## Petroleum Industry Act 2021

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### Overview
- The Petroleum Industry Act (PIA) was enacted in August 2021, "providing clarity for the oil and gas sector".
- Oil production accounts for roughly 10 percent of GDP and "has remained subdued reflecting security and technical challenges and an ageing infrastructure."

### Recent developments affecting the oil and gas sector
- Despite a rebound in oil prices since 2020, oil production remained below pre-pandemic levels due to security, technical challenges, and ageing infrastructure.
- The resurgence of implicit oil subsidies at end-2020 contributed to lower year-to-date oil revenues compared to 2020.
- The balance of payments improved in 2021H1, with the current account deficit narrowing owing to increases in the trade balance and official transfers; authorities placed several Eurobonds in September 2021 amidst strong investor interest.

### Macroeconomic context and outlook relevant to the PIA’s implementation
- Real GDP growth projections:
  - 2021: 2.6 percent
  - 2022: 2.7 percent
  - Medium term: projected to remain at that level
- Oil production outlook:
  - "expected to increase gradually as security and technical challenges dissipate but to remain below the 2019 level."
- Inflation and reserves:
  - Headline inflation: peaked at 18.2 percent y-o-y in March 2021 and declined to 16 percent by October 2021.
  - Gross reserves: $36.5 billion at end-2020; $41.3 billion at end-October 2021.
- Exchange rate:
  - NEER (I&E rate basis) depreciated by 4.3 percent during January–October 2021.
  - Premiums in the parallel market and BDCs exchange rates stayed elevated and widened further following the discontinuation of FX supply to the BDCs in July 2021.
- Demographic context cited:
  - Nigeria population growth rate: 2½ percent.

### Implications and policy considerations signaled in the chapter
- The enactment of the PIA is presented alongside mixed policy developments since the 2020 Article IV consultation (e.g., discontinuing the official exchange rate in May 2021 and resurgence of fuel subsidies at end-2020).
- Risks to sustaining reforms:
  - "With volatile oil prices and the country entering into the 2023 Presidential election cycle, there are risks that reforms, including much needed fiscal and exchange rate reforms, could wane further."
- Policy priorities highlighted:
  - Safeguard a durable and robust exit from the pandemic.
  - Rejuvenat[e] the reform agenda, including:
    - Establishing a market-clearing unified exchange rate.
    - Revenue mobilization through tax administration and tax policy reforms.

### Key statistics from the chapter (as stated)
- Oil production share of GDP: roughly 10 percent.
- PIA enactment date: August 2021.
- Real GDP growth projections: 2.6 percent (2021) and 2.7 percent (2022).
- Headline inflation peak: 18.2 percent y-o-y in March 2021; 16 percent by October 2021.
- Gross reserves: $36.5 billion at end-2020; $41.3 billion at end-October 2021.
- NEER depreciation (I&E rate basis): 4.3 percent during January–October 2021.
- Nigeria population growth rate cited: 2½ percent.

*Source: IMF staff report excerpt (chapter: Petroleum Industry Act 2021).*

### 1. Petroleum Industry Act 2021 __________________________________________________________________  31

### 1. Petroleum Industry Act 2021

### Overview
- The Petroleum Industry Act (PIA) was enacted in August 2021, "providing clarity for the oil and gas sector" (Box 1).
- Oil production accounts for roughly 10 percent of GDP and "has remained subdued reflecting security and technical challenges and an ageing infrastructure."

### Recent developments affecting the oil and gas sector
- Despite a rebound in oil prices since 2020, oil production remained below pre-pandemic levels due to security, technical challenges, and ageing infrastructure.
- The resurgence of implicit oil subsidies at end-2020 contributed to lower year-to-date oil revenues compared to 2020.
- The balance of payments improved in 2021H1, with the current account deficit narrowing owing to increases in the trade balance and official transfers; authorities placed several Eurobonds in September 2021 amidst strong investor interest.

### Macroeconomic context and outlook relevant to the PIA’s implementation
- Real GDP growth: projected at 2.6 and 2.7 percent for 2021 and 2022 respectively, and to remain at that level in the medium term.
- Oil production outlook: "expected to increase gradually as security and technical challenges dissipate but to remain below the 2019 level."
- Headline inflation: reached a peak of 18.2 percent y-o-y in March 2021 and declined to 16 percent by October 2021.
- Reserves: gross reserves stood at $36.5 billion at end-2020 and rose to $41.3 billion at end-October 2021.
- Exchange rate: the nominal effective exchange rate (NEER), based on the Investor and Exporters window rate (I&E rate), depreciated by 4.3 percent during January–October 2021; premiums in the parallel market and Bureau de Change (BDCs) exchange rates have stayed elevated and widened further following the discontinuation of FX supply to the BDCs in July 2021.

### Implications and policy considerations signaled in the chapter
- The enactment of the PIA is presented as part of mixed policy developments since the 2020 Article IV consultation, alongside actions such as discontinuing the official exchange rate in May 2021 and the resurgence of fuel subsidies at end-2020.
- Risks to sustaining reforms: "With volatile oil prices and the country entering into the 2023 Presidential election cycle, there are risks that reforms, including much needed fiscal and exchange rate reforms, could wane further."
- The priority is to "safeguard a durable and robust exit from the pandemic" and to "rejuvenat[e] the reform agenda," which includes establishing a market-clearing unified exchange rate and revenue mobilization through tax administration and tax policy reforms.

### Key statistics from the chapter (as stated)
- Oil production share of GDP: roughly 10 percent.
- PIA enactment date: August 2021.
- Real GDP growth projections: 2.6 percent (2021) and 2.7 percent (2022).
- Headline inflation peak: 18.2 percent y-o-y in March 2021; 16 percent by October 2021.
- Gross reserves: $36.5 billion at end-2020; $41.3 billion at end-October 2021.
- NEER depreciation (I&E rate basis): 4.3 percent during January–October 2021.
- Nigeria population growth rate cited for context: 2½ percent.

*Source: IMF staff report excerpt (chapter: Petroleum Industry Act 2021).*

### 10.       The outlook faces balanced risks (Annex II). On the downside, low vaccination rates partly

### 10. The outlook faces balanced risks (Annex II)

### Near-term risks and scenario assumptions
- Downside risks:
  - Low vaccination rates partly owing to low supply continue to expose Nigeria to future pandemic waves and new variants. (Vaccination data source: National Primary Health Care Development Agency; vaccination share noted as of November 15, 2021.)
  - Uncertainties surrounding the ongoing omicron variant, including adverse spillovers via oil prices.
  - Worsening violence and insecurity could become macro-critical, negatively affecting growth and inflation.
  - Fiscal risks on the downside (¶14); higher U.S. interest rates would raise the cost of market financing and high debt service relative to government revenues poses fiscal sustainability risks (Annex III).
- Upside possibilities:
  - Stronger-than-expected non-oil sector recovery supported by credit policies.
  - Higher production from the Dangote refinery: authorities expect 650,000 barrels per day starting in 2022; staff’s baseline projections assume production of 50,000 barrels per day in 2022 increasing to 300,000 barrels per day by 2026 (staff’s assumptions are more conservative reflecting limited production details and past delays).
  - The PIA’s more generous fiscal terms could attract higher foreign investment in the oil sector.
  - Ratification of AfCFTA could boost outcomes if accompanied by reduced trade barriers and improved trade logistics.
- Fuel/transportation price assumptions:
  - Petroleum Motor Spirit (PMS) prices assumed to rise in mid-2022 by around 40 percent with an immediate impact on the CPI (2 percent of the CPI basket).
  - Transportation prices assumed to rise in three steps in July 2023, January 2024, and July 2024 (0.8 percent of the CPI basket, assuming only the fuel component is affected).

### Authorities’ views
- Growth:
  - Authorities are more optimistic about growth projections, citing investments under the 2021-25 National Development Plan (Lagos-Ibadan railway and highway, Lagos mass transit, Abuja-Kano road), plus the Dangote refinery and petrochemical by-products, as likely to yield much higher real GDP growth than staff projections.
  - They acknowledge positive real per capita growth over the medium term depends on further reforms.
- Inflation and subsidies:
  - Authorities share staff’s inflation views but expect higher impacts from fuel subsidy removal due to possible second-round effects on wages.
  - Strong commitment to fully remove fuel subsidies by mid-2022; planning temporary monthly cash transfers to vulnerable urban households to cushion impacts; negotiations ongoing with labor unions.
- COVID-19 response:
  - Authorities acknowledge need for vigilance; mass information campaign to reduce vaccine hesitancy.
  - Supply-side challenges—delayed vaccine delivery and limited availability—need urgent attention.
- Fiscal expectations:
  - Authorities expect fiscal situation to improve in the medium term from higher growth and administration reforms (2021-25 NDP and Strategic Revenue Growth Initiative aim to increase GG revenue to 15 percent of GDP by 2025).
  - Plan to keep recently allocated SDR allocation as contingent fiscal financing in case of shortfall or higher external borrowing costs.

### Policy discussions — overall direction
- Needed macro policy mix:
  - Multi-year revenue-based fiscal consolidation to create policy space and reduce sustainability risks.
  - Establish a market-clearing unified exchange rate to address FX shortages and improve FX buffers.
  - Supportive monetary policy appropriate for now, but gradual tightening required to reduce structurally high inflation.
  - Medium-term reforms: better monetary transmission mechanism, deeper trade reforms, significant improvement in governance and corruption.
  - Cushion near-term negative impacts on the vulnerable through targeted social assistance.
- Capacity development:
  - A comprehensive capacity development strategy is needed to ensure a robust recovery (Annex V).

### A. Fiscal policy: Create policy space — staff baseline and risks
- Staff baseline projections:
  - General government (GG) fiscal deficit projected to widen in 2021 to 6.3 percent of GDP, mainly reflecting implicit fuel subsidies (1 percentage point of GDP) and higher spending in the supplementary budget (0.5 percentage point of GDP).
  - Under the baseline, oil prices expected to moderate over the medium term; fiscal deficits projected to stay elevated and above the pre-pandemic average (4.3 percent of GDP during 2014-2019).
- Significant downside fiscal risks:
  - Risks arise from ongoing pandemic, adverse oil price shocks, security challenges, and electoral-cycle spending pressures.
  - Staff advised expenditure reprioritization and use of the SDR allocation if pandemic and security-related risks materialize; recommended transparent accounting of SDR use and resistance to other spending pressures.
  - Public debt projected to increase to over 42 percent of GDP in the medium term; deemed sustainable but subject to high risks with interest payments-to-revenue ratio remaining elevated relative to EMDE peers (Annex III).
- Urgency of fiscal consolidation:
  - Given limited policy space, elevated risks, and dependence on central bank financing, fiscal consolidation is urgent.
  - Staff-recommended measures would produce cumulative net savings of 5.1 percent of GDP over 2022-26, keep public debt-to-GDP ratio below 40 percent, reduce GG interest payments-to-revenue ratios, and create room for additional social assistance.

### A. Fiscal policy: Specific staff recommendations
- Tax administration measures (near-term and medium-term):
  - Near-term: (i) e-customs reforms, including efficient procedures and controls; (ii) reduction of customs and excise fraud; (iii) broadened entry criteria for the Large Taxpayer Office (LTO).
  - Medium-term: (iv) develop a basic VAT Compliance Improvement Program; (v) improve compliance across large, medium, and micro/small taxpayers including reviewing the penalty regime; (vi) rationalize tax incentives and customs duty waivers; (vii) improve effectiveness of the State Internal Revenue Service (IRS)’s administration of the Pay-As-You-Earn (PAYE) system.
  - IMF is in the process of placing a long-term resident expert in Abuja (Annex V).
- Tax policy measures:
  - As recovery strengthens and compliance improves, authorities encouraged to consider tax rates comparable to ECOWAS peers:
    - Further increase the VAT rate to at least 10 percent by 2022 and to 15 percent by 2026.
    - Increase excise rates on alcoholic and tobacco products combined with a broadening of the base.
- Fuel and electricity subsidies:
  - Full and permanent removal of fuel subsidies and move to market-based pricing in early 2022 as stipulated in the 2021 Petroleum Industry Act (PIA) is critical.
  - Without subsidy reform, the overall fiscal deficit is projected to be 1 percentage of GDP higher annually based on current subsidies.
  - Untargeted PMS subsidies disproportionately benefit upper income quintiles; removal expected to lessen inequality.
  - Targeted social assistance to the poor would cushion negative impacts and cost less than current subsidies.
  - Under a scenario with social transfers to keep poverty headcount constant, estimated cost of transfers is NGN 239 billion (0.13 percent of 2021 GDP).
  - Staff emphasized need to build consensus and trust via public communication and transparent plans to protect the poor; electricity pricing reforms under the Power Sector Recovery Plan (PSRP) should implement cost-reflective tariffs as of January 2022.
- Social assistance improvements:
  - As of 2018, around a fifth of the vulnerable population (the bottom 60 percent) receives some social assistance; small fraction receive cash transfers.
  - Measures under development with the World Bank: well-targeted cash transfer program; use of National Social Registry (NSR) for beneficiary selection; improve coordination/integration between state and national registers; establish strong information management system.
  - Staff recommended increasing social spending by up to 1 percent of GDP cumulatively for 2022-2026 (around 0.2 percent of GDP each year) for well-targeted programs.

### B. External sector: restore confidence and competitiveness
- Current external assessment:
  - External position in 2021 preliminarily assessed weaker than implied by fundamentals and desirable policy settings.
  - Estimated current account (CA) gap of about -3 percent of GDP, corresponding to a 15 percent overvaluation in the REER (see Annex IV).
  - Reserves are below levels recommended by IMF’s ARA metric; capital inflows remain modest.
- Exchange rate policy recommendations:
  - Move to a market-clearing exchange rate should be facilitated by improved outlook.
  - Exchange restrictions and administrative controls generate distortions; allowing further adjustment in the I&E rate (currently managed with ~30 percent divergence from BDCs and parallel market) would help remove misalignment, alleviate FX pressures, and enable price discovery.
  - Institutional removal of multiple FX windows at the CBN and allowing all FX transactions to take place in the I&E market are important.
  - CBN encouraged to step back from main FX intermediation role, limit interventions to smoothing volatility, and allow banks to freely determine FX buy-sell rates.
  - Gradual removal of Capital Flow Measures (CFMs) should be properly timed and sequenced, consistent with IMF’s Institutional View.
- Inflationary impact of depreciation and expected magnitudes:
  - A 15 percent depreciation in the I&E rate is estimated to eventually lift Nigeria’s price level by 5.8 percent with its peak impact on annual inflation at 2.2 percent.
  - An estimated 63 percent of the naira’s depreciation as reflected in the BDC rate has already been passed through to inflation.
  - To preserve competitiveness gains, exchange rate adjustment should be accompanied by: a clear medium-term fiscal consolidation plan, monetary policy framework reforms (¶30-¶31), and clear communications to guide expectations.
- Risks of a sudden adjustment:
  - A sudden exchange rate adjustment without forward guidance and supportive macro policies could undermine confidence with significant adverse consequences for the real economy.

### Selected numeric highlights and projections (from Text Table 1 and related analysis)
- Fiscal and revenue indicators (percent of GDP):
  - Total revenue: 2020: 6.3; 2021: 7.4; 2022: 7; 2023: 6.8; 2024: 6.7; 2025: 6.7; 2026: 6.6
  - o.w. oil revenue: 2020: 2.2; 2021: 3.2; 2022: 2.6; 2023: 2.3; 2024: 2.1; 2025: 2.1; 2026: 1.9
  - o.w. non-oil revenue: 2020: 4.1; 2021: 4.3; 2022: 4.3; 2023: 4.3; 2024: 4.4; 2025: 4.5; 2026: 4.6
  - Total expenditure: 2020: 12; 2021: 13.7; 2022: 13.4; 2023: 12.4; 2024: 12.6; 2025: 12.8; 2026: 12.9
  - o.w. fuel subsidy: 2020: 0.1; 2021: 0.5; 2022 onward: ---- (baseline assumes no fuel subsidies beyond mid-2022)
  - Overall balance: 2020: -5.7; 2021: -6.3; 2022: -6.4; 2023: -5.7; 2024: -5.9; 2025: -6.2; 2026: -6.3
  - Public Debt (percent of GDP): 2020: 34.5; 2021: 36; 2022: 37.5; 2023: 38.5; 2024: 40.5; 2025: 42.4; 2026: 42.9
- Memorandum items:
  - GG interest/revenue: 2020: 33.5; 2021: 29; 2022: 32; 2023: 36.6; 2024: 41.7; 2025: 46.3; 2026: 51.2
  - FGN interest/revenue: 2020: 88.8; 2021: 85.5; 2022: 92.6; 2023: 96.3; 2024: 110.9; 2025: 124.9; 2026: 139
  - Oil price (US$/barrel): 2020: 42.3; 2021: 66.9; 2022: 65.9; 2023: 63; 2024: 61; 2025: 59.4; 2026: 58.4
- Fiscal policy savings target:
  - Recommended measures projected to yield cumulative net savings of 5.1 percent of GDP over 2022-26.
- Social protection costing:
  - Cost to keep poverty headcount constant under targeted transfer scenario: NGN 239 billion (0.13 percent of 2021 GDP).
  - Recommended increase in social spending: up to 1 percent of GDP cumulatively for 2022-2026 (around 0.2 percent of GDP each year).
- Vehicle conversion illustrative costs (Text Table 2):
  - Public vehicles (8 million) × $400 per conversion = $3.2 billion.
  - All vehicles (22 million = 8 million public + 14 million private) × $400 per conversion = $8.8 billion.
- Exchange rate inflation pass-through estimates:
  - A 15 percent depreciation in the I&E rate: eventual price level increase 5.8 percent; peak impact on annual inflation 2.2 percent.
- External position:
  - Estimated CA gap of about -3 percent of GDP corresponding to a 15 percent REER overvaluation.

*Source: IMF staff report content (selected excerpts).*

### 24.      A restrictive trade regime impedes Nigeria’s external competitiveness and non-oil

### 24.      A restrictive trade regime impedes Nigeria’s external competitiveness and non-oil exports.

### Trade regime, tariffs, and non-tariff measures (NTMs)
- Tariff and NTM environment
  - Tariff rates have been decreased substantially since the early 2000s but remain higher than the average rates in peer countries and generally display positive escalation.
  - Tariff escalation increases the cost of delivery to the final consumer exponentially when production stages take place across tariff-ridden borders and hinders integration in global value chains and higher trade (Figure 13).
  - NTMs, mostly comprising customs inspection processes and costs associated with port storage and demurrage, are pervasive and trade logistics are problematic.
- Trade outcomes
  - These issues have held back Nigeria’s trade with ECOWAS members despite a preferential trade agreement (PTA) since 1993.
  - Exports as a share of GDP have declined over time and remain highly concentrated in oil and gas.
- Additional constraints
  - FX access for certain imports has been restricted since 2015 including for many basic necessities.
- Empirical/contextual references (as presented)
  - Figure 13: Weighted Average Tariff Rates (in percent); Tariffs on Intermediate Goods and Backward Integration in Global Value Chains, 2015; Nigeria and Peers: Trade affected by NTM (Latest available year between 2013 and 2016); Logistic Performance Index, 2018; Exports to the World 2000 vs. 2019 (percent of GDP); Export Diversification and Real GDP Per Capita.
  - Backward integration reflects the extent to which a country uses foreign inputs in its exports.
  - The export diversification index is the sum of within (intensive margin) and between (extensive margin) Theil indices calculated following the methodology in Cadot et al. 2011.

### Policy recommendations to maximize AfCFTA gains
- Preconditions emphasized
  - Establish a market-clearing and unified exchange rate and clear exchange rate policy.
- Priority measures recommended
  - (i) Reducing tariff escalation and aligning the average tariff rate in line with the agreement under the AfCFTA.
  - (ii) Streamlining import documentation requirements and reducing customs clearance time.
  - (iii) Improving the customs capacity to enforce preferential rules of origin and detect abuse.
  - (iv) Keeping land borders open while addressing smuggling concerns through stepped-up customs reform.

### Authorities’ views on FX measures and trade reform
- FX management stance
  - Authorities view recent FX measures as necessary and appropriate to curb FX demand, at least in the short run.
  - They consider the exchange rate to be unified, with the I&E rate serving as the reference rate in the economy and the anchor for rates in various CBN windows within acceptable margins (i.e., ±2 percent).
  - Authorities plan to eventually remove exchange rate restrictions but regard FX management policies as deliberate efforts to mute excess demand for frivolous imports and to protect local industries.
  - They do not deem parallel market rates as representing the fair value of the naira, citing market imperfections.
  - They consider that the exchange rate misalignment has narrowed substantially following the depreciation of the official exchange rate.
- Balance of payments (BOP) outlook and AfCFTA commitment
  - Authorities expect continued improvement in the BOP due to the recovery in oil price since the start of the pandemic and higher remittances.
  - Improved BOP will help maintain healthy FX reserves while meeting legitimate FX demand.
  - Authorities are committed to implementing the AfCFTA and reducing trade barriers, seeing significant benefits for Nigeria given its sophisticated banking system, vibrant digital economy, and ongoing customs reforms.

### Monetary policy: recent inflation drivers and policy stance
- Inflation drivers and dynamics
  - Staff analysis indicates that the uptick in inflation during the pandemic has mostly been driven by transitory factors.
  - Four fifths of the increase in headline inflation since the onset of the pandemic is attributed to supply shortages and exchange rate depreciation; their effects appear to have dissipated or plateaued.
  - Rising food supply from the new harvest season is projected to keep headline inflation on a downward trend, although risks exist from potentially higher divergences between the I&E rate and the rates in the BDCs and the parallel market.
- Long-term inflation context (1970-2020)
  - Long-term average CPI inflation at 16 percent was higher than the average rates for both SSA (13 percent) and EMDEs (13.6 percent).
  - Panel regression of 130 EMDEs over 1970-2020 shows about half of the average inflation in Nigeria is explained by M3 growth, another quarter by nominal exchange rate depreciation, and the remainder by country-specific effects (structural factors).
- Policy recommendations
  - A supportive monetary stance is appropriate in the current juncture, but a gradual tightening is needed to reduce the structurally high inflation base.
  - Staff recommended vigilance to prevent adverse feedback loops between elevated inflation and periodic exchange rate adjustments if monetary policy becomes excessively accommodative.
  - Gradual tightening of monetary policy, together with fiscal consolidation, will help prevent further build-up of REER misalignment.
  - The discretionary use of the CRR continues to pose uncertainties to the banking system and may impede monetary policy transmission channels.
  - Staff reiterated advice to:
    - (i) modernize the 2007 CBN Act to establish primacy of price stability;
    - (ii) facilitate integration of the interbank and debt markets;
    - (iii) use central bank or government bills of short maturity as the main liquidity management tool.
- Credit intervention programs
  - CBN’s credit injection to the private sector, both direct lending and on-lending through banks, accounts for about 45 percent of credit growth since 2020—significantly above the average of 12 percent in pre-pandemic years.
  - Such interventions provided financing to underserved markets (e.g., agriculture) and mitigated pandemic impact but cannot be expanded indefinitely given likely efficiency costs and market distortions; a thorough review is warranted.
- Safeguards and governance
  - A safeguards assessment of the CBN was completed in April 2021 but progress on implementation of recommendations has been limited.
  - The CBN Act needs modernization to strengthen autonomy and governance, and to establish price stability as the primary objective.
  - CBN’s involvement in quasi-fiscal operations and developmental lending activities should be phased out; financial reporting practices should be bolstered through full adoption of International Financial Reporting Standards and resumed publication of annual financial statements.

### Banking sector: stability and risks
- Overall assessment
  - The banking sector weathered the crisis well, supported by ample pre-crisis buffers and prudent credit policies during the pandemic.
  - Capitalization has remained adequate in aggregate, except for some smaller undercapitalized banks.
  - NPL ratios remained broadly stable during the pandemic owing to conservative lending policies, regulatory forbearance and CBN credit intervention programs.
  - Tighter market liquidity due to CRR debits and restricted access to the CBN discount window are raising banks’ funding costs.
  - Profitability has held up, buoyed by soaring e-banking revenues, though results vary across individual banks.
- Dollarization and credit risk
  - Credit risk from exchange rate depreciation on borrowers in FX is lower as the share of loan and deposit dollarization fell during the pandemic (both by about 5 percentage points to 32 and 21 percent, respectively).
- Restructured loans and systemic risk
  - The share of restructured loans, while declining, remains sizable at almost a quarter of total bank credit.
  - CBN stress tests show that a doubling of NPLs and significant migration of restructured loans to NPLs would erode the system’s capital buffers.
  - Staff supported the authorities’ plan to allow expiration of the optional loan restructuring at end-February 2022 to better assess underlying loan quality.
- Authorities’ perspective
  - Authorities justify the CBN’s multi-faceted role given the need to shepherd a frail recovery amidst very limited fiscal space.
  - They emphasize the importance of unconventional instruments (notably the CRR) to control excess liquidity while allowing use for credit to priority sectors.
  - They view intervention programs as targeted to sectors with a large empirical elasticity vis-à-vis job creation.
  - While agreeing on shifting away from intrusive measures in the medium term, authorities believe phasing out quasi-fiscal activities can only be resumed once the crisis is over.

*International Monetary Fund — Chapter: “A restrictive trade regime impedes Nigeria’s external competitiveness and non-oil exports.”*

### 36.      Bank oversight is being enhanced through several initiatives. The banking law (BOFIA)

### Bank oversight is being enhanced through several initiatives.

### Banking law reforms and prudential strengthening
- The banking law (BOFIA) was revamped in late 2020, introducing:
  - a bank resolution fund,
  - bail-in instruments,
  - special tribunals for asset recovery,
  - enhancements to banks’ corporate governance (e.g., independent board members).
- Once fully implemented, the new provisions should facilitate bank resolution and help forestall cases of chronic capital insufficiency.
- The CBN is about to implement a suite of Basel II/III instruments, notably:
  - Liquidity Coverage Ratio,
  - Capital Conservation Buffer,
  - Leverage Ratio,
  - capital and liquidity planning regulations.
- Staff recommended adoption of macroprudential tools to mitigate cyclical and household leverage risks, such as:
  - a Countercyclical Capital Buffer,
  - Debt service-to-Income Ratio.

### Asset recovery and AMCON
- Asset recovery by the public asset management company (AMCON) has encountered obstacles, leaving a large financing gap ahead of its planned closure in end-2023.
- Collection on large delinquent borrowers has been slow during the pandemic, leaving a shortfall relative to the debt owed to the CBN of more than 3 trillion naira.
- Recoveries are set to accelerate thanks to an amendment to the AMCON act passed in April 2021 facilitating property foreclosures.
- Banks will likely continue to finance recovery operations and AMCON debt amortization beyond AMCON’s closure which could sustain the negative impact on banks’ profitability.

### eNaira (CBDC): benefits and risks
- The recent introduction of the eNaira promises several potential benefits, including higher financial inclusion.
- The eNaira offers low-cost and phone-enabled financial transactions outside established channels and could potentially increase financial inclusion over time in rural areas and help meet the authorities’ target to increase the share of financially included adults to 95 percent.
- Staff highlighted risks that require vigilance, including risks to:
  - monetary policy implementation,
  - bank funding,
  - cyber security,
  - operational resilience,
  - financial integrity and stability.
- Staff recommendations and observations:
  - conduct regular risk assessment and contingency planning for CBDC implementation;
  - perform a money laundering/terrorist financing risk assessment of domestic and cross-border uses of eNaira;
  - adopt and implement AML/CFT regulation for eNaira intermediaries and put in place risk-sensitive mitigation measures as a priority;
  - monitor consumer protection issues arising from a dynamic digital lending ecosystem dominated by fintechs.

### AML/CFT framework: deficiencies and priorities
- The mutual evaluation report of Inter-Governmental Action Group against Money Laundering (GIABA) identifies significant deficiencies that could result in a Financial Action Task Force (FATF) grey listing as early as next year with broader implications on the financial sector.
- Authorities’ actions underway include:
  - creating a national committee to develop an AML/CFT action plan,
  - capacity building initiatives for key AML/CFT institutions,
  - proposed amendments to money laundering and terrorism prevention legislations.
- Staff recommended speeding-up efforts and taking sustained action in line with a prioritized and clear action plan. Priority actions include:
  - (i) improving the understanding of money laundering and terrorism financing risks,
  - (ii) enhancing risk-based supervision and compliance of reporting entities,
  - (iii) improving the availability of adequate, (iv) accurate and updated beneficial ownership (BO) information,
  - (v) strengthening enforcement against money laundering/terrorist financing and confiscation of ill-gotten proceeds,
  - (vi) properly implementing targeted financial sanctions in line with relevant United Nations Security Council Resolutions related to terrorism, terrorism financing, and proliferation financing.

### Authorities’ views on financial sector risks and reforms
- Authorities deem risks to the financial sector as manageable, noting:
  - a low risk of significant deterioration in the quality of restructured loans and mandatory provisioning of these loans;
  - the new BOFIA provisions should improve the financial safety net;
  - close monitoring of undercapitalized banks with expectation of solutions within months.
- On CBDC implementation, authorities consider the safeguard measures sufficient and are vigilant on the fintech sector via:
  - a regulatory sandbox,
  - increased use of code-based phone transactions,
  - mandated data sharing between banks and fintechs (“open banking” concept),
  - consideration of centralized regulation of digital lending.

### Staff appraisal and policy recommendations related to financial stability and macro policy
- The banking sector has weathered the crisis well due to pre-existing buffers, conservative lending policies, CBN credit intervention programs, and regulatory forbearance.
- Given the ongoing recovery, the planned expiration of the time-bound pandemic-related support measures in end-February 2022 is appropriate.
- To safeguard financial stability, staff recommended timely action against chronically undercapitalized banks.
- Other relevant macro-financial assessments and numbers:
  - Following the 2020 disbursement under the RFI, the total amount of outstanding credit from the Fund reached SDR 2.45 billion (100 percent of quota and 9.7 percent of gross international reserves).
  - Under the baseline, repayments to the Fund are projected to increase over the medium-term, peaking at SDR 1.24 billion in 2024, equivalent to 3.6 percent of exports, 5.3 percent of gross international reserves, and 6.9 percent of external debt service.
  - FPIs’ estimated naira asset holdings were $16.9 billion as of September 2021.
  - A downside scenario could drop reserves to $29.1 billion in 2024 with repayments to the Fund rising to 3.7 percent of exports, 6.3 percent of reserves, and 7.9 percent of external debt service.
  - The downside scenario assumes a temporary oil price shock in 2022Q1 ($40 per barrel) which raises sovereign borrowing costs (by 100 bps) and higher capital outflows (75 percent rollover of existing foreign capital stock).

*International Monetary Fund — Nigeria: selected sections on banking oversight, AMCON, eNaira, AML/CFT, and related macro-financial assessments.*

### introduction of additional macroprudential instruments to better manage systemic and cyclical risks.

### introduction of additional macroprudential instruments to better manage systemic and cyclical risks.

### Macro and policy overview: growth, transparency, and IMF engagement
- Bold reforms are needed to ensure job-rich growth; a less restrictive and protectionist trade regime is recommended to enhance Nigeria’s growth potential and harness the gains from the AfCFTA.
- Agriculture accounts for almost half of employment; improving agricultural productivity is important for overall growth and employment.
- Improved transparency and governance would bolster business confidence and public trust in reforms. Notable progress has been made in reducing corruption and improving transparency in recent years.
- Strengthening public perceptions of government effectiveness and the civil service is needed to increase tax compliance and buy-in of reforms.
- It is important to pick up implementation of transparency and accountability measures committed under the RFI. Planned civil service reforms are welcome; stronger efforts are needed to improve transparency of COVID-19 pandemic spending and procurement information.
- Nigeria’s capacity to repay the Fund remains adequate. All indicators of Nigeria’s capacity to repay remain adequate under the baseline and the downside scenarios.
- The Fund proposes that the next Article IV consultation take place on the standard 12-month cycle.

### Petroleum Industry Act (PIA) 2021 — key features and fiscal implications
- Enacted in August 2021 with objectives to ensure good governance and accountability, create a commercially oriented national petroleum company, and foster a good business environment for petroleum operations.
- Governance and institutions:
  - Dual regulatory agencies: the Nigerian Upstream Regulatory Commission (the “Commission”) and the Midstream and Downstream Petroleum Regulatory Authority (the “Authority”).
  - “NNPC Limited” is to be incorporated within 6 months and replace the NNPC entirely within 18 months; NNPC Limited is to be operated on a commercial basis without government funding and must publish annual reports and audited accounts. Government owns all shares in NNPC Limited through the Ministry of Finance & Ministry of Petroleum while controlling selection of its management team.
- Administration:
  - Objective to promote exploitation of petroleum resources for the benefit of Nigerian people and ensure transparency in administration.
  - Market-based pricing principle for petroleum products to avoid cross-subsidies.
  - When the authority regulates tariffs and prices, the authority shall allow the seller to recover reasonably and prudently incurred costs, including a reasonable return on the capital invested.
- Host community development:
  - Operating companies issued oil prospecting licenses or mining leases must set up a host community development trust fund.
  - The company will contribute 3% of its actual operating expenditure in the upstream petroleum operations in the preceding calendar year to the trust fund.
- Fiscal framework and tax changes:
  - New fiscal terms intended to promote investment but could reduce government take from new and converted fields; short-term revenue impact depends on pace of conversion of existing fields to new terms.
  - A new royalty combines a base rate with a variable rate linked to oil prices.
  - The Petroleum Profits Tax (PPT) is replaced by the regular CIT at 30% and a new Hydrocarbon tax at rates from nil for offshore production to 15% or 30% for onshore production.
  - This reduces the average effective tax rate for companies in the upstream sector to around 60~70% as opposed to the previous 85% rate.
  - The Commission will collect rents, royalties, and production shares as applicable; the Authority will collect the gas flare penalty from midstream operations.
  - A Frontier Exploration Fund will be financed through a 30% deduction of profit oil and gas in production sharing, profit sharing and risk service contracts, administered by NNPC.
  - Gas flaring penalties will no longer be transferred to the Federation Account and will instead be used for gas infrastructure development or environmental remediation in the host communities.
- Miscellaneous:
  - The PIA repeals about 10 laws including the Associated Gas Reinjection Act; Hydrocarbon Oil Refineries Act; Motor Spirits (Returns) Act; NNPC (Projects) Act; NNPC Act; and PPPRA Act.

### eNaira (CBDC): potential benefits and risks
- Launch and design:
  - The Central Bank of Nigeria (CBN) officially launched the “eNaira”—a central bank digital currency (CBDC)—on October 25, 2021.
  - The eNaira is designed to circulate as a fiat money, and as such has intrinsic value.
- Expected benefits (expected to materialize gradually with robust regulation):
  - Increased financial inclusion as eNaira wallet coverage expands from only people with bank accounts to anyone with a mobile phone.
  - Facilitation of remittances, as the Nigerian diasporas are, in due course, allowed to obtain eNaira from international money transfer operators and digitally transfer it to Nigeria free of charge.
  - Reduced informality and illegal activities, as eNaira transactions are in principle fully traceable.
- Identified risks and mitigation measures:
  - Disintermediation risks: eNaira wallets may be perceived as safer and more convenient than commercial bank deposits. CBN mitigation: subjecting the transfer of funds from bank deposits to eNaira wallets to daily transactions limits.
  - Cybersecurity risks associated with the eNaira.
  - Legal and operational risks from unforeseen private-law issues (e.g., the exact nature of legal relationship between wallet providers and CBDC holders) that may lead to litigation and operational risks.
  - Financial integrity risks: mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
  - Prospective expansion to cross-border fund transfers and agency bank networks may cause new money-laundering/financing of terrorism (ML/FT) risks.

### Inflationary impact of exchange rate depreciation — channels, estimates, and model results
- Channels:
  - Exchange rate passthrough to inflation operates through prices of imported goods in the CPI basket and second-round effects through input and output links.
- Imported goods weight estimates:
  - No official statistics on total share of imported goods in the CPI basket; staff estimates this share to be in the 13-20 percent range based on the share of imported food in the CPI basket (13.3 percent) and the share of imports in total private consumption (6.4 percent).
- Econometric model and findings:
  - A parsimonious model using M2, BDC exchange rate, and BDC-to-I&E exchange rate spread for 1995M05-2021M7 shows:
    - Exchange rate shocks—captured by the parallel market rate depreciation—explain 38 percent of the overall CPI developments since 2019.
    - Despite a highly managed rate in the I&E window, 62 percent of the naira’s depreciation as reflected in the BDC rate has already been passed through to inflation.
- Estimated impacts of further depreciation:
  - Staff estimates the cumulative impact on CPI inflation from a further 15 percent depreciation in the I&E rate to be 5.8 percent during 2022-31.
  - This compares to first-round effects of 2-3 percent based on estimated weights of imported goods in the CPI basket, implying an imputed estimate of second-round effect of 3-4 percent.
  - The impact shows a peak at 2.2 percent in 2022 which tapers off to 0.3 percent in 2026.
- Caveat:
  - While the ARDL model is relatively free from endogeneity bias, there may be a possible endogeneity bias in the estimated exchange rate effect—which could have resulted in its overestimation.

*Source: IMF staff report excerpt (PDF chapter/section).*

### Box 4. Nigeria’s Planned Climate Adaptation Policies

### Box 4. Nigeria’s Planned Climate Adaptation Policies

### GHG emissions baseline, projections, and targets
- Nigeria’s greenhouse gas emissions (GHG) rose to 347 million tons of CO2 equivalent in 2018.
- Energy and agriculture sectors contributed to 60 and 25 percent of this increase, respectively.
- Government projection under a business-as-usual scenario: GHG to rise to 453 million tons of CO2 by 2030.
- Government commitments for 2030:
  - Unconditional limit: 362 million tons of CO2 in 2030.
  - Conditional limit (assuming considerable financial support): 247 million tons of CO2.

### Focus on adaptation and National Adaptation Framework
- Authorities are focusing on adaptation measures given the likely severe impact of climate change on the Nigerian economy.
- Adaptation measures are articulated in the National Adaptation Framework, published in 2020, which will guide policy developments and implementation.
- Adaptation policies focus on five areas:
  - Agriculture: better soil management to improve yields and thereby help reduce food insecurity.
  - Forestry: improving forestry management to help reverse the loss in forest cover and aggressive afforestation (12 million trees to be planted in 2023).
  - Energy: expanding sustainable energy sources (including solar) and decentralizing transmission to improve electricity availability in rural areas.
  - Water management: improving the quality of water-producing ecosystems and sanitation services and strengthening the resilience of water supply infrastructure.
  - Disaster preparedness: transforming the focus of the national emergency management agency from relief to disaster management and introducing a Disaster management Act to secure budgetary funding.

### Implementation costs and financing needs
- Government estimate of full cost of NDC implementation: $177 billion over 2021-30 (40 percent of Nigeria’s 2021 GDP).
  - About two thirds of this cost are for the electricity sector alone.
- The 2021-25 NDP indicates a government contribution of 1.8 trillion naira over this period (1 percent of 2021 GDP) for the water sector and environment.
- Almost all funding would therefore need to come from the private sector and development partners.
- Implementation requires large foreign funding that is yet to materialize.

*This box is based on Federal Government of Nigeria 2021 NDC Update.*

### Annex I. Policy Commitments Under the RFI

### Annex I. Policy Commitments Under the RFI

### Monetary and exchange rate policy
- Commitment: Strengthen monetary and exchange rate policies with a view to move towards full exchange rate unification and greater exchange rate flexibility.
- Status: Ongoing
- Progress and remaining tasks:
  - The official exchange rate has been discontinued.
  - The I&E rate has depreciated by about 5 percent since April 2020.
  - Full exchange rate unification, which would require institutional abolishing of the windows, has not been achieved.
  - Exchange rate flexibility has not materially improved.

### Fiscal policy
- Commitment: The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which have been eliminated, do not reemerge.
- Status: Unmet
- Progress and remaining tasks:
  - Implicit fuel subsidies have reemerged since November 2020.
  - The automatic market-based fuel price formula has not been introduced.

### Power sector reform
- Commitment: Move to full cost-reflective tariffs in 2021.
- Status: On-going
- Progress and remaining tasks:
  - Delayed to January 1 2022.

### Governance
- (i) Commitment: Create specific budget lines to facilitate the tracking and reporting of emergency response expenditures.
  - Status: Met
  - Progress: Budget lines were created.
- (ii) Commitment: Report funds released and expenditures incurred monthly on the transparency portal.
  - Status: Partially met
  - Progress and remaining tasks:
    - The quality of information on the transparency portal regarding funds and expenditure remains uneven as does public access.
- (iii) Commitment: Publish procurement plans, procurement notices for all the emergency response activities—including the name of awarded companies and of beneficial owners—on the Bureau of Public procurement website.
  - Status: Partially met
  - Progress and remaining tasks:
    - Procurement contracts above N5 Million are published at the Ministry of Finance Portal. https://opentreasury.gov.ng/ (access remains uneven)
    - Crisis-related Procurement Contracts are published according to specific guidelines (access remains uneven)
    - Corporate Registry started to publish the list of Persons with Significant Control since January 2021 as the implementation of the new Companies and Allied Matter Act started. Companies incorporated prior to CAMA implementation date (January 3, 2021) have disclosed beneficial ownership, and the companies formed after the date are required to disclose it once their annual return for the first fiscal year is completed. https://post.cac.gov.ng/search/type/company
- (iv) Commitment: Publish no later than three to six months after the end of the fiscal year the report of an independent audit into the emergency response expenditures and related procurement process, which will be conducted by the Auditor General of the Federation—who will be provided the resources necessary and will consult with external/third party auditors.
  - Status: Delayed
  - Progress and remaining tasks:
    - The Office of the Accountant General (OAGF) has commissioned an audit unit to undertake financial audits of COVID-19 spending.
    - The Auditor General’s office is conducting audits of the spending utilization across procurement agencies—with the first audit recently conducted and the report being drafted.
    - Given decentralized auditing authority due to Nigeria’s Federal structure, a single national audit report is deemed infeasible.

### Article VIII commitment
- Commitment: Not to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement.
- Status: Unmet
- Progress and remaining tasks:
  - A trade restriction was introduced for import of sugar.

*Source: Annex I. Policy Commitments Under the RFI (content unit)*

### Annex II. Risk Assessment Matrix — Key Risks and Policy Responses

### External Risks
- Uncontrolled COVID-19 local outbreaks and subpar/volatile growth in affected countries.
  - Likelihood: High
  - Time Horizon: Short to Medium Term
  - Impact on Nigeria: High
  - Policy Responses:
    - Allow greater exchange rate flexibility to preserve external buffers, structural reforms to enhance economic diversification and efficiency, and fiscal consolidation to ensure continued access to international capital markets.
    - Continue to focus on meeting the goal of vaccinating 70 percent of population by 2022, including through vaccine campaigns.
    - Continue with the proactive approach to closely monitor developments and prepare for new waves.
- Widespread social discontent and political instability.
  - Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact on Nigeria: Medium
  - Policy Responses:
    - Step up social spending by creating space through expenditure reprioritization, revenue mobilization and use of concessional financing resources.
    - Step up anti-corruption and governance efforts.
- Intensified geopolitical tensions and security risks.
  - Likelihood: High
  - Time Horizon: Short Term
  - Impact on Nigeria: Medium
  - Policy Responses:
    - Allow greater exchange rate flexibility to preserve external buffers particularly in view of risks of commodity price volatility.
- Cyber-attacks on critical infrastructure, institutions, and financial systems.
  - Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact on Nigeria: Low
  - Policy Responses:
    - Strengthen the supervisory and regulatory framework, especially as it pertains to oversight of holding companies; improve corporate governance; and address weaknesses in the bank resolution framework.
    - Strengthen contingency planning, and the institutional framework of emergency response.
- Higher frequency and severity of natural disasters.
  - Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Impact on Nigeria: High
  - Policy Responses:
    - Rebuild fiscal and external buffers now to counter effects of future demand shortfalls particularly on vulnerable groups.
    - Continue improving the business environment to boost productivity and competitiveness, and to foster diversification to dampen negative effects.
    - Implement climate adaptation plan to limit the impact of natural disasters.

### Nigeria-specific Risks
- Speed of reform implementation.
  - Downside: Continuation of implicit fuel subsidies will significantly reduce fiscal space and prolonged use of administrative measures to address higher FX demand could trigger a loss of confidence.
  - Upside: The AfCFTA could yield a positive net export boost if accompanied by a reduction in trade barriers and improvement of trade logistics.
  - Likelihood: Medium
  - Time Horizon: Short Term (downside) / Medium Term (upside)
  - Impact on Nigeria: High
  - Policy Responses:
    - Implement the integrated policy package which includes adopting a market-clearing unified exchange rate, fiscal consolidation, strengthen monetary and exchange rate frameworks, and an improved business environment.
    - Further expedite business-enabling structural reforms including more open trade policy.
    - Strengthen security and investment environment in the oil and gas sector.
- Deterioration of security conditions disrupting oil production and food supply.
  - Likelihood: Medium
  - Time Horizon: Near to Medium Term
  - Impact on Nigeria: High
  - Policy Responses:
    - A coordinated effort in both military and developmental fronts is essential to address security challenges.
- Slow progress in addressing corruption, tax evasion, and related money laundering.
  - Likelihood: High
  - Time Horizon: Short Term
  - Impact on Nigeria: High
  - Policy Responses:
    - Step up anti-corruption and governance efforts including asset declaration, risks posed by politically exposed persons, transparency of beneficial ownership, and corporate governance.
    - Strengthen the AML/CFT regime, to address weaknesses identified in the 2021 GIABA mutual assessment.
- Higher-than-projected production of refined products by the Dangote refinery and higher investment in the petroleum sector from the adoption of the PIA.
  - Likelihood: Medium
  - Time Horizon: Medium Term
  - Impact on Nigeria: High
  - Policy Responses:
    - Further expedite business-enabling structural reforms to maximize growth benefits from positive spillovers.

*Source: Annex II. Risk Assessment Matrix (content unit)*

### Annex III. Public Debt Sustainability Analysis — Baseline and Stress Findings

### Summary assessment
- Overall: Nigeria’s public debt is assessed to be sustainable, but subject to high risks and uncertainties.
- Main vulnerabilities:
  - Liquidity-based indicators—driven by weak revenue mobilization—remain concerning.
  - Interest payments represent a high share of government revenue, making debt servicing capacity vulnerable to shocks.
- Recommended policy package: Fiscal consolidation based on non-oil revenue mobilization over the medium term, once the COVID-19 crisis passes, to reduce the interest payments-to-revenue ratio to more sustainable levels.

### Baseline projections and key statistics
- Public debt trajectory:
  - Debt rose to 29 percent of GDP in 2019 from 9 percent in 2009.
  - In 2020, public debt increased further to 35 percent of GDP.
  - The debt-to-GDP ratio is expected to increase in the medium term to 43 percent of GDP.
- Gross financing needs (GFN):
  - Expected to increase to 8.9 percent of GDP in 2021 from 7.3 percent in 2020.
  - Expected to reach 11.4 percent in the medium term.
- Foreign currency denominated debt:
  - Has stayed at 20 percent of public debt.
- Interest payments and revenue:
  - Interest payments were 2 percent of GDP in 2020.
  - About 89 percent of federal government revenues were absorbed by interest payments in 2020.
  - FG interest-to-revenue ratio is expected to slightly decline to around 86 percent in 2021 and rise steadily to reach 139 percent by 2026.
- Contingent liabilities:
  - Explicit contingent liabilities of the federal government are around 2.9 percent of GDP in end-2020 (according to the DMO).
  - Non-guaranteed liabilities of government-owned entities and certain PPPs may pose additional risks (no data available).

### Stress tests and vulnerabilities
- Individual shocks:
  - Individual shocks to real GDP growth, primary balance, real interest rate, real exchange rate, as well as a contingent liability shock would push public debt no higher than 48 percent of GDP over the medium term.
- Combined macro-fiscal shock:
  - A standardized combined macro-fiscal shock would increase the debt level to 54 percent of GDP by 2026.
  - This remains below the 70 percent MAC-DSA benchmark but is near the literature-identified safe range of 40-58 percent of GDP for countries like Nigeria.
- Gross financing needs under shocks:
  - Would reach 13 percent of GDP under shocks to the real interest rate.
  - Would reach almost 14.7 percent of GDP under the combined macro-fiscal shock.
  - Under other shocks, GFN remains below 12 percent of GDP over the medium-term.
- FG interest payments-to-revenue ratio under stress:
  - A real interest rate shock would increase the FG interest-to-revenue ratio to about 348 percent by 2026.
  - A standardized combined macro-fiscal shock would increase the ratio to 398 percent by 2026.
  - Other shocks (real GDP growth, primary balance, exchange rate) increase the ratio to between 247 and 273 percent by 2026.
- GG interest payments-to-revenue ratio under stress:
  - Would be kept below 100 percent under shocks, except for the real interest rate and combined macro-fiscal shocks, under which the ratio would go up to 128 and 147 percent respectively.
- Uncertainty indicators:
  - Symmetric fan chart width estimated at about 20 percent of GDP by the end of the projection period.
  - Asymmetric fan chart: an extreme downside shock constraining growth to zero results in a more upward-sloping debt path.
- Heat map:
  - Ten green cells (low risk), four yellow cells (medium risk), and one red cell (high risk).
  - Major vulnerability: change in short-term debt, which increased significantly in 2020 due to COVID-19 crisis.
  - Medium risks indicated for foreign currency debt, external debt, external financing requirements and market perception.

*Source: Annex III. Public Debt Sustainability Analysis (content unit)*

### Annex IV. External Stability Assessment — Current Account and External Position

### Preliminary assessment
- Staff preliminary assessment for 2021: External position is weaker than implied by fundamentals and desirable policies.
- Current account gap and REER:
  - Staff estimates a current account (CA) gap of -3 percent of GDP, corresponding to a real effective exchange rate (REER) overvaluation of 15 percent.
  - Assessment is preliminary, pending revisions and full-year data for 2021.
- Reserves and capital inflows:
  - Reserves at end-2020 corresponded to 72 percent of the Assessment of Reserve Adequacy (ARA) metric, including the oil buffer, but have recently improved further.
  - Capital inflows remain modest relative to pre-pandemic years.
- Policy implication: Greater exchange rate flexibility together with deep structural reforms would be required to bring the external position back into balance over the medium term.

### Current account balances and 2020 impacts
- Trade and CA developments:
  - Exports collapsed by 45 percent relative to 2019 in 2020.
  - Imports fell by 17 percent in 2020.
  - Deficits in services trade and income were reduced by almost a half in 2020.
  - Remittances dipped by 28 percent in 2020.
  - The CA deficit widened to a historic 4 percent of GDP in 2020 (from a deficit of 3.3 percent in 2019).
- 2021H1 preliminary data:
  - Preliminary data suggests the current account deficit narrowed significantly to 1.2 percent of GDP in 2021H1.
  - Interpretation complicated by divergence in trade data between the CBN and the National Bureau of Statistics as well as large errors and omissions.

*Source: Annex IV. External Stability Assessment (content unit)*

*Document: 1ngaea2022001 - Annex I. Policy Commitments Under the RFI (extracted content unit)*

### 2.      Financial inflows declined significantly in 2020 and remain subdued in 2021H1. There

### 2.      Financial inflows declined significantly in 2020 and remain subdued in 2021H1. There

### Financial inflows and components
- Net portfolio outflows of $3.6 billion in 2020 — "for the first time since the global financial crisis."
- Preliminary 2021H1 portfolio flows:
  - Net portfolio inflows of $1.9 billion in 2021Q1.
  - Net portfolio outflows of $0.5 billion in 2021Q2.
- Net other investment inflows:
  - Declined to $4.3 billion in 2020 (from $7.7 billion in 2019), mostly due to lower private sector net inflows.
  - Preliminary 2021H1 shows persistent net outflows totaling $3 billion in the first two quarters.
- Foreign direct investment (FDI):
  - Picked up to $1.8 billion in 2021H1.
  - Reached $2.7 billion in 2020.
- Aggregate net financial inflows:
  - Held up better in 2020 relative to past crises partly reflecting authorities’ policies to restrict capital outflows.
  - Net financial inflows "barely reached $0.5 billion in 2021H1."
- Comparative notes:
  - Net portfolio outflows were $3.4 billion during the 2008 global financial crisis.
  - Net portfolio inflows collapsed in 2015 but remained positive at $859 million.
  - In 2015, net financial outflows peaked at $11.2 billion.

### Reserve adequacy and reserves outlook
- Gross foreign exchange (FX) reserves:
  - Declined to $36.5 billion at end-2020, equivalent to 72 percent of the Assessment of Reserve Adequacy (ARA) metric including the oil buffer.
  - SDR allocation of $3.35 billion and Eurobond issuance of $4 billion boosted reserves to $41.3 billion at end-October (year implied by surrounding text).
- Reserve drainage and pressures:
  - Gross FX reserves are projected to decline from $41.3 billion during the course of this year, partly owing to clearance of FX backlog owed to foreigners (estimated by the authorities at $1.7 billion as of end-October) and delivery of forward contracts.
  - In the absence of major policy adjustments, foreign capital inflows are projected to remain subdued in the medium term resulting in limited accumulation of FX reserves, which are projected to remain below 100 percent of the ARA metric.
- Reserve adequacy indicators shown in source figures (preserved as described):
  - Comparators/benchmarks include: 10% of Exports, 10% of Broad money, 30% of Short-term debt, 20% of Other liabilities, 100% of ARA metric, 125% of ARA metric, 100% metric+oil buffer *.

### Exchange rate assessment and external position
- EBA-Lite approaches and outcomes for 2021:
  - CA model (preferred):
    - Establishes a CA norm of -0.1 percent of GDP in 2021.
    - Preliminary adjusted CA balance ends at -3.1 percent of GDP for 2021 after cyclical and exceptional adjustments.
    - Corresponding CA gap is -3 percent of GDP, suggesting an external position weaker than implied by fundamentals and desired policy settings.
    - Using a current account elasticity to the real exchange rate (REER) of -0.20, the CA gap corresponds to an REER overvaluation of 14.9 percent.
    - Estimates subject to large unidentified residuals (-5.4 percent of GDP) from BoP errors and omissions and model uncertainties.
  - REER model:
    - Suggests REER overvaluation of 4.1 percent and "broadly consistent with fundamentals and desirable policies."
  - External stability (ES) approach:
    - Suggests REER overvaluation of 7.8 percent.
- Vulnerabilities and policy implication:
  - Nigeria’s complex exchange rate policy and multiple exchange rates remain a major source of vulnerability.
  - Recommendation: "A unified and market-clearing exchange rate would foster competitiveness and alleviate BoP pressures in Nigeria."
  - Need for "further clarity on exchange rate" to help attract larger capital inflows, including FDI.

### Capacity development (CD) priorities and implementation (Annex V summary)
- Strategic focus areas:
  - Revenue mobilization, public financial management, banking supervision, and macroeconomic statistics.
  - Monetary and exchange rate policy: authorities interested in training on modeling but not technical assistance on monetary policy operations.
- CD delivery mix:
  - Current mission mix HQ/RTAC ≈ 1:2 considered adequate.
  - Training activities to be gradually expanded.
- Key CD priorities and objectives (excerpted):
  - Tax policy and revenue administration:
    - TA advice partially incorporated in the 2020 Finance Bill.
    - Going forward: comprehensive oil and non-oil tax policy reforms, rationalization of tax expenditures, improved non-oil revenue mobilization by strengthening tax and customs administrations.
  - Public financial management:
    - Traction: Treasury Single Account in place; progress on medium-term debt strategy, cash management, budget planning.
    - Going forward: more integrated cash, asset, liability management, macro-fiscal forecasting, and fiscal risks management.
  - Financial supervision and regulation:
    - Traction: intake of policy advice on banking supervision, early warning system, risk-based supervision.
    - Going forward: capacity development in banking supervision, including onsite/offsite functions and bank resolution through AFRITAC West II.
  - Macroeconomic and financial statistics:
    - Traction: progress disrupted by pandemic delays in Census and surveys; little intake on GFS statistics.
    - Going forward: improve compilation of national accounts and price statistics.
- Risks and mitigation:
  - Main risks: absorptive capacity and data quality.
  - Mitigants: resident advisor program, merit-tested resource allocation for new TAs, deployment of long-term resident expert (LTX) on revenue mobilization, coordination with World Bank Program for Results on revenue mobilization.
- Authorities’ views:
  - Authorities agreed with priorities, expressed renewed commitment and ownership, appreciated rebalancing toward hands-on support, and interest in TA for budget reporting and CBDC rollout support.

### External Debt Sustainability (Annex VI)
- External debt levels and trends:
  - External debt (public + private) projected at 24.1 percent of GDP at end-2021.
  - External debt-to-exports ratio:
    - About 262.2 percent in 2020.
    - Projected to rise to almost 300 percent in 2026, up from 145½ percent in 2015.
- Baseline projection:
  - Under the baseline, external debt would decline slightly as share of GDP.
  - Private sector external borrowing projected on a downward trend; public sector expected to continue drawing financing from bilateral and commercial external sources.
- Stress test findings:
  - Higher interest rates or slower growth alone would not lead to outcomes substantially different from baseline.
  - A shock to the non-interest current account (interpreted as a substantial decline in oil exports) would place external debt-to-GDP on a substantially higher path due to high historical volatility of the current account.
  - A combined (interest rate, growth, current account) shock has a similar impact, driven by current account dynamics.
  - A one-time real depreciation of 30 percent in the first projection year would cause an upward level shift in debt but not an upward path.
- Key numerical projections and indicators (selected from Table 1 and surrounding text; preserved verbatim where presented):
  - Baseline: External debt (percent of GDP) — 2020: 24.6; 2021: 24.1; 2022: 22.8; 2023: 21.1; 2024: 19.9; 2025: 18.9; 2026: 18.1.
  - External debt-to-exports ratio (in percent) — 2016: 157.4; 2017: 187.4; 2018: 151.3; 2019: 146.3; 2020: 264.2; 2021: 197.0; 2022: 210.6; 2023: 235.7; 2024: 262.9; 2025: 287.2; 2026: 296.7.
  - Gross external financing need (in billions of US dollars): 2016: 4.5; 2017: -5.6; 2018: 14.4; 2019: 37.6; 2020: 48.8; 2021: 40.0; 2022: 39.0; 2023: 40.4; 2024: 39.2; 2025: 38.8; 2026: 35.6.
  - Key macro assumptions (selected):
    - Real GDP growth (in percent): 2020: -1.8; 2021: 2.5; 2022: 2.8; 2023: 2.6; 2024: 2.7; 2025: 2.7; 2026: 2.6.
    - Growth of exports (US dollar terms, in percent): 2020: -42.9; 2021: -3.2; 2022: 27.2; 2023: 41.8; 2024: -1.2; 2025: -5.4; 2026: -4.5.
    - Current account balance, excluding interest payments (in percent of GDP): 2020: -3.6; 2021: 1.0; 2022: 3.2; 2023: -2.3; 2024: -2.3; 2025: -2.1; 2026: -1.6.
- Notes on data and methodology:
  - Analysis subject to gaps in data on remaining maturity of external obligations; staff estimates used for portfolio investment liabilities based on estimated stock of non-resident holdings of government securities issued on the domestic market.
  - Reference to IMF (2008) “Staff Guidance Note on Debt Sustainability Analysis for Market Access Countries” for methodology.

*Source: IMF staff report (Staff Report for the 2021 Article IV Consultation — Informational Annex, December 14, 2021).*

### Section 2(a) of the IMF’s Articles of Agreement: (i) an exchange restriction arising from the

### Section 2(a) of the IMF’s Articles of Agreement: (i) an exchange restriction arising from the

### Exchange restrictions and MCPs
- Exchange restrictions identified:
  - Prohibition to access foreign exchange at the Nigerian foreign exchange markets for the payment of imports of 42 categories of items.
    - Note: One of the 42 items on the list is the foreign securities. The prohibition by the CBN to purchase FX for such securities on the Nigeria FX market constitutes a capital flow management measure (CFM) but not an exchange restriction for current international transactions.
  - Rationing of foreign exchange by the CBN in different FX windows, and allocation based on the CBN’s determination of priority categories of transactions.
  - Existing limits on the amounts of foreign exchange available when traveling abroad (BTA/PTAs), which cannot be exceeded even upon verification of the bona fide nature of the transaction.
- MCPs (Measures subject to Fund approval under Article VIII, Section 3):
  - An MCP arising from the practice of the CBN that results in the establishment of an exchange rate for use in official (government) transactions and some other transactions, which may differ by more than 2 percent from the rate used by commercial banks in other CBN FX windows (SMIS, SME, IEFX and Invisibles).
    - From May 10, 2021, the previously existing facility for banks to have access to US$50,000 per day on a rotating basis at the official exchange rate was eliminated.
  - An MCP arising from the large spread between exchange rates used by the CBN in its FX windows and the rates in the parallel market, caused by the CBN’s limitation on the availability of foreign exchange which channels current international transactions to such market.
  - An MCP arising from the potential spread of more than 2 percent in the exchange rates at which the CBN sells foreign exchange to successful auction bidders in the SMIS window.
    - On March 2020, the CBN suspended sales to banks for wholesale SMIS window; however, SMIS retail is still functional for critical sectors.

### Safeguards Assessment of the CBN
- A safeguards assessment was completed in April 2021; progress on implementation of recommendations has been limited.
- Observations on governance and controls:
  - Internal and external audit mechanisms broadly adhere to international standards.
  - The CBN Act needs modernization to:
    - Enshrine price stability as the primary objective.
    - Strengthen central bank autonomy by reducing presence of government officials at the Board and the CBN’s committees.
    - Safeguard the independence and tenure of central bank officials.
  - Legal amendments recommended to provide independent oversight:
    - Establish a majority non-executive Board.
    - Establish an Audit Committee that is independent of executive management.
  - Financial autonomy recommendations:
    - Clear statutory limits on credit to government.
    - Prohibition of quasi-fiscal operations and developmental lending activities, which need to be phased out.
  - Financial reporting:
    - Full adoption of International Financial Reporting Standards.
    - Resumed publication of annual financial statements.
- Implementation status:
  - Limited traction has been seen on implementation; staff continues to engage with the authorities.

### Article IV consultation and IMF engagement
- Nigeria is on the standard 12-month Article IV consultation cycle.
  - The previous Article IV consultation was concluded on January 27, 2021.
- Mission leadership:
  - Ms. Jesmin Rahman has been the IMF’s Mission Chief since May 2020.
  - Mr. Ari Aisen has been the IMF’s Resident Representative since October 2020.

### Technical assistance (TA) since January 2020 (selected)
- Departments and purposes (missions and durations listed in source):
  - FAD: Customs administration — July 13 – July 29, 2020; September 14–September 30, 2020; October 3 – October 18, 2020; December 9 – 24, 2020; January 17 – February 2, 2021; March 24 – April 9, 2021.
  - FAD: Tax administration follow-up — November 16 – November 30, 2020.
  - FAD: Tax and customs administration — January 26 – February 11, 2021.
  - FAD: Tax diagnostic tool assessment — December 30, 2020 – January 18, 2021.
  - FAD: Tax policy — August 8 – August 21, 2020; February 12 – 26, 2021; July 30 – August 3, 2020; December 22 – 31, 2020.
  - FAD: Public Finance Management — December 7 – 12, 2020; February 4 – 18, 2021; February 4 – 13, 2021; February 27 – March 3, 2021; March 9 – 21, 2021.
  - FAD: Assess Need to Support Nigerian FIRS on administering revenue for Extractive Industries (EI) — January 16 - January 29, 2020.
  - FAD: Cash Flow Forecasting — January 13 - January 17, 2020.
  - FAD: Customs Administration — February 06 - February 18, 2020.
  - FAD: Follow-up on petroleum tax reform and fiscal modeling — January 22 - January 29, 2020.
  - MCM: Banking Supervision: Islamic Finance — September 02 - September 13, 2019; May 11 – May 20, 2020; November 2 – November 13, 2020.
  - MCM: Project Assessment and TA Needs Assessment — February 17 - February 21, 2020.
  - MCM: Risk Based Supervision: Application of Inspection Procedures and Report Writing — February 24 - February 28, 2020.
  - STA: National Accounts — January 11 – 22, 2021.
  - STA: Price statistics - Rebasing of Price index numbers — March 4-14, 2021; August 17 – August 28, 2020.

### Statistical issues and data adequacy (As of November 2021)
- Overall assessment:
  - Data are broadly adequate for surveillance, but shortcomings remain (notably subnational public finances and large errors and omissions in the balance of payments).
  - Ongoing TA on national accounts, monetary, government finance and external sector statistics.
- National accounts:
  - NBS implemented new base year 2010, ISIC revision 4, and Supply and Use Table framework.
  - GDP rebasing exercise planned to be completed by the end of 2023.
  - National Business Sample Census conducted in 2021; National Agriculture Survey Census expected in 2022.
- Price statistics:
  - Official monthly CPI available timely; current index weights and basket based on 2003/04 National Consumer Expenditure Survey.
  - CPI update using 2018 National Household Livings Standards Survey weights expected in 2022.
  - Compilation of updated producer price index ongoing; funding uncertain.
- Government finance statistics (GFS):
  - Key weaknesses: inadequate coverage, incomplete coverage of federal institutions, limited subnational data (subnational accounts for almost one half of total government expenditure).
  - Need for standardized budget classification, chart of accounts, accounting systems, use 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.
  - Nigeria does not report any GFS data to STA, though quarterly debt data is reported to the IMF / World Bank Quarterly Public Sector Debt Database.
- Monetary and financial statistics:
  - CBN reports Monetary and Financial Statistics (MFS) to the Fund using Standardized Report Forms (SRFs) for central bank and ODCs.
  - In late 2020, CBN began reporting data for other financial corporations (OFCs), covering the pension fund sector; expected gradual expansion to finance companies, development finance institutions, and insurance companies.
  - Nigeria reports some indicators to the Financial Access Survey (FAS), including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- Financial soundness indicators (FSIs):
  - CBN reports quarterly data for all of Nigeria’s core and eleven encouraged FSIs for deposit takers.
  - CBN working with STA to improve methodology and consolidation basis to capture cross-border activities.
- Balance of payments:
  - Significant efforts and TA to improve compilation and reduce large errors and omissions.
  - Remaining needs: improved validation of bank-reported transactions, measurement of transactions outside banking system, treatment of enterprises in free trade zones (residency criterion), improved coverage of external assets and liabilities of banking sector.
  - Need for private transfers survey and more frequent foreign assets and liabilities data (currently annual).
  - Collection of position data for inward and outward portfolio investment with country breakdown needed to enable participation in the CPIS.
  - 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.
  - Debt Management Office (DMO) collaborating with CBN to extend coverage to include private sector liabilities and foreign investment in debt securities issued domestically.
  - IMF and World Bank staff worked with the DMO to develop analytical capacity for debt management strategy.
- Data dissemination participation:
  - Nigeria has participated in the IMF’s GDDS since April 2003.
  - In February 2016, Nigeria implemented e-GDDS recommendations by publishing critical data through the National Summary Data Page (NSDP).
  - No Data ROSC is available.

### Table of Common Indicators Required for Surveillance (As of November 19, 2021) — selected entries (dates preserved exactly)
- Exchange Rates: Date of latest observation Oct. 2021; Date received Nov. 2021; Frequency M M M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency M M M.
- Reserve/Base Money: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency M M M.
- Broad Money: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency M M M.
- Central Bank Balance Sheet: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency M M M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency M M M.
- Interest Rates: Date of latest observation Aug. 2021; Date received Oct. 2021; Frequency D D D.
- Consumer Price Index: Date of latest observation Sept. 2021; Date received Nov. 2021; Frequency M M M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation Sep. 2021; Date received Nov. 2021; Frequency M M M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation Jun. 2021; Date received Sep. 2021; Frequency Q Q Q.
- External Current Account Balance: Date of latest observation Jun. 2021; Date received Sep. 2021; Frequency Q Q Q.
- GDP/GNP: Date of latest observation Sep. 2021; Date received Nov. 2021; Frequency Q Q Q.
- Gross External Debt: Date of latest observation Jun. 2021; Date received Sep. 2021; Frequency Q Q Q.
- International Investment Position: Date of latest observation Jun. 2021; Date received Nov. 2021; Frequency Q Q Q.

### Staff Statement update (Statement by the Staff Representative on Nigeria — January 24, 2022)
- COVID-19 / Omicron:
  - Omicron first detected in Nigeria in November; cases fell to below 300 per day as of January 17 compared to a peak of over 6000 on December 22 (Johns Hopkins University data).
  - As of January 11, less than 3 percent of the population have been vaccinated, compared to a median of 8 percent in Sub-Saharan Africa.
  - Authorities are actively encouraging increased vaccination and are considering producing the vaccine domestically.
- Growth and oil sector:
  - Upward revision in real GDP growth for 2021 to 3 percent, driven by more robust than projected non-oil growth notwithstanding lower oil output.
  - Nigerian oil output continued to decline through the fourth quarter of 2021:
    - Daily oil production excluding condensates at 1.2 million barrels per day, down from a peak of 1.4 million barrels in the first quarter, and below the OPEC quota of 1.67 million barrels.
    - Including condensates, oil and gas production amounted to 1.5 million barrels per day in the last quarter compared to 1.6 million barrels in the previous quarter.
  - Decline in petroleum production associated with continued security issues, especially in the Niger delta area.
  - Non-oil sector strength: Stanbic purchasing manager’s index rose by 1.4 units in December to 56.4; index at its highest level since late 2019.
  - Staff projection of 2022 real growth remains unchanged at 2.7 percent.
- Fiscal and external:
  - Lower than projected fiscal expenditures (January–November data) and imports (Q1–Q3 data) likely to result in lower fiscal and current account deficits for 2021.
  - Staff estimates 2021 overall fiscal deficit to be 5.9 percent of GDP compared to 6.3 percent in the staff report.
  - Current account deficit estimated around 2.4 percent of GDP compared to 2.8 percent in the staff report; uncertainties due to diverging trade statistics between the CBN and the NBS.
- Inflation:
  - End-December 2021 CPI inflation at 15.6 percent (year over year), higher than anticipated in the staff report (14.9 percent).
  - Higher inflation mostly due to food inflation uptick in December and further uptick in some sub-components (alcoholic beverages and housing and utilities).

*Source: IMF staff report content provided in the supplied PDF extract.*

### 1. Our  Nigerian  authorities  welcome  the  constructive  engagement  with  staff  during  the

### 1. Our  Nigerian  authorities  welcome  the  constructive  engagement  with  staff  during  the

### I. Authorities’ overview and policy stance
- Authorities share the broad thrust of staff’s assessment of economic developments and key policy priorities; topical selected issues papers are appreciated.
- Economy showing nascent signs of recovery following the 2020 contraction induced by COVID-19 and the oil-price downturn.
- Authorities credit proactive pandemic response measures and external financial assistance, including under the Fund’s Rapid Financing Instrument (RFI), for providing the foundation for recovery.
- Authorities remain vigilant to Omicron risks and oil industry instability (including shutdowns at Forcados and Okono terminals) that pose threats to government revenue.
- Commitment to reforms to achieve the objectives of the National Development Plan (NDP) 2021–25 and to deploy a coordinated macroeconomic policy mix to safeguard recovery gains.

### II. Recent Economic Developments and Outlook
- Real GDP growth:
  - Rebounded by 4.4 percentage points, from -1.8 percent in 2020 to 2.6 percent in 2021.
  - Projections: constrained growth at 2.7 percent in 2022 and 2023.
- COVID-19 vaccination status as of January 15, 2022:
  - 10.1 percent of the population targeted for vaccination has received the first dose.
  - 4.4 percent is fully vaccinated.
- Inflation:
  - Declined from a peak of 18.2 percent in March 2021 to 15.6 percent in December 2021.
  - Expected to decline to 14.3 percent in 2022 and 12.8 percent in 2023, supported by improved food supply.
- Current account and reserves:
  - Current account balance improved from -4.0 percent of GDP in 2020 to -2.8 percent of GDP in 2021.
  - Gross official reserves remained stable at 5 months of import cover.
- Dangote Refinery investment expected to reduce imports of petroleum products and improve current account performance in 2022 and 2023.
- Labor market remains weak due to COVID-19 dynamics; authorities plan to ramp up vaccination to support broader recovery.

### III. Fiscal Policy
- Fiscal stance and commitments:
  - Maintained an accommodative fiscal policy to support recovery, while committed to medium-term revenue and expenditure reforms to strengthen public finances and keep public debt on a sustainable path.
  - Will continue to operate within the constraints of the Fiscal Responsibility Act 2007, restricting borrowing with a focus on capital expenditure and human development.
  - Government has consistently met debt service commitments; Staff’s post financing assessment shows adequate capacity to repay the Fund.
- Pandemic-related fiscal actions:
  - Extraordinary expenditure measures implemented for COVID-19 containment, protection of poor and vulnerable, and economic resuscitation.
  - Aggressive investment in critical infrastructure and a supplementary budget addressing security and health sectors increased nominal expenditure and the fiscal deficit.
  - Suspension of upward price adjustments and petrol subsidy removal delays affected government revenues; fiscal deficit widened amid a sharp decline in revenue.
- Strategic Revenue Growth Initiative (SRGI) targets:
  - Increase the revenue-to-GDP ratio from the current 8.0 percent to 15.0 percent by 2025.
  - Beyond 2025, the debt-service-to-revenue ratio is expected to no longer be a critical concern.
- Revenue and administration measures:
  - Plans include digitalizing tax identification, rationalizing tax incentives, amendments to the Finance Act to address loopholes, and removing tax duplication to support business viability.
- Expenditure control and public sector reforms:
  - Expenditure rationalization initiatives to continue; MDAs on integrated payroll increased to 711 to date, from 459 in 2017.
  - Petroleum Industry Act 2021 (effective early 2022) and incorporation of the Nigeria National Petroleum Corporation expected to support elimination of oil subsidies and strengthen expenditure rationalization.
- Social protection measures:
  - Temporary monthly cash transfers planned for vulnerable urban households to cushion higher fuel prices when subsidies are lifted.
  - 2022 budget reflects gender-responsive budgeting.
  - eNaira (CBDC) expected to enable efficient delivery of social assistance and support higher financial inclusion over time.

### IV. Monetary and Exchange Rate Policy
- Inflation and monetary policy stance:
  - Authorities intend to pursue a declining inflationary trend as transitory pressures ease; guard against entrenched inflationary expectations while supporting recovery.
  - Temporary pressure on headline inflation expected in 2022-23 with removal of fuel subsidies; inflation should decline thereafter as supply shocks taper off.
  - Central bank will periodically review the monetary policy program for consistency with global and domestic conditions and effectiveness of tools.
- Exchange rate policy and reforms:
  - CBN phased out the official exchange rate by adopting the NAFEX market determined Investor and Exporters (I&E) rate as the reference rate.
  - Exchange rate misalignment narrowed considerably following abolition of the official exchange rate.
  - Authorities plan to eventually allow full market mechanisms but emphasize careful planning and management given risks, including those associated with the eNaira.
  - Recovery in oil prices and higher remittances expected to improve the balance of payments and FX market stability.

### V. Financial Sector Policy
- Banking sector resilience and supervision:
  - Banking sector remained resilient, supported by ample pre-crisis capital buffers and prudent credit policies.
  - CBN to sustain a tight prudential regime aiming to bring the NPL ratio down further below the prudential benchmark of 5.0 percent.
  - Ongoing monitoring, periodic stress tests (including loan reclassification), and mandatory provisioning to limit deterioration in restructured loans.
  - New banking law (BOFIA) enhances bank oversight, facilitates bank resolution, and helps prevent chronic capital insufficiency.
  - Implementation of additional Basel instruments and workable solutions expected for undercapitalized banks in the near future.
- Fintech and digital finance:
  - CBN monitoring fintech via a regulatory sandbox, increased use of code-based phone transactions, and mandated data sharing between banks and fintechs.
  - Considering centralized regulation of digital lending; pushing for increased intermediation to support recovery.
- eNaira (CBDC):
  - Expected benefits: enhance payment ecosystem, increase financial inclusion, boost tax collection, aid targeted social interventions, improve remittance flows, and reduce informality.
  - Digital Currency Management System leverages blockchain-based distributed ledger technology with attention to privacy, data protection, and AML/CFT considerations.
  - System designed to prevent illicit flows by requiring identification of transacting parties and transaction details.
  - Planned expansions: offline eNaira payments, cross-border payments, interoperability with other CBDCs, and multiple signatory wallets.
  - Authorities seek continued Fund technical support and guidance.

### VI. Structural Reforms
- Diversification and infrastructure:
  - Priority on diversification to lessen dependency on oil, reduce inequality and unemployment, build institutions, and address governance issues (aligned with NDP 2021–25).
  - Emphasis on investment in transport, electricity, education, and health to improve business environment.
  - Tertiary institutions' entrepreneurship scheme expected to enhance employment and entrepreneurship development.
  - Measures to enhance SME credit access and boost foreign-exchange-generating capacity.
  - Commitment to implementing AfCFTA to bolster non-oil exports and external competitiveness; plans to reduce tariff and non-tariff trade barriers.
- Climate change and transition:
  - Climate adaptation prioritized; selection of climate-smart infrastructure projects to address risks while accelerating diversification.
  - Climate Change Act outlines adaptation and mitigation measures; authorities reiterated commitment to cut carbon emissions and reach net-zero by 2060.
  - Climate bill includes five-year emission budgets aiming for net-zero greenhouse gas emissions between 2050 and 2070.
  - Mitigation measures include intensifying conversion from petroleum to natural gas vehicles (NGVs) and raising electricity tariffs to more cost-effective levels.
- Governance, transparency, and GOE reform:
  - Improved transparency at NNPC: last two annual financial statements published, reconciling gross and net oil revenues remitted to the Federation Account.
  - Corporate registry began publishing information on individuals with significant control over newly established companies.
  - Technical issues on transparency portal being addressed; comprehensive report on COVID-19 spending will follow completion of the audit.
  - Whistleblower bill being presented to Parliament.
  - Strengthened framework for GOE performance management to improve efficiency, viability, and transparency.
  - Finance Act 2021 imposes a 50 percent cost-to-income ratio on GOEs, contributing to reduced wasteful expenditures and increased operating surpluses transferred to the Consolidated Revenue Fund.
  - Allocations to TETFUND and budgets of 63 GOEs integrated into the 2022 federal budget proposal to reduce corruption and enable possible mergers under civil service reforms.
  - Commitment to improving AML/CFT framework to align with FATF standards.

### VII. Conclusion
- Authorities reaffirm commitment to improving healthcare capacity, supporting economic recovery, and ensuring debt sustainability.
- Committed to a macroeconomic policy mix to achieve domestic and external balance while ensuring equitable growth.
- Will intensify fiscal consolidation once higher growth is entrenched, generating fiscal space through increased revenue mobilization and expenditure management.
- Authorities appreciate Fund advice and technical support and look forward to Directors’ support in concluding the 2021 Article IV consultation.

*IMF country authorities' statement (Nigeria) as presented in the 2021 Article IV consultation document.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ngaea2022001.pdf_