## 1. A Growth Generating Adjustment Scenario ## Source details **Canonical URL:** [1. A Growth Generating Adjustment Scenario](https://www.imf.org/-/media/files/publications/cr/2018/cr1863.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1863.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1863.pdf.json) --- ### Background: Fragile Recovery - Historic terms of trade shock—exacerbated by falling oil production and inadequate policy implementation—led to output contraction in 2016 for the first time in more than two decades and reduced external and fiscal buffers. - Initial policy responses (increases in electricity and fuel prices, a more depreciated exchange rate) did not yield expected benefits due to: - sabotage of oil infrastructure; - foreign exchange restrictions; - delayed implementation of structural reforms. - Consequences: worsened investor confidence, increased borrowing costs, and crowding out of private sector credit. - Recent supportive developments: - oil prices doubled from early 2016 levels; - introduction of a new investor and exporter FX window (IEFX); - tighter monetary policy. - Outcomes include: - better FX availability and narrowing of the parallel market premium; - contained inflationary pressures; - reserve buffers reaching a four-year high; - positive growth for two consecutive quarters in 2017, supported by recovering oil production; - reforms under the ERGP improving Doing Business ranking and governance steps. - Persistent vulnerabilities: - non-oil non-agricultural activity comprises about 65 percent of the economy and has not picked up; - fiscal dominance from weak revenue mobilization; - rising ratio of interest payments to Federal Government revenue to unsustainable levels; - supply-driven high inflation, rising banking sector vulnerabilities, FX market distortions, large infrastructure gap, high gender and income inequality, pervasive corruption, low financial inclusion, and an ongoing humanitarian crisis in the North East. - Urgent policy action needed ahead of 2019 elections and given demographic trends (Nigeria could be the third most populous country by 2050). ### Recent Macro-Financial Developments - Growth and labor market - After five quarters of recession, economic activity expanded by 0.8 percent in Q2 and by 1.4 percent y-o-y in Q3 2017. - Non-oil-non-agricultural sector contracted by 1 percent in the first three quarters of 2017 y-o-y. - Unemployment rose to 18.8 percent in Q3 2017 from 14.2 percent at end-2016. - Inflation - CPI (end of period) declined to 15.4 percent y-o-y by end-December 2017 from 18½ percent at end-2016. - Core inflation has remained below 13 percent since May; month-on-month inflation dropped to 0.6 percent. - Food price inflation (more than 50 percent of the CPI basket) remains above 19 percent y-o-y. - External sector and reserves - Trade balance turned into a surplus as imports compressed and exports rose. - Gross reserves rose above $39 billion (below $34 billion excluding FX swaps) in early January 2018, representing 7½ (6½) months of next year's imports of goods and services. - FX measures in 2017: - over $12 billion provided across FX windows; - removal of the “60/40” rule in February 2017; - IEFX window introduced April 2017; - parallel market premium narrowed to about 20 percent against the official rate (N/$305) from a peak of 60 percent in February 2017; - IEFX transactions attained $22 billion ($6 billion net inflows); - the IEFX rate remained relatively stable around N/$ 360 for eight months; CBN purchases in IEFX totaled about $3.25 billion. - Financial markets - Nigerian Stock Exchange gained 60 percent in value from end-2016 to mid-January 2018, led by financial sector stocks (+70 percent). - Offshore investors increased exposure by $2 billion in equities and $6 billion in government securities since early 2017. - Yield curve shifted down by as much as 430 bps at the shorter end and -330 bps at longer maturities recently. - Monetary policy and liquidity - CRR at 22.5 percent and MPR unchanged since March and July 2016, respectively. - Money market rates about twice the 14 percent MPR on average due to liquidity-draining operations; effective CRR about 27 percent on stock of eligible deposits due to asymmetric application. - Special OMOs used (three in May/June and one in November); excess liquidity declined by 50 percent over the year. - Broad money increased by 1.6 percent in 2017; overnight rates declined to 4 percent in December from averages above 30 percent earlier in the year. - Banking sector vulnerabilities - Banks’ solvency ratios declined from 14.8 to 10.5 percent between December 2016 and October 2017 due to difficulties in four undercapitalized banks (including one insolvent bank). - Non-performing loans increased from 5 percent in June 2015 to 15.6 percent in October 2017 (about 82 percent of NPLs are fully provisioned). - Reported restructured loans range 2–30 percent of total loans for largest banks; averaging 10 percent. - Return on equity rose from 10 percent at end-2016 to 20.5 percent by end-September 2017. - Fiscal developments - Provisional Federal Government overall fiscal deficit for 2017 was 4.3 percent of GDP, 50 percent higher than in 2016, driven by increases in recurrent and investment spending (1.5 percent of GDP relative to 2016, including a doubling of capital expenditures). - Revenues declined marginally as higher oil receipts were offset by FG independent revenue at 80 percent relative to budget. - FG interest payments-to-FG revenue ratio rose to 63 percent to end-September 2017 and is estimated at 72 percent for 2017 as a whole. - Subnational finances - State and local governments face salary backlogs, debts to contractors, slow internal revenue generation, and 11 percent of Paris Club refunds outstanding. - Budget Support Facility transfers N700 million per month per state (N126 billion between June and October 2017) continued despite some states not meeting disbursement conditions. ### Outlook and Risks - Baseline outlook (unchanged policies) - Higher oil prices provide near-term relief. - Growth projected to pick up to 2.1 percent in 2018 from 0.8 percent in 2017. - Inflation would remain above the announced target range following some monetary accommodation; authorities expect faster deceleration than staff. - Renewed import growth would reduce gross reserves despite continued access to international markets. - After arrears clearance in 2018, fiscal deficit would narrow and public debt levels remain relatively low. - Interest payments-to-FG revenue ratio would still average 82 percent by 2023. - Adjustment scenario (frontloaded comprehensive policy package) — key elements - Upfront implementation of comprehensive measures including non-oil revenue mobilization and increased public investment. - Tight monetary policy in the short term. - A unified and more flexible exchange rate. - Structural measures to address infrastructure gaps and raise productivity. - Reforms in the oil sector to restore production to 2010 levels. - Adjustment scenario — expected impacts - Increased investor confidence, reduced vulnerabilities, and boosted growth. - Inflation reduced to single digits (see Box 1 in source). - Reduced government financing needs and increased capital buffers in banking sector, leading to increased lending to the private sector. - Export diversification and non-oil growth rising to 5 percent in the medium term. ### Text Table 1: Baseline vs. Adjustment Scenario — selected projections (figures preserved exactly) - National income and prices (Real GDP, Non-oil GDP, Non-oil non-agricultural GDP, Production of crude oil in million barrels per day, CPI end of period) - 2017: Real GDP 0.8; Non-oil GDP 0.2; Non-oil non-agricultural GDP -0.9; Production of crude oil 1.9; CPI (end of period) 15.4 - Baseline Real GDP 2018–2023: 2.1, 1.9, 2.1, 2.0, 2.0, 2.0 - Adjustment Real GDP 2018–2023: 3.0, 3.9, 4.2, 4.6, 4.6, 4.6 - Baseline Non-oil GDP 2018–2023: 1.3, 1.5, 1.7, 2.1, 2.1, 2.1 - Adjustment Non-oil GDP 2018–2023: 2.2, 3.2, 4.1, 4.6, 5.0, 5.0 - Baseline Non-oil non-agricultural GDP 2018–2023: 0.4, 0.6, 0.9, 1.5, 1.4, 1.4 - Adjustment Non-oil non-agricultural GDP 2018–2023: 1.7, 2.8, 4.0, 4.6, 5.2, 5.2 - Baseline Production of crude oil 2018–2023: 2.1, 2.2, 2.3, 2.3, 2.3, 2.3 - Adjustment Production of crude oil 2018–2023: 2.1, 2.3, 2.4, 2.5, 2.5, 2.5 - Baseline CPI end of period 2018–2023: 14.5, 16.6, 14.0, 14.0, 14.0, 14.0 - Adjustment CPI end of period 2018–2023: 14.0, 10.0, 8.0, 7.0, 7.0, 7.0 - Investment and savings (Gross national savings, Investment, Public, Private) - 2017: Gross national savings 14.9; Investment 12.9; Public 2.9; Private 10.0 - Baseline Gross national savings 2018–2023: 13.3, 13.6, 14.0, 14.3, 14.0, 13.9 - Adjustment Gross national savings 2018–2023: 16.0, 16.5, 18.0, 17.9, 18.8, 20.0 - Baseline Investment 2018–2023: 13.3, 13.4, 13.6, 13.9, 13.8, 13.8 - Adjustment Investment 2018–2023: 14.2, 15.1, 16.1, 17.1, 18.0, 19.2 - Baseline Public 2018–2023: 2.7, 2.8, 2.7, 2.6, 2.6, 2.6 - Adjustment Public 2018–2023: 3.1, 3.7, 4.2, 4.5, 5.0, 5.7 - Baseline Private 2018–2023: 10.5, 10.6, 10.9, 11.2, 11.2, 11.1 - Adjustment Private 2018–2023: 11.1, 11.4, 12.0, 12.6, 13.0, 13.5 - Current account balance - 2017: 2.0 - Baseline 2018–2023: 0.1, 0.2, 0.5, 0.5, 0.2, 0.1 - Adjustment 2018–2023: 1.8, 1.4, 1.9, 0.9, 0.8, 0.8 - Consolidated government operations (Total revenues and grants; oil and gas revenue; Total expenditure and net lending; Capital Expenditure; Overall balance) - 2017: Total revenues and grants 5.7; oil and gas revenue 2.5; Total expenditure and net lending 11.2; Capital Expenditure 2.9; Overall balance -5.5 - Baseline Total revenues and grants 2018–2023: 7.4, 7.1, 7.1, 6.7, 6.8, 7.0 - Adjustment Total revenues and grants 2018–2023: 8.0, 9.4, 11.4, 12.6, 14.3, 16.3 - Baseline oil and gas revenue 2018–2023: 3.7, 3.3, 3.1, 2.7, 2.7, 2.6 - Adjustment oil and gas revenue 2018–2023: 3.7, 3.6, 3.9, 3.9, 4.1, 4.4 - Baseline Total expenditure and net lending 2018–2023: 11.9, 11.6, 11.0, 10.8, 10.7, 10.9 - Adjustment Total expenditure and net lending 2018–2023: 12.0, 12.4, 13.3, 13.7, 14.4, 15.4 - Baseline Capital Expenditure 2018–2023: 2.7, 2.8, 2.7, 2.6, 2.6, 2.6 - Adjustment Capital Expenditure 2018–2023: 3.1, 3.7, 4.2, 4.5, 5.0, 5.7 - Baseline Overall balance 2018–2023: -4.5, -4.4, -4.0, -4.1, -3.9, -3.9 - Adjustment Overall balance 2018–2023: -3.9, -3.0, -1.9, -1.1, -0.1, 0.9 - Non-oil primary balance and Non-oil revenue (percent of non-oil GDP) - 2017: Non-oil primary balance -7.0; Non-oil revenue 3.4 - Baseline Non-oil primary balance 2018–2023: -7.6, -6.7, -5.8, -5.3, -4.9, -4.8 - Adjustment Non-oil primary balance 2018–2023: -7.0, -5.6, -4.8, -3.8, -3.1, -2.5 - Baseline Non-oil revenue 2018–2023: 3.9, 4.0, 4.1, 4.2, 4.3, 4.5 - Adjustment Non-oil revenue 2018–2023: 4.6, 6.1, 8.0, 9.4, 10.9, 12.6 - Public gross debt (percent of GDP) and FGN interest payments (percent of FGN revenue) - 2017: Public gross debt 22.3; FGN interest payments 71.9 - Baseline Public gross debt 2018–2023: 25.3, 26.0, 26.0, 26.4, 26.6, 26.8 - Adjustment Public gross debt 2018–2023: 24.7, 24.7, 24.0, 22.8, 20.8, 17.7 - Baseline FGN interest payments 2018–2023: 59.7, 68.0, 73.6, 80.0, 81.8, 82.3 - Adjustment FGN interest payments 2018–2023: 52.0, 49.4, 40.6, 34.3, 28.3, 22.0 - Money and credit - 2017: Broad money 1.6; Net foreign assets 27.4; Net domestic assets -25.9; Credit to the private sector -3.3 - Baseline Broad money 2018–2023: 14.0, 17.9, 18.6, 18.4, 18.2, 16.9 - Adjustment Broad money 2018–2023: 11.3, 9.0, 12.3, 11.8, 11.7, 11.8 - Baseline Net foreign assets 2018–2023: 1.5, -2.8, -0.3, -0.6, -0.5, 0.3 - Adjustment Net foreign assets 2018–2023: 12.4, 10.2, 13.3, 6.3, 6.5, 8.1 - Baseline Net domestic assets 2018–2023: 12.5, 20.7, 18.9, 19.0, 18.7, 16.6 - Adjustment Net domestic assets 2018–2023: -1.1, -1.2, -1.0, 5.5, 5.2, 3.7 - Baseline Credit to the private sector 2018–2023: 1.0, 2.1, 2.3, 2.4, 2.6, 2.9 - Adjustment Credit to the private sector 2018–2023: 7.9, 7.2, 11.3, 12.6, 13.2, 13.7 - External sector - 2017: Price of Nigerian oil 54.4; Gross international reserves 39.2; equivalent months of imports 7.3 - Baseline Price of Nigerian oil 2018–2023: 67.8, 63.9, 61.1, 59.6, 59.1, 59.0 - Adjustment Price of Nigerian oil 2018–2023: 67.8, 63.9, 61.1, 59.6, 59.1, 59.0 - Baseline Gross international reserves US$ billions 2018–2023: 39.2, 36.6, 35.6, 35.4, 34.4, 33.6 - Adjustment Gross international reserves US$ billions 2018–2023: 47.1, 50.6, 56.9, 59.5, 62.1, 65.6 - Baseline equivalent months of imports 2018–2023: 7.1, 6.2, 6.0, 5.7, 5.4, 4.8 - Adjustment equivalent months of imports 2018–2023: 8.1, 8.0, 8.4, 8.4, 8.5, 8.4 ### Box 1 — Adjustment scenario and macroeconomic impact (highlights) - Growth-friendly fiscal consolidation driven by frontloading of non-oil revenue mobilization measures yielding an additional 8.3 percent of GDP by 2023 while increasing public investment. - Illustration: future increases in public expenditure and tax revenue over 2018–23 result in growth increasing by about one percentage point within two years, and two percentage points in the medium term. - Monetary policy: tighten short term to lower inflation to CBN target range of 6–9 percent, loosen in medium term once inflation stabilizes. - Exchange rate: unified and market-determined; immediate removal of FX restrictions. - Financial sector: higher capital buffers; weak banks to acquire new capital; strengthened prudential standards. - Structural reforms: restore oil production to pre-2010 levels (2.5 mbpd); expand transfers from social safety nets to N400 billion annually to mitigate impacts on the most vulnerable. ### Policy implications and priorities (implied by adjustment scenario) - Frontload non-oil revenue mobilization measures while increasing public investment. - Maintain tight monetary policy in the short term to reduce inflationary pressures. - Move to a unified and more flexible exchange rate to reduce market segmentation and boost investor confidence. - Reinforce banking sector capital buffers to reduce crowding out and increase private sector lending. - Implement structural reforms to close infrastructure gaps, increase productivity, and support export diversification. - Implement oil sector reforms to restore production to 2010 levels and prevent arrears in joint ventures. ### Authorities’ views (selected) - Fiscal policy: authorities agree with structural fiscal reforms and are determined to increase non-oil revenue; VAIDS expected to yield $1 billion by end-March 2018; Finance Bill to increase excises, reform VAT, change stamp duties; oil asset divestment strategy in progress; no intention to reintroduce fuel subsidy provisions. - Monetary policy: authorities consider monetary tightening directed at reducing exchange rate pressures; an increase in the MPR is not needed per authorities if reserves accumulate and headline inflation drops below 12 percent; authorities favor applying CRR on deposit flows. - Exchange rate: unification is part of ERGP; authorities view some FX restrictions as temporary and effective in protecting local industries; plan to remove them once reserve buffers reach comfortable levels. - Financial sector: CBN has asked banks to conduct their own stress testing and believes capital buffers are adequate; CBN would intervene in weak banks if recapitalization plans are not timely. - Structural reforms: authorities established an ERGP implementation unit in the VP's office and report Doing Business improvement (rise of 24 places to 145th). ### Structural reforms and governance — recent actions and staff recommendations - Doing Business: Nigeria rose by 24 places to 145th in the World Bank Doing Business Rankings. - Power sector: PSRP increased peak generation to 5100MW in December 2017; objectives include restoring financial viability and attracting private investment. - Anti-corruption and transparency: adoption of NACS (August 2017); passage of PIGB by House of Representatives; initial digitization of asset declarations; publication of national AML/CFT risk assessment. - Staff recommendations include: complete Doing Business reforms, implement PSRP urgently, accelerate tariff review, strengthen financial inclusion (reduce exclusion from 41 percent overall to 20 percent by 2020), streamline anti-corruption frameworks, and implement gender and social policies. ### Debt sustainability and risks (selected findings from Annex II) - Public gross debt 2017: 22.3 percent of GDP; projected baseline increase to 26.6 percent by 2022. - Debt-stabilizing primary balance estimated at 1.8 percent of GDP. - Interest payments-to-revenue almost tripled from 27 percent in 2014 to 71.9 percent in 2017; interest payments projected above 80 percent of FG revenue by 2022 under baseline. - Financing needs under current policies average about 6.4 percent of GDP in medium term. - Stress tests: interest rate shock could raise interest payments to 104 percent of FG revenue by 2022; a one-time bailout of the financial sector (10 percent of banking sector assets) pushes interest payments to 98 percent by 2022; a combined shock could push interest payments close to 130 percent by 2022. - External debt low: external debt 11.1 percent of GDP in 2016; external debt-to-exports and gross external financing needs exhibit sensitivity to oil exports and naira depreciation. ### Data, TA, and technical assistance - Data broadly adequate for surveillance; improvements ongoing in national accounts, CPI, and BOP statistics. - Technical assistance missions since January 2016 across LEG, MCM, STA, FAD, and AFRITAC 2 (detailed mission list preserved in source). - Resident IMF staff: Senior Resident Representative Mr. Amine Mati (Mission Chief) since February 2017; Resident Technical Assistance Advisor Mr. Leonard Chumo since February 2017. *Source: IMF staff report — "1. A Growth Generating Adjustment Scenario" (excerpts and tables preserved exactly as presented).* ### 1. A Growth Generating Adjustment Scenario __________________________________________________ 11 ### 1. A Growth Generating Adjustment Scenario ### Background: Fragile Recovery - A historic terms of trade shock—exacerbated by falling oil production and inadequate policy implementation—led to output contraction in 2016 for the first time in more than two decades and reduced external and fiscal buffers. - Initial policy responses (increases in electricity and fuel prices, a more depreciated exchange rate) did not yield expected benefits due to: - sabotage of oil infrastructure; - foreign exchange restrictions; - delayed implementation of structural reforms. - Consequences included worsened investor confidence, increased borrowing costs, and crowding out of private sector credit. - New policies and recovering oil prices have supported a slow exit from recession: - oil prices doubled from early 2016 levels; - introduction of a new investor and exporter FX window (IEFX); - tighter monetary policy. - These developments contributed to: - better FX availability and a significant narrowing of the parallel market exchange rate premium; - contained inflationary pressures; - a soaring financial market and reserve buffers reaching a four-year high; - positive economic growth for two consecutive quarters in 2017, supported by recovering oil production; - reforms under the Economic Recovery and Growth Plan (ERGP) improving Doing Business ranking and governance steps. - Persistent vulnerabilities: - non-oil non-agricultural activity has not picked up (about 65 percent of the economy); - fiscal dominance driven by weak revenue mobilization; - rising ratio of interest payments to Federal Government revenue to unsustainable levels; - supply-driven high inflation; - rising banking sector vulnerabilities; - FX market distortions slowing long-term investment and diversification; - large infrastructure gap, high gender and income inequality, pervasive corruption, low financial inclusion, and an ongoing humanitarian crisis in the North East. - Urgent policy action is needed, especially given demographic trends (Nigeria could be the third most populous country by 2050) and the risk of political delays ahead of the 2019 elections. ### Recent Macro-Financial Developments - Growth and labor market - After five quarters of recession, economic activity expanded by 0.8 percent in Q2 and by 1.4 percent y-o-y in Q3 2017, driven by recovering oil production and agriculture. - Non-oil-non-agricultural sector contracted by 1 percent in the first three quarters of 2017 compared to the same period in the previous year. - Unemployment rose to 18.8 percent in Q3 2017 from 14.2 percent at end-2016. - Inflation - Inflation declined to 15.4 percent y-o-y by end-December 2017, from 18½ percent at end-2016. - Core inflation has remained below 13 percent since May; month-on-month inflation dropped to 0.6 percent. - Food price inflation (more than 50 percent of the CPI basket) remains persistently high (above 19 percent y-o-y). - External sector and reserves - Trade balance turned into a surplus as imports compressed and exports rose with recovering oil prices and production. - Gross reserves rose above $39 billion (below $34 billion excluding FX swaps) in early January 2018, representing 7½ (6½) months of next year's imports of goods and services. - FX market relief but segmentation persists: - over $12 billion provided across FX windows in 2017; - removal of the “60/40” rule for prioritized FX allocations in February 2017; - introduction of the IEFX window in April 2017; - parallel market premium narrowed to about 20 percent against the official rate (N/$305) from a peak of 60 percent in February 2017; - IEFX transactions attained $22 billion ($6 billion net inflows); - the IEFX rate remained relatively stable around N/$ 360 for eight months; CBN purchases in IEFX totaled about $3.25 billion. - Financial markets - Nigerian Stock Exchange gained 60 percent in value from end-2016 to mid-January 2018, led by financial sector stocks (+70 percent). - Offshore investors increased exposure by $2 billion in equities and $6 billion in government securities since early 2017. - Yield curve shifted down by as much as 430 bps at the shorter end and -330 bps at longer maturities recently. - Monetary policy and liquidity - Cash reserve requirement (CRR) at 22.5 percent and monetary policy rate (MPR) unchanged since March and July 2016, respectively. - Liquidity-draining operations (sale of CBN bills) kept money market rates about twice the 14 percent MPR on average; banks face an effective CRR of 27 percent when measured on the stock of eligible deposits due to asymmetric application. - Special OMOs (three in May/June and one in November) were used to remove excess liquidity; excess liquidity declined by 50 percent over the year. - Broad money increased by only 1.6 percent in 2017; overnight rates declined to 4 percent in December from averages above 30 percent earlier in the year. - Banking sector vulnerabilities - Banks’ solvency ratios declined from 14.8 to 10.5 percent between December 2016 and October 2017 due to difficulties in four small and medium-sized undercapitalized banks (including one insolvent bank); some are kept afloat via continuous recourse to CBN lending facilities. - Non-performing loans increased from 5 percent in June 2015 to 15.6 percent in October 2017 (about 82 percent of NPLs are fully provisioned). - Commercial banks pre-emptively restructured loans (reported restructured loans range 2–30 percent of total loans for largest banks; averaging 10 percent). - Higher net interest margins from government securities improved bank profitability: returns on equity rose from 10 percent at end-2016 to 20.5 percent by end-September 2017. - Fiscal developments - Provisional Federal Government overall fiscal deficit for 2017 was 4.3 percent of GDP, 50 percent higher than in 2016, driven by increases in recurrent and investment spending (1.5 percent of GDP relative to 2016, including a doubling of capital expenditures). - Revenues declined marginally as higher oil receipts were offset by FG independent revenue at 80 percent relative to budget. - Higher financing requirements and increased banks’ risk aversion crowded out private sector lending (-3.3 percent y-o-y). - FG interest payments-to-FG revenue ratio rose to 63 percent to end-September 2017 and is estimated at 72 percent for 2017 as a whole. - Subnational finances - State and local governments face backlogs in salary payments, debts to contractors, slow internal revenue generation, and 11 percent of Paris Club refunds outstanding. - The Budget Support Facility continued transfers of N700 million per month per state (N126 billion between June and October 2017) despite some states not meeting disbursement conditions in the 22 points Fiscal Sustainability Plan. ### Outlook and Risks - Baseline outlook (unchanged policies) - Higher oil prices provide near-term relief. - Growth projected to pick up to 2.1 percent in 2018 from 0.8 percent in 2017 due to greater FX availability and recovering oil production. - Oil sector reforms and new funding requirements would boost oil production over the medium term. - Inflation would remain above the announced target range following some monetary accommodation; authorities expect a faster deceleration than staff. - Renewed import growth would reduce gross reserves despite continued access to international markets. - After arrears clearance in 2018, fiscal deficit would narrow and public debt levels remain relatively low. - Interest payments-to-FG revenue ratio would still average 82 percent by 2023. - Adjustment scenario (frontloaded comprehensive policy package) - Key elements: - upfront implementation of comprehensive measures including non-oil revenue mobilization and increased public investment; - tight monetary policy in the short term; - a unified and more flexible exchange rate; - structural measures to address infrastructure gaps and raise productivity; - reforms in the oil sector to restore production to 2010 levels. - Expected impacts: - increased investor confidence, reduced vulnerabilities, and boosted growth; - inflation reduced to single digits (see Box 1 in source); - reduced government financing needs and increased capital buffers in banking sector, leading to increased lending to the private sector; - export diversification and non-oil growth rising to 5 percent in the medium term. - Text Table 1: Baseline vs. Adjustment Scenario — selected projections (all figures preserved exactly as in source) - National income and prices (Real GDP, Non-oil GDP, Non-oil non-agricultural GDP, Production of crude oil in million barrels per day, CPI end of period) - 2017: Real GDP 0.8; Non-oil GDP 0.2; Non-oil non-agricultural GDP -0.9; Production of crude oil 1.9; CPI (end of period) 15.4 - Baseline 2018–2023 (Real GDP): 2.1, 1.9, 2.1, 2.0, 2.0, 2.0 - Adjustment 2018–2023 (Real GDP): 3.0, 3.9, 4.2, 4.6, 4.6, 4.6 - Baseline 2018–2023 (Non-oil GDP): 1.3, 1.5, 1.7, 2.1, 2.1, 2.1 - Adjustment 2018–2023 (Non-oil GDP): 2.2, 3.2, 4.1, 4.6, 5.0, 5.0 - Baseline 2018–2023 (Non-oil non-agricultural GDP): 0.4, 0.6, 0.9, 1.5, 1.4, 1.4 - Adjustment 2018–2023 (Non-oil non-agricultural GDP): 1.7, 2.8, 4.0, 4.6, 5.2, 5.2 - Baseline 2018–2023 (Production of crude oil): 2.1, 2.2, 2.3, 2.3, 2.3, 2.3 - Adjustment 2018–2023 (Production of crude oil): 2.1, 2.3, 2.4, 2.5, 2.5, 2.5 - Baseline CPI end of period 2018–2023: 14.5, 16.6, 14.0, 14.0, 14.0, 14.0 - Adjustment CPI end of period 2018–2023: 14.0, 10.0, 8.0, 7.0, 7.0, 7.0 - Investment and savings (Gross national savings, Investment, Public, Private) - 2017: Gross national savings 14.9; Investment 12.9; Public 2.9; Private 10.0 - Baseline 2018–2023 (Gross national savings): 13.3, 13.6, 14.0, 14.3, 14.0, 13.9 - Adjustment 2018–2023 (Gross national savings): 16.0, 16.5, 18.0, 17.9, 18.8, 20.0 - Baseline 2018–2023 (Investment): 13.3, 13.4, 13.6, 13.9, 13.8, 13.8 - Adjustment 2018–2023 (Investment): 14.2, 15.1, 16.1, 17.1, 18.0, 19.2 - Baseline 2018–2023 (Public): 2.7, 2.8, 2.7, 2.6, 2.6, 2.6 - Adjustment 2018–2023 (Public): 3.1, 3.7, 4.2, 4.5, 5.0, 5.7 - Baseline 2018–2023 (Private): 10.5, 10.6, 10.9, 11.2, 11.2, 11.1 - Adjustment 2018–2023 (Private): 11.1, 11.4, 12.0, 12.6, 13.0, 13.5 - Current account balance - 2017: 2.0 - Baseline 2018–2023: 0.1, 0.2, 0.5, 0.5, 0.2, 0.1 - Adjustment 2018–2023: 1.8, 1.4, 1.9, 0.9, 0.8, 0.8 - Consolidated government operations (Total revenues and grants; of which oil and gas revenue; Total expenditure and net lending; Capital Expenditure; Overall balance) - 2017: Total revenues and grants 5.7; oil and gas revenue 2.5; Total expenditure and net lending 11.2; Capital Expenditure 2.9; Overall balance -5.5 - Baseline 2018–2023 (Total revenues and grants): 7.4, 7.1, 7.1, 6.7, 6.8, 7.0 - Adjustment 2018–2023 (Total revenues and grants): 8.0, 9.4, 11.4, 12.6, 14.3, 16.3 - Baseline 2018–2023 (oil and gas revenue): 3.7, 3.3, 3.1, 2.7, 2.7, 2.6 - Adjustment 2018–2023 (oil and gas revenue): 3.7, 3.6, 3.9, 3.9, 4.1, 4.4 - Baseline 2018–2023 (Total expenditure and net lending): 11.9, 11.6, 11.0, 10.8, 10.7, 10.9 - Adjustment 2018–2023 (Total expenditure and net lending): 12.0, 12.4, 13.3, 13.7, 14.4, 15.4 - Baseline 2018–2023 (Capital Expenditure): 2.7, 2.8, 2.7, 2.6, 2.6, 2.6 - Adjustment 2018–2023 (Capital Expenditure): 3.1, 3.7, 4.2, 4.5, 5.0, 5.7 - Baseline 2018–2023 (Overall balance): -4.5, -4.4, -4.0, -4.1, -3.9, -3.9 - Adjustment 2018–2023 (Overall balance): -3.9, -3.0, -1.9, -1.1, -0.1, 0.9 - Non-oil primary balance (percent of non-oil GDP) and Non-oil revenue (percent of non-oil GDP) - 2017: Non-oil primary balance -7.0; Non-oil revenue 3.4 - Baseline 2018–2023 (Non-oil primary balance): -7.6, -6.7, -5.8, -5.3, -4.9, -4.8 - Adjustment 2018–2023 (Non-oil primary balance): -7.0, -5.6, -4.8, -3.8, -3.1, -2.5 - Baseline 2018–2023 (Non-oil revenue): 3.9, 4.0, 4.1, 4.2, 4.3, 4.5 - Adjustment 2018–2023 (Non-oil revenue): 4.6, 6.1, 8.0, 9.4, 10.9, 12.6 - Public gross debt (percent of GDP) and FGN interest payments (percent of FGN revenue) - 2017: Public gross debt 22.3; FGN interest payments 71.9 - Baseline 2018–2023 (Public gross debt): 25.3, 26.0, 26.0, 26.4, 26.6, 26.8 - Adjustment 2018–2023 (Public gross debt): 24.7, 24.7, 24.0, 22.8, 20.8, 17.7 - Baseline 2018–2023 (FGN interest payments): 59.7, 68.0, 73.6, 80.0, 81.8, 82.3 - Adjustment 2018–2023 (FGN interest payments): 52.0, 49.4, 40.6, 34.3, 28.3, 22.0 - Money and credit (Broad money percent change; Net foreign assets; Net domestic assets; Credit to the private sector y-o-y,%) - 2017: Broad money 1.6; Net foreign assets 27.4; Net domestic assets -25.9; Credit to the private sector -3.3 - Baseline 2018–2023 (Broad money): 14.0, 17.9, 18.6, 18.4, 18.2, 16.9 - Adjustment 2018–2023 (Broad money): 11.3, 9.0, 12.3, 11.8, 11.7, 11.8 - Baseline 2018–2023 (Net foreign assets): 1.5, -2.8, -0.3, -0.6, -0.5, 0.3 - Adjustment 2018–2023 (Net foreign assets): 12.4, 10.2, 13.3, 6.3, 6.5, 8.1 - Baseline 2018–2023 (Net domestic assets): 12.5, 20.7, 18.9, 19.0, 18.7, 16.6 - Adjustment 2018–2023 (Net domestic assets): -1.1, -1.2, -1.0, 5.5, 5.2, 3.7 - Baseline 2018–2023 (Credit to the private sector): 1.0, 2.1, 2.3, 2.4, 2.6, 2.9 - Adjustment 2018–2023 (Credit to the private sector): 7.9, 7.2, 11.3, 12.6, 13.2, 13.7 - External sector (Price of Nigerian oil US$/bbl; Gross international reserves US$ billions; equivalent months of imports of G&Ss) - 2017: Price of Nigerian oil 54.4; Gross international reserves 39.2; equivalent months of imports 7.3 - Baseline 2018–2023 (Price of Nigerian oil): 67.8, 63.9, 61.1, 59.6, 59.1, 59.0 - Adjustment 2018–2023 (Price of Nigerian oil): 67.8, 63.9, 61.1, 59.6, 59.1, 59.0 - Baseline 2018–2023 (Gross international reserves US$ billions): 39.2, 36.6, 35.6, 35.4, 34.4, 33.6 - Adjustment 2018–2023 (Gross international reserves US$ billions): 47.1, 50.6, 56.9, 59.5, 62.1, 65.6 - Baseline 2018–2023 (equivalent months of imports): 7.1, 6.2, 6.0, 5.7, 5.4, 4.8 - Adjustment 2018–2023 (equivalent months of imports): 8.1, 8.0, 8.4, 8.4, 8.5, 8.4 ### Policy implications and priorities (implied by adjustment scenario) - Frontload non-oil revenue mobilization measures while increasing public investment. - Maintain tight monetary policy in the short term to reduce inflationary pressures. - Move to a unified and more flexible exchange rate to reduce market segmentation and boost investor confidence. - Reinforce banking sector capital buffers to reduce crowding out and increase private sector lending. - Implement structural reforms to close infrastructure gaps, increase productivity, and support export diversification. - Implement oil sector reforms to restore production to 2010 levels and prevent arrears in joint ventures. *Source: IMF staff report — "1. A Growth Generating Adjustment Scenario" (excerpts and tables preserved exactly as presented).* ### Box 1. Nigeria: A Growth Generating Adjustment Scenario ### Box 1. Nigeria: A Growth Generating Adjustment Scenario ### Adjustment scenario and macroeconomic impact - Scenario premised on upfront implementation of a coordinated, comprehensive package of policies that improves confidence and provides the basis for a private sector supply response. - Growth-friendly fiscal consolidation driven by frontloading of non-oil revenue mobilization measures yielding an additional 8.3 percent of GDP by 2023 while increasing public investment. - Illustration (leveraging October 2017 sub-Saharan Africa REO): future increases in public expenditure and tax revenue over 2018–23 result in growth increasing by about one percentage point within two years, and two percentage points in the medium term. - Monetary policy: tightened in the short term to lower inflation to the CBN target range of 6–9 percent and loosened in the medium term once inflation has stabilized. - Exchange rate: unified and market-determined exchange rate, immediate removal of FX restrictions, and tight monetary policy expected to boost investor confidence and increase external buffers. - Financial sector: higher capital buffers supported by reduced government financing needs would permit higher lending to the private sector (albeit at higher rates); weak banks expected to acquire new capital (including through mergers and acquisition); strengthened prudential standards and banking supervision to safeguard stability. - Structural reforms to address infrastructure gaps and increase productivity would support export diversification; reforms in the oil sector would restore oil production to pre-2010 levels (2.5 mbpd). - Mitigating impacts on the most vulnerable: transfers from existing social safety nets would be expanded to 400 billion Naira annually. ### Risks and spillovers - Main external downside risks: lower oil prices and tighter external market conditions. - Domestic risks: heightened security issues; delayed fiscal policy response resulting in an unsustainable interest-to-revenue ratio; banking sector vulnerabilities constraining private sector lending; weak implementation of structural reforms. - Stress scenarios highlight sensitivity of external and public debt, particularly to oil exports and naira depreciation. - Upside risks: a further or sustained uptick in international oil prices and/or faster-than-expected implementation of infrastructure projects. - Regional spillovers: Nigeria accounts for an estimated 70 percent of ECOWAS exports; a weaker naira negatively impacts partner country exports. FX restrictions have led to increasing food imports in neighboring countries, reportedly smuggled through porous borders. Spillover risk from the banking sector—measured through net claims to subsidiaries—has declined by 34 percent over the past year. ### Authorities' projections and objectives - Authorities project that reforms under their ERGP (largely aligned with staff’s adjustment scenario) would increase growth to around 3.5 percent in 2018 and reduce inflation rates to lower double digit rates. - Stronger execution of capital budget, structural reforms, and higher oil production would raise growth to 7 percent in the medium term. - Authorities aim to reduce the interest-payments to revenue ratio to 30 percent by 2022. ### Fiscal stance and key numerical outcomes (2017–18) - Draft 2018 budget targets significant fiscal consolidation: FG overall fiscal deficit declining from 4.3 percent of GDP in 2017 to 1.4 percent of GDP in 2018. - Staff estimate an overall budget deficit of 3.6 percent of GDP in 2018 after accounting for unbudgeted spending pressures and conservative revenue yields. - Table of selected Federal Government aggregates (Percent of GDP): - Total revenue and grants: 2017 = 2.0; Proj. = 4.6; Budget = 2.4 - Oil revenue: 2017 = 0.9; Proj. = 1.8; Budget = 1.1 - Non-oil revenue: 2017 = 1.1; Proj. = 2.7; Budget = 1.1 - Import and excise duties: 2017 = 0.2; Proj. = 0.3; Budget = 0.3 - Companies' income tax: 2017 = 0.5; Proj. = 0.6; Budget = 0.5 - Value-added tax: 2017 = 0.1; Proj. = 0.1; Budget = 0.1 - Federal government independent revenue: 2017 = 0.2; Proj. = 0.1; Budget = 0.2 - Total expenditure: 2017 = 6.3; Proj. = 6.0; Budget = 6.0 - Recurrent expenditure: 2017 = 5.3; Proj. = 4.3; Budget = 5.0 - Interest payment: 2017 = 1.4; Proj. = 1.4; Budget = 1.4 - Capital expenditure: 2017 = 1.0; Proj. = 1.7; Budget = 1.0 - Overall balance: 2017 = -4.3; Proj. = -1.4; Staff proj. = -3.6 - Memorandum items: Oil price (US$/bbl): 2017 = 54.4; Proj. = 47.0; Budget = 67.8 - Interest payments (percent of FGN revenue): 2017 = 71.9; Proj. = 30.5; Budget = 56.2 ### Medium-term fiscal anchor and revenue mobilization - Anchor: move towards reducing the non-oil primary deficit below 3 percent of non-oil GDP to ensure sustainability in case of an oil price collapse. - Target: increase the non-oil revenue-to-GDP ratio from 3.2 percent in 2017 to close to 13 percent by 2023, with SLGs contributing through automatic revenue increases linked to revenue sharing arrangements and higher internally generated revenue. - Result: FG interest payments-to-revenue ratio would decrease towards the authorities’ 30 percent objective by 2022. - Priority increases: social cash transfers to 0.2 percent of GDP and public investment to close to 6 percent of GDP over the medium term. ### Tax policy and administration measures (yields and components) - Comprehensive tax reform could increase revenues by 1.1 percent of GDP within a year and 8.3 percent of GDP by 2023 (Staff calculations). - Tax policy measures (Gains compared to 2017, Percent of GDP): - VAT (increase compliance to 65% by 2022): 2018 = 0.2 - VAT (reform base, remove exemptions, and increase rate to 10 percent): 2018–23 = 0.2 - CIT (close loopholes and exemptions): 2018–23 = 2.1 - Excises and levies (rate increase/compliance): 2018–23 = 1.6 - Removal of customs duty waivers: 2018 = 0.07; 2018–23 = 0.2 - FGN Internally Generated Revenue (compliance): 2018 = 0.007; 2018–23 = 0.4 - Property tax: 2018–23 = 0.5 - Total: 2018 = 1.0; 2018–23 = 8.3 - Tax administration measures (in billion Naira, 2018): - Recovery of tax arrears: 150 - Customs (better targeting/enforcement): 15 - Total: 165 (in percent of GDP: 0.1) - Additional administrative actions: double compliance rate to at least 50 percent; increase tax audits; use e-filing; conduct data matching; strengthen enforcement; focus on large taxpayers. - Upcoming TADAT exercise to establish performance benchmarks for tax administration reform. ### Oil, energy, and power sector recommendations - Welcome adoption of the Petroleum Industry Governance Bill (PIGB) to create new independent regulatory agencies and allow the national oil company to be run on a commercial basis. - Recommend full implementation of the fuel price adjustment mechanism to avoid further losses at the national oil company for refined product retail sales. Such losses are expected to lower the operating surplus to the federation account in 2018 by an estimated 0.45 percent of GDP and could put pressure on the national oil company’s ability to fund JV commitments. - Recommend full costing and budgeting of the power sector reform. ### Expenditure, public financial management, and debt management - Continue rationalizing current expenditures to make room for capital spending: contain overhead and personnel costs through cost auditing, whistleblower policy, and continuous payroll audit; resist pressures to increase minimum wages or deviate from approved budget appropriations. - Strengthen public financial management and explore savings from public investment efficiency: closer coordination of central financial agencies; stronger expenditure controls and auditing; efficient procurement with e-procurement and open contracting; strengthen multi-year budgeting; create a single SOE oversight unit to monitor fiscal risks and present a fiscal risk statement. - Debt management: substitute a quarter of outstanding T-Bills with Eurobonds—$3 billion—with expected savings of N60 to N70 billion in 2017/2018; increase FX borrowing given low external debt-to-GDP ratio and negligible external interest payments. Note that the long-term objective of an external-to-domestic-debt ratio of 40 percent may need review in view of lumpy redemptions and doubled exchange rate risk. - Clear domestic arrears (outstanding stock of arrears N2.7 trillion): recommend speedy parliamentary approval of Bill allowing cash payments in 2018–20 for salary/pension arrears and issuance of ten-year promissory notes for contractors' arrears. - Strengthen coordination between cash management, debt management and central bank operations: more closely coordinate CBN mopping-up operations and T-bill issuances; more effective use of the Treasury Single Account to avoid CBN overdrafts while large idle government cash deposits are available (N6 trillion by end-2017); use longer-term government cash flow forecasts to adjust T-bill issuances. ### State and Local Government (SLG) oversight and revenue - Increase SLG monitoring to reduce arrears accumulation and increase internally generated revenue: ensure strict compliance with the 22-point Fiscal Sustainability Plan (including fiscal reporting) prior to states receiving additional budget support. - Additional internal revenue could be generated from tax reforms (property tax, overhaul of personal income tax) reinforced by compliance improvements. ### Social protection and distributional considerations - Expand national cash transfer program and accelerate implementation. - Illustrative scenario (doubling the VAT rate, increasing compliance to 70 percent) shows cash transfers of about N400 billion would be needed to keep the poverty gap unchanged relative to current levels. - As social safety nets may not be fully scalable short term, complementary measures (lifeline tariff; increase in health and education spending) will be needed as part of the reform package. *International Monetary Fund — Box 1. Nigeria: A Growth Generating Adjustment Scenario* ### 24. Authorities’ views. The government agrees with the proposed structural fiscal reforms and is ### Authorities’ views ### A. Fiscal Policy: Increase Non-Oil Revenue and Structural Reforms - Government agrees with the proposed structural fiscal reforms and is determined to increase non-oil revenue—a key priority under the ERGP. - Immediate focus: improving collection through tax administration efforts, including widening the base by implementing the Voluntary Asset Income Declaration Scheme, expected to yield $1 billion by end-March 2018. - Finance Bill being presented to Parliament comprising: - Increases in excises. - Reform of the VAT (e.g., introducing a VAT registration threshold and removing exemptions). - Changes to stamp duties. - Expected effect: help increase revenues from 2018 onwards. - Oil asset divestment strategy, including possible privatization of the Nigeria Petroleum Development Company’s assets, is in progress and would yield proceeds in 2018. - Additional focus: auditing the operations of the national oil company (NNPC) to ensure full understanding of its arrears and oil revenue remitted. - Authorities do not intend to reintroduce fuel subsidy provisions into the budget. *Source: IMF staff report text.* ### B. Monetary Policy: Tight Stance and Stronger Framework Findings and context: - Current macroeconomic challenges require keeping monetary policy tight and strengthening the policy framework. - Significant reduction in broad money—the CBN’s intermediate target—is welcome. - Mopping up operations should continue to support the announced objective of lowering inflation closer to the CBN’s 6 to 9 percent target range. - Allowing money market rates to trade consistently above the MPR—combined with CBN development finance interventions—hinders the signaling impact of monetary policy. - CBN’s direct lending to the government through overdrafts is unnecessary, particularly when the government is a net creditor, and it further weakens monetary policy transmission. Graphical/data points referenced: - CBN Lending, 2013–17 (Billions of Naira) series include: T Bills; Converted Bonds; Overdrafts to Federal Government; Lending to Non-financial SOEs; Net claims on Federal Government. (Source: Central Bank of Nigeria.) Policy recommendations: - Increase the MPR to positive real levels to: - More transparently reflect CBN intentions. - Help anchor inflation expectations. - Signal forward-looking policy. - If a sudden increase in MPR is difficult, consider a symmetrical interest rate corridor (e.g., +/-5 percent to replace the current +2/-5 percent corridor) to temporarily accommodate gradual adjustment of market rates to the upper band; restore a narrower corridor once money market rates align to MPR movements. - Clarify CBN operations and discontinue direct interventions by: - Discontinuing unannounced special OMOs done slightly below market rates and not conducted through auctions. - Adopting a higher and symmetrically applied CRR—based on an average stock of deposits—to achieve liquidity draining objectives. - Improving CBN communication policy through more discussion of forward looking indicators and reinforcing price stability as the key CBN mandate. - Confirming newly appointed Directors of the CBN Board and members of the MPC to signal CBN independence. - Ending development financing interventions—these should be undertaken by other public institutions or through industrial policy transparently costed in the budget. - Restricting the use of overdrafts to unplanned and unexpected cash shortfalls. Authorities’ views: - Monetary policy tightening has been directed at reducing pressures on the exchange rate, which they consider a key channel for controlling inflation. - An increase in the MPR is not needed and the monetary stance could be loosened if gross reserve accumulation continues and headline inflation drops below 12 percent. - They believe applying CRR on deposit flows—as opposed to eligible stocks—has merits for Nigeria, which suffers from structural surplus liquidity. - Agree that some current CBN practices lie outside its core mandate, but highlight such policies were necessary to boost agricultural growth, spur bank lending into priority sectors, and control foreign exchange market pressures. ### C. Exchange Rate Policy: Move to a Market-Based Exchange Rate Findings: - Ongoing convergence of exchange rate windows is welcome, but a multitude of exchange rates remain: - CBN official window: N/$305 (mainly for petroleum imports and government expenditures). - Retail/wholesale window: N/$325–330 (about 30 percent of non-official transactions, mostly at the 30 to 60-day forward rate). - IEFX window: about N/$360 since September (reportedly, about 70 percent of non-official transactions). - CBN also sells FX for invisible transactions, Bureau de Changes and SMEs separately (at about N/$360–365). - Some government transactions (e.g., FAAC allocation) occur at a rate closer to N/$320–325. - Nigeria maintains exchange restrictions and multiple currency practices subject to Fund approval under Article VIII, Section 2(a) and 3. Staff assessment: - External Balance Assessment suggests Nigeria’s external position was moderately weaker in 2017 than the level consistent with medium-term fundamentals and desirable policies. - Exchange rate misalignment: - Negligible using current account models. - Real exchange rate model implies a real overvaluation of about 12 percent relative to the official exchange rate of N/$305 in 2017 (Annex IV). Policy recommendations: - Move towards a unified exchange rate as soon as possible: - Remove multiple currency practices and unify the exchange rate quickly; unification should be supported by sound macroeconomic and structural policies. - Immediately remove restrictions on FX access for 40 categories of goods and existing capital flow restrictions to eliminate parallel market premium and encourage investment where banned items are used as intermediate goods. - Remove distortions from capital flow management (CFM) measures such as payment limits on naira-denominated credit cards for overseas transactions, repatriation/surrender requirement on export proceeds, and prohibition of FX purchases in the official market for foreign currency bond and share investments—remove these in line with the Fund’s institutional view. - Strengthen external buffers to reduce potential risks from capital reversals and oil price uncertainties. - At end-December 2017, gross reserves of $39 billion would represent about 100 percent of the IMF reserve adequacy metric, adjusted for an oil buffer (compared to a recommended level of 100 to 150 percent according to this metric). Authorities’ views: - A move to a unified exchange rate is part of their strategy as underscored in the ERGP. - Two main windows are already converging as forward transactions in the wholesale/retail window push the exchange rate closer to the IEFX rate. - CBN notes sufficient liquidity in the IEFX window, with no backlog demand; operators wanting a more appreciated rate can wait for FX in the SMIS retail and wholesale windows. - Restriction on FX for 40 categories of products has been successful in increasing competitiveness of targeted local industries and reducing imports; authorities consider such restrictions temporary and plan to remove them once reserve buffers reach more comfortable levels. - They are not requesting Board approval of the restrictions and MCPs. - Authorities agreed with staff on the need to accumulate international buffers for FX intervention margins, particularly in case of a sudden stop. - Authorities remain skeptical about the use of the 2 percent rule to determine MCPs from spot transactions, which they believe is arbitrary. ### D. Macro-Financial: Safeguard Financial Stability and Contain Banking Sector Risks Findings: - Banking system resilience needs strengthening to support growth. - Capital buffers have dwindled over the past two years; CAR remains marginally above the Basel II regulatory 8 percent ratio albeit higher for large banks. - Loan restructuring may mask underlying asset quality deterioration. - Attractive returns on government securities have helped banks maintain healthy profits; higher oil prices may alleviate concerns (oil and gas sector accounts for 45 percent of the loan book). - Falling bond yields may reduce profits. - Adoption of a rate closer to N/$330–360 for financial reporting could further reduce solvency ratios by an additional 2 to 3 percentage points. - Recapitalizing four undercapitalized banks (7 to 10 percent of total assets) is long overdue. - Asset Management Company poses contingent liability risk of 4 percent of GDP. Staff recommendations: - Require the ten largest banks to conduct an Asset Quality Review (AQR) through a recognized international auditing firm, linked to scenario stress testing on the 10 largest banks (95 percent of assets). - Adopt a more prudent approach to treatment of doubtful loans: - Investigate and discontinue "ever-greening" of potentially problematic loans. - Support 2 percent general provisioning of loans and take a conservative approach to assessing doubtful loans, which should be fully provisioned. - Write off non-performing loans that have been fully provisioned. - Phase out regulatory forbearance quickly, including remaining forbearance on net open FX positions. - Increase available capital buffers: - Call on banks to increase capital, including by requiring withholding of dividend payments, in view of upcoming move to IFRS 9 implementation and adoption of a rate closer to the IEFX window rate for financial reporting. - Enhance banking supervision by intensifying risk-based on-site inspections and strict enforcement of prudential requirements; undertake robust macroeconomic scenario stress testing to capture sovereign-bank nexus risk. - Strengthen the resolution framework with enhanced legal powers to write down capital, override shareholders' rights, and amend the bank liquidation regime to resolve non-viable banks expeditiously. - Respect timeline for winding down the state-backed Asset Management Company. Authorities’ views: - CBN has asked banks to conduct their own stress testing scenarios and does not believe an AQR is needed. - Steps taken by the CBN to monitor sectors with highest NPLs (such as oil and gas) and withholding of dividends will be sufficient to keep capital buffers above regulatory ratios. - Capital buffers are strong enough to withstand financial reporting at a more market determined exchange rate and the move towards IFRS9 from January 2018 onwards. - CBN would intervene in a weak bank if recapitalization plans are not implemented in a timely manner; banks have been given six months to come up with plans to increase their capital. - With respect to regulatory forbearance, the CBN does not believe a common deadline is effective due to differing balance sheet structures; each bank works on a timeline agreed with the CBN. ### E. Structural Policies: Reforms to Support Inclusive Growth and Employment Findings: - Structural impediments hamper recovery and diversification: a large infrastructure gap, logistical challenges, weak business climate, burdensome regulations, and high corruption. - Nigeria ranks 136 among 176 countries in the Corruption Perceptions Index and one out of three Nigerians reports having paid bribes. - Weak financial inclusion and inequality of opportunity and income constrain a large share of the population. - Gender inequality is very high; Nigeria ranks 122 among 144 countries (World Economic Forum). - Narrowing infrastructure and gender gaps could boost growth: - Closing the infrastructure gap could boost growth by more than ¾ percentage points a year. - Narrowing the gender gap could boost growth by 1¼ percentage point a year. - Export diversification has decreased in recent decades. Data and indicators referenced: - Financial Soundness Indicators, 2013–17 series include: Regulatory Tier 1 Capital to Risk-Weighted Assets; Liquid Assets to Total Assets (Liquid Asset Ratio); Non-Performing Loans Net of Provisions to Capital; Non-Performing Loans to Total Gross Loans. (Source: Central Bank of Nigeria.) - Indicators of public infrastructure: public education infrastructure (secondary teachers per 1,000 persons), electricity production per capita (thousands of kWh per person), roads per capita (km per 1,000 persons), public health infrastructure (hospital beds per 1,000 persons), access to treated water (percent of population). - Financial Inclusion, 2010–16: categories include Banked, Formal other, Informal only, Financially excluded (percent of population). (Sources: CBN, EFInA 2010, 2016.) *Source: IMF staff report (cr1863, chapter text provided).* ### 36. Addressing structural impediments is a priority of the Nigerian government and its ### 36. Addressing structural impediments is a priority of the Nigerian government and its ### Structural reforms and recent actions - Doing Business - Nigeria rose by 24 places to 145th place in the World Bank Doing Business Rankings. - Notable measures: significant decrease in documents required to import and export, implementation of the 48-hour electronic visa, establishment of a collateral registry. - Power sector and infrastructure - Actions under the Power Sector Recovery Plan (PSRP): increased power supply generation, with a new record peak generation of 5100MW in the grid in December 2017. - Other measures: appointment of new boards for sector agencies; appropriate budget provisions to ensure government agencies pay electricity bills and enable the Bulk Trader to pay in full for generated power; an off-grid electrification strategy. - PSRP objectives: restore financial viability, technical stability, regulatory certainty and governance to attract private sector investment across the value chain. - ERGP objective: partner with the private sector through public-private partnerships to scale up infrastructure investment. - Anti-corruption and transparency - Adoption in August 2017 of the National Anti-Corruption Strategy (NACS). - Recent passing of the PIGB by the House of Representatives. - Initial efforts to digitize public officials’ asset declarations. - Publication of the first national money laundering and terrorist financing risk assessment report and ongoing development of an action plan to address identified risks (Selected Issues Paper IV: Strengthening Transparency and Governance in Nigeria). ### Staff recommendations to continue structural reform agenda - Business environment - Complete reforms under the second 60-day Doing Business plan. - Further simplify administrative and tax procedures. - Increase speed and efficiency of conflict resolution. - Launch the 24 hours accelerated pilot port operations. - Submit the “Omnibus Bill” to parliament to achieve quick-wins in removing administrative constraints. - Power sector - Urgently implement the PSRP. - Accelerate the review of the multi-year tariff schedule (in line with World Bank technical assistance) to reset revenue requirements and cost recovery levels and set the stage for tariff increases in 2019. - Use tariff review time to improve collection (through metering) and increase reliable power delivery. - Financial inclusion - Accelerate revision of the financial inclusion strategy aiming to reduce exclusion from 41 percent overall (80 percent in the North) to 20 percent by 2020. - Priorities: develop reliable and inclusive wholesale and retail payment systems, mobile money and agent expansion, and creation of a harmonized biometric citizens’ database. - Governance and transparency - Streamline legal and institutional framework to improve investigation, prosecution and conviction of corruption and facilitate asset recovery. - Advance transparency, particularly in the extractive sector in line with the EITI standard. - Strengthen the asset declaration regime. - Continue to strengthen AML/CFT measures by formulating prioritized policies to address identified risks and target CBN’s AML/CFT supervision. - Address risks posed by politically-exposed persons and vulnerabilities of BDCs. - Gender and social policies - Implement policies to level the playing field for men and women, including executing and updating the 2006 national gender strategy (notably on adopting equal legal rights). - Allocate more funds to the health sector; improve awareness and protection against gender-based violence; reinvigorate gender-based budgeting. - Strengthen provision of gender-disaggregated data. ### Authorities’ views - Authorities acknowledge perceptions of widespread corruption and inadequate infrastructure. - Established an ERGP implementation unit at the VP's office (coordinated by the Ministry of Budget and National Planning). - "New workshop" labs starting in January 2018 expected to accelerate delivery on policies for industrialization, agriculture, and the power sector (with development partners’ technical assistance). - Authorities committed to advance anti-corruption efforts, implement the NACS and fulfill open government partnership commitments. - Authorities concerned about low financial inclusion and consider that risks associated with mobile money banking need full assessment before further encouragement. ### Other surveillance issues and data - Data provided to the Fund assessed to be broadly adequate for surveillance. - Ongoing improvements in national accounts, CPI and BOP statistics with Fund technical assistance. - Considerable room for improvements in SLG fiscal data, SOE fiscal operations, and domestic arrears monitoring. ### Staff appraisal — macroeconomic outlook, risks, and policy priorities - Current situation - Nigeria is slowly exiting recession but remains vulnerable. - Recovery from stagflation and external pressures caused by sharp fall in oil prices/production and inadequate policy response. - Rising oil prices and new foreign exchange measures contributed to soaring financial markets and helped boost reserves to a four-year high. - Non-oil-non-agricultural sector growth has not picked up; inflation is sticky; unemployment is rising; poverty remains high. - Outlook and risks - Higher oil prices would support a recovery in 2018 but a “muddle-through” outlook is projected for the medium term under current policies, with fiscal dominance and structural constraints leading to continuing falls in real GDP per capita. - Key risks: additional delays in policy and reform implementation in a pre-election year, increasing security tensions, and a fall in oil prices triggering a capital flow reversal. - Progress to date - Authorities started convergence in foreign exchange windows and maintained a tight monetary policy. - Improvements in tax administration, introduction of new excises, gains in the business environment, and strengthened anti-corruption initiatives — reforms aligned with past IMF advice. - Urgent policy priorities - Initiate fiscal consolidation that frontloads non-oil revenue mobilization measures. - Maintain a tight monetary policy. - Implement full exchange rate unification allowing accumulation of additional buffers. - Strengthen the banking sector and accelerate structural reform implementation underpinning the ERGP. - Address demographic trends that require faster growth to reduce unemployment. ### Specific policy prescriptions and technical recommendations - Fiscal policy - Implement a growth friendly fiscal adjustment based on frontloaded revenue mobilization. - Increase non-oil revenues by 8 percentage points over the next five years to reduce the interest payments to revenue ratio and create space for scaling up priority capital and social spending. - Strengthen focus on large taxpayers and adopt more ambitious tax policy measures, including reforming the VAT and rationalizing tax incentives. - Fully implement an automatic fuel price-setting mechanism. - Substantially scale up a social safety net scheme to mitigate impacts on the most vulnerable and reduce poverty. - Public financial and debt management - Strengthen efficiency via closer coordination of central financial agencies and stronger expenditure controls. - Strategy to replace some existing T-bills with Eurobonds is welcome given the low external debt-to-GDP ratio; increased exchange rate risk from the long-term objective of achieving an external-to domestic-debt ratio of 40 percent requires careful monitoring. - Improve use of the Treasury Single Account. - Monetary policy - Monetary policy should remain tight until inflation is within the single digit target range. - Commendation for the Central Bank’s tightening bias in 2017; recommendation for a more transparent policy explicitly anchored on a higher monetary policy rate. - As a second-best, consider a wider interest rate corridor. - End unannounced special auctions conducted at below market rates, asymmetric application of reserve requirements, and direct central bank interventions in the economy. - Speedy resolution of issues delaying confirmation of the newly appointed CBN Board of Directors and MPC members is essential to maintain credibility and independence. - Exchange rate policy - Move toward a unified and market-based exchange rate is essential. - External position was moderately weaker in 2017 than the level consistent with medium-term fundamentals and desirable policies. - Welcome progress towards unifying some exchange rate windows and efforts to strengthen external buffers. - Need for full exchange rate unification and immediate removal of existing restrictions on access to foreign exchange for 40 categories of products. - Benefits: reduce parallel market premium sustainably, remove distortions in private and public decision making, facilitate diversification. - Staff does not support the exchange measures that gave rise to exchange restrictions and multiple currency practices (MCPs) in the absence of a clear timetable for their removal; urges authorities to articulate a speedy and monitorable strategy for removal. - Banking sector - Contain rising banking sector risks: declining bank solvency ratios and asset quality. - Increase banks’ capital, including through withholding dividend payments. - Conduct an asset quality review to identify potential capital needs. - Recapitalize the four undercapitalized banks promptly to avoid undermining financial stability. - Enhance risk-based banking supervision, strictly enforce prudential requirements, and revamp the resolution framework. - Structural reforms - Continue implementing reforms to lay the foundation for a diversified private-sector-led economy. - Priorities: urgently implement the PSRP, strengthen governance and transparency initiatives, update and implement financial inclusion and gender strategies. - Data and statistics - Quality and availability of economic statistics continue to improve with technical assistance. - Continue efforts to address remaining gaps, notably in national accounts, BOP, and fiscal statistics. *Source: IMF country report text.* ### 52. It is recommended that the next Article IV consultation take place on the standard ### cr1863 - 52. It is recommended that the next Article IV consultation take place on the standard ### Real sector and inflation - Economy exited recession in the second quarter of 2017, driven by agriculture and oil production; performance in the rest of the economy remains weak. - Real GDP (at 2010 market prices): - 2016: -1.6 - 2017: 0.8 (Prel.) - 2018–2023 projections: 2.1, 1.9, 2.1, 2.0, 2.0, 2.0 - Oil and Gas GDP: - 2016: -14.4 - 2017: 7.6 - 2018: 10.8 - Non-oil GDP: - 2016: -0.3 - 2017: 0.2 - 2018: 1.3 - Production of crude oil (million barrels per day): - 2016: 1.81 - 2017: 1.90 - 2018–2023: 2.10, 2.20, 2.30, 2.30, 2.30, 2.30 - Inflation: - Consumer price index (annual average): 2016: 15.7; 2017: 16.5; 2018: 14.0; 2019: 14.8 - CPI (end of period): 2016: 18.5; 2017: 15.4; 2018: 14.5 - Demand-side developments: - Consumption has taken a hit; net exports drove most growth during 2014–16. - Labor market: - Unemployment rates increased through 2017Q3, with sharper rises for women (unemployment time series shown for 2014–2017Q3). ### External sector - Current account and trade: - Current account balance (Percent of GDP): 2010–2017 improved; table (Table 2) shows Current account balance (billions of U.S. dollars): - 2016: 2.7 - 2017: 8.1 - 2018: 0.4 - 2019: 1.3 - 2020–2023: 2.9, 3.1, 1.8, 1.3 - Trade balance (Billions of U.S. dollars): 2016: -0.5; 2017: 8.6; 2018: 9.2; 2019: 9.0; 2020: 5.7; 2021: 4.5; 2022: 2.5; 2023: 1.3 - Exports of goods and services (percent of GDP): 2016: 9.5; 2017: 12.2; 2018: 14.3 - Imports of goods and services (percent of GDP): 2016: 11.6; 2017: 12.2; 2018: 14.7 - Reserves and capital flows: - Gross official reserves (US$ billions, end-of-period, Table 2 memorandum): - 2016: 27.0 - 2017: 39.2 - 2018: 39.2 - 2019: 36.6 - 2020–2023: 35.6, 35.4, 34.4, 33.6 - Net capital inflows recovered (2011–2017), with short-term inflows predominant in 2017. - Daily volume traded at I&E Window, 2017M6–2017M12 increased (series in millions of U.S. dollars shown). - Exchange rate and parallel market: - Parallel market spread narrowed in 2017; interbank, bureau de change, I&E, and CBN official rates tracked in 2015M1–2017M12. ### Fiscal and monetary developments - Consolidated government operations (Percent of GDP, Table 5): - Total revenue: 2016: 5.6; 2017: 5.7; 2018: 7.4; 2019: 7.1 - Total expenditure: 2016: 9.5; 2017: 11.2; 2018: 11.9; 2019: 11.6 - Overall balance: 2016: -3.9; 2017: -5.5; 2018: -4.5; 2019: -4.4 - Non-oil primary balance (percent of non-oil GDP): 2016: -5.1; 2017: -7.0; 2018: -7.6; 2019: -6.7 - Public debt and financing: - Public gross debt (percent of GDP): 2016: 19.6; 2017: 22.3; 2018: 25.3; 2019: 26.0; 2020–2023: 26.0, 26.4, 26.6, 26.8 - FGN interest payments (percent of FGN revenue): 2016: 61.7; 2017: 71.9; 2018: 59.7; projection 2019: 68.0; 2020: 73.6; 2021: 80.0; 2022: 81.8; 2023: 82.3 - Monetary conditions: - Broad money (percent change; end of period): 2016: 17.4; 2017: 1.6; 2018 (proj): 14.0 - Credit to the private sector (y-o-y,%): 2016: 22.3; 2017: -3.3; 2018: 1.0; 2019–2023: 2.1, 2.3, 2.4, 2.6, 2.9 - MPR and other rates: overnight call rate consistently above the monetary policy rate; tight monetary policy stance evident. - Key fiscal tables (selected levels, Table 1 and Table 3): - Nominal GDP at market prices (trillions of naira): 2016: 102.6; 2017: 121.0; 2018: 142.9; 2019: 166.2 - Total revenue and grants (Federal Government, Table 3): 2017: 2,129; 2018: 2,418; 2019: 3,435 (Billions of Naira) - Total expenditure (Federal Government, Table 3): 2017: 4,965; 2018: 7,564; 2019: 8,584 (Billions of Naira) - FGN overall balance (percent of GDP, Table 3): 2016: -2.8; 2017: -4.3; 2018: -3.6; 2019: -3.0 ### Banking sector and financial soundness - System-level indicators (Table 9 and Figure 4): - Regulatory Capital to Risk-Weighted Assets: - 2013 Q4: 17.1; 2014 Q4: 18.6; 2015 Q4: 17.7; 2016Q4: 14.8; 2017Q3: 10.6 - Non-Performing Loans to Total Gross Loans: - 2013 Q4: 3.4; 2014 Q4: 3.0; 2015 Q4: 4.9; 2016Q4: 12.8; 2017Q3: 15.1 - Non-Performing Loans Net of Provisions to Capital increased to 43.0 in 2017Q3. - Return on Assets and Return on Equity series provided (e.g., ROA 2017Q3: 2.4; ROE 2017Q3: 20.5). - Five largest banks performance through end-September 2017: - Capital Adequacy Ratio, Liquid Assets to Total Assets, Deposits to Total Liabilities, Deposits to Loans Ratio, and Profit Margin series presented for First Bank, Zenith, UBA, Access, Guaranty. - First Bank carries 20 percent of the system’s NPLs; inclusion of Etisalat loan (USD 1.3bn) could raise NPLs further. - Liquidity and funding: - Banks’ liquid assets up by 21 percent since end 2015. - Deposits remain main funding source; interest-bearing liabilities up 30 percent in absolute terms since 2015 but account for 44 percent of total liabilities. - Policy implications: - Banking system asset quality deterioration requires increased capital and provisioning for NPLs and strengthened supervision and resolution frameworks. ### Diversification, corruption, inequality, and poverty - Diversification: - Primary sector dominates output; goods export diversification remains low (Theil Index series). - Export Complexity Index and export complexity regressions imply Nigeria’s export products are less complex than peers; complexity has declined over two decades. - Stronger export diversification could have boosted GDP per capita growth historically and mitigated output volatility. - Corruption (survey results): - Most respondents experienced direct contact with corruption; bribery is widespread. - Reasons for not reporting bribery include "Pointless, nobody would care" (32%), "Common practice" (31%), "Do not know to whom to report" (6%), "Fear of reprisals" (6%), and other reasons (25%). - Institutions considered most important for reporting: ICPC, FMoJ, FHC, EFCC, NPF (awareness and perceived effectiveness series provided). - Inequality and poverty: - Gini and Theil indices series: Gini increased from 2004 to 2016 (Gini series shown as 2004/2013/2016 decile shares). - Poverty headcount by state presented for 2004 and 2010 (map/chart). - Share of consumption by deciles for 2004, 2013, 2016: top deciles capture large shares (series includes 1rst–10th deciles with values 26.6, 33.7, 31.1 noted in chart). ### Projections and key macro balances - Selected projections from Table 1 (high-level): - Nominal GDP per capita (US$): 2016: 2,254; 2017: 2,099; 2018: 2,268; 2019: 2,567; 2020: 2,928; 2021: 3,307; 2022: 3,741; 2023: 4,232 - Price of Nigerian oil (US dollar per barrel): 2016: 44.6; 2017: 54.4; 2018: 67.8; 2019: 63.9; 2020: 61.1; 2021: 59.6; 2022: 59.1; 2023: 59.0 - External debt outstanding (US$ billions): 2016: 46.1; 2017: 56.5; 2018: 65.0; 2019: 71.2; 2020: 78.2; 2021: 85.9; 2022: 94.4; 2023: 103.9 - Gross international reserves (US$ billions): 2016: 27.0; 2017: 39.2; 2018: 39.2; 2019: 36.6; 2020: 35.6; 2021: 35.4; 2022: 34.4; 2023: 33.6 ### Risk Assessment and policy recommendations (from Risk Assessment Matrix) - Principal risks identified (relative likelihood and policy responses summarized): - External risks: retreat from cross-border integration; policy and geopolitical uncertainties; tighter global financial conditions; further pressure on traditional bank models. - Policy responses include: diversify exports; improve business environment and trade facilitation; allow greater exchange rate flexibility in a unified market; rebuild fiscal buffers and reserves; strengthen monetary and exchange rate framework; reduce monetary growth; unwind CBN quasi fiscal activities; strengthen supervisory/regulatory framework; improve corporate governance; address bank resolution weaknesses. - Weaker-than-expected global growth and lower energy prices: - Policy responses include: diversify exports; continue improving business environment; address infrastructure gap; prioritize non-oil revenue mobilization; contain recurrent expenditure; greater exchange rate flexibility supported by tighter monetary policy; advance structural reforms to boost diversification. - Cyber-attacks: - Policy response: strengthen supervisory and regulatory framework, especially cross-border banking oversight; improve corporate governance; address weaknesses in bank resolution. - Nigeria-specific risks: prolonged policy uncertainty (e.g., ahead of elections); worsening SLG finances; prolonged disruption of oil production; deterioration in banking sector FSIs. - Policy responses include: urgent integrated package of policies and communication strategy; fiscal sustainability program and clarity on SLG adjustment plans; encourage SLGs to adopt Treasury Single Account and cash management reforms; strengthen security arrangements and investment climate in oil and gas; increase banks’ capital and provisioning for NPLs; implement targeted anti-money laundering measures; address infrastructure gaps and institute social safety nets. *Italic line: Source: IMF staff report content as provided in the supplied unit.* ### Annex I. Status of Key Recommendations for the 2017 Article IV ### Annex I. Status of Key Recommendations for the 2017 Article IV Consultation ### Fiscal Policy — Recommendation and Status - Recommendation: Promote a sustainable and growth-friendly fiscal policy centered on non-oil revenue mobilization, prioritized capital spending, sound debt management, and a well-targeted social safety net. - Status: - The authorities have focused 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 draft 2018 budget relies on tripling non-oil revenue on the basis of improved compliance and enforcement, an increase in SOEs’ surplus revenue, and divestment of oil assets. - There are no major tax policy initiatives yet implemented, except for some excises increases. ### Monetary and Exchange Rate — Recommendation and Status - Recommendations: - Tighten monetary policy to contain inflation and to protect reserves. - Remove distortions in the foreign exchange regime. - Status: - In line with the CBN’s objective of keeping inflation close to its 6-9 target range, monetary policy has been significantly tightened in 2017, despite an unchanged MPR since July 2016. Inflation has declined but remains sticky. - New FX measures helped significantly decrease the parallel market premium to about 20 percent against the official rate (from 60 percent in February 2017). These include a sustained intervention of the CBN in the FX market, and the introduction of the Investor and Exporter window. - Distortions in the FX market due to multiple rates and continued ban on FX access for certain import items remain. ### Financial Sector — Recommendation and Status - Recommendation: Enhance banking sector resilience through tighter prudential requirements, intensified monitoring, strengthened regulations, and recapitalization of banks. - Status: - Authorities have undertaken several measures to contain risks and strengthen banking sector resilience, including increased provisioning, strict limits on net FX positions, and prohibition of dividend payments. - Banking system vulnerabilities persist. ### Structural Reforms — Recommendation and Status - Recommendation: Implement structural reforms in the power and integrated transportation sectors, health and education, governance, and the business environment. - Status: - Authorities continued addressing structural impediments and focused on reforms to boost growth and improve governance, also as part of their ERGP. - Nigeria moved up 25 places (to 145) in the World Bank Doing Business survey and was among the ten fastest reform economies this year. - Other developments: actions under the Power Sector Recovery Plan improving power supply and ensuring government agencies pay electricity bills; adoption of the Petroleum Industry Governance Bill; intensified investigations by the Economic and Financial Crimes Commission; dismissal of two high government officials for alleged corruption. *Source: IMF staff.* ### Annex II. Public and External Debt Sustainability ### A. Public Debt Sustainability Analysis — Key Findings - Debt level and trajectory: - Debt as a share of GDP stands at comfortable levels, but remains high relative to historical averages and on an upward trajectory. - The debt-stabilizing primary balance is estimated at 1.8 percent of GDP. - Interest payments and revenue: - Interest payments as a share of federal government revenue rise to unsustainable levels under unchanged policies, to above 80 percent by 2022. - The Federal Government interest payments-to-revenue almost tripled from 27 percent in 2014 to an estimated 71.9 percent in 2017. - Baseline projections summary: - Public debt rose from 12 percent to 19.6 percent of GDP during 2014–16. - Public gross debt figures reflect Federal Government overdrafts from CBN, which account for 2.6 percent of GDP in 2016. - Public net debt was lower because government deposits have been in excess of overdrafts (about 5 percent of GDP in 2016). - Public debt-to-GDP ratio is forecast to increase from 22.3 percent in 2017 to 26.6 percent in 2022, largely driven by deficits and liabilities from State and Local Governments. - Arrears in the amount of N2 trillion are included as part of debt stock in 2018, where payments will be over 10 years in equal amount in form of promissory notes that carry no coupon. - The “imputed” primary deficit is projected to narrow to 2 percent of GDP by 2022, down from 4.1 percent in 2017. - Under current policies, Nigeria’s financing needs in the medium term will average about 6.4 percent of GDP. - Financing pressures are primarily driven by interest payments projected to reach 81.7 percent of federal government revenue in 2022, up from 61.7 percent in 2016. - Part of debt management strategy: replace maturing short-term debt (Treasury bills), worth $3 billion, with Eurobond issuances to reduce borrowing cost over 2018. Yield rates on T-bills are down by 390 bps since the start of 2018. - Contribution drivers (as reported): - Primary (noninterest) revenue and grants: 14.9, 7.0, 5.5, 5.7, 7.4, 7.1, 6.7, 6.8, 40.8 (cumulative) [years span 2015–2022 as in table]. - Primary (noninterest) expenditure: 14.2, 9.4, 8.5, 9.8, 10.5, 10.0, 9.3, 9.0, 57.4 (cumulative). - Change in gross public sector debt (cumulative): -0.7, 2.9, 3.6, 2.7, 3.0, 0.7, 0.0, 0.4, 0.3, 7.0. ### A. Public Debt Sustainability Analysis — Stress Tests and Risks - Sensitivity and scenarios: - Projections for debt and gross financing needs are particularly sensitive to growth and primary balance shocks. - With an interest rate shock, interest payments would increase to 104 percent of FG revenue by 2022. - A hypothetical one-time bail out of the financial sector, increasing non-interest expenditures by 10 percent of banking sector assets, would push interest payments to 98 percent of FG revenue by 2022. - A combined macro-fiscal shock would push interest payments close to 130 percent of FG revenue by 2022. - Uncertainty: - Fan charts indicate significant uncertainty around the baseline; the symmetric fan chart width is estimated at about 25 percent of GDP. - An extreme downside shock constraining growth to zero results in a more upward-sloping debt path, reflecting downside-skewed risks. - Heat map and principal risk: - The heat map identifies market perception as principal risk to debt sustainability. - Decisive fiscal actions are essential to curb financing pressures. - Strengthening non-oil revenue mobilization at levels envisaged in the authorities’ ERGP could help achieve this objective. - Additional notes on contingent liabilities: - In the absence of comprehensive data, contingent liability stress assumed a one-time banking sector bailout (10 percent of banking sector assets). - Power sector contingent liabilities are estimated at about 1.7 percent of GDP. - Some proceeds from Eurobond issuances in 2017, roughly $500 million, were used to retire T-bills maturing in December 2017 and some in January 2018. ### A. Public DSA — Selected Underlying Assumptions (as presented) - Real GDP growth (baseline): 0.8, 2.1, 1.9, 2.1, 2.0, 2.0 (2017–2022). - Inflation (GDP deflator): 17.0, 15.7, 14.2, 14.8, 13.8, 14.0 (2017–2022). - Primary Balance (percent of GDP, baseline): -4.1, -3.1, -2.9, -2.2, -2.3, -2.0 (2017–2022). - Effective interest rate (baseline): 8.6, 7.2, 7.3, 7.8, 8.1, 8.4, 8.7, 8.4 (values reported across tables and scenarios). - Alternative scenario (Historical): Real GDP growth 0.8, 5.6, 5.6, 5.6, 5.6, 5.6; Primary Balance -4.1, -0.8, -0.8, -0.8, -0.8, -0.8. ### A. Public DSA — Stress-Test Outcomes (selected) - Under Primary Balance Shock, Real Interest Rate Shock, Real GDP Growth Shock, Real Exchange Rate Shock, Combined Shock, and Contingent Liability Shock the report provides year-by-year underlying assumptions and resulting debt paths (2017–2022). Representative entries include: - Interest payments (in percent of FGN Revenue) show large increases across stress scenarios, with lines indicating substantial vulnerability over 2017–2022. - Gross Nominal Public Debt (in percent of GDP) and Public Gross Financing Needs (in percent of GDP) increase notably under adverse scenarios across 2017–2022. ### B. External Debt Sustainability — Key Finding - External debt is low and is projected to remain broadly unchanged relative to the size of the economy under baseline projections. - Stress scenarios highlight sensitivity of external debt, particularly to oil exports and naira depreciation. *Source: IMF staff.* ### 7. The level of (public and private) external debt is low, at 11.1 percent of GDP in 2016 ### 7. The level of (public and private) external debt is low, at 11.1 percent of GDP in 2016 ### External debt levels and composition - External debt was 11.1 percent of GDP in 2016. - External debt has risen modestly since 2013 owing to capital inflows in 2014 and the weakening of the naira in 2015–16. - On average, public sector debt accounts for just over a third of total external debt, with most public external debt on concessional terms – much higher than peers. - The external debt-to-exports ratio: - 2012: 37.5 percent - 2013: 37.6 percent - 2014: 55.5 percent - 2015: 96.5 percent - 2016: 119.8 percent - 2017: 117.0 percent - 2018: 103.4 percent - 2019: 113.3 percent - 2020: 122.5 percent - 2021: 135.6 percent - 2022: 147.7 percent - Gross external financing needs (in billions of US dollars): - 2012: -6.7 - 2013: -7.3 - 2014: 11.5 - 2015: 31.3 - 2016: 13.9 - 2017: 6.8 - 2018: 15.3 - 2019: 14.9 - 2020: 15.7 - 2021: 19.3 - 2022: 20.6 - Gross external financing need (in percent of GDP): - 2012: -1.5 percent - 2013: -1.4 percent - 2014: 2.0 percent - 2015: 6.3 percent - 2016: 3.4 percent - 2017: 1.7 percent - 2018: 3.4 percent - 2019: 2.9 percent - 2020: 2.6 percent - 2021: 2.7 percent - 2022: 2.5 percent ### Projections and baseline assumptions - Under baseline projections, external debt would 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 levels prevailing in 2011–14, 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. - Foreign investor participation in the domestic debt market, recently lower, is expected to pick up as in 2017. - An increase in interest rates on external debt is projected given expected normalization of monetary policy in advanced economies and Nigeria’s macroeconomic risk profile; the increase is contained to some extent by the fixed-rate, concessional nature of a large proportion of public external debt. Key macroeconomic assumptions underlying baseline (selected series) - Baseline: External debt (percent of GDP): 2012: 8.1; 2013: 7.3; 2014: 8.3; 2015: 9.6; 2016: 11.1; 2017: 14.0; 2018: 14.5; 2019: 13.6; 2020: 12.8; 2021: 12.1; 2022: 11.4 - Debt-stabilizing non-interest current account: -1.6 - Change in external debt (annual): 2012: 0.9; 2013: -0.8; 2014: 1.0; 2015: 1.3; 2016: 1.5; 2017: 2.9; 2018: 0.5; 2019: -0.8; 2020: -0.9; 2021: -0.7; 2022: -0.7 - Identified external debt-creating flows (4+8+9): 2012: -7.5; 2013: -6.0; 2014: -1.1; 2015: 4.2; 2016: 0.2; 2017: -3.9; 2018: -1.5; 2019: -1.1; 2020: -1.3; 2021: -1.2; 2022: -1.0 - Current account deficit, excluding interest payments (percent of GDP): 2012: -4.3; 2013: -4.1; 2014: -0.5; 2015: 2.6; 2016: -1.3; 2017: -2.7; 2018: -0.8; 2019: -0.9; 2020: -1.1; 2021: -1.1; 2022: -0.8 - Exports (percent of GDP): 2012: 21.5; 2013: 19.5; 2014: 14.9; 2015: 9.9; 2016: 9.3; 2017: 11.9; 2018: 14.0; 2019: 12.0; 2020: 10.4; 2021: 8.9; 2022: 7.7 - Imports (percent of GDP): 2012: 17.7; 2013: 15.0; 2014: 15.2; 2015: 14.6; 2016: 11.4; 2017: 11.9; 2018: 14.4; 2019: 12.8; 2020: 11.6; 2021: 10.1; 2022: 9.0 - Net non-debt creating capital inflows (negative): 2012: -3.0; 2013: -1.4; 2014: -0.2; 2015: 0.0; 2016: -1.0; 2017: -1.8; 2018: -1.2; 2019: -0.7; 2020: -0.6; 2021: -0.6; 2022: -0.6 - Automatic debt dynamics (contribution, percent of GDP): 2012: -0.2; 2013: -0.5; 2014: -0.4; 2015: 1.6; 2016: 2.5; 2017: 0.6; 2018: 0.4; 2019: 0.5; 2020: 0.4; 2021: 0.4; 2022: 0.4 - Contribution from nominal interest rate (percent of GDP): 2012: 0.5; 2013: 0.4; 2014: 0.3; 2015: 0.5; 2016: 0.7; 2017: 0.7; 2018: 0.7; 2019: 0.7; 2020: 0.7; 2021: 0.6; 2022: 0.6 - Contribution from real GDP growth (percent of GDP): 2012: -0.3; 2013: -0.4; 2014: -0.4; 2015: -0.3; 2016: 0.2; 2017: -0.1; 2018: -0.3; 2019: -0.2; 2020: -0.2; 2021: -0.2; 2022: -0.2 - Residual, incl. change in gross foreign assets (2-3) (percent of GDP): 2012: 8.3; 2013: 5.2; 2014: 2.1; 2015: -2.9; 2016: 1.3; 2017: 6.8; 2018: 2.0; 2019: 0.3; 2020: 0.4; 2021: 0.5; 2022: 0.3 Selected key macro assumptions (growth, deflator, interest rates, exports/imports growth) - Real GDP growth (in percent): 2012: 4.3; 2013: 5.4; 2014: 6.3; 2015: 2.7; 2016: -1.6; 2017: 5.6; 2018: 3.5; 2019: 0.8; 2020: 2.1; 2021: 1.9; 2022: 2.1; 10-Year Average: 2.0 - GDP deflator in US dollars (change in percent): 2012: 6.7; 2013: 6.0; 2014: 3.8; 2015: -15.4; 2016: -16.6; 2017: 1.3; 2018: 12.7; 2019: -3.1; 2020: 8.7; 2021: 14.2; 2022: 14.8; 10-Year Average: 13.8 - Nominal external interest rate (in percent): 2012: 8.3; 2013: 4.9; 2014: 5.0; 2015: 5.1; 2016: 5.8; 2017: 5.8; 2018: 1.4; 2019: 5.8; 2020: 5.5; 2021: 5.6; 2022: 5.7; 10-Year Average: 5.6 - Growth of exports (US dollar terms, in percent): 2012: -3.8; 2013: 0.9; 2014: -15.6; 2015: -42.0; 2016: -21.6; 2017: -0.6; 2018: 27.9; 2019: 25.7; 2020: 30.1; 2021: 0.0; 2022: 1.6; 10-Year Average: -0.7 - Growth of imports (US dollar terms, in percent): 2012: -10.9; 2013: -5.2; 2014: 11.9; 2015: -16.8; 2016: -34.7; 2017: 6.0; 2018: 27.6; 2019: 2.5; 2020: 34.3; 2021: 2.9; 2022: 6.4; 10-Year Average: 1.4 ### Stress tests and scenario analysis - Stress tests (Figure 7) illustrate sensitivity of external debt to shocks. - Individual permanent one-half standard deviation shocks to interest rates 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 is driven by the high historical volatility of Nigeria’s current account balance, largely due to fluctuations in oil exports. - The likely buffering channels for an oil-export shock are import compression and income debits, as experienced in 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 in 2017 would cause an upward level shift in debt, but would not place it on an upward path. Selected scenario box numbers from Figure 7 (average projections in boxes) - Interest-rate shock box: 11.8 (versus Baseline 11.4) - Current-account shock box: 21.4 (versus Baseline 11.4) - Combined shock box: 17.5 (versus Baseline 11.4) - Real depreciation (30%) box: 17.0 (versus Baseline 11.4) - Growth shock box: 12.9 (versus Baseline 11.4) - Historical and other scenario averages shown in Figure 7 as labeled. Notes on analysis limitations - The analysis is subject to gaps in the data on Nigeria’s International Investment Position and remaining maturity of external obligations. - Staff estimates are used for portfolio investment liabilities based on the estimated stock of non-resident holdings of government securities issued on the domestic market, capital markets data on securities issued abroad, and average interest rates on such securities. ### Annex III — Public investment efficiency and infrastructure - The government’s Economic Growth and Recovery Plan envisions a large scale up in public and private investment to close Nigeria’s large infrastructure gap (35 percent of GDP shortfall relative to emerging market average). - Findings: - Nigeria’s public capital stock is low, and of relatively poor quality, both in absolute terms and relative to benchmark countries. - Public investment represents less than 15 percent of total expenditures, and budgeted capital expenditures have been consistently under-executed. - Nigeria’s capital stock has grown more slowly than in benchmark countries; public capital stock per head is relatively low. - In terms of economic capital (electricity, roads) and social capital (education and health infrastructure), Nigeria’s infrastructure is generally less than half the size than in the average sub-Saharan Africa country and only a fraction of that in emerging market economies. - Perceived quality of infrastructure is low. - Public investment spending efficiency: - Efficiency gaps compared to the frontier suggest that, with similar inputs, the quality and quantity of infrastructure could be higher by as much as 39 percent and 87 percent, respectively. - Hybrid efficiency gap cited as 77 percent in figure panels. - Growth impact from scaling up infrastructure: - Real growth in Nigeria could have been higher by 0.3 to more than 1 percentage points if infrastructure levels had been that of benchmark countries. - Institutional improvements: - Improving Nigeria’s regulatory quality rating to best-practice levels in sub-Saharan Africa (Mauritius) would reduce the efficiency gap by almost 8 percentage points, increasing the amount of infrastructure and growth dividend from each dollar invested in public capital. - Specific weaknesses across the public investment process and suggested actions: - Project appraisal: - No assessment of social and economic costs and benefits of projects; no specific agency responsible for independent project review. - Recommendation: Institute a project identification and appraisal phase as part of the budget preparation cycle and select projects from a pool of appraised projects. - Facility operation: - No asset register of public sector property, equipment, vehicles to assess change in value of public capital. - Recommendation: Ministries, Department and Agencies (MDAs) could be required to create comprehensive asset registers, with incentives for compliance. - Project evaluation: - Lack of a formal process to record whether projects finished within original budget/timeframe, delivered specified outputs, and had unintended impacts. - Recommendation: Introduce a formal project evaluation process including these elements. - Procurement: - Recommendation: Implement an efficient procurement process through (i) a central online procurement portal with all relevant procurement notices and documents, (ii) full incorporation of a procurement module in the full roll-out of GIFMIS at Federal level, (iii) wider use of the procurement model of GIFMIS across FGN (currently about 100 out of over 900 Ministries Departments Agencies are using it). - Strengthening multi-year budgeting: - Recommendation: Establish a predictable medium-term expenditure framework, based on reliable macro-fiscal forecasting, to facilitate project planning for spending agencies. *Sources: National authorities; International Monetary Fund, country desk data; and IMF staff estimates.* ### Annex IV. External Sustainability Assessment ### Annex IV. External Sustainability Assessment ### A. Current Account and Exchange Rate - Exchange rate assessment models give a wide range of results: - Current account approach (EBA-Lite and EBA-Oil): - Models find the current account (CA) in 2017 was broadly in line with the norm. - Macroeconomic policies contributed -1.3 and -1.5 percent of GDP to the CA gap in EBA-Lite and EBA-Oil, respectively. - “This suggests the actual current account would have been further into surplus if policies – particularly the fiscal deficit and change in reserves—had been at their recommended settings.” - External sustainability approach: - Derives a CA norm as the medium-term balance that would allow net foreign assets (NFA) to reach a benchmark level set at zero percent of GDP (the difference between its current level and that which would permit accumulation of international reserves sufficient to reach 100 percent of the reserve adequacy metric by 2023). - On this basis, the projected 2023 CA is broadly in line with the norm. - Equilibrium REER approach: - Price-based panel framework suggests an exchange rate gap of about 12 percent relative to the official rate. - This is consistent with indicators of market expectations: the exchange rate implied by 12-month non-deliverable naira forwards traded offshore, the outlook from Consensus Forecasts, and the margin between the interbank and Bureau de Change exchange rates. - Assessment uncertainty: - Presence of FX restrictions and multiplicity of exchange rates (official, parallel, other segments) increases uncertainty. - The REER approach uses the CBN official rate as input; CA and ES approaches implicitly use an effective exchange rate reflecting transactions across all FX market segments. - Large swings in errors and omissions suggest imprecision in reported values of the CA and/or the NFA position. - Key model results (Table 1: Current Account and Real Exchange Rate Assessment Results) - EBA-lite - CA/REER reference: 2.0 - CA/REER norm: 2.2 - Current account gap: -0.1 - o/w: Policy gap: -1.3 - Residual: 1.2 - Real exchange rate gap: 1.1 - EBA-Oil - CA/REER reference: 2.0 - CA/REER norm: 1.4 - Current account gap: 0.6 - o/w: Policy gap: -1.5 - Residual: 2.1 - Real exchange rate gap: -5.3 - External Sustainability Approach - CA/REER reference: 0.1 - CA/REER norm: 0.2 - Current account gap: 0.0 - Residual: 9.9 - Real exchange rate gap: 0.2 - Equilibrium RER Regression - CA/REER reference: 4.7 - CA/REER norm: 4.5 - Current account gap: -- - o/w: Policy gap: 2.0 - Residual: -- - Real exchange rate gap: 11.9 - Note: Positive numbers indicate overvaluation. Elasticity of current account to real exchange rate gap is 0.11. ### B. Reserve Adequacy and Capital Flows - Gross international reserves: - Recovered from less than $24 billion in September 2016 to above $39 billion at end-December 2017. - Represented around 100 percent of the ARA metric adjusted for an oil buffer (calculated as an oil price gap multiplied by oil exports). - However, presence of FX swaps and forwards likely overstates available resources: - Inflows due to FX swaps have amounted to about $5.4 billion since 2014. - Outstanding forward FX sales by the central bank amount to $0.2 billion. - Gross reserves excluding these predetermined FX outflows were $33.7 billion at end-December 2017, suggesting gross reserves at year-end would be just about 85 percent of the ARA metric adjusted for an oil buffer (suggested adequate range: 100–150 percent). - Under baseline projections, reserves are expected to steadily decline to around $33 billion by 2023, equivalent to only 66 percent of the ARA metric. - Reserve adequacy components and markers (as presented): - Reserves, 2017 (with and without FX swaps & forwards) and forecast 2023 compared to: - 100% of ARA metric - 125% of ARA metric - 100% metric + oil buffer (oil price gap multiplied by oil exports) - Capital flows and balance of payments: - Capital flows: - Net inflows (liabilities to non-residents) fell below 1.0 percent of GDP in 2016. - Net inflows are estimated to reach above 4 percent of GDP in 2017, largely driven by strong net portfolio inflows coming through the IEFX window. - Errors and omissions (E&Os): - E&Os remain around 3 percent of GDP on average. - E&Os have amounted to as large as current account surpluses in some years, suggesting imprecision in estimates of the balance of payments and/or NFA position. - Financial account composition (illustrative series 2010–22): - Foreign Direct Investment, Portfolio investment, Other investment, and Capital and financial account (excl. reserves) shown as volatile components across years. - Measures of net foreign asset accumulation and cumulative CA and E&Os show substantial variation since 2010. ### C. Overall Assessment and Policy Implications - Overall finding for 2017: - The external position was moderately weaker than that implied by medium-term fundamentals and desirable policies. - Real exchange rate gap of less than 12 percent relative to the official exchange rate. - Supporting evidence: - Estimated contribution of policies to the current account balance (policy gaps of -1.3 and -1.5 percent of GDP in EBA-Lite and EBA-Oil). - Weak non-oil exports. - Inadequate FX buffers under baseline projections (reserves projected to decline to around $33 billion by 2023, 66 percent of ARA). - Slow and volatile capital inflows. - Uncertainty: - High degree of uncertainty due to FX restrictions and multiplicity of exchange rates used in transactions. - Policy recommendation summary: - Adjustment of other policies—particularly fiscal, monetary, and structural—in line with staff’s recommendations would contribute to reducing the estimated gaps. *IMF staff analysis as presented in Annex IV. External Sustainability Assessment* ### 13. Upgrade the solvency regime, as well as valuation and the reserve requirements, to better ### 13. Upgrade the solvency regime, as well as valuation and the reserve requirements, to better capture risk. ### Progress on insurance solvency, valuation, and reserves - 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. ### Enforcement of mandatory insurance - 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) — employer database and mortality tables - 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. - 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) — board and broker-dealer supervision - 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. - 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 — contingent fiscal commitments - 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. *Source: STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX* ### introduction of the IEFX window in April 2017, and the operation of the other FX windows by the CBN. ### introduction of the IEFX window in April 2017, and the operation of the other FX windows by the CBN. ### Exchange regime and FX windows - The rationing and prioritization of foreign exchange in the IFEM and SMIS windows by the CBN give rise to an exchange restriction. - The SMIS windows also give rise to an MCP. ### Safeguards Assessment - Under the Fund’s safeguards assessment policy, the CBN was subject to a full safeguards assessment with respect to the Stand-By Arrangement that expired on October 31, 2001. - The assessment, which included an on-site visit, was completed on November 28, 2001. - The assessment concluded that vulnerabilities existed in the areas of financial reporting and legal structure of the Central Bank. ### Article IV Consultation cycle - Nigeria is on the standard 12-month Article IV consultation cycle. - The previous Article IV consultation was concluded on March 29, 2017. ### Technical Assistance (TA) since January 2016 — overview - TA missions listed by Department, Purpose of TA mission, and Duration (selected entries preserved exactly): - LEG: AML.CFT reform agenda — January 11–25, 2016 - MCM: Banking Supervision (Long-term Expert) — January 12, 2016 – January 11, 2017 - STA: Monetary and financial statistics — January 18–29, 2016 - FAD: Budget preparation, expenditure review, treasury single account, and cash management reforms — January 20–February 9, 2016 - FAD: Fiscal reporting/EBFs — February 1–14, 2016 - FAD: Program Budgeting, TSA and Cash Management Performance — February 5–9, 2016 - MCM: Developing Medium Term Debt Management Strategy — February 11 – 18, 2016 - STA: Enhanced General Data Dissemination System (e-GDDS) — February 15–19, 2016 - FAD: Tax Policy and Administration — March 30 – April 13, 2016 - MCM: Building Early Warning System - Bank Supervision and Regulations — July 11 – 21, 2016; repeated entries July 11 – 21, 2016; August 20 – 22, 2016; October 3 – November 11, 2016 - STA: National Accounts – Developing Source data (EDDI2) — November 27 – December 2, 2016 - FAD: Oversight of SOEs — December 1–14, 2016 - STA: Balance of Payments Statistics — January 23 – February 3, 2017 - FAD: Assessment of proposed petroleum fiscal regime reforms — February 13–24, 2017 - FAD: Tax and Customs Administration — April 26 – May 8, 2017 - FAD: Tax policy and revenue mobilization — July 20 – August 3, 2017 - FAD: Fiscal Regime of the Oil Sector Follow-up — November 2–13, 2017 - STA: Price Statistics — May 22–26, 2017; September 18–22, 2017; November 13–24, 2017 - STA: National Accounts — September 25 – October 6, 2017 - STA: Real Sector Statistics — December 4–8, 2017 - MCM: Nigeria Securities Exchange Commission: Risk Based Supervision — January 15–26, 2018 - MCM: Financial Stability: Early Warning System — January 29 – February 9, 2018 - MCM: BIS/IMF Symposium on Capacity Building in Financial Sector Regulation and Supervision — February 7–9, 2018 ### West Africa Regional Technical Assistance Center 2 (AFRITAC 2) — TA highlights - Selected TA missions and durations (preserved exactly): - FAD: Tax Administration — January 18–29, 2016 - FAD: Public Financial Management — January 20 – February 9, 2016 - MCM: Monetary and Forex Operations, including Islamic Banking — February 8–19, 2016 - MCM: Banking Legislation — February 22–26, 2016 - FAD: Assist FIRS in Developing Strategic Plan — March 14–24, 2016 - FAD: Customs Compliance Improvement — March 30 – April 12, 2016 - STA: Consumer Price Index — April 4–15, 2016 - FAD: Advancing TSA implementation — June 6–17, 2016 - MCM: Enhancing Basel II/III — August 22 – September 9, 2016 - FAD: Support the Federal Inland Revenue Service (FIRS) to finalize Strategic Plan — September 9–19, 2016 - FAD: Develop Compliance Risk Management Strategy — April 4–12, 2016 - STA: National Accounts — October 3–7, 2016 (repeated) - FAD: Strengthening SOE Oversight — December 1–16, 2016 - MCM: Compliance with CPMI-IOSCO Principles for Financial Market Infrastructures — December 5–8, 2016 - STA: Price Statistics — January 30 – February 10, 2017 - FAD: Strengthening Cash Flow Forecasting and Cash Management — February 1–11, 2017 - FAD: Develop Project Governance Framework — February 20 – March 3, 2017; April 17, 2017; January 8–19, 2018 - FAD: Strengthen Business Analysis Capabilities — February 20 – March 3, 2017 - STA: National Accounts — February 27 – March 3, 2017 - FAD: Develop Project Governance Framework for FIRS — April 17, –28, 2017 - FAD: Mission on Tax & Customs Policy and Administration — May 1–10, 2017 - FAD: Audit Training Exchange Program — 6/12/2017; June 12–23, 2017; November 6–17, 2017 - MCM: Monetary Policy Operations - A Stock Taking — June 12–16, 2017 - MCM: Basel II – ICAAP/SREP Review — July 24 – August 11, 2017 - FAD: Data Matching Project Exchange program for FIRS — July 24 – August 11, 2017 - FAD: Accounting Data Quality and Financial Reporting — August 16 – 28, 2017 - FAD: Advancing TSA Implementation and Cash Management (sub-national) — August 29 – September 8, 2017 - STA: Consumer Price Index — September 18–22, 2017 - STA: National Accounts — September 25 – October 6, 2017 - FAD: Strengthening Oversight of Federal Government-Owned Enterprises — October 4–17, 2017 - MCM: IFRS 9 Implementation — October 9–20, 2017 - FAD: Review of TTF Program — October 9–18, 2017 - FAD: Compliance Improvement Program (FIRS) — October 30 – November 8, 2017 - STA: Prices and Index Numbers — November 13–24, 2017 - MCM: Risk Based Supervision (RBS) Framework — December 11–15, 2017; January 23 – February 3, 2018 - FAD: Develop Operational Plans for Support Groups (FIRS) — February 5–16, 2018 - MCM: Implementation of the Pillar II of the Basel framework — February 12–23, 2018 - FAD: Customs Risk Management — February 19 – March 2, 2018 - MCM: Nigeria Securities Exchange Commission: Risk Based Supervision — January 15–26, 2018 (listed earlier) ### Resident IMF staff in Abuja - Senior Resident Representative: Mr. Amine Mati is the IMF’s Senior Resident Representative (and Mission Chief) in Abuja since February 2017. - Resident Technical Assistance Advisor: Mr. Leonard Chumo is the IMF resident advisor for banking supervision at the Central Bank of Nigeria, since February 2017. ### Joint World Bank–IMF work program, 2017–18 (summary) - Collaboration areas: Power Sector Recovery Plan, petroleum fiscal regime reforms, fiscal policy measures on poverty and income inequality, financial sector, sub-national fiscal data, domestic revenue mobilization, and public financial management reform. - Selected Bank lending program timings (preserved exactly): - Power Sector Recovery Performance Based Operation (PforR) — FY18Q4 - State Fiscal Transparency, Accountability and Sustainability PforR — FY18Q4 - Nigeria Fiscal Governance and Institutions Project — FY19Q1 - Nigeria Electricity Transmission Project — FY18Q3 - Nigeria Electrification Project — FY18Q4 - Nigeria Electricity and Gas Improvement Project — Continuous ongoing - Youth Employment & Social Support Operation — Continuous ongoing - Community & Social Development Project — Continuous ongoing - National Social Safety Nets Project — Continuous ongoing - State Employment and Expenditure — Continuous Ongoing - State and Local Governance Reform (TF) — Continuous Ongoing - Housing Finance Development — Continuous Ongoing - Development Finance Project — continuous Ongoing - Nigeria Bi-Annual Economic Update — continuous Ongoing - Nigeria Federal Government Public Expenditure Review — continuous Ongoing - Nigeria Subnational Fiscal Management Support — continuous Ongoing - Nigeria Programmatic Approach to Financial Sector Development — continuous Ongoing - Nigeria Strengthening Capacity in Banking Supervision — continuous Ongoing - Nigeria Financial Inclusion — Continuous Ongoing - Strengthening Nigerian Petroleum Sector Policy and Governance — Continuous Ongoing - IMF work program highlights: - Article IV Consultation — December 2017; Board: March, 2018 - Work on gender and income inequality — ongoing ### Joint AfDB–IMF work program, 2017–18 (summary) - Selected AfDB lending program entries and timings: - Santa Clara Medical Facility — February 2018; Expected delivery date: March 2018 - Jigawa Solar Project PV (IPP) — February and April 2018; Expected delivery date: June 2018 - Bauchi Solar Power Project — February and April 2018; Expected delivery date: June 2018 - Cassava Industrialization Facility — March and April 2018; Expected delivery date: July 2018 - Skypower Solar Project — April and June 2018; Expected delivery date: September 2018 ### Statistical issues (As of February 13, 2018) - General assessment: - Data are broadly adequate for surveillance, but shortcomings remain (notably subnational public finances and large errors and omissions in the balance of payments). - The Statistics Act of 2007 established the NBS as the main coordinating agency and led to improvements in information sharing and data compilation. - Implementation achievements: e-GDDS, use of GIFMIS for budget preparations, a fully operational Treasury Single Account (TSA), and a reduction in balance of payments errors and omissions. - Remaining priorities include extending improvements to subnational levels. - National accounts: - NBS implemented new base year 2010, ISIC revision 4, and SUT framework. - Authorities continue to receive TA to complete a GDP rebasing exercise, including producing a GDP back-casted series. - Prices statistics: - Official monthly CPI is available on a timely basis; index weights and basket are based on the 2003/04 National Consumer Expenditure Survey and need updating. - Compilation of an updated PPI is ongoing but funding for the survey is uncertain. - NBS continues to receive TA but high staff turnover presents challenges. - Government finance statistics: - Most pressing shortcoming: inadequate data coverage at subnational governments level, which accounts for almost one half of total government expenditure. - Need for standardized budget classification, chart of accounts, accounting systems, and adoption of IPSAS—cash basis—at Federal and State levels. - Need to formalize publication of government accounts monthly or quarterly and to increase coverage of state-owned enterprises and public sector delineation. - Monetary and financial statistics: - Significant improvements in monetary statistics compilation. - Further work required to extend ODC sector beyond commercial banks and to improve reporting of monetary aggregates. - Nigeria expected to report OFCs data through IMF standardized Report Forms (SRFs). - Financial soundness indicators (FSIs): - CBN compiles a broad range of core and non-core FSIs, though publishing FSIs on a timely basis is needed. - CBN is working with STA to improve FSI methodology and consolidation to capture cross-border activities. - Balance of payments: - Significant efforts and progress in reducing errors and omissions and producing an international investment position. - Remaining needs: improved validation of bank-reported transactions, measurement of transactions outside the banking system, appropriate treatment of enterprises in free trade zones (residency criterion), and improved coverage of external assets and liabilities of the banking sector. - DFID project (2010-14) helped CBN diversify data collection for the ESS. - Recent TA (2017) assisted with validation and grossing-up of 2013 and 2014 private financial flows and stocks surveys. - A survey of private transfers, with results expected by end-2017, should improve estimates of private transfers, especially those received through informal channels and in-kind values (currently not estimated). - International reserves: - The authorities have not yet initiated compilation of international reserves data in line with the Data Template on International Reserves and Foreign Currency Liquidity. - External debt: - Public external debt data are of good quality and available on a timely basis. - The Debt Management Office (DMO) is collaborating with CBN to extend coverage to include private sector liabilities and foreign investment in domestically-issued debt securities. - IMF and World Bank staff worked with the DMO to develop analytical capacity for debt management strategy based on detailed cost-risk analysis. ### Data standards and quality - Participant in the enhanced General Data Dissemination System (e-GDDS) since April 2017. - As of February 13, 2018, Nigeria was meeting 33 percent of the timeliness set for 14 data categories disseminated through the National Summary Data Page. - No Data ROSC. ### Table of Common Indicators Required for Surveillance (As of February 13, 2018) — selected entries (preserved exactly) - Exchange Rates — Date of latest observation: Oct. 2017; Date received: Nov. 2017; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: Sep. 2017; Date received: Nov. 2017; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Reserve/Base Money — Date of latest observation: Dec. 2017; Date received: Feb. 2018; Frequency: M M M - Broad Money — Date of latest observation: Dec. 2017; Date received: Feb. 2018; Frequency: M M M - Central Bank Balance Sheet — Date of latest observation: Dec 2017; Date received: Feb.2018; Frequency: M M M - Consolidated Balance Sheet of the Banking System — Date of latest observation: Dec. 2017; Date received: Feb. 2018; Frequency: M M M - Interest Rates — Date of latest observation: Dec. 2017; Date received: Feb. 2018; Frequency: D D D - Consumer Price Index — Date of latest observation: Dec. 2017; Date received: Jan. 2018; Frequency: M M M - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of latest observation: Dec. 2017; Date received: Jan. 2018; Frequency: M M M - Revenue, Expenditure, Balance and Composition of Financing – General Government — Date of latest observation: Dec. 2017; Date received: Jan.2018; Frequency: M M M - Stocks of Central Government and Central Government-Guaranteed Debt — Date of latest observation: Dec. 2016; Date received: Feb. 2017; Frequency: Q Q Q - External Current Account Balance — Date of latest observation: 2016; Date received: Oct. 2017; Frequency: Q Q A - Exports and Imports of Goods and Services — Date of latest observation: Sept. 2017; Date received: Jan. 2018; Frequency: Q Q A - GDP/GNP — Date of latest observation: 2016; Date received: Dec. 2017; Frequency: Q Q Q - Gross External Debt — Date of latest observation: 2015; Date received: Dec. 2016; Frequency: A A A - International Investment Position — Date of latest observation: 2016; Date received: Oct. 2017; Frequency: A A A *Prepared by the African Department — supplementary information to the STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION (as of February 13, 2018).* ### 1. GDP growth outturn in 2017 was in line with expectations, albeit with some ### 1. GDP growth outturn in 2017 was in line with expectations, albeit with some ### Economic activity and growth outturn - Real GDP expanded by 1.9 percent y-o-y in the fourth quarter of 2017, mainly driven by the oil sector (+8.4 percent) and agriculture (+4.2 percent). - Non-oil non-agricultural sector grew by 0.4 percent y-o-y in Q4 2017, the first quarter of positive y-o-y growth after seven quarters of contraction. - Real GDP grew by 0.8 percent in 2017 (in line with staff projections). - Composition: non-oil growth came in stronger (0.5 percent vs. 0.2 in staff’s estimate), and oil growth lower (from 7.6 to 4.8 percent). - Revisions have no significant impact on staff’s projections for 2018 and beyond. - Authorities estimate growth will reach 3.5 percent in 2018 and rise substantially in the medium term following strong execution of the capital budget, a rebound in private sector investment, and higher oil production. ### Inflation - Headline inflation eased to 15.1 percent year-on-year in January (from 15.4 percent in December 2017). - Food inflation fell to 18.9 percent in January (from 19.4 percent in December 2017). - Most other sub categories reported slightly higher inflation, except for clothing, utilities and restaurants. - Inflation declined to 15.4 percent year-on-year by end-December 2017 (from 18½ percent at end-2016). - Inflation has moderated to 15.1 percent in January 2018, marking the twelfth consecutive month of decline, and is expected to reach lower double-digit rates by the end of 2018. ### External sector, reserves, and Eurobond issuance - Authorities launched a $2.5 billion Eurobond issuance on February 15, 2018 in dual tranches of $1.25 billion each with 12-year and 20-year maturity. - Peak order book exceeded $11.5 billion (4.5 times oversubscribed). - Pricing: 12 year and 20 year priced at 435 and 455 basis points (bps) above US Treasuries, respectively; comparison: 15 year note issued February 2017 priced at a spread of 548 bps. - Foreign exchange reserves amount to $45.2 billion after receipt of the Eurobond proceeds. - CBN purchases in the Investor and Exporters window since August amount to $6 billion. - Foreign investors’ purchases in debt markets increased, with non-resident holdings now amounting to $10 billion (from $6 billion at end-December 2017). - Authorities report FX availability improved from $27.0 billion in 2016 to a four-year high of $39.2 billion in 2017. - Exchange rate convergence: parallel market premium declined from 60 percent in February 2017 to 20 percent in December 2017. - Financial markets gained 60 percent in value from end-2016 to mid-January 2018. - Prospects: foreign reserves risen to $42.8 billion as at February 2018 (noted in authorities’ text). ### Fiscal policy and revenue measures - 2018 budget targets reduction of the overall fiscal deficit from 4.3 percent of GDP in 2017 to 1.4 percent of GDP in 2018. - Authorities aim to increase non-oil revenue and implement structural fiscal reforms. - Measures to double the tax compliance rate to about 50 percent via tax audits, e-filing, data matching, strengthened enforcement, and combating corruption in tax offices. - Proposals tabled in parliament: increase excises on tobacco and alcohol, review stamp duties, introduce a registration threshold for VAT. - Implementation of the Voluntary Asset Income Declaration Scheme (VAIDS) expected to positively impact revenue collections by end-March 2018. - Plans to table a Finance Bill with proposals to increase excise rates, reform VAT by introducing registration thresholds and removing exemptions, and introducing stamp duties. - Implementation of the Oil Asset Divestment Strategy and possible privatization of the Nigeria Petroleum Development Company expected to yield additional revenues. - Authorities advancing audit of the Nigerian National Petroleum Corporation (NNPC) to determine arrears and revenue due to government. - Authorities plan to maintain expenditures at budgeted levels; savings from recurrent costs will offset increase in planned capital investment. - No plans to reintroduce fuel subsidy in the budget. - Strategy to replace a portion of existing T-bills with Eurobonds will be pursued. - Strengthening of the Treasury Single Account (TSA) mechanism to utilize idle resources and reduce domestic borrowing. - Increased monitoring of fiscal activities, identification of arrears, and requirement for state and local governments to provide regular financial reports. ### Monetary policy and CBN stance - CBN raised the monetary policy rate (MPR) from 12 percent to 14 percent in July 2016 to address inflationary pressures. - CBN will continue to be vigilant and anticipate fiscal and liquidity pressures ahead of the 2019 elections. - Monetary Policy Committee (MPC) will be proactive in managing liquidity to achieve CBN’s price stability objective while implementing measures to strengthen financial sector stability and inclusive growth. - MPC will deploy a range of instruments including the MPR, open market operations (OMO), and cash reserve ratio (CRR). - MPC restated CRR rate remains 22.5 percent on eligible deposits as reflected in the latest MPC communique issued in November 2017. - MPC prefers applying CRR on deposit flows (Nigeria suffers from structural liquidity surpluses) as opposed to CRR on deposit stocks recommended by staff. - CBN will maintain commitment to the development finance mandate and any parliamentary-approved divestment of interest in development finance institutions (DFIs) would take medium to long term. ### Exchange rate policy - Authorities committed to unification of exchange rates in the medium-term (as encapsulated in the ERGP). - Measures implemented: encourage increased remittance flows through licensed IMTOs, more CBN sales in the interbank market, establishment of the investor and exporter foreign exchange (IEFX) window. - CBN monitoring convergence between forward transactions in the wholesale/retail window and the IEFX rate. - CBN intends to remove restrictions in the FX market for the 40-category products once reserve buffers improve to comfortable levels. ### Financial sector stability - Nigeria’s financial sector remains broadly stable apart from rising non-performing loans (NPLs) in a few sectors. - Banks are adhering to stricter standards for internationally active players than required under Basel II; balance sheets remain strong. - Capital buffers can withstand financial reporting at a more market determined exchange rate, including the January 2018 transition to IFRS9. - Commercial banks implemented stricter adherence to revised repayment plans for restructured loans and moved out of NPL territory, especially for loans to the oil, gas and power sector. - CBN is strengthening supervisory oversight and deploying early warning systems to identify vulnerabilities and manage emerging risks in the financial system. - CBN issued a new circular prohibiting banks with low solvency ratios or high NPLs from paying a dividend (aligned with staff advice). ### Structural reforms and governance - Progress under the ERGP includes prioritization of structural impediments, improving business environment, accelerating power sector reform, strengthening governance, and promoting financial inclusion and gender equality. - Power Sector Recovery Plan (PSRP) achievements: increased power generation peak of 5100MW in the grid in December 2017; appointment of new boards for sector agencies; budget provisions to ensure government agencies pay electricity bills enabling the bulk trader to pay in full for generated power; and an off-grid electrification strategy. - ERGP Implementation Unit established in the Vice President’s office to accelerate delivery on industrialization, agriculture, and power policies. - Nigeria moved 24 places to 145th position in the World Bank Ease of Doing Business ranking in 2017 and was among the top 10 reforming countries. - 2018 Budget retains the social intervention program for job creation, small business support, and finance/economic opportunities for vulnerable people. - Governance measures: adoption of the National Anti-Corruption Strategy (NACS); commitment to digitize public officials’ asset declarations; publication of the first national money laundering and terrorist financing risk assessment report. - Authorities acknowledge data shortcomings and are seeking TA support to state and local governments fiscal data, reduction in balance of payments errors and omissions, and enhancement of the Debt Management Office to extend coverage to private sector liabilities and foreign investments. ### Conclusion and policy priorities - Authorities reiterate commitment to sustain ongoing reforms and implement urgent comprehensive policies to support durable and inclusive growth. - Policy mix: growth-friendly fiscal policy complemented by tight monetary and flexible exchange rate policies to contain vulnerabilities. - Policy anchors: stronger execution of the capital budget, investment-sensitive structural reforms, and higher oil production. - Additional priorities: boost non-oil sector activity, reduce inflation to the target range, contain emerging banking sector vulnerabilities, and address unemployment. - Authorities value Fund advice and technical assistance which have helped shape policy direction. *Statement by Mr. Mkwezalamba, Executive Director and Mr. Odonye, Senior Advisor to Executive Director on Nigeria — March 5, 2018* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1863.pdf_