (percent of GDP): 2.2 (2017), 2.0 (2018), 1.2 (2019), 1.1 (2020)
- BOP Current Account (percent of GDP): 0.7 (2017), 2.0 (2018), 2.6 (2019), 2.9 (2020)
- Gross Reserves (US$ billions): 30.6 (2017), 43.5 (2018), 60.1 (2019), 79.6 (2020)
- Source: Ministry of Budget and National Planning (as reported in the ERGP)

### Staff baseline outlook and risks (unchanged policy)
- Baseline projections:
  - Growth: 0.8 percent in 2017 (slight pickup), driven by recovering oil production, strong agriculture, and base effects.
  - Non-oil non-agricultural output: relatively flat through the medium term.
  - Inflation: remains in double digits under accommodative monetary policy.
  - Financing constraints and bank risk aversion: crowd out private credit and increase FG debt service burden.
- Main risks:
  - Continued FX market distortions and policy of prioritizing exchange rate stability could produce an increasingly overvalued exchange rate, then disorderly depreciation to avoid reserves falling below acceptable levels.
  - Real–financial linkages: lack of FX and policy uncertainty would weaken corporate performance, increase NPLs (corporates represent 75 percent of banks’ loan book, and 45 percent of bank loans are in FX), reduce banking sector resilience, and increase likelihood of capital needs.

### Alternative growth-generating adjustment scenario — key elements and outcomes (Box 2)
- Preconditions: upfront implementation of a coherent, coordinated, and comprehensive policy package to restore confidence and enable private sector supply response.
- Fiscal:
  - Tightened through a 1.6 percent of GDP improvement (by 2020) in the non-oil primary balance, with adjustment front-loaded to create space for higher public investment.
  - Main driver: increasing non-oil revenues to reduce interest payments-to-revenue ratio.
- Monetary:
  - Tighter monetary policy with monetary growth contained to nominal GDP growth and no central bank quasi-fiscal activities.
- Exchange rate / FX market:
  - Immediate removal of FX restrictions and adoption of a more flexible exchange rate regime.
  - Expected: immediate increase in the exchange rate toward the parallel rate, possible overshooting, then stabilization; restoration of FX market function would attract capital inflows and rebuild reserves.
- Banking sector adjustments:
  - Return of confidence and reduced government financing needs would enable banks to resume private lending at higher lending rates; higher net interest margins would help repair capital buffers.
  - Weak banks expected to acquire new capital including through mergers and acquisitions.
  - Maintain macro-prudential FX rules (NOPs and limits on FX loans to those with FX revenues).
- Structural reforms:
  - Boost power, revitalize the oil industry, and improve the business environment to support diversification and private sector development.
- Outcomes targeted:
  - Increase oil production to 2.5 mbpd and boost non-oil growth to 5 percent in the medium term.
  - In 2017, immediate removal of FX restrictions, lower risk premia, and reduced government financing needs would generate a small improvement in non-oil growth.
- Fiscal multiplier: A 1 percentage point increase in public investment is expected to increase growth by 0.5-1 percent over 3 years.

### Policy recommendations highlighted by staff
- Implement a comprehensive package that:
  - Tightens fiscal policy (front-loaded non-oil primary balance improvement of 1.6 percent of GDP by 2020).
  - Implements tighter monetary policy with constrained monetary growth and elimination of central bank quasi-fiscal activities.
  - Immediately removes FX restrictions and adopts a more flexible exchange rate regime.
  - Pursues structural reforms to improve power, oil industry performance, and the business environment.
- Maintain macro-prudential FX rules to contain banking sector risks while restoring FX market functioning.
- Front-load fiscal consolidation to create space for higher public investment and reduce FG interest payments-to-revenue burden.

### Adjustment scenario: fiscal measures and 2017 yields (Percent of GDP)
- VAT (rate increase to 10 percent): 0.7
- CIT (close loopholes and exemptions): 0.8
- Excises and Levies (rate increase/compliance): 0.2
- FGN Internally Generated Revenue (compliance): 0.05
- Total: 1.7
- Note: Measures are for mid-year implementation (IMF staff calculations).

### Exchange rate, FX market, and monetary policy (staff views)
- FX market remains restrictive and segmented; 40 categories of goods still face FX access restrictions despite June liberalization.
- CBN began providing FX for certain invisibles at a margin not expected to exceed 20 percent above the interbank rate and removed the 60 percent allocation requirement to raw materials, equipment, and machinery.
- Effects of FX distortions: lower imports and dividend payments, deprived companies of imported inputs, cuts in production/employment/investment, and distortions from CFMs (surrender/repatriation requirements, payment limits on naira credit cards).
- Staff recommends:
  - Exchange rate unification: immediate removal of remaining restrictions (the 40 categories list and new segment for certain invisibles).
  - Expect initial overshooting of the exchange rate but stabilization with adequate supporting policies (monetary, fiscal, structural).
  - Avoid CFMs; improve FX interbank market operations and price discovery.
- Monetary recommendations (Box 3):
  - Broad money growth close to 14 percent in 2017.
  - Raise policy rate to positive real levels.
  - Unwind unconventional/quasi-fiscal CBN operations; make credit support transparent and time-bound.
  - Announce price stability as CBN’s primary objective; conduct open market operations and keep corridor around policy rate narrow.

### Banking sector prudential and resolution recommendations (Box 3)
- Tighten prudential requirements and enforce existing ones; welcome 2 percent general provisioning reinstatement and NOP FX limit reduction.
- Conservative collateral valuation; impose timelines for regulatory forbearance.
- Reduce FX risk by matching FX assets/liabilities and consider maturity mismatches.
- Intensify intrusive supervision, expand stress testing, and conduct targeted audits on FX loans.
- Improve asset quality: restructure/divest/write off NPLs after provisioning.
- Caution on establishing a new private AMC; require clear governance, autonomy, and financing model.
- Promptly increase capital of undercapitalized banks; finalize sale of one bank as soon as possible.
- Strengthen legal resolution framework: powers to write down capital, override shareholders’ rights, and amend liquidation regime.
- Enhance crisis contingency planning and limit emergency liquidity use in runs.

### Fiscal policy: reducing dependence on oil revenue (findings and measures)
- Key findings:
  - Non-oil revenue mobilization plus improved expenditure efficiency/composition essential for fiscal space, debt sustainability, and scaling-up capital expenditure.
  - Authorities registered 818,000 new taxpayers, collected arrears, and conducted targeted tax audits.
  - IPPIS eliminated 65,000 ghost workers; TSA implemented.
  - Weak subnational expenditure controls persist.
- Staff projection: federal deficit projected at 3.7 percent of GDP (higher than 2.8 percent in 2017 budget).
- Financing constraints may limit execution; larger deficits likely financed domestically, raising yields and crowding out private credit (1-3 percent growth, y-o-y).
- External financing in 2017: Additional Eurobond issuances and concessional World Bank/AfDB financing make up most (60 percent) of external financing; FG plans ten-year promissory notes (2.2 percent of GDP) in 2017 to settle domestic arrears.
- Adjustment scenario targets:
  - Decline FG interest-to-revenue ratio from 66 percent in 2016 to below 30 percent in 2020.
  - Increase non-oil revenue-to-non-oil GDP ratio to 11.6 percent in 2020 (against 4.1 percent under baseline).
  - Cumulative improvement by 2020 of 1.6 percentage points in the non-oil primary balance-to-non-oil GDP ratio (relative to 0.3 percent of GDP under baseline), with a quarter accruing in 2017 (an improvement of 2 percent of GDP over baseline).
- Measures: accelerate revenue in 2017 (non-oil revenues increase by about 2 percent of GDP), medium-term VAT reform including progressive increase to 15 percent by 2020 and raising VAT base from ~15 percent of GDP (2016) to 42 percent of GDP by 2020, rationalize exemptions, review PIT and CIT, consider property tax for states.
- Recurrent expenditure rationalization: reduce overhead/personnel costs; implement automatic fuel price-setting mechanism.
- Capital spending: prioritize high-impact projects, improve project preparation and procurement.
- Avoid new arrears; ensure states implement FSP; strengthen subnational TSA and cash management reforms.
- Reduce SOE fiscal risks: single oversight unit, integrate SOE quasi-fiscal operations into the budget, strengthen boards and reporting.
- Contingency: Presidential Initiative for 8.5 million people in the North East—Recovery and Peace Building Assessment estimates reconstruction/humanitarian cost at $6.6 billion; projected humanitarian cost for 2017 of $1 billion with $530 million (0.2 percent of GDP) budgeted—identify additional savings if external donor financing falls short.
- Expand social safety nets for vulnerable groups to mitigate tax/price reforms.

### Debt sustainability and stress tests (Annex III) — key findings
- Public debt-to-GDP: 18.6 percent in 2016 → projected 24.9 percent in 2022.
- 2017-22 gross financing needs: about 5½ percent of GDP (historical average).
- Interest payments as share of general government fiscal revenue: 66 percent in 2016 → 89 percent in 2022.
- Debt-stabilizing primary deficit: 0.2 percent of GDP.
- Needed overall balance adjustment in 2017: about 2.5 percentage points of GDP.
- Foreign-currency debt: about 18 percent of total debt (projection period).
- Stress test outcomes (selected):
  - Growth shock (real growth lowered by 3½ percentage points in 2018–19): debt-to-GDP reaches 32.4 percent in 2022; gross financing needs ~16.4 percent of GDP.
  - Real interest rate shock (spreads +200 bps from 2018): debt-to-GDP reaches 30½ percent in 2022; gross financing needs ~15.4 percent of GDP.
  - Primary balance shock (1.6 percentage points deterioration in 2018–19): debt-to-GDP ~32.2 percent in 2022.
  - Real exchange rate shock (55 percent depreciation): debt-to-GDP reaches 29 percent in 2022; gross financing needs ~14 percent of GDP.
  - Combined shock: debt rises to 38.2 percent of GDP in 2022; gross financing needs above 18.4 percent of GDP.
  - Contingent liability shock (one-time bail-out of financial sector, non-interest expenditures increase by 10 percent of banking sector assets): debt-to-GDP ~33½ percent in 2022; gross financing needs ~17.3 percent of GDP.
- Policy implication: decisive fiscal actions—boosting oil and non-oil revenue mobilization—are essential to curb medium-term financing pressures.
- Uncertainty: symmetric fan chart width ~29 percent of GDP; upside/downside skew with downside risk to debt path.

### External debt and reserves (selected)
- External debt: 10.8 percent of GDP in 2016 (Table 1).
- External debt-to-exports ratio increased from 33 percent in 2012 to 116 percent in 2016 due to decline in oil exports.
- Gross international reserves: $28.6 billion at end-Jan. 2017 (120 percent of IMF reserve adequacy metric); excluding predetermined FX outflows reserves were $23.4 billion (97 percent of metric).
- Staff recommended reserve target: 125 percent of the reserve adequacy metric.
- Under staff baseline, reserves would fall to about 60 percent of the metric in the medium term (less than half of staff’s recommended level).
- External vulnerabilities: reliance on market access, risks from oil export failure, large naira depreciation, and access to external financing.

### Exchange-rate expectations, market indicators, and staff assessment
- Market indicators (non-deliverable forwards, Consensus Forecasts, interbank–BDC margin) suggest market participants expect a substantial depreciation of the interbank exchange rate.
- External position assessment (2016): moderately weaker than implied by fundamentals and desirable policy settings.
- Estimated gaps: current account gap of 1 to 2 percent of GDP; real exchange rate gap of 10 to 20 percent for the interbank rate.
- Staff implication: adjustment of fiscal, monetary, and structural policies would help reduce estimated gaps.

### Authorities’ views and priorities
- Authorities recognize need to reduce infrastructure gap and implement a comprehensive power sector recovery plan, but stress governance, efficiency, and improved delivery should precede tariff increases.
- PEBEC tasked to improve Doing Business ranking to 100 by 2020 (from 169).
- Priorities reiterated: fighting corruption, promoting SME development and access to financing, implementing social investment programs (conditional cash transfers, homegrown school feeding).
- Social safety net measures under ERGP:
  - N-Power Job Creation Scheme.
  - Homegrown School Feeding program.
  - Conditional Cash Transfer program: in Dec. 2016 one million beneficiaries from 9 states started receiving N5,000 per month.
  - GEEP: zero-interest, 5 percent administrative fee loans through the Bank of Industry; targets over 1.2 million artisans, traders, market men and women, and women cooperatives.

### Data adequacy and technical assistance needs
- Data provided to the Fund broadly adequate for surveillance, but improvements needed in:
  - National accounts (especially quarterly demand-side).
  - Balance of payments data.
  - SLG and SOE fiscal data and domestic arrears.
  - Timeliness of FSI data.
- Completion of household surveys over the next year will improve social data for targeting safety nets.

### Staff appraisal and recommended near-term policy priorities
- Key macro findings: fall in oil receipts since 2014 exposed structural weaknesses; growth fell, inflation doubled, buffers eroded, parallel market premium emerged, banking vulnerabilities increased, unemployment and poverty remain high, militant activity curtailed oil production, humanitarian crisis in North East.
- Urgent policy needs:
  - Frontloaded fiscal consolidation.
  - Tighter monetary policy.
  - Full exchange rate liberalization.
  - Build a more resilient banking sector (intensify monitoring, contingency planning, strengthen resolution frameworks, increase capital of undercapitalized banks, limit regulatory forbearance).
  - Implement structural reforms to reduce oil dependence (power sector, business environment, SME financing, governance and anti-corruption).
- Timing: the 2019 general elections shorten the window for implementing reforms.

### Risk Assessment Matrix — major risks and recommended responses (selected)
- Retreat from cross-border integration (Likelihood: High; Impact: High): anchor macro stability; diversify exports; improve business environment.
- Policy and geopolitical uncertainties (Likelihood: High): allow greater exchange rate flexibility; rebuild fiscal buffers and reserves.
- Financial conditions (US dollar strength, higher rates): up-front fiscal consolidation; strengthen monetary and exchange rate frameworks; unwind central bank quasi-fiscal activities; strengthen supervisory frameworks.
- Lower energy prices / oil production risk (Likelihood: Low; Impact: High): prioritize non-oil revenue mobilization; contain recurrent expenditure; greater exchange rate flexibility; advance structural reforms.
- Nigeria-specific risks (prolonged policy uncertainty, SLG finances, oil disruption, banking sector deterioration) (Likelihood: High; Impact: High): integrated policy package, fiscal sustainability program for SLGs, strengthen oil/gas security, address infrastructure and social safety nets, boost banking resilience.

### Annex highlights
- Annex I: Status of 2016 Article IV recommendations — progress on tax administration, IPPIS, TSA, fuel price deregulation; exchange rate liberalization incomplete; monetary stance remained accommodative with reserve money and broad money growth high.
- Annex II: Outward spillovers — Nigeria accounts for an estimated 70 percent of ECOWAS exports; significant presence of Nigerian banks in neighboring countries; empirically significant growth spillovers to Chad (elasticity 0.97; P-value 0.01) and Niger (elasticity 0.42; P-value 0.02).
- Annex V: Progress on 2013 FSAP — CBN enhanced cross-border supervisory cooperation, capacity building, EWS; some reforms pending (BOFIA amendments suspended).
- Power Sector Recovery Program (PSRP): PSRP recognizes annual losses of $1.5 billion for next five years if not addressed; near-term actions include tariff revision schedule by mid-May 2017 and payment of federal government debt owed to generation companies by June 2017; PSRP expected to unlock at least $5 billion of investments.

*Italic source: cr1780 - 1. The Economic Recovery and Growth Plan (ERGP), 2017-20 (PDF chapter/section)*

### 1. The Economic Recovery and Growth Plan (ERGP), 2017-20 _____________________________________  5

### The Economic Recovery and Growth Plan (ERGP), 2017-20

### Background and challenges
- The Nigerian economy was severely affected by an accumulation of shocks: low oil prices, a significant fall in oil production owing to sabotage of infrastructure, and inadequate policy implementation.
- Resulting macroeconomic conditions: inflation doubling, domestic arrears mounting, borrowing costs rising, FX market distortions, and growing banking sector risks.
- Pre-existing structural challenges: large infrastructure deficit, weak business environment, strictures of fiscal federalism, high unemployment and poverty rates, regional inequities, militant tensions in the Niger Delta, and an evolving insurgency-related humanitarian crisis in the North East.
- Political and implementation risks: perceptions of policy ineffectiveness, yet-to-be fulfilled election promises, political uncertainty about the President’s health, inadequate coordination among economic policymakers and across tiers of government, more inward policies, and political maneuvering ahead of the 2019 elections.

### Macroeconomic developments (2015–2016) — key facts
- Growth: collapsed to -1.5 percent in 2016 (from 2.7 percent in 2015), driven by a sharp slowdown in oil production owing to sabotage.
- Non-oil output: contracted by 0.3 percent in 2016; agriculture performed strongly while manufacturing, construction, and trade slowed.
- Annual inflation: rose to 18.6 percent in 2016, double that for 2015 and twice the CBN’s medium-term inflation target (6-9 percent). Contributing factors included electricity and fuel tariff hikes (45 and 68 percent, respectively), a weaker naira (a 55 percent depreciation in the interbank market, and 84 percent for inputs priced at the parallel market), and accommodating monetary conditions.
- Fiscal deficit (consolidated government): widened to 4.7 percent of GDP in 2016 (from 3.5 percent of GDP in 2015).
- Federal government revenue performance: revenue underperformed at 50 percent of budget; FG interest payments-to-revenue ratio doubled to 66 percent at end-2016.
- Capital expenditure under-execution in 2016: out of the N1.8 trillion budgeted, only N596 billion spent.
- Financing: budget financed mostly from domestic sources; bank financing through December amounted to 1.7 percent of GDP—most of which was through the central bank. External borrowing limited to project loans; first tranche ($600 million) of AfDB budget loan recorded in January 2017.
- State and local governments (SLG): total distributions averaged N216 billion (0.2 percent of GDP), about 25 percent lower than projected for 2016; SLGs accumulated salary, pension, and contractor arrears.
- Monetary aggregates: policy rate increased from 11 percent in December 2015 to 14 percent in July 2016; reserve money expanded by 33 percent; broad money expanded by 19 percent.
- Banking sector asset quality: NPLs doubled to 13 percent by end-2016. Capital adequacy ratios (CAR) fell from 17.7 percent in December 2015 to 14.8 percent in 2016. As of December 2016, three banks (about 5 percent of assets) had CARs below 8 percent.
- External current account: shifted from a deficit of 3.1 percent of GDP in 2015 to a surplus of 0.6 percent of GDP in 2016 due to import compression and lower dividend repatriation.
- Gross reserves: fell from $28.3 billion at end-2015 to below $24 billion in September 2016, then recovered to $28.6 billion at end-January 2017 (equivalent to about 120 percent of the IMF reserve adequacy metric). Underlying reserves at end-January 2017 were $23.4 billion (97 percent of the metric), excluding FX swaps and forward sales.
- FX market: parallel-interbank exchange rate premium averaged about 50 percent; unmet FX orders estimated at about $4 billion. CBN limited FX sales to about $7.5 million a week.
- International issuance: new $1 billion 15-year Eurobond issued in February 2017 almost 8 times oversubscribed at 7.875 percent. Authorities planned another $500 million issuance.
- Domestic borrowing costs: borrowing rates in the domestic market increased sharply.

### The ERGP objectives and focus areas
- Overall aim: structural transformation toward a more diversified and inclusive economy for 2017-2020.
- Championing key priorities:
  - Food security through agriculture and agro-related manufacturing.
  - Sufficiency in energy through developing oil and gas and renewables.
  - Promoting industrialization.
- Maintaining macroeconomic stability:
  - Aligning monetary, fiscal and trade policies for effective coordination.
  - Accelerating non-oil revenue generation.
  - Rationalizing recurrent expenditure (state and local government finances not incorporated under ERGP).
  - Promoting price stability and continued implementation of a market-determined exchange rate regime (details not specified).
  - Promoting expenditure switching policies to support local production.
  - Pursuing an enabling policy and regulatory environment for private sector investment.
- Investing in social infrastructure:
  - Conditional cash transfers for the most vulnerable.
  - Advancing school feeding and public work programs.
  - Improving quality of health care and access to education.
- Building a globally competitive economy:
  - Development of physical infrastructure—power, integrated transport and IT networks.
  - Improved business environment.
- Improving governance:
  - Fighting corruption, reinforcing security, reforming the public service, and strengthening coordination at regional and local levels.

### ERGP selected economic indicators (2017–2020) — official projections (annual percentage growth, unless otherwise indicated)
- Growth: 2.2 (2017), 4.8 (2018), 4.5 (2019), 7.0 (2020)
- Oil Production (million barrels per day): 2.2 (2017), 2.3 (2018), 2.4 (2019), 2.5 (2020)
- Inflation (annual average): 15.8 (2017), 12.4 (2018), 13.4 (2019), 9.9 (2020)
- Fiscal Deficit (percent of GDP): 2.2 (2017), 2.0 (2018), 1.2 (2019), 1.1 (2020)
- BOP Current Account (percent of GDP): 0.7 (2017), 2.0 (2018), 2.6 (2019), 2.9 (2020)
- Gross Reserves (billions of US dollars): 30.6 (2017), 43.5 (2018), 60.1 (2019), 79.6 (2020)

Source: Ministry of Budget and National Planning (as reported in the ERGP)

### Staff baseline outlook and risks (unchanged policy)
- Baseline projections:
  - Growth would pick up only slightly to 0.8 percent in 2017, mostly reflecting recovering oil production, strong agriculture, and base effects.
  - Non-oil non-agricultural output would stay relatively flat through the medium term.
  - Inflation would remain in double digits under accommodative monetary policy.
  - Financing constraints and risk aversion by banks would crowd out private credit and increase the Federal Government’s debt service burden.
- Risks:
  - Continued FX market distortions and a policy of prioritizing exchange rate stability could produce an increasingly overvalued exchange rate, leading eventually to a disorderly depreciation to avoid reserves falling below acceptable levels.
  - Linkages between real and financial sectors: lack of FX and policy uncertainty would weaken corporate performance, increase NPLs (corporates represent 75 percent of banks’ loan book, and 45 percent of bank loans are in FX), reduce banking sector resilience, and increase likelihood of capital needs.

### Alternative growth-generating adjustment scenario (Box 2) — key elements and outcomes
- Preconditions: upfront implementation of a coherent, coordinated, and comprehensive package of policies to improve confidence and enable a private sector supply response.
- Fiscal policy:
  - Tightened through a 1.6 percent of GDP improvement (by 2020) in the non-oil primary balance, with adjustment front-loaded to create space for higher public investment.
  - Main driver: increasing non-oil revenues to reduce the ratio of interest payments to FG revenue.
- Monetary policy:
  - Tighter monetary policy with monetary growth contained to nominal GDP growth and no central bank quasi-fiscal activities.
  - Expected to help reduce inflation stemming from a more depreciated exchange rate and from higher retail fuel prices under a strict automatic fuel price formula.
- Exchange rate and FX market:
  - Immediate removal of FX restrictions and a more flexible exchange rate regime.
  - Result: immediate increase in the exchange rate toward the parallel rate, possible overshooting, then stabilization. Restoration of FX market function combined with tighter monetary policy would attract capital inflows and rebuild reserves.
- Banking sector adjustments:
  - Return of confidence and reduced government financing needs (lower bond yields) would enable banks to resume lending to the private sector, though at higher lending rates.
  - Increased profitability from higher net interest margins would help reduce initial shortfalls in banks’ capital buffers (after provisioning for higher NPLs).
  - Weak banks expected to acquire new capital including through mergers and acquisitions.
  - Existing macro-prudential FX rules (net open positions and limiting FX loans to those with FX revenues) to be sustained.
- Structural reforms:
  - Boost power, revitalize the oil industry, and improve the business environment to support diversification and private sector development.
- Outcomes targeted:
  - Increase oil production to 2.5 mbpd and boost non-oil growth to 5 percent in the medium term.
  - In 2017, renewed investor confidence—spurred by immediate removal of FX restrictions, lower risk premia, and reduced government financing needs—would generate a small improvement in non-oil growth.

### Policy recommendations highlighted by staff
- Implement a comprehensive and coherent package that:
  - Tightens fiscal policy (front-loaded non-oil primary balance improvement of 1.6 percent of GDP by 2020).
  - Implements tighter monetary policy with constrained monetary growth and elimination of central bank quasi-fiscal activities.
  - Immediately removes FX restrictions and adopts a more flexible exchange rate regime.
  - Pursues structural reforms to improve power, oil industry performance, and the business environment.
- Maintain macro-prudential FX rules to contain banking sector risks while restoring FX market functioning.
- Front-load fiscal consolidation to create space for higher public investment and to reduce the FG interest payments-to-revenue burden.

*Italic source: cr1780 - 1. The Economic Recovery and Growth Plan (ERGP), 2017-20 (PDF chapter/section)*

### Box 2. Nigeria: A Growth Generating Adjustment Scenario (continued)

### Box 2. Nigeria: A Growth Generating Adjustment Scenario (continued)

### Adjustment scenario and growth dynamics
- A 1 percentage point increase in public investment is expected to increase growth by 0.5-1 percent over 3 years.
- Over the medium term, higher savings and capital inflows support investment, with retained earnings and less fiscal dominance allowing double-digit growth in private sector credit.
- 1/ The impact on the banking sector of a depreciation and removal of FX restrictions would be limited since some banks are already provisioning for higher FX depreciation.

### Risks and regional spillovers
- Main downside risks:
  - Continued disruptions in oil and gas production arising from militancy activities.
  - Further delays in policy implementation.
  - Limited capacity to implement the targeted scaling-up of capital expenditure.
  - Further deterioration in banking sector soundness indicators.
  - A higher external market premium for sovereign bonds.
- Upside potential:
  - Stability in the Niger Delta and a rebound in investor confidence.
- Regional linkages and outward spillovers:
  - Nigeria accounts for an estimated 70 percent of ECOWAS exports and 17 percent of imports in Sub-Saharan Africa.
  - Trade and remittance channels are particularly strong to neighboring countries; staff analysis indicates overall activity in Nigeria’s neighbors has held up well recently, with the oil price shock representing a positive terms-of-trade dividend for all neighboring countries except Chad.
  - About a dozen Nigerian banks have significant operations in Sub-Saharan African countries, with Nigerian subsidiaries holding more than 20-30 percent of deposits in Benin, Gambia, and Sierra Leone. Risks to operations of subsidiaries from a slowdown in Nigeria are limited because subsidiaries are in part ring-fenced, direct cross-border positions are not typically large relative to host economies, and subsidiaries are mostly locally funded.

### Key macroeconomic figures (Baseline and Adjustment Scenario, selected)
- Real GDP (at 2010 market prices): 2015 2.7, 2016 -1.5, 2017 0.8, 2018 1.9, 2019 1.9, 2020 1.8 (baseline and adjustment columns presented in source).
- Non-oil GDP: 2015 3.6, 2016 -0.3, 2017 0.2, 2018 1.1, 2019 1.6, 2020 2.0 (source table contains full series).
- Production of crude oil (million barrels per day): 2015 2.12, 2016 1.85, 2017 2.00, 2018 2.20, 2019 2.30, 2020 2.30.
- Consumer price index (end of period): 2015 9.6, 2016 18.6, 2017 17.5, 2018 16.5, 2019 15.5, 2020 15.0.
- Gross national savings (percent of GDP): 2015 12.4, 2016 13.1, 2017 13.5, 2018 13.8, 2019 14.2, 2020 14.7.
- Investment (percent of GDP): 2015 15.5, 2016 12.5, 2017 12.5, 2018 12.8, 2019 13.5, 2020 14.1.
- Current account balance (percent of GDP): 2015 -3.1, 2016 0.6, 2017 1.0, 2018 1.0, 2019 0.7, 2020 0.7.
- Total revenues and grants (percent of GDP): 2015 7.6, 2016 5.3, 2017 5.7, 2018 5.9, 2019 6.1, 2020 6.5.
  - Of which: oil and gas revenue (percent of GDP): 2015 3.5, 2016 2.1, 2017 2.3, 2018 2.4, 2019 2.4, 2020 2.6.
- Total expenditure and net lending (percent of GDP): 2015 11.1, 2016 10.0, 2017 10.7, 2018 10.2, 2019 10.1, 2020 10.4.
- Overall balance (percent of GDP): 2015 -3.5, 2016 -4.7, 2017 -5.0, 2018 -4.2, 2019 -4.0, 2020 -3.9.
- Non-oil primary balance (percent of non-oil GDP): 2015 -6.3, 2016 -5.8, 2017 -6.7, 2018 -5.7, 2019 -5.1, 2020 -5.0.
- Anchor: non-oil revenue (percent of non-oil GDP): 2015 4.4, 2016 3.4, 2017 3.6, 2018 3.7, 2019 3.9, 2020 4.1.
- Public gross debt (percent of GDP): 2015 14.3, 2016 18.6, 2017 23.3, 2018 24.1, 2019 24.3, 2020 24.6.
- FGN interest payments (percent of FGN revenue): 2015 33.2, 2016 66.4, 2017 60.7, 2018 65.1, 2019 75.0, 2020 78.3.
- Broad money (percent change; end of period): 2015 5.9, 2016 18.7, 2017 19.2, 2018 18.7, 2019 18.7, 2020 18.2.
- Credit to the private sector (y-o-y, %): 2015 0.1, 2016 22.3, 2017 3.2, 2018 2.2, 2019 2.0, 2020 1.2.
- Price of Nigerian oil (US dollar per barrel): 2015 53.1, 2016 44.6, 2017 56.3, 2018 55.9, 2019 55.0, 2020 54.9.
- Gross international reserves (US$ billions): 2015 28.3, 2016 27.0, 2017 27.1, 2018 26.7, 2019 27.0, 2020 26.9.
  - Equivalent months of imports of G&Ss: 2015 6.9, 2016 5.8, 2017 5.5, 2018 5.2, 2019 5.1, 2020 5.0.

### Fiscal policy: reducing dependence on oil revenue (findings)
- Non-oil revenue mobilization, coupled with improved expenditure efficiency and composition, is essential to create fiscal space for debt sustainability and scaling-up capital expenditure.
- Authorities have increased tax administration efforts: registration of 818,000 new taxpayers, arrears collection, and targeted tax audits.
- Efficiency gains from reduced overhead costs, extension of the Integrated Personnel Payroll Information System (IPPIS) eliminating 65,000 ghost workers, and implementation of the Treasury Single Account (TSA).
- Weak expenditure controls at subnational levels remain a challenge.
- Draft 2017 Federal budget: expenditure envelope is 20 percent higher than the 2016 budget; carryovers from 2016 with a 33 percent execution rate can amount to N473 billion.
- Staff projects the federal deficit to be 3.7 percent of GDP (higher than the 2.8 percent of GDP in the 2017 budget).
- Financing constraints likely to limit execution; larger deficit would likely be financed domestically, further raising yields and crowding out private sector credit (1-3 percent growth, y-o-y).
- External financing in 2017: Additional Eurobond issuances and concessional financing from the World Bank/AfDB constitute most (60 percent) of the external financing. FG plans to issue ten-year promissory notes (2.2 percent of GDP) in 2017 to settle domestic arrears.

### Fiscal policy: adjustment scenario targets and measures
- Target: decline FG interest-to-revenue ratio from 66 percent in 2016 to below 30 percent in 2020.
- Target: increase the non-oil revenue-to-non-oil GDP ratio to 11.6 percent in 2020 (against 4.1 percent under the baseline).
- Result: cumulative improvement by 2020 of 1.6 percentage points in the non-oil primary balance-to-non-oil GDP ratio of the consolidated government (relative to 0.3 percent of GDP under the baseline), with a quarter accruing in 2017 (an improvement of 2 percent of GDP over the baseline).
- Measures to achieve targets:
  - Accelerating revenue in 2017: non-oil revenues increase by about 2 percent of GDP, mostly through new tax policy measures (hiking excise rates, removing exemptions/duty waivers, initiating VAT increase in July 2017).
  - Medium-term tax reforms: modify VAT system to allow tax credits for all inputs (including capital goods); increase the registration threshold with a simplified presumptive tax regime for SMEs; rationalize exemptions; progressively increase the VAT rate to 15 percent by 2020; raise the VAT base from an estimated 15 percent of GDP in 2016 to 42 percent of GDP by 2020; rationalize tax expenditures; review PIT and CIT rate structures; consider introducing a property tax to boost IGR of states.
  - Rationalizing FG recurrent expenditures: continue reducing overhead and personnel costs; implement an automatic price-setting mechanism to eliminate recurrence of fuel subsidies or absorption of costs through NNPC if international prices rise or exchange rate depreciates.
  - Executing better FG capital spending: prioritize completion of high-impact projects, effect budget allocations to agencies with ready projects, improve project preparation, and streamline procurement.
  - Avoid accumulation of new arrears at all tiers of government: ensure states implement FSP; focus on budget preparation, expenditure controls, subnational TSA and cash management reforms, fiscal reporting, and IGR administration via strengthening Joint Tax Boards.
  - Reduce fiscal risks from SOE operations: create a single oversight unit, integrate SOE quasi-fiscal operations into the budget, strengthen boards, and improve reporting.
  - Contingency planning for unbudgeted costs related to Presidential Initiative for 8.5 million people in the North East: Recovery and Peace Building Assessment estimates total reconstruction cost/humanitarian assistance at $6.6 billion; projected humanitarian cost for 2017 of $1 billion and $530 million (0.2 percent of GDP) budgeted, so additional savings (including new tax measures) should be identified in case of shortfalls in external donor financing.
  - Expanding social safety net programs for the most vulnerable to mitigate effects of tax increases or an automatic fuel price mechanism.

### Adjustment Scenario yield by measure, 2017 (Percent of GDP)
- VAT (rate increase to 10 percent): 0.7
- CIT (close loopholes and exemptions): 0.8
- Excises and Levies (rate increase/compliance): 0.2
- FGN Internally Generated Revenue (compliance): 0.05
- Total: 1.7
- 1/ Measures are for mid-year implementation (source: IMF staff calculations).

### Authorities’ views on fiscal policy
- Authorities agree continuation of current policies is not sustainable in the medium term; they note the economy began to recover by end-2016 under difficult conditions and partial reforms.
- Authorities consider a more ambitious growth path possible, with GDP growth reaching 7 percent in 2020 provided bold initiatives in ERGP are implemented (improve business environment, complete high-quality infrastructure projects, focus on priority sectors with high growth and employment potential, promote social inclusion to catalyze private sector development).
- Authorities agree on need to reduce debt service-to-revenue ratio close to 30 percent of GDP by 2020 and advocate increasing tax-to-GDP ratio from 6 to 15 percent within 5 years.
- For 2017, authorities expect gains from improved tax administration (new registered taxpayers, arrears collection, targeted tax audits) and a limited tax amnesty to enable voluntary declaration and payment of liabilities.
- On tax policy, authorities find raising tax rates in weak growth politically difficult and are considering targeted VAT rate increases from 2018 onwards (telecoms and luxury items), changes in excises, reducing exemptions, and possible asset sales/privatization.
- Committed to reducing spending through the efficiency unit and eliminating overlapping agency mandates; risks from SLGs and SOEs to be reduced through FSP implementation and enhanced monitoring.

### Exchange rate, FX market, and monetary policy
- FX market characteristics:
  - Remains restrictive and segmented with restrictions on access to FX for 40 categories of goods still in place.
  - Despite the June liberalization, interbank FX market transaction volumes have remained modest, price discovery weak, and a large spread with the parallel market persists.
  - Beginning in February 2017, CBN began providing FX for certain invisibles (business and personal travel, medical needs, and school fees) at a margin not expected to exceed 20 percent above the interbank rate, and market participants are no longer required to allocate 60 percent of FX to raw materials, equipment, and machinery.
  - CBN special FX interventions are no longer dedicated to priority sectors.
- Effects of FX distortions:
  - FX restrictions on current account transactions have contributed to lower imports and dividend payments and deprived some companies of vital imported inputs, leading to cuts in production, employment, and investment.
  - Distortions also arise through CFMs such as surrender/repatriation requirements on export proceeds and payment limits on naira denominated credit cards for overseas transactions.
- Policy and Fund engagement:
  - Nigeria maintains exchange restrictions and MCPs subject to Fund approval. In the 2016 Article IV consultation, three exchange restrictions and one MCP were identified; since then the previously identified MCP and one exchange restriction have been eliminated, but two new MCPs subject to Fund approval under Article VIII, Sections 2(a) and 3 have been introduced (see Informational Annex in source).
- Staff views and recommendations:
  - A more flexible exchange rate regime is essential to buffer external shocks and help unlock FX supply.
  - Current policies could lead to further deterioration in reserves and/or a disorderly exchange rate adjustment; the interbank exchange rate around N315 per dollar is estimated to be about 18 percent overvalued for 2016 and would worsen given inflation differentials and continuing FX restrictions.
  - Staff recommends implementing exchange rate unification, including immediate removal of remaining restrictions on access to FX in the interbank market—specifically, the 40 categories list and the new segment for transactions in certain invisibles.
  - Staff acknowledges immediate reaction could be initial overshooting of the exchange rate, but expects stabilization provided an adequate set of supporting policies (monetary, fiscal and structural) is implemented.
  - In view of substantial room for warranted macroeconomic policy changes, the use of CFMs should be avoided in line with the Fund’s institutional view.

*Sources: Nigerian authorities; and IMF staff estimates and projections.*

### Box 3. The Impact of a Naira Depreciation

### Box 3. The Impact of a Naira Depreciation

### Short-term fiscal and external effects
- A 10 percent depreciation of the currency would reduce the overall fiscal deficit by 0.1 percent of GDP, as revenue gains (mainly through higher oil and customs/VAT revenues) more than offset higher foreign-financed capital expenditure and interest payments. At the same time, FG net financing (in naira) would improve slightly.
- A ten percent real effective depreciation would improve the current account balance by about 1 percent of GDP, mainly through lower non-oil imports.
- A depreciation may encourage capital inflows by reducing overvaluation; previous staff analysis found that expectations of future depreciation reduced capital flows, especially for government debt securities.

### Inflationary impact
- With imports representing 17 percent of the CPI basket, staff estimates that a 10 percent depreciation of the naira will increase inflation by 1 percentage point within 6 months (see WP/16/91).
- Second round inflationary effects could ensue, for example from transportation mark-ups or inflationary expectations.

### Banking sector and corporate balance-sheet effects
- A 10 percent depreciation of the naira could amplify corporate and financial sector vulnerabilities, increasing the banking sector’s NPLs net provision to capital and reducing the overall CAR by 3 and 1 percentage points, respectively.
- Existing limits on foreign currency exposure—on FX borrowing and NOP FX—combined with the policy of encouraging banks to lend in foreign currency only to those customers with foreign currency revenue would mitigate the impact of the depreciation on banks’ balance sheets.
- Higher naira repayments on FX loans (and inputs for operations) could adversely impact financial/operating surpluses of corporates.

### Growth and investment implications
- Real GDP growth is expected to improve, initially increasing by 0.4 percent through improved net exports following a 10 percent depreciation.
- Investment would be expected to increase as confidence improves from a clearer articulation of a package of coherent policies.

### FX market and exchange-rate framework recommendations
- Improve the operations of the FX interbank market, including through greater price discovery. This would occur by clearly stating CBN objectives—either in terms of reserves, or through a pre-announced rate of FX sales—and a clear commitment to a market-determined exchange rate in line with economic fundamentals.
- Discourage CBN engagement in transactions at non-market prices.

### Monetary policy recommendations
- Ensure broad money targets remain consistent with price stability:
  - Broad money growth—the CBN’s intermediate target—should be kept close to 14 percent in 2017 to restrain inflationary pressures and contain any second round effects from a more unified exchange rate (and depreciation).
  - The policy rate should also be raised to positive real levels to help reduce inflation to single digits in the medium term and support the move toward a more flexible exchange rate regime.
- Unwind “unconventional monetary policy operations.” The execution of the CBN’s quasi-fiscal activities has effectively masked the signaling of the monetary policy stance and should be phased out. In the meantime, CBN’s credit support should be transparent and time-bound.
- Continue to improve the monetary policy framework:
  - Clearly announce price stability as the CBN’s primary objective.
  - Conduct open market operations such that money market rates reflect the policy rate.
  - Keep the corridor around the policy rate narrow to convey a clear signal of the policy stance and anchor inflation expectations.

### Banking sector prudential and resolution recommendations
- Tighten prudential requirements and strictly enforce existing ones:
  - Staff welcomes the recent implementation of a 2 percent general provisioning (previously suspended in 2016) and reduction in the NOP FX limit.
  - Take a conservative approach to collateral valuation and impose a timeline for SOLs regulatory forbearance while encouraging enforcement of timelines submitted by banks to bring exposure to prudential norms.
  - Reduce foreign exchange risks by encouraging banks to continue matching FX assets with liabilities, giving due consideration to maturity mismatch.
- Intensify monitoring of the banking system:
  - Adopt intrusive bank supervision for all banks, expand stress test scenarios to full-fledged scenario analysis, and continue targeted audits on credit risks (particularly for FX loans) or market/operational risks.
- Improve asset quality:
  - Banks should address non-performing assets by restructuring or divesting assets and writing them off after proper provisioning.
  - Staff urged caution in pursuing a proposal to establish a new private asset management company (AMC) in addition to the existing AMCON; a successful AMC would require clear and transparent governance rules, financial and operational autonomy, and a proper financing model.
- Increase promptly the capital of undercapitalized banks:
  - The three undercapitalized banks should implement their action plans, including the finalization of the sale of one as soon as possible.
- Strengthen the legal resolution framework by modifying existing resolution tools to allow powers to write down capital, enhance statutory powers to override shareholders’ rights, and amend the bank liquidation regime to address legal challenges and protracted delays.
- Enhance crisis contingency planning, including identifying limits in the use of the emergency liquidity framework for solvent but illiquid banks during a bank run.

*Source: Box 3. The Impact of a Naira Depreciation.*

### 28.      Authorities’ views. The authorities recognize the importance of reducing the infrastructure

### 28.      Authorities’ views. The authorities recognize the importance of reducing the infrastructure gap and the urgency of implementing a comprehensive power sector recovery plan, but underscored that improvements in governance, efficiency, and power delivery should precede tariff increases.

### Authorities’ stated priorities and actions
- Tasked the newly-formed Presidential Enabling Business Environment Council (PEBEC) to improve Nigeria’s DB ranking to 100 by 2020 (from 169 currently), starting recently with a 60-day plan focusing on reforms to facilitate entry/exit of people and goods and simplify government procurement.
- Top priorities reiterated by the authorities:
  - Fighting corruption to strengthen the business climate.
  - Promoting the development of SMEs (including access to financing).
  - Implementing the social investment program, including:
    - the conditional cash transfer payment scheme for the most vulnerable, and
    - the homegrown school feeding program (Box 5).

### Box 5 — Social Safety Net Measures Undertaken by the Nigerian Government
- Context:
  - Despite the rise in GDP, the incidence of poverty has increased over the past decade, reaching 61 percent in 2010 and implying that around 100 million Nigerians live below the poverty line.
- Measures undertaken in the context of the ERGP:
  - The N-Power Job Creation Scheme: A job creation volunteer-service program designed to mitigate specific problems in local communities through the deployment of unemployed Nigerian graduates.
  - The Homegrown School Feeding program: Aims to provide basic nutrition needs for children, while creating employment and supporting agricultural production in local communities.
  - The Conditional Cash Transfer program: Targeted at supporting the most vulnerable and poorest Nigerians. In December 2016, one million beneficiaries from 9 states started receiving N5,000 per month from the Federal Government.
  - The General Enterprise and Empowerment Program (GEEP): A zero-interest, 5 percent administrative fee loan scheme through the Bank of Industry, targeting over 1.2 million Nigerian artisans, traders, market men and women, as well as women cooperatives.

### Data issues (paragraph 29)
- Data provided to the Fund are assessed to be broadly adequate for surveillance, but improvements are needed in:
  - National accounts statistics (particularly quarterly data on the demand side).
  - Balance of payments data.
  - SLG and SOE fiscal data and domestic arrears.
  - Timeliness of FSI data.
- The completion of household surveys over the next year will help update social data necessary for well-targeted social safety nets.

### Staff appraisal — Key macroeconomic findings and risks (paragraphs 30–32)
- Recent developments and challenges:
  - Fall in oil receipts since 2014 has exposed structural and policy weaknesses and highlighted the urgency of diversifying the economy to address rising unemployment and the high poverty rate.
  - Outcomes observed: Growth has fallen, inflation has doubled, external and fiscal buffers have eroded, a large parallel market premium has emerged, banking sector vulnerabilities have increased, unemployment and poverty rates remain high, militant activity in the Niger Delta has curtailed oil production, and an insurgency-related humanitarian crisis has taken root in the North East.
- Elevated risks and insufficient adjustment:
  - Authorities have taken several steps (deregulating fuel prices, limiting non-interest recurrent spending, initiating currency depreciation, strengthening banking supervision, increasing anti-corruption efforts) but much more is needed urgently.
  - In the absence of additional policies and measures to address pre-existing structural bottlenecks in infrastructure and governance, growth will remain weak and imbalances will persist, increasing the risk of a currency crisis.
  - Key risks to the outlook include:
    - Lower oil prices.
    - Further delays in reform implementation.
    - Low oil production from an intensification of militancy activities.
    - Worsening global risk aversion.
    - Further deterioration in finances of State and Local Governments.
- Urgent policy needs:
  - Initiate frontloaded fiscal consolidation.
  - Adopt tighter monetary policy.
  - Pursue full exchange rate liberalization.
  - Build a more resilient banking sector.
  - Note: The advent of general elections in early 2019 shortens the window for implementing reforms.

### Fiscal consolidation and revenue mobilization (paragraph 33)
- Recommendations for fiscal strategy:
  - Non-oil revenue mobilization should underpin fiscal consolidation, starting from 2017.
  - Staff recommends a larger and much more frontloaded fiscal adjustment than currently planned to create fiscal space for higher priority spending while reducing the non-oil primary deficit.
  - Specific revenue target: A major effort to raise the nonoil revenue-to-nonoil GDP ratio from under 4 to about 12 percent over five years, so as to bring the debt service to revenue ratio down to more sustainable levels.
  - Initial measures should include:
    - Continuing improvements in tax and customs administration.
    - New tax policy measures of about 2 percent of non-oil GDP in 2017.
    - Implementation of an independent fuel price-setting mechanism to eliminate fuel subsidies.
    - Strengthened public financial management.
    - Well-targeted social safety nets.
  - Containing the fiscal deficit of state and local governments through improved transparency and monitoring is essential.

### External position and exchange rate policy (paragraph 34)
- Assessment:
  - The external position is weaker than consistent with Nigeria's fundamentals and desirable policy settings.
  - Inadequate implementation of the announced policy of greater exchange rate flexibility, coupled with foreign exchange restrictions, have weakened investor confidence and generated large imbalances in the FX market.
- Risks:
  - If unaddressed, this could risk a further deterioration in reserves and/or a disorderly adjustment of the exchange rate.
- Recommended course:
  - Removal of exchange restrictions and moving towards a unified foreign exchange market.
  - Combine with tighter monetary policy, fiscal consolidation, and cost-reducing structural reforms to facilitate needed diversification.
  - In view of available room for policy actions, avoid capital flow management measures.

### Banking sector resilience (paragraph 35)
- Current mitigation:
  - Existing prudential requirements and targeted audits of weaker banks help contain risks.
- Further needs:
  - Further intensify bank monitoring.
  - Enhance contingency planning.
  - Strengthen resolution frameworks.
  - Quickly increase the capital of undercapitalized banks.
  - Exit from regulatory forbearance, which should be limited in time.

### Structural reforms to reduce oil dependence (paragraph 36)
- Essential reforms:
  - Tackle the large infrastructure gap (particularly in the power sector).
  - Pursue more aggressive efforts to improve the business environment.
  - Improve SME access to financing.
  - Strengthen governance and anti-corruption efforts.
- Expected outcomes:
  - If implemented effectively and in a timely manner, the combined measures would promote inclusive growth and help reduce unemployment and poverty.

### Exchange restrictions and multiple currency practices (paragraph 37)
- Staff position:
  - Staff does not support the exchange measures that have given rise to the exchange restrictions and multiple currency practices.
  - In the absence of a clear timetable for their removal, staff is not in a position to recommend approval of the exchange restrictions and MCPs.
  - Staff urges the authorities to articulate a speedy and monitorable strategy for their removal to allow improved functioning of the foreign exchange market and convergence of the multiple exchange rates.

### Data adequacy and improvements (paragraph 38)
- Data provided to the Fund are broadly adequate for surveillance.
- Quality and availability of economic statistics have improved, including through technical assistance.
- Continued efforts should enhance national accounts and BOP data, as well as fiscal accounts of subnational governments.
- The authorities’ commitment to update social data is welcome.

*Source: cr1780 - 28. Authorities’ views. The authorities recognize the importance of reducing the infrastructure gap and the urgency of implementing a comprehensive power sector recovery plan.*

### 39.      It is recommended that the next Article IV consultation take place on the standard 12-

### 39.      It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Economic growth, inflation, and drivers
- Economic growth weakened between 2010 and 2016; contributions to GDP by component are shown for 2012–2016 and quarterly 2016 (Oil, Non-Oil: Manufacturing, Non-Oil: Other, Agriculture, GDP).
- Inflation:
  - CPI (annual average and end-of-period) and CPI excl. Farm Produce and Energy trends shown for 2010–2016.
  - Consumer price index (annual average): 9.0 (2015), 15.7 (2016), 17.4 (2017), 15.6 (2018), 16.0 (2019), 15.2 (2020), 14.7 (2021), 14.5 (2022).
  - Consumer price index (end of period): 9.6 (2015), 18.6 (2016), 17.5 (2017), 16.5 (2018), 15.5 (2019), 15.0 (2020), 14.5 (2021), 14.5 (2022).

### Fiscal developments and public debt
- Low oil prices and reduced production curtailed oil revenue, widening the fiscal deficit despite a sharp decline in capital expenditures.
- Consolidated government operations (percent of GDP and nominal figures):
  - Total revenues and grants: 7.6 (2015), 5.3 (2016), 5.7 (2017), 5.9 (2018), 6.1 (2019), 6.5 (2020), 6.8 (2021), 7.0 (2022).
  - Of which: oil and gas revenue: 3.5 (2015), 2.1 (2016), 2.3 (2017), 2.4 (2018), 2.4 (2019), 2.6 (2020), 2.7 (2021), 2.7 (2022).
  - Total expenditure and net lending: 11.1 (2015), 10.0 (2016), 10.7 (2017), 10.2 (2018), 10.1 (2019), 10.4 (2020), 10.7 (2021), 10.8 (2022).
  - Overall balance: -3.5 (2015), -4.7 (2016), -5.0 (2017), -4.2 (2018), -4.0 (2019), -3.9 (2020), -3.8 (2021), -3.8 (2022).
- Public gross debt (percent of GDP): 12.1 (2015), 18.6 (2016), 23.3 (2017), 24.1 (2018), 24.3 (2019), 24.6 (2020), 25.0 (2021), 24.9 (2022).
- FGN interest payments (percent of FGN revenue): 33.2 (2015), 66.4 (2016), 60.7 (2017), 65.1 (2018), 75.0 (2019), 78.3 (2020), 82.8 (2021), 88.7 (2022).
- Federal Government nominal figures (Table 3a, Billions of Naira) highlights:
  - Total revenue: 3,057 (2015), 1,978 (2016), 2,312 (2017), 3,002 (2018), 3,645 (2019), 4,528 (2020), 5,457 (2021), 6,457 (2022).
  - Oil revenue: 1,359 (2015), 915 (2016), 1,015 (2017), 1,455 (2018), 1,769 (2019), 2,241 (2020), 2,686 (2021), 3,167 (2022).
  - Total expenditure: 5,406 (2015), 4,903 (2016), 6,870 (2017), 7,149 (2018), 8,457 (2019), 10,150 (2020), 12,236 (2021), 14,554 (2022).
  - Overall balance: -2,349 (2015), -2,925 (2016), -4,558 (2017), -4,147 (2018), -4,812 (2019), -5,622 (2020), -6,779 (2021), -8,097 (2022).
  - FGN Total Debt (memorandum): 8,837 (2015), 14,823 (2016), 21,581 (2017), 25,728 (2018), 30,540 (2019), 36,162 (2020), 42,941 (2021), 51,038 (2022).
  - Budget oil price: 53.0 (2015), 38.0 (2016), 44.5 (2017), 45.0 (2018), 50.0 (2019), 49.9 (2020), 50.5 (2021), 51.5 (2022).
- Consolidated government (Table 3b, Billions of Naira):
  - Total revenue: 7,224 (2015), 5,426 (2016), 6,922 (2017), 8,479 (2018), 10,354 (2019), 12,988 (2020), 15,851 (2021), 18,954 (2022).
  - Total expenditure: 10,555 (2015), 10,253 (2016), 13,086 (2017), 14,573 (2018), 17,087 (2019), 20,713 (2020), 24,665 (2021), 29,158 (2022).
  - Overall balance: -3,332 (2015), -4,827 (2016), -6,164 (2017), -6,094 (2018), -6,733 (2019), -7,725 (2020), -8,813 (2021), -10,204 (2022).

### External sector and reserves
- Declining imports outweighed the fall in exports, contributing to a trade surplus and moving the current account to a surplus while capital inflows remained depressed.
- Balance of payments (Billions of U.S. dollars):
  - Current account balance: -15.4 (2015), 2.6 (2016), 4.0 (2017), 4.7 (2018), 4.0 (2019), 3.9 (2020), 3.3 (2021), 2.6 (2022).
  - Trade balance: -6.4 (2015), -0.5 (2016), 5.8 (2017), 7.7 (2018), 7.0 (2019), 6.7 (2020), 6.0 (2021), 5.3 (2022).
  - Exports: 45.9 (2015), 34.7 (2016), 47.2 (2017), 50.9 (2018), 52.0 (2019), 53.1 (2020), 53.9 (2021), 55.1 (2022).
    - Oil/gas exports: 42.4 (2015), 32.0 (2016), 44.1 (2017), 47.6 (2018), 48.7 (2019), 49.6 (2020), 50.0 (2021), 50.9 (2022).
  - Imports: -52.3 (2015), -35.2 (2016), -41.4 (2017), -43.2 (2018), -45.0 (2019), -46.4 (2020), -47.9 (2021), -49.9 (2022).
  - Net international reserves (increase -): 5.7 (2015), 1.0 (2016), -0.1 (2017), 0.4 (2018), -0.3 (2019), 0.1 (2020), 0.5 (2021), 1.1 (2022).
  - Gross official reserves, end-of-period: 28.3 (2015), 27.0 (2016), 27.1 (2017), 26.7 (2018), 27.0 (2019), 26.9 (2020), 26.5 (2021), 25.4 (2022).
  - Gross international reserves strengthened to $27 billion at end-2016 (source text).
- Price of Nigerian oil (US dollar per barrel): 53.1 (2015), 44.6 (2016), 56.3 (2017), 55.9 (2018), 55.0 (2019), 54.9 (2020), 55.5 (2021), 56.6 (2022).

### Monetary, foreign exchange, and financial sector developments
- Exchange rate and FX market:
  - Despite greater exchange rate liberalization, FX restrictions kept the wedge between the parallel and interbank exchange rates at over 50 percent.
  - Exchange rates (Naira per U.S. dollar; period average) and components: Interbank Market, Bureau de Change, 12-month NDF, Lagos Parallel Rate (series shown for 2015M1–2017M2).
- Money and credit:
  - Broad money (percent change; end of period): 5.9 (2015), 18.7 (2016), 19.2 (2017), 18.7 (2018), 18.7 (2019), 18.2 (2020), 18.0 (2021), 17.5 (2022).
  - Credit to the private sector (y-o-y,%): 0.1 (2015), 22.3 (2016), 3.2 (2017), 2.2 (2018), 2.0 (2019), 1.2 (2020), 1.0 (2021), 1.0 (2022).
  - Gross international reserves (billions of US dollar) in monetary survey memoranda: 28.3 (2015), 27.8 (2016), 26.5 (2017), 23.8 (2018), 27.0 (2019), 27.1 (2020), 26.7 (2021), 27.0 (2022), 26.9 (2023?), 26.5, 25.4 (projection series as provided).
- Financial soundness indicators and stress:
  - Non-performing loans (NPL) dynamics: NPLs doubled and capital adequacy ratios declined.
  - Financial Soundness Indicators (selected, percent):
    - Regulatory Capital to Risk-Weighted Assets: 17.9 (2011Q4), 18.3 (2012Q4), 17.1 (2013Q4), 17.2 (2014Q4), 16.1 (2015Q4), 16.6 (2016Q1), 14.7 (2016Q2), 15.0 (2016Q3), 14.8 (2016Q4).
    - Regulatory Tier 1 Capital to Risk-Weighted Assets: 18.1 (2011Q4), 18.0 (2012Q4), 17.1 (2013Q4), 15.5 (2014Q4), 17.1 (2015Q4), 15.4 (2016Q1), 13.8 (2016Q2), 12.7 (2016Q3), 12.6 (2016Q4).
    - Non-Performing Loans Net of Provisions to Capital: 7.1 (2011Q4), 3.8 (2012Q4), 5.8 (2013Q4), 4.1 (2014Q4), 5.9 (2015Q4), 20.1 (2016Q1), 28.4 (2016Q2), 37.3 (2016Q3), 35.0 (2016Q4).
    - Non-Performing Loans to Total Gross Loans: 5.3 (2011Q4), 3.7 (2012Q4), 3.4 (2013Q4), 2.9 (2014Q4), 5.3 (2015Q4), 10.7 (2016Q1), 11.7 (2016Q2), 13.2 (2016Q3), 12.8 (2016Q4).
  - Money market and policy rates:
    - MPR and other interest rates series plotted (MPR, Overnight, Call Rate, T-bill 3M, Prime Lending Rate, Savings Deposit Rate). Note: “The wide lending-deposit rates spread is mainly explained by high non-interest cost (please see AIV and SIP 2016 for details).”
  - Central Bank of Nigeria (CBN) balance sheet and monetary aggregates (selected, Billions of Naira):
    - Reserve money: 7,042 (Dec. 2015), projections rising to 25,713 (2022 Dec).
    - Reserve money y/y growth rate series includes: 14.5, 21.9, 16.1, 38.5, 32.6, 19.2, 18.7, 18.7, 18.2, 18.0, 17.5 (as provided).
    - Money multiplier shown at 2.8–3.0 levels across periods and projected constant at 2.5 in later years.
  - Monetary survey (selected, Billions of Naira):
    - Broad money: 19,925 (2015), 20,280 (2016), 21,483 (2017), 21,930 (2018), 23,645 (2019), 28,182 (2020), 33,464 (2021), 39,721 (2022), 46,958, 55,406, 65,129 (later projections).
    - Credit to private sector (level and y-o-y): o/w credit to the private sector levels 11,583 (2015), 11,439 (2016), 13,617 (2017), 14,129 (2018), 14,164 (2019), 14,617 (2020), 14,938 (2021), 15,237 (2022), with y-o-y growth rates: 0.1 (2015), -4.9 (2016), 11.7 (2017), 19.9 (2018), 22.3 (2019), 3.2 (2020), 2.2 (2021), 2.0 (2022).
- Financial sector liquidity and external spreads:
  - Gross international reserves strengthened to $27 billion at end-2016.
  - Eurobond spread vs. US10Y (basis points) remain elevated.
  - As CBN’s sales of forex declined and monetary policy stance eased, banking sector liquidity increased and money market rates fell sharply below the MPR before increasing more recently.
  - Despite monetary easing, credit to the private sector grew by 22 percent y-o-y in December (period not specified in this excerpt) but remained relatively flat after correcting for exchange rate changes.

### Spillovers, financial inclusion, and cross-border exposures
- Figure 2 highlights outward spillovers from Nigerian subsidiary banks (liabilities due to Nigerian subsidiary banks, 2016) and Nigerian banks’ share of deposits abroad (2013 data where available).
  - Country shares shown: Cote d'Ivoire 18%, Ghana 15%, Senegal 22%, Togo 25%, others 20% (as illustrated).
- Financial inclusion (Figure 3, 2014) key points:
  - Nigerians’ savings at financial institutions fare better than peers, but dependence on the formal sector for borrowing is lower than peers.
  - Disparity of access to financial institutions by income-level compares with peers.
  - With regards to gender, Nigeria scores much lower than peers.
  - Reasons for not having an account are similar to peers; compared to peers, lack of access is mainly involuntary.

### Risks (Risk Assessment Matrix) and recommended policy responses
- Major identified external and domestic risks with relative likelihood, time horizon, impact, and policy responses (summarized):
  - Retreat from cross-border integration
    - Relative likelihood: High
    - Time horizon: Short to Medium Term
    - Impact: High
    - Policy response:
      - Anchor macroeconomic stability through appropriate fiscal, monetary, exchange rate and structural policies.
      - Diversify exports (products and trading partners).
      - Continue improving the business environment (streamline business regulations, contract enforcement, affirmation of investors’ rights, improve trade facilitation).
  - Policy and geopolitical uncertainties (U.S., Europe, fragmentation/security dislocation)
    - Relative likelihood: High (policy uncertainty) and High (fragmenation risks)
    - Time horizon: Short to Medium Term
    - Impact: Medium/High
    - Policy response:
      - Allow greater exchange rate flexibility.
      - Rebuild fiscal buffers and reserves.
  - Financial conditions (US dollar strength, higher rates, European bank distress)
    - Relative likelihood: High (US dollar/rates), Medium (European bank distress)
    - Time horizon: Short Term
    - Impact: High/Medium
    - Policy response:
      - Up-front fiscal consolidation measures.
      - Strengthen monetary and exchange rate policy framework: greater flexibility in interbank exchange rate; emphasize price stability as primary monetary objective; reduce monetary growth to its benchmark; unwind central bank quasi fiscal activities.
      - Strengthen supervisory and regulatory frameworks, oversight of cross-border banking, corporate governance, and bank resolution framework.
  - Weaker-than-expected global growth and structural weak growth in key economies
    - Relative likelihood: Medium to High/Medium
    - Time horizon: Short to Medium Term
    - Impact: Medium/High
    - Policy response:
      - Diversify exports and improve business environment.
      - Address infrastructure gap via significant public and private investment.
  - Lower energy prices / oil production risk
    - Relative likelihood: Low
    - Time horizon: Short to Medium Term
    - Impact: High
    - Policy response:
      - Prioritize non-oil revenue mobilization.
      - Contain recurrent expenditure to conserve resources for public investment.
      - Allow greater exchange rate flexibility with tighter monetary stance.
      - Advance structural reforms for diversification.
  - Nigeria-specific risks (prolonged policy uncertainty, worsening SLG finances, prolonged oil disruption, deterioration in banking sector FSIs)
    - Relative likelihood: High
    - Time horizon: Short to Medium Term
    - Impact: High
    - Policy response:
      - Implement an integrated package of policies (including communication strategy) to address near-term vulnerabilities and support transition to diversification.
      - Fiscal sustainability program and clarity on SLGs' adjustment plans and revenue mobilization.
      - Encourage SLG adoption of Treasury Single Account, cash management reforms, improved fiscal reporting.
      - Strengthen oil and gas sector security and investment environment; implement targeted anti-money laundering measures to detect illicit flows.
      - Address infrastructure gaps and social safety nets.
      - Boost banking sector resilience through improved monitoring, contingency planning, and strengthened resolution frameworks.

### Key projections and memorandum items (selected)
- National income and price projections (annual percentage change and levels as provided):
  - Real GDP: 2.7 (2015), -1.5 (2016), 0.8 (2017), 1.9 (2018), 1.9 (2019), 1.8 (2020), 1.8 (2021), 1.8 (2022).
  - Oil and Gas GDP: -5.4 (2015), -13.6 (2016), 7.8 (2017), 10.0 (2018), 4.5 (2019), 0.0 (2020–2022).
  - Non-oil GDP: 3.6 (2015), -0.3 (2016), 0.2 (2017), 1.1 (2018), 1.6 (2019), 2.0 (2020), 2.0 (2021), 2.0 (2022).
  - Production of crude oil (million barrels per day): 2.12 (2015), 1.85 (2016), 2.00 (2017), 2.20 (2018), 2.30 (2019–2022).
  - Nominal GDP at market prices (trillions of naira): 95.2 (2015), 102.7 (2016), 122.1 (2017), 143.6 (2018), 169.4 (2019), 198.5 (2020), 231.6 (2021), 269.8 (2022).
  - Nominal GDP per capita (US$): 2,760 (2015), 2,256 (2016), 2,123 (2017), 2,435 (2018), 2,798 (2019), 2,995 (2020), 3,014 (2021), 3,040 (2022).
- Current account balance (percent of GDP): -3.1 (2015), 0.6 (2016), 1.0 (2017), 1.0 (2018), 0.7 (2019), 0.6 (2020), 0.5 (2021), 0.4 (2022).
- External debt and reserves (memorandum, selected):
  - External debt outstanding (US$ billions): 47.2 (2015), 44.5 (2016), 48.0 (2017), 54.9 (2018), 62.9 (2019), 67.8 (2020), 69.8 (2021), 72.3 (2022).
  - Gross international reserves (US$ billions): 28.3 (2015), 27.0 (2016), 27.1 (2017), 26.7 (2018), 27.0 (2019), 26.9 (2020), 26.5 (2021), 25.4 (2022).
  - Gross international reserves (equivalent months of imports of G&Ss): 7.2 (2015), 5.8 (2016), 5.5 (2017), 5.2 (2018), 5.1 (2019), 5.0 (2020), 4.7 (2021), 4.3 (2022).

*Source: IMF staff report (cr1780) — Nigeria: Selected economic indicators, fiscal and monetary tables, balance of payments, financial soundness indicators, and Risk Assessment Matrix as provided in the source content.*

### Annex I. Status of Key Recommendations for the 2016 Article IV

### Annex I. Status of Key Recommendations for the 2016 Article IV Consultation

### Fiscal
- Recommendations
  - Raise non-oil revenue to ensure fiscal sustainability while maintaining infrastructure and social spending through strengthening tax administration, and an increase in VAT rate.
  - Foster an orderly adjustment of budgets at the sub-national level through reform in budget preparation and execution.
  - Implement an independent price-setting mechanism to address petrol subsidies while strengthening the social safety net.
- Status and actions taken
  - The authorities have focused their fiscal policy efforts on improving tax administration, including through new registrations of corporates, collection of arrears, and targeted tax audits. No major tax policy change was implemented to increase non-oil revenue.
  - The federal government is providing financial assistance to states, conditional on states providing a plan for implementing a 22-point Fiscal Sustainability Program (covering accountability and transparency, public financial management, and debt management).
  - The authorities increased regulated fuel prices (67 percent) and deregulated fuel import markets. However, with higher oil prices and a depreciated exchange rate, the full implementation of an automatic fuel price formula is needed to avoid a reoccurrence of fuel subsidies.

### Monetary and Exchange Rate
- Recommendations
  - Credibly adjust to the terms-of-trade shock including through greater exchange rate flexibility and speedy unwinding of exchange restrictions.
  - Target price stability to maintain inflation within the target range.
- Status and actions taken
  - The authorities allowed the interbank exchange rate to depreciate by 55 percent in 2016. However, exchange restrictions and demand management of FX remains.
  - The policy rate was increased from 11 percent in December 2015 to 14 percent in July 2016. However, the monetary stance remains accommodative with reserve money and broad money growing at 50 percent and 19 percent, respectively.

### Financial
- Recommendation
  - Further strengthen the regulatory and supervisory frameworks to improve financial sector resilience.
- Status and actions taken
  - The authorities have undertaken a number of proactive measures to contain risks to financial stability, including increased provisioning, strict limits on net FX positions, prohibition of dividend payments (for banks with NPLs higher than 5 percent).

### Structural
- Recommendation
  - Implement structural reforms to enhance competitiveness and support investment.
- Status and actions taken
  - The authorities continued their drive for transparency and greater emphasis on good governance as well as on efforts that could restore oil production.
  - Renewed the amnesty program and initiated engagement with stakeholders in the Niger Delta.
  - Signed an agreement with IOCs to repay cash call arrears and a financing mechanism to effect cash recovery for JV operations, and advanced discussion on regulations for oil and gas policy and a fiscal regime.
  - Initiatives have continued for strengthening the agricultural sector, initiating road and rail infrastructure, and a social investment program to promote social inclusion.

*Source: Annex I. Status of Key Recommendations for the 2016 Article IV Consultation (cr1780)*

### Annex II. Outward Spillovers to Sub-Saharan Africa

### Overview
- Nigeria’s economic size and regional links
  - As of 2014, Nigeria accounted for 33 percent of GDP and 17 percent of imports in Sub-Saharan Africa.
  - Linkages with neighbors occur through exports and remittances; informal trade with immediate neighbors is significant and not fully reflected in official statistics.

### Cross-border financial linkages
- Nature of financial linkages
  - Widespread presence of Nigerian-owned banks in the region; several are systemically-important in host countries.
  - Nigerian-owned banks constitute a substantial share of banking system assets and liabilities in many Sub-Saharan African countries.
  - Most Nigerian-owned banks are subsidiaries whose operations are partly ring-fenced from their parent banks; direct cross-border positions vis-à-vis parents are not typically large relative to host economies.
  - Most subsidiaries are mostly locally funded and do not depend significantly on Nigerian funding.
- Historical precedent
  - The systemic banking crisis in Nigeria in 2009–10 led in some cases to declines in deposits or credit of cross-border subsidiaries but did not generate systemic spillovers elsewhere in the region.
  - Emphasizes importance of sound host-country regulation and supervision, and cooperation among supervisory agencies across borders.

### Transmission channels and recent manifestations
- Key channels cited in IMF staff reports (selected examples)
  - Customs revenue: Lower trade flows due to insecurity in border regions contributed to underperformance in customs revenue (Chad, Niger).
  - Electricity: Nigerian sources provide 65 percent of Niger's electricity consumption and have been subject to periodic supply problems due to fuel and foreign exchange shortages (Niger).
  - Financial: High share of loans to the commerce sector poses risks due to firms' close trade ties with Nigeria (Benin).
  - Inflation: Disruptions to trade flows, in particular in food items, led to increased domestic prices for some products (Chad).
  - Refugee flows: Niger hosts an estimated 140,000 refugees from Nigeria due to the Boko Haram conflict, diverting spending from other priority sectors (Niger).
  - Tax revenue: Revenue collection (customs and VAT) on informal trade is estimated at 14 percent of total tax revenues; Nigeria's slowdown and foreign exchange restrictions have limited re-exports (Benin).
  - Smuggling incentives: Naira depreciation raises incentive for smuggling gasoline, limiting tax revenue from formal consumption (Benin, Niger, Togo).
  - Trade flows: Naira depreciation, foreign exchange restrictions, and lower Nigerian economic activity contributed to lower exports to and higher imports from Nigeria (Benin, Chad, Niger, Togo).
  - Reduction in fuel subsidies in Nigeria reduced incomes from smuggling, with impacts on households in neighboring countries (Benin).

### Empirical evidence on growth spillovers
- Econometric findings
  - Growth spillovers were estimated using a regression of real GDP among neighboring economies on Nigeria’s GDP, controlling for oil prices.
  - Statistically significant spillovers were found for:
    - Chad (elasticity 0.97; P-value 0.01 **)
    - Niger (elasticity 0.42; P-value 0.02 **)
  - No statistically significant impact was found on other countries in the sample:
    - Benin: elasticity -0.04; P-value 0.53
    - Burkina Faso: elasticity 0.02; P-value 0.88
    - Cameroon: elasticity -0.02; P-value 0.67
    - Cote d'Ivoire: elasticity -0.22; P-value 0.23
    - Ghana: elasticity 0.02; P-value 0.82
    - Togo: elasticity -0.13; P-value 0.66
  - Note: regressions of neighboring countries’ exports on Nigeria’s imports or GDP did not yield significant results; informal activity not reflected in official statistics would not be captured in these estimates.
- Recent activity and decoupling
  - After growth in both Nigeria and neighboring countries slowed in 2015, performance in 2016 suggests some decoupling.
  - The median growth rate among neighboring economies excluding Chad recovered to an estimated 5.2 percent despite a contraction in the Nigerian economy.
  - A large proportion of the slowdown in Chad can be explained by the impact of the oil price shock, while for most of Nigeria’s other neighbors lower oil prices represent a terms of trade dividend.

*Source: Annex II. Outward Spillovers to Sub-Saharan Africa (cr1780)*

### Annex III. Public and External Debt Sustainability

### Annex III. Public and External Debt Sustainability

### Public Debt Sustainability: Key Findings and Risks
- Nigeria’s public debt profile reveals weaknesses driven by higher-than-historical fiscal deficits and a challenging macroeconomic environment.
- Public debt-to-GDP is projected to rise by one third between 2016 and 2022 to 24.9 percent of GDP.
- The 2017-22 gross financing needs are forecast to remain at the (already high) historical average, about 5½ percent of GDP.
- Interest payments are projected to represent a higher share of general government fiscal revenue: 66 percent in 2016 rising to 89 percent in 2022.
- Effective interest rates are forecast to almost double in the medium term.
- Nigeria’s debt dynamics are sustainable but vulnerable to macroeconomic shocks, especially to interest rate, growth, and primary balance shocks.
- Debt-stabilizing primary deficit is estimated at 0.2 percent of GDP; the needed adjustment in the overall balance in 2017 is estimated at about 2.5 percentage points of GDP.
- Policy priority: fiscal reforms to boost non-oil revenue mobilization are essential to stabilize debt and reduce financing pressures.

### Baseline Projections (assumptions and outcomes)
- Baseline macro assumptions:
  - Real GDP growth: projected to reach 1.8 percent in the medium term.
  - Inflation (GDP deflator): will continue to be above 14 percent, significantly higher than the authorities’ targeted range between 6 and 9 percent.
  - Baseline excludes the full benefits of recently signed public investment agreements with China and private sector projects expected by 2018 due to policy implementation risks.
- Fiscal balance and debt outcomes:
  - “Imputed” primary deficit: projected to narrow to 1.7 percent of GDP by 2022, down from 3.9 percent in 2017.
  - Federal government interest payments: projected to grow to 2.1 percent of GDP in 2022, up from 1.3 percent of GDP in 2016.
  - Public (mostly domestic) debt-to-GDP: from 18.6 percent in 2016 to 24.9 percent in 2022, largely driven by deficits and State and Local Government liabilities.
  - Contribution of growth will not be large enough to offset adverse dynamics from real interest rates.

### Stress Tests: Scenarios and Quantified Impacts
- Growth shock:
  - Real output growth rates lowered by 3½ percentage points for 2018 and 2019.
  - Debt-to-GDP reaches 32.4 percent in 2022.
  - Gross financing needs average around 16.4 percent of GDP.
- Real interest rate shock:
  - Assumes medium-term financing challenges increase Nigeria’s spreads by 200 bps from 2018 onward.
  - Debt-to-GDP reaches 30½ percent by the end of the projection horizon.
  - Gross financing needs projected at around 15.4 percent of GDP on average.
- Primary balance shock:
  - Assumes a 1.6 percentage points deterioration of the primary balance in 2018 and 2019.
  - Debt-to-GDP reaches almost 32.2 percent in 2022.
  - Financing requirements in percent of GDP about 7 percent between 2017 and 2019.
- Real exchange rate shock:
  - Assumes exchange rate depreciates by 55 percent (maximum historical movement over the past ten years).
  - Debt-to-GDP reaches 29 percent in 2022.
  - Gross financing needs average 14 percent of GDP.
  - Effect driven by foreign currency–denominated debt of about 18 percent of total debt in the projection period.
- Combined macro-fiscal shock:
  - Incorporates simultaneous shocks to real GDP growth, inflation, interest rate, primary balance, and exchange rate.
  - Debt increases to 38.2 percent of GDP by 2022.
  - Gross financing needs above 18.4 percent of GDP at the end of the projection horizon.
- Contingent liability shock:
  - Hypothetical one-time bail out of the financial sector increases non-interest expenditures by 10 percent of banking sector assets.
  - Debt-to-GDP ratio reaches 33½ percent at the end of the projection horizon.
  - Gross financing needs increase to 17.3 percent on average, higher than the baseline.
  - Note: other contingent liability risks include PPPs and state-owned enterprises; power sector contingent liabilities estimated at about 1.2 percent of GDP (upper bound estimate).
- Uncertainty metrics:
  - Symmetric fan chart width estimated at about 29 percent of GDP, indicating significant uncertainty around the baseline.
  - Asymmetric fan chart indicates downside skew: an extreme downside shock constraining growth to zero yields a more upward-sloping debt path.

### Heat Map and Risk Assessment
- Although debt-to-GDP stands below standard warning thresholds, gross financing needs are sizeable and interest payments as a share of general government revenue approach 89 percent by 2022.
- Heat map identifies major risks: rising foreign-currency denominated debt, market perception (spreads), growth shocks, and contingent liabilities.
- Policy implication: decisive fiscal actions—strengthening both oil and non-oil revenue mobilization—are essential to curb medium-term financing pressures.

### Debt Indicators and Notable Quantities (selected exact figures)
- Public debt-to-GDP: 18.6 percent in 2016 → 24.9 percent in 2022.
- Imputed primary deficit: 3.9 percent in 2017 → 1.7 percent in 2022.
- Federal government interest payments: 1.3 percent of GDP in 2016 → 2.1 percent of GDP in 2022.
- Interest payments as percent of general government revenue: 66 percent in 2016 → 89 percent in 2022.
- Gross financing needs: about 5½ percent of GDP (medium term, baseline).
- Debt-stabilizing primary deficit: 0.2 percent of GDP.
- Required overall balance adjustment in 2017: about 2.5 percentage points of GDP.
- Foreign-currency debt: about 18 percent of total debt (projection period).
- Fan chart symmetric width: about 29 percent of GDP.

### External Debt Sustainability: Summary and Risks
- The level of external debt (covering public and private sector) is low and is projected to remain broadly unchanged relative to the size of the economy under the baseline.
- Key risks to external debt sustainability:
  - Failure of oil exports to recover as expected.
  - Further substantial devaluation of the naira.
  - Inability to access market financing for an extended period.

*Source: IMF staff.*

### 10.8 percent of GDP in 2016 (Table 1).

### cr1780 - 10.8 percent of GDP in 2016 (Table 1)

### External debt overview and composition
- External debt was 10.8 percent of GDP in 2016 (Table 1).
- Public sector debt accounts for just over a third of total external debt, with over half of public external debt from multilateral lenders on concessional terms.
- The ratio of external debt to exports increased from 33 percent in 2012 to 116 percent in 2016, driven by the decline in oil exports.
- Estimated gross external financing needs remain small relative to the size of the economy.

### Baseline projections and financing dynamics
- In the baseline scenario, external debt is forecast to increase broadly in line with the size of the economy, and gross external financing needs are projected to remain around 3 percent of GDP in the medium term.
- Private sector external borrowing is projected to be below the levels prevailing in 2011–2014, given only mild recoveries in oil prices and economic activity.
- The public sector is expected to draw on financing from multilateral, bilateral, and commercial external sources.
- The recent lower level of participation of foreign investors in the domestic debt market is expected to persist.
- An increase in interest rates on external debt is projected, given expected normalization of monetary policy in advanced economies and Nigeria’s deteriorating macroeconomic risk profile; this increase is contained to some extent by the fixed-rate, concessional nature of a large proportion of public external debt.
- The sustainability of the projected debt path hinges critically on the ability of both the government and private borrowers to maintain market access, given Nigeria’s relatively short history of accessing commercial financing and the lending capacity constraints of multilateral and bilateral creditors.

### Scenario sensitivities and shock analysis
- Higher interest rates on external debt or a slowdown in economic growth would not, by themselves, lead to outcomes substantially different from the baseline.
- A shock to the non-interest current account—interpreted as a substantial decline in oil exports given Nigeria’s trade structure—would place the external debt-to-GDP ratio on an upward path; this result is driven by the high historical volatility of Nigeria’s current account balance, largely due to fluctuations in oil exports.
- The impact of an oil-export shock would likely be buffered to a large extent by lower imports and income debits, as experienced during the recent oil shock.
- A combined (interest rate, growth, current account) shock has a similar impact on the debt path, driven by current account dynamics.
- A one-time real depreciation of 30 percent would raise the debt level (given the lower base of GDP in U.S. dollars) but would not place it on an upward path.

### Key statistics and selected projections (as presented in Table 1)
- Baseline: External debt (in percent of GDP)
  - 2012: 7.0
  - 2013: 6.3
  - 2014: 7.4
  - 2015: 9.6
  - 2016 est.: 10.7
  - 2017: 11.7
  - 2018: 11.4
  - 2019: 11.1
  - 2020: 10.8
  - 2021: 10.8
  - 2022: 10.8
- Change in external debt (line 2)
  - 2012: -0.2
  - 2013: -0.7
  - 2014: 1.1
  - 2015: 2.2
  - 2016 est.: 1.2
  - 2017: 1.0
  - 2018: -0.3
  - 2019: -0.3
  - 2020: -0.2
  - 2021: -0.1
  - 2022: 0.0
- Identified external debt-creating flows (line 3)
  - 2012: -7.5
  - 2013: -5.9
  - 2014: -1.0
  - 2015: 4.1
  - 2016 est.: 0.2
  - 2017: -2.1
  - 2018: -2.0
  - 2019: -1.6
  - 2020: -1.5
  - 2021: -1.4
  - 2022: -1.3
- Current account deficit, excluding interest payments (line 4)
  - 2012: -4.3
  - 2013: -4.0
  - 2014: -0.5
  - 2015: 2.7
  - 2016 est.: -1.3
  - 2017: -1.6
  - 2018: -1.6
  - 2019: -1.3
  - 2020: -1.3
  - 2021: -1.2
  - 2022: -1.1
- Exports (line 6)
  - 2012: 21.5
  - 2013: 19.5
  - 2014: 14.9
  - 2015: 9.9
  - 2016 est.: 9.2
  - 2017: 12.5
  - 2018: 11.4
  - 2019: 9.8
  - 2020: 9.2
  - 2021: 9.0
  - 2022: 8.9
- Imports (line 7)
  - 2012: 17.7
  - 2013: 15.0
  - 2014: 15.2
  - 2015: 14.6
  - 2016 est.: 11.4
  - 2017: 13.6
  - 2018: 12.2
  - 2019: 10.8
  - 2020: 10.1
  - 2021: 10.1
  - 2022: 10.1
- Net non-debt creating capital inflows (line 8, negative values)
  - 2012: -3.0
  - 2013: -1.4
  - 2014: -0.2
  - 2015: 0.0
  - 2016 est.: -1.0
  - 2017: -1.1
  - 2018: -0.8
  - 2019: -0.7
  - 2020: -0.7
  - 2021: -0.7
  - 2022: -0.7
- Automatic debt dynamics (line 9)
  - 2012: -0.2
  - 2013: -0.4
  - 2014: -0.3
  - 2015: 1.4
  - 2016 est.: 2.4
  - 2017: 0.6
  - 2018: 0.4
  - 2019: 0.4
  - 2020: 0.5
  - 2021: 0.5
  - 2022: 0.5
- Contribution from nominal interest rate (line 10)
  - 2012: 0.5
  - 2013: 0.3
  - 2014: 0.3
  - 2015: 0.4
  - 2016 est.: 0.6
  - 2017: 0.6
  - 2018: 0.6
  - 2019: 0.6
  - 2020: 0.7
  - 2021: 0.7
  - 2022: 0.7
- Contribution from real GDP growth (line 11)
  - 2012: -0.3
  - 2013: -0.3
  - 2014: -0.4
  - 2015: -0.2
  - 2016 est.: 0.2
  - 2017: -0.1
  - 2018: -0.2
  - 2019: -0.2
  - 2020: -0.2
  - 2021: -0.2
  - 2022: -0.2
- Residual, incl. change in gross foreign assets (line 13)
  - 2012: 7.3
  - 2013: 5.2
  - 2014: 2.1
  - 2015: -2.0
  - 2016 est.: 1.0
  - 2017: 3.1
  - 2018: 1.7
  - 2019: 1.3
  - 2020: 1.3
  - 2021: 1.3
  - 2022: 1.3
- External debt-to-exports ratio (in percent)
  - 2012: 32.6
  - 2013: 32.3
  - 2014: 49.8
  - 2015: 96.2
  - 2016 est.: 116.2
  - 2017: 94.2
  - 2018: 100.4
  - 2019: 112.4
  - 2020: 118.5
  - 2021: 120.0
  - 2022: 121.5
- Gross external financing need (in billions of US dollars) (line 5)
  - 2012: -6.7
  - 2013: -8.0
  - 2014: 10.8
  - 2015: 30.6
  - 2016 est.: 14.0
  - 2017: 10.6
  - 2018: 10.9
  - 2019: 13.0
  - 2020: 16.0
  - 2021: 19.9
  - 2022: 19.0
- Gross external financing need (in percent of GDP)
  - 2012: -1.5
  - 2013: -1.6
  - 2014: 1.9
  - 2015: 6.2
  - 2016 est.: 3.4
  - 2017: 2.6
  - 2018: 2.3
  - 2019: 2.3
  - 2020: 2.6
  - 2021: 3.1
  - 2022: 2.8

### Exchange rate, current account, and external position assessment
- Current account balance was 0.6 percent of GDP in 2016, from a deficit of 3.1 percent of GDP in 2015.
- The improved current account was driven by compression in non-oil imports, services, and the income balance, raising the non-oil current account by 5 percentage points.
- As of end-2016 the naira depreciated against the U.S. dollar by 55 percent in the interbank market and 84 percent in the Bureau de Change (BDC) segment; the nominal effective depreciation of the interbank rate was 20 percent in period-average terms.
- With inflation higher than among trading partners, the real effective exchange rate (REER) depreciated by 10 percent, leaving the naira only 5 percent weaker in real terms than in 2013.
- Nigeria’s non-oil goods and services exports amounted to 1.5 percent of GDP in 2016 and have remained below 2 percent of GDP over the last decade.
- Quantitative assessments:
  - EBA-lite and oil-exporter variant: models find the current account in 2016 broadly in line with the norm; EBA-lite estimated macroeconomic policies contributed -0.9 percent of GDP to the current account gap, and the oil-exporter variant estimated -2.3 percent of GDP.
  - External sustainability approach: estimated NFA position was -4.5 percent of GDP at end-2016; NFA benchmark was set at zero percent of GDP to permit accumulation of international reserves sufficient to reach 125 percent of the reserve adequacy metric by 2022; projected 2022 current account is broadly in line with the norm.
  - Equilibrium REER approach suggests an exchange rate gap (overvaluation) of about 18 percent.

### Reserve adequacy, international reserves, and capital flows
- Gross international reserves were $28.6 billion at end-January 2017, recovered from less than $24 billion in September 2016; this corresponds to 120 percent of the IMF’s reserve adequacy metric.
- Inflows due to FX swaps have amounted to about $3.9 billion since 2014 and outstanding forward sales of FX by the central bank amount to $1.2 billion.
- Gross reserves excluding these predetermined FX outflows were $23.4 billion at end-January, unchanged with respect to end-2015, and amounting to 97 percent of the reserve adequacy metric.
- Staff recommended target: 125 percent of the reserve adequacy metric.
- Under the flat profile of reserves in staff’s baseline scenario, reserves would fall to about 60 percent of the metric in the medium term, less than half of staff’s recommended level.
- Capital flows remained subdued in 2016: inflows (liabilities to non-residents) averaged over 4 percent of GDP from 2011 to 2014, but fell to less than 1.5 percent of GDP in 2015.

### Key macroeconomic assumptions underlying the baseline (selected)
- Real GDP growth (in percent): historical and baseline projections include values such as 4.3, 5.4, 6.3, 2.7, -1.5, 5.6, 3.5, 0.8, 1.9, 1.9, 1.8, 1.8, 1.8.
- GDP deflator in US dollars (change in percent): 6.7, 6.0, 3.8, -15.4, -16.5, 1.3, 12.7, -2.1, 15.6, 15.9, 8.0, 1.6, 1.8.
- Nominal external interest rate (in percent): 8.3, 5.0, 5.1, 5.2, 5.5, 5.8, 1.4, 5.9, 6.2, 6.5, 6.5, 6.6, 6.8.
- Growth of exports (US dollar terms, in percent): -3.8, 0.9, -15.6, -42.0, -21.9, -0.7, 27.9, 33.0, 7.3, 2.4, 2.2, 1.6, 2.3.
- Growth of imports (US dollar terms, in percent): -10.9, -5.2, 11.9, -16.8, -34.4, 6.0, 27.6, 17.5, 5.7, 4.5, 2.9, 3.2, 3.7.
- Current account balance, excluding interest payments: 4.3, 4.0, 0.5, -2.7, 1.3, 4.1, 4.2, 1.6, 1.6, 1.3, 1.3, 1.2, 1.1.
- Net non-debt creating capital inflows: 3.0, 1.4, 0.2, 0.0, 1.0, 0.1, 3.6, 1.1, 0.8, 0.7, 0.7, 0.7, 0.7.

*Source: IMF staff estimates and data as presented in cr1780 - 10.8 percent of GDP in 2016 (Table 1).*

### 1.0 percent of GDP in 2016 (Figure 9). Indicators of exchange rate expectations—the exchange rate

### cr1780 - 1.0 percent of GDP in 2016 (Figure 9). Indicators of exchange rate expectations—the exchange rate

### Exchange rate expectations and market indicators
- Indicators cited: the exchange rate implied by non-deliverable naira forwards traded offshore, the outlook from Consensus Forecasts, and the margin between the interbank and Bureau de Change exchange rates.
- These indicators "all suggest that market participants expect a substantial depreciation of the interbank exchange rate (Figure 10)."
- Footnote observation: "The non-deliverable forward rate incorporates both an expected depreciation premium and a premium from the degree to which administrative measures on foreign exchange market activity are binding for capital outflows (see Swiston, 2016, 'Capital Flows to Nigeria: Recent Developments and Prospects,' in Nigeria: Selected Issues, IMF Country Report No. 16/102)."

### External position assessment
- The assessment is "subject to a high degree of uncertainty because of the presence of FX restrictions and the multiplicity of exchange rates at which transactions occur."
- Overall conclusion for 2016: "the external position was moderately weaker than that implied by medium-term fundamentals and desirable policy settings."
- Estimated gaps reported:
  - "current account gap of 1 to 2 percent of GDP"
  - "real exchange rate gap of 10 to 20 percent for the interbank rate"
- Supporting evidence cited for the assessment:
  - estimated contribution of policies to the current account balance
  - decline in non-oil exports
  - low level and continued decline in FX buffers
  - slow capital inflows
  - indicators pointing to substantial further expected depreciation
  - low turnover in the interbank market suggesting a considerable share of transactions occurs at more depreciated exchange rates

### Implications for policy
- Statement on policy adjustment: "Adjustment of other policies—notably fiscal, monetary, and structural—in line with staff’s recommendations would contribute to reducing the estimated gaps."

*Source: IMF staff analysis in the Nigeria country report text (extracted content).*

### Annex V. Progress on 2013 FSAP Recommendations

### Annex V. Progress on 2013 FSAP Recommendations

### Central Bank of Nigeria (CBN)
- Recommendation: Further enhance supervisory oversight over banks with international presence.
  - Progress:
    - On-site examination of subsidiaries take place regularly, and the CBN continues to monitor and supervise subsidiaries through the parent bank.
    - Information is shared frequently and regularly between regional supervisors.
    - A memorandum of understanding with host regulatory/supervisory agencies have been signed.
    - The college of supervisors of the West African Monetary Zone (CSWAMZ) meet regularly.
    - Joint examination takes place with supervisory authorities of foreign subsidiaries of Nigerian banks in WAMZ.
    - A crisis resolution framework for cross border banks is being finalized by the West African Monetary Institute.
    - The Financial Stability Board Regional Consultative Group for Sub-Saharan Africa (FSB RCG-SSA) meets regularly.

- Recommendation: Strengthen macro-prudential oversight and crisis preparedness by enhancing the functioning of the Financial Services Regulation Coordinating Committee (FSRCC).
  - Progress:
    - The role of FSRCC is being enhanced to include a financial stability function. A framework that underpins the duties of FSRCC has been drafted—it covers the macro-prudential and crisis and resolution frameworks that the FSRCC will be overseeing.

- Recommendation: Strengthen capacity of supervisors and establish clarity regarding their regulatory authority; and improve availability and quality of data for macro prudential analysis.
  - Progress:
    - Capacity building is an on-going process. The CBN receives training from the IMF, WB, Federal Reserve Board, Federal Deposit Insurance Corporation, and other institutions.
    - For example, an Early Warning System (EWS) to prevent bank failure has been put in place and scenario stress testing is in the process of being incorporated.

- Recommendation: Review and update the BOFIA to reflect internationally accepted framework for bank regulation and supervision.
  - Progress:
    - Amendments to the BOFIA and NDIC Act are suspended by the National Assembly until further notice.

- Recommendation: Implement HRD plan for a new category of BSD specialists with a separate career path.
  - Progress:
    - Completed

- Recommendation: Withdraw the CBN circular restricting recapitalization of foreign subsidiaries by Nigerian parent banks.
  - Progress:
    - The CBN considers a request for recapitalization of foreign subsidiaries on a case-by-case basis. The premise for the old circular was to ensure Nigerian subsidiaries were not discriminated against. Indeed, according to the recent FSR, CBN gave approval to recapitalize a number of subsidiaries.

- Recommendation: Unwind crisis response measures and revert to the conventional financial safety nets that are already in place, including the Deposit Insurance Scheme.
  - Progress:
    - The authorities will consider these actions when the economic situation becomes more favorable.

- Recommendation: Establish end–2017 as the sunset for AMCON, disallow further acquisition of assets, and use surplus funds to buy back bonds.
  - Progress:
    - There is no immediate plan to wind up AMCON. However, CBN is the only institution holding AMCON bonds. The Corporation has stopped further purchase of Eligible Bank Assets (EBAs) from banks; and efforts are being made to recover EBAs previously purchased. AMCON has also announced recently acquiring the main domestic airline company.

- Recommendation: Review the licensing of the microfinance banks, to offer two types of license.
  - Progress:
    - License requirements differ by types of microfinance: unit, state and national.

- Recommendation: Divest CBN’s interest in DFIs to the FMoF and/or the private sector as appropriate.
  - Progress:
    - The CBN is committed in utilizing DFI as conduits to provide finance to the real sector. To this end, there is no plan to divest CBN’s interest in the DFI, at least not in the short-run since the Acts of the DFIs has a 60:40 shareholding (FGN: CBN) provision. Any divestment attempt will require parliamentary approval.

- Recommendation: Review the design and performance of the Development Finance Schemes.
  - Progress:
    - The CBN is reviewing its policy on development financing, the strategy is to gradually to reduce the Bank’s exposure, have exit dates for all the Bank’s interventions.
    - In addition, an impact assessment of some interventions is scheduled to take place.

- Recommendation: Revise the 2009 Regulatory Framework for Mobile Payment Services to level the playing field and intensify competition.
  - Progress:
    - Regulatory requirements continue to be strengthened. Regulations distinguish between Bank and non-Bank led operators. Capital requirements have also been increased.

### National Insurance Commission (NAICOM)
- Recommendation: Upgrade the solvency regime, as well as valuation and the reserve requirements, to better capture risk.
  - Progress:
    - Adopted risk-based reserve requirements and guidance was issued.
    - IFRS accounting was introduced in 2013, therefore reserve requirement and valuations are at par with international practice.
    - Ground work is progressing to identify the necessary requirements for adopting Solvency II framework.

- Recommendation: Put high priority on enforcement of mandatory insurance.
  - Progress:
    - NAICOM is working closely with respective counterparts to enforce mandatory insurance—for example, the Brigade for fire insurance and the Federal Road Safety Commission for car insurance.

### Pension Commission (PENCOM)
- Recommendation: Establish a database of employers required to comply with the Pension Reform Act, 2004.
  - Progress:
    - Pencom has been in consultation with the Ministry of Budget and Planning, the government ministry that has the legal right to request such, to compile a database of employers. The consultation is at advanced stage.

- Recommendation: Develop Nigerian specific mortality tables for pricing annuities and programmed withdrawals.
  - Progress:
    - Developing mortality tables will need input from several government agencies including the Ministry of Budget and National Planning and NAICOM. To this end, Pencom has taken the lead by writing to the Government of the Federation requesting for the relevant agencies of government to be asked to work on developing the necessary tables.

### Securities and Exchange Commission (SEC)
- Recommendation: Expeditiously nominate the new Board members of the SEC.
  - Progress:
    - The SEC board was nominated soon after the FSAP mission left, but it was dissolved following the election in 2015.

- Recommendation: Ensure that broker-dealers are subject to higher risk-based capital requirements and other prudential requirements as well as sufficient entity-level supervision, including regular on-site inspections.
  - Progress:
    - Adopted risk-based provision.
    - Moving to risk-based capital requirement with minimum capital requirement.
    - A regulatory framework following the Malaysia and the USA models is under design.

### Federal Ministry of Finance
- Recommendation: Create central unit to monitor contingent fiscal commitments and develop a strategy as regards further commitments.
  - Progress:
    - The government has increased its monitoring of fiscal activity, including identifying arrears and requiring state and local governments to report regularly.

*Annex V. Progress on 2013 FSAP Recommendations — IMF staff report excerpt*

### 1.      The Central Bank of Nigeria (CBN) has boosted its supply of foreign exchange (FX)

### cr1780 - 1.      The Central Bank of Nigeria (CBN) has boosted its supply of foreign exchange (FX)

### FX interventions and reserves
- The CBN has sold more than $2.8 billion of FX in its forward market from the beginning of the year until March 21, 2017.
- The CBN increased spot FX sales to about $140 million per month in February and March, from about $30 million per month in December and January.
- These actions contributed to a 35 percent appreciation of the parallel exchange rate over the past six weeks, which helped narrow the parallel market premium to about 25 percent as of March 27, 2017.
- Gross reserves remain above $30 billion.
- Staff view: while greater FX intervention is helping clear the backlog of FX orders, removal of FX restrictions and moving towards a unified exchange rate market should remain the key priority; interventions should be limited to smoothing large fluctuations.

### Power Sector Recovery Program (PSRP)
- On March 22, the Nigerian government approved the Power Sector Recovery Program (PSRP), designed in consultation with the World Bank Group.
- The PSRP explicitly recognizes the power sector will face losses of $1.5 billion a year for the next five years unless actions are taken immediately.
- Near-term actions include:
  - design by mid-May 2017 of a schedule of tariff revisions;
  - measures to fill shortfalls; and
  - payment by June 2017 of all federal government debt owed to electricity generation companies.
- Staff assessment:
  - Implementation is an important step to address Nigeria’s infrastructure gap and is expected to release at least $5 billion of investments from international financial institutions (World Bank Group and AfDB) and the private sector.
  - Ensuring the power sector’s financial sustainability would contain borrowing needs and reduce banks’ risk exposure to the sector.
  - PSRP scenarios recognize tariff increases envisaged for the next five years will not cover all the sector’s deficit, thus requiring explicit subsidies that will increase the fiscal deficit by about 0.15 percent of GDP on an annual basis compared to staff’s adjustment scenario.
  - External funding from the World Bank and other development partners, as well as potential sales of power generation companies, are expected to help fund PSRP implementation.
  - Staff urges authorities to offset the costs of electricity subsidies through new revenue measures to keep the fiscal path sustainable and consistent with bringing the FG debt service-to-revenue ratio to sustainable levels.
  - Important to keep “public service obligations” on budget and avoid introduction of a special exchange rate for transactions in the power sector.
  - Vulnerable households should continue to be protected through lifeline tariffs.

### Recent economic developments and outlook
- 2016: growth contracted by 1.5 percent and the economy tipped into recession.
- Inflation ended 2016 at 18.6 percent.
- Drivers of recent momentum: recovery in oil production and strong performance in agriculture; supported by recovery in the global economy.
- Government’s medium term Economic Recovery and Growth Plan (ERGP), 2017–20, announced early March 2017, aims to accelerate growth and create employment through private sector-led diversification, investment in infrastructure, and improving the business environment.
- Growth projections:
  - 2017: 2.2 percent
  - 2018: 4.8 percent
  - 2019: 4.5 percent
  - 2020: 7.0 percent
- Over the medium term, projected oil production at 2.5 million barrels per day is expected to stimulate non-oil growth to 5 percent.
- Fiscal multiplier from increased public investment is expected to mitigate dampening effects of fiscal consolidation on growth.
- Risks: slower-than-expected global activity; tight monetary policy stances in major economies resulting in strengthening of their currencies; depressed oil prices.

### Fiscal policy
- ERGP fiscal consolidation targets reducing dependence on oil revenue and anticipates a 1.6 percent of GDP improvement in the non-oil primary balance by 2020.
- The adjustment will be front-loaded to create space for higher public investment.
- Measures to improve tax administration include registration of about one thousand new taxpayers, arrears collection, and targeted tax audits.
- Efficiency gains from reduced overhead costs and extension of the Integrated Personnel Payroll Information System (IPPIS) helped eliminate around 65000 ‘ghost workers’ from the wage bill.
- Implementation of the Treasury Single Account (TSA) provided the basis for central liquidity management.
- The 2017 budget under consideration aims to restore sustained growth and focuses mainly on infrastructure projects.
- The budget deficit is projected to average 2.8 percent of GDP in 2017 and will be financed from domestic and external sources, including Eurobond issuances and concessional financing.
- Government commitments and targets:
  - reduce the debt service-to-revenue ratio close to 30 percent by 2020;
  - increase the tax-to-GDP ratio from 6 to 15 percent of GDP over the next 5 years.
- Further measures: Voluntary Asset and Income Declaration scheme, non-provision for fuel subsidies in the 2017 budget, changes in excises, reduction of tax exemptions, asset sales, and VAT rate increases on telecommunications and luxury items starting from 2018 onwards.
- Authorities will step up efforts to manage fiscal risks from State and Local Governments (SLGs) and State Owned Enterprises (SoEs) through the Fiscal Sustainability Program (FSP) and enhanced monitoring.

### Monetary and exchange rate policy
- The CBN remains committed to its price stability objective.
- In 2016, monetary policy decisions balanced price stability and growth; with a negative output gap the Bank took steps to support the economy.
- With slowing inflation momentum and an economy in recovery mode, the CBN considers the current policy rate appropriate.
- Path toward the medium-term inflation target will be gradual to avoid undue risks to recovery.
- On exchange rate policy:
  - Authorities favor a gradual evolution of the flexible exchange rate system and view current FX measures as having helped preserve reserves by stimulating some local industries and limiting speculative demand.
  - The CBN reiterates commitment to a unified FX market and emphasizes the need for supportive fiscal and structural policies to address exchange rate misalignments.
  - The prioritized FX allocation rule introduced in August 2016 was removed.
  - Current FX measures are temporary and will be removed when complementary fiscal and structural measures under the ERGP are in place and reserves reach appropriate levels.
  - The CBN judges that the value of the naira in the interbank foreign exchange market is in line with the Bank’s estimates of non-speculative demand for FX.

### Banking system stability
- The CBN is vigilant in its oversight of the banking system.
- Most commercial banks have kept capital buffers above the Basel requirements.
- The CBN monitors risks from rising NPLs, declining asset quality, credit concentration and high FX exposures.
- Key measures include intensified monitoring, strengthened compliance and supervisory oversight on utilization of FX sourced by banks.
- Banks were required to conduct stress tests and assess the impact of the June 2016 foreign exchange framework on capital and profitability.
- Plans are in place for every bank to be fully capitalized by end-June 2017 and maintain contingency planning scenarios.
- The CBN is working with the three banks that failed the capital adequacy rule.
- Given the current resolution framework and liquidation regime is firm, the CBN has no plans for immediate revisions.

### Structural policies and infrastructure
- Authorities agree removing structural impediments to investment and employment creation is cardinal for diversification and inclusive growth.
- The power recovery plan is part of an integrated infrastructure development program covering power, road, rail, water, ports and broadband.
- Funding for the infrastructure program is estimated at about USD3 trillion and spread over the next 30 years, to be sourced by leveraging private sector capital via public-private partnerships, special purpose vehicles, investment funds, and guaranty arrangements.
- Government plans to borrow up to $30bn over the Plan period to meet its share of funds to build the Mambilla hydropower plant, and priority segments of the Coastal Railway, the Lagos-Kano Railway and the Abuja Mass Transit Rail line.
- Strategic use of the Nigerian Sovereign Investment Authority (national sovereign wealth fund) is planned.
- The ERGP addresses governance, funding, legal, regulatory and pricing constraints across the four main segments in the power value chain (gas supply, generation, transmission and distribution).
- The Presidential Enabling Business Environment Council (PEBEC) is tasked to improve Nigeria’s Doing Business ranking to 100 by 2020 (from 169 currently), starting with a 60-day plan.
- Priorities include fighting corruption, promoting SME development and access to financing, implementing the social investment program, conditional cash transfer payment scheme, and supporting the homegrown school feeding program.
- In 2016, several high-profile corruption cases were exposed and ill-gotten wealth confiscated.

### Conclusion
- The Nigerian economy is gaining momentum reflecting higher oil production and strong performance in agriculture.
- Recent measures to reduce vulnerabilities—including fuel price deregulation, monetary policy tightening, and measures to address possible exchange rate misalignment—should sustain momentum.
- In the medium term, authorities’ commitment to implement policies to rebuild confidence and boost economic recovery, supported by the ERGP, should result in a sustained turnaround.

*Prepared By The African Department — March 28, 2017; Statement by Mr. Mkwezalamba, Mr. Mahlinza, and Mr. Odonye — March 29, 2017*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1780.pdf_