## THE IMPACT OF FUEL SUBSIDY REEMERGENCE IN NIGERIA

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### A. Reemergence of implicit fuel subsidy and estimates
- Since January 2021, the Nigerian government reverted to providing implicit fuel subsidies; although the FGN announced removal of the fuel price cap in June 2020, a market-based pricing mechanism was not introduced and implicit subsidy costs accumulated on the NNPC.
- Implicit fuel subsidies are estimated at NGN 1,912 billion for 2021.
- Cost decomposition for one liter of PMS (average January–September 2021):
  - cost per liter: NGN 233
  - regulatory retail price: NGN 167
  - gap (proxy for implicit subsidy per liter): NGN 66
- Assumed consumption: about 54 million liters per day in Nigeria; applying the above under-recovery yields the annual implicit subsidy estimate of NGN 1,912 billion in 2021.
- Monthly fuel subsidies began accumulating in January 2021 and continued through the period covered.
- Subsidy incidence:
  - most subsidies are for PMS; there is no subsidy for kerosene, implying a “regressive” pricing policy (PMS used more by richer households; kerosene used mainly by poorer households).
- Methodology highlights (2017–2021):
  - Cost definition (symbolic formulation provided in source): C = Pwop ... Pd * (1+... ) * End * Do (as defined in source).
  - Demand relationship: DDD = Pm * Do (as defined in source).
  - Subsidy: S = C − DDD (as defined in source).
  - Data and assumptions:
    - PMS demand available monthly through February 2021 from NNPC; February–end-2021 demand assumed flat until updates.
    - Fuel oil demand uses U.S. Department of Energy annual data through 2018 and electricity growth assumptions for 2019–21.
    - Cost projected using futures oil prices and fixed market exchange rate.

### B. Fiscal and distributional impact
- Fiscal impact and projections:
  - Reemergence of implicit fuel subsidies estimated to increase the overall fiscal deficit by around 1 percentage point of GDP in 2021.
  - General government fiscal deficit projected at 6.3 percent of GDP in 2021, compared to 4.7 percent of GDP in the 2020 Article IV staff report.
  - Baseline assumes implicit fuel subsidies exist only until mid-2022, in line with the enacted PIA and draft 2022 budget; without bold tax reforms, fiscal deficits projected to stay elevated above pre-crisis levels (4.3 percent of GDP during 2014–19).
  - Public debt projected to increase from 35 percent of GDP in 2020 to over 42 percent in 2026.
- Key fiscal indicators and medium-term projections (in percent of GDP):
  - Total Revenue and Grants: 2020: 6.3; 2021: 7.4; 2022: 7.0; 2023: 6.8; 2024: 6.7; 2025: 6.7; 2026: 6.6
  - Oil Revenue: 2020: 2.2; 2021: 3.0; 2022: 2.6; 2023: 2.3; 2024: 2.1; 2025: 2.0; 2026: 1.9
  - Non-Oil Revenue: 2020: 4.1; 2021: 4.3; 2022: 4.3; 2023: 4.4; 2024: 4.5; 2025: 4.6; 2026: 4.7
  - Total Expenditure: 2020: 12.0; 2021: 13.7; 2022: 13.4; 2023: 12.4; 2024: 12.6; 2025: 12.8; 2026: 12.9
  - Implicit Fuel Subsidies (1/): 2020: 0.1; 2021: 1.0; 2022: 0.5; 2023: --; 2024: --  (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
  - Gross Public Debt: 2020: 34.5; 2021: 36.0; 2022: 37.5; 2023: 38.5; 2024: 40.0; 2025: 41.5; 2026: 42.9
  - Sources: IMF Staff Projections and Nigerian Authorities.
- Distributional effects and poverty:
  - Empirical pattern: richer households spend a larger share of income on PMS than poorer households; kerosene expenditure share is higher for poorer households.
  - PMS subsidy is characterized as “regressive”; literature finds top income quintile typically captures six times more in subsidies than the bottom.
  - IMF (2019) estimates:
    - A 40 percent increase in PMS price (recovery of current costs) reduces disposable income of rich households and decreases income inequality (Gini coefficient) by 1/4 point.
    - Headcount poverty rate increases by 1.2 percentage point after fuel subsidy removal.
    - Poverty gap increases by 0.4 percentage point after fuel subsidy removal.
    - Compensatory scenario that keeps the poverty headcount constant would require transfers equivalent to NGN 239 billion (0.13 percent of 2021 GDP).
    - Potential savings from fuel subsidy removal estimated at 1 percent of GDP in 2021.
    - That compensatory scenario would reduce income inequality and poverty gap further by around 1.3 and 1 percentage points, respectively.
- Policy-relevant projection:
  - Staff recommends scaling up social spending by up to 1 percent of GDP cumulatively for 2022–2026 (around 0.2 percent each year) through well-targeted cash transfers, leveraging World Bank engagement on delivery systems and digitalization.

### C. Developments, reversals, and lessons from past reforms
- Historical context:
  - Fuel subsidies first introduced in 1977 and retained by subsequent governments; subsidy bills escalated rapidly when international oil prices rose (e.g., 2000–2012).
  - Past reform attempts often implemented by moving to a new regulated price rather than creating a market-based pricing mechanism; subsidies tended to reemerge following currency depreciation and related inflation.
- Case study — 2012 reform (lessons):
  - On January 1, 2012, FGN raised gasoline price from NGN 65 to NGN 145 per liter to remove the subsidy; SURE (Subsidy Reinvestment and Empowerment) program announced as mitigation.
  - The reform triggered widespread protests and a national strike; the government partially reversed the reform, lowering the fuel price to NGN 97 per liter on January 15, 2012.
  - Political resistance and coalitions protecting subsidies impeded sustained reform; mitigation measures did not prevent reversal.
- Petroleum Industry Act (PIA) and implications:
  - PIA enacted into law in August 2021; it stipulates market-based pricing principles for petroleum products.
  - Selected PIA provisions:
    - 123(1) (f) and (g): market-based pricing principles — avoid economic distortions, ensure competitive market, avoid cross-subsidies.
    - 207: where the Authority regulates tariffs and prices of a licensee, the Authority shall allow the seller to recover reasonably and prudently incurred costs, including a reasonable return on capital invested.
    - 371(6): Government may request NNPC Limited as supplier of last resort to ensure adequate supply and distribution of PMS for a period not exceeding 6 months; all associated costs shall be for the account of the federation.
      - PMS subsidy lasting up to 6 months is retained (would imply expiration by February 16, 2022 under the source timeline).
  - Despite PIA, fuel subsidies were expected to remain pending negotiations with labor unions; authorities expressed commitment to fully remove fuel subsidies by mid-2022 at the latest and planned temporary monthly cash transfers to vulnerable urban households while negotiating with labor unions.
- Nigeria’s NGV conversion plan (selected figures and considerations):
  - Government target: convert one million vehicles from petrol to gas by end-2021 and aim to convert 40 percent of its fleets within 10 years.
  - FGN and CBN intervention fund: NGN 250 billion.
  - Conversion cost estimates:
    - DPR: conversion cost per vehicle: $400 (or around N164,000).
    - If converting 8 million public vehicles: 8 million × $400 = $3.2 billion.
    - If converting all 22 million vehicles: 22 million × $400 = $8.8 billion.
  - Given Nigeria’s per-capita GDP of slightly above $2,000, $400 per vehicle represents a sizable fiscal burden.
  - Cross-country lessons: successful NGV conversion programs implemented continuously over the medium term and often paired with incentive programs; some countries mitigated fiscal burden via gradual subsidy removal (“subsidy swap”).
- Why past reforms failed and lessons:
  - Main factors: lack of a well-designed communication campaign; public unawareness that the majority of subsidy accrues to better-off Nigerians; perception proceeds would not benefit general population.
  - Recommendations:
    - Conduct a well-designed, sustained communication campaign explaining reasons for reform, compensation for worst affected, and benefit distribution.
    - Establish government credibility that proceeds will be used for the general population.
    - Build broad consensus across all tiers of government and institutions (federal, state, local, CBN, National Assembly, NNPC, etc.).
- Policy recommendations (summary):
  - Implement simultaneously:
    - (i) Short-term fuel subsidy removal (market-based pricing) with mitigating measures to protect the poor.
    - (ii) Medium-term conversion plan from petroleum to natural gas vehicles (NGVs).
    - These two measures are complementary, not replaceable.
  - Specific measures:
    - Adhere to the PIA’s market-based pricing provisions and reach agreement with labor unions by early next year.
    - Conduct a well-designed communication campaign to persuade the public and unions.
    - Put in place well-targeted cash transfer programs (in consultation with the World Bank to strengthen delivery via digitalization and registry integration).
    - Build broad consensus on the reform among all tiers of government and public institutions.

*Prepared by IMF staff (content unit: THE IMPACT OF FUEL SUBSIDY REEMERGENCE IN NIGERIA).*

### References _______________________________________________________________________________ 16

### THE IMPACT OF FUEL SUBSIDY REEMERGENCE IN NIGERIA

### A. Reemergence of implicit fuel subsidy and estimates
- Since January 2021, the Nigerian government has reverted to providing implicit fuel subsidies; although the FGN announced removal of the fuel price cap in June 2020, a market-based pricing mechanism was not introduced and implicit subsidy costs accumulated on the NNPC.
- Implicit fuel subsidies are estimated at NGN 1,912 billion for 2021.
- Cost decomposition for one liter of PMS (average January–September 2021): cost per liter NGN 233; regulatory retail price NGN 167; gap NGN 66 (used as proxy for implicit subsidy per liter).
- Assumed consumption: about 54 million liters per day in Nigeria; applying the above under-recovery yields the annual implicit subsidy estimate of NGN 1,912 billion in 2021.
- Monthly fuel subsidies began accumulating in January 2021 and continued through the period covered.
- Subsidy incidence: most subsidies are for PMS; there is no subsidy for kerosene, implying a “regressive” pricing policy (PMS used more by richer households; kerosene used mainly by poorer households).

- Methodology to calculate implicit fuel subsidy (2017–2021):
  - Cost definition:
    퐶퐶 = 푃푃푃푃푃푃
    푃푃 ∗ (1 + 푃푃푃푃) ∗ 퐸퐸퐸퐸
    푃푃 ∗ 퐷퐷푃푃     (1)
    where Pwop is the world price for Nigeria bonny per barrel, Pd is the cost of landing fees and product distribution, End is the naira per dollar market-based exchange rate and Do is the demand for the refined oil products.
  - Demand relationship:
    퐷퐷퐷퐷 = 푃푃푃푃 ∗ 퐷퐷푃푃   (2)
    where Pm is the (regulated) national market price for PMS and Do is the demand for the refined oil products.
  - Subsidy:
    푆푆 = 퐶퐶 − 퐷퐷퐷퐷   (3)
  - Notes: PMS demand available monthly through February 2021 from NNPC; February–end-2021 demand assumed flat until updates; fuel oil demand uses U.S. Department of Energy annual data through 2018 and electricity growth assumptions for 2019–21; cost projected using futures oil prices and fixed market exchange rate.

### B. Fiscal and distributional impact
- Fiscal impact and projections:
  - Reemergence of implicit fuel subsidies estimated to increase the overall fiscal deficit by around 1 percentage point of GDP in 2021.
  - General government fiscal deficit projected at 6.3 percent of GDP in 2021, compared to 4.7 percent of GDP in the 2020 Article IV staff report.
  - Medium-term projection caveat: baseline assumes implicit fuel subsidies exist only until mid-2022, in line with the enacted PIA and draft 2022 budget; without bold tax reforms, fiscal deficits projected to stay elevated above pre-crisis levels (4.3 percent of GDP during 2014–19).
  - Public debt projected to increase from 35 percent of GDP in 2020 to over 42 percent in 2026.
- Key fiscal indicators and medium-term projections (in percent of GDP):
  - Total Revenue and Grants: 2020: 6.3; 2021: 7.4; 2022: 7.0; 2023: 6.8; 2024: 6.7; 2025: 6.7; 2026: 6.6
  - Oil Revenue: 2020: 2.2; 2021: 3.0; 2022: 2.6; 2023: 2.3; 2024: 2.1; 2025: 2.0; 2026: 1.9
  - Non-Oil Revenue: 2020: 4.1; 2021: 4.3; 2022: 4.3; 2023: 4.4; 2024: 4.5; 2025: 4.6; 2026: 4.7
  - Total Expenditure: 2020: 12.0; 2021: 13.7; 2022: 13.4; 2023: 12.4; 2024: 12.6; 2025: 12.8; 2026: 12.9
  - Implicit Fuel Subsidies (1/): 2020: 0.1; 2021: 1.0; 2022: 0.5; 2023: --; 2024: --  (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
  - Gross Public Debt: 2020: 34.5; 2021: 36.0; 2022: 37.5; 2023: 38.5; 2024: 40.0; 2025: 41.5; 2026: 42.9
  - Sources: IMF Staff Projections and Nigerian Authorities.
- Distributional effects and poverty:
  - Richer households spend a larger share of income on PMS than poorer households; kerosene expenditure share is higher for poorer households (Figures 3 and 4).
  - PMS subsidy is “regressive”; empirical literature finds top income quintile typically captures six times more in subsidies than the bottom.
  - IMF (2019) estimates: a 40 percent increase in PMS price (recovery of current costs) reduces disposable income of rich households and decreases income inequality (Gini coefficient) by 1/4 point.
  - Poverty impacts (IMF (2019) estimates for fuel subsidy removal):
    - Headcount poverty rate increases by 1.2 percentage point.
    - Poverty gap increases by 0.4 percentage point.
    - A compensatory scenario that keeps the poverty headcount constant would require transfers equivalent to NGN 239 billion (0.13 percent of 2021 GDP).
    - Potential savings from fuel subsidy removal estimated at 1 percent of GDP in 2021.
    - That compensatory scenario would reduce income inequality and poverty gap further by around 1.3 and 1 percentage points, respectively.
- Policy-relevant projection:
  - Staff recommends scaling up social spending by up to 1 percent of GDP cumulatively for 2022–2026 (around 0.2 percent each year) through well-targeted cash transfers, leveraging World Bank engagement on delivery systems and digitalization.

### C. Developments, reversals, and lessons from past reforms
- Historical context:
  - Fuel subsidies first introduced in 1977 and retained by subsequent governments; subsidy bills escalated rapidly when international oil prices rose (e.g., 2000–2012).
  - Past reform attempts often implemented by moving to a new regulated price rather than creating a market-based pricing mechanism; subsidies tended to reemerge following currency depreciation and related inflation.
- Case study — 2012 reform (lessons):
  - On January 1, 2012, FGN raised gasoline price from NGN 65 to NGN 145 per liter to remove the subsidy; SURE (Subsidy Reinvestment and Empowerment) program announced as mitigation.
  - The reform triggered widespread protests and a national strike; the government partially reversed the reform, lowering the fuel price to NGN 97 per liter on January 15, 2012.
  - Political resistance and coalitions protecting subsidies impeded sustained reform; mitigation measures did not prevent reversal.
- Implication for current reforms:
  - Successful subsidy removal requires credible market-based pricing mechanisms, effective and well-targeted compensatory social measures, and strategies to mitigate political economy resistance.

*Prepared by IMF staff (content unit: THE IMPACT OF FUEL SUBSIDY REEMERGENCE IN NIGERIA).*

### Box 2. 2012 Fuel Subsidy Reform, SURE Program and its Reversal

### Box 2. 2012 Fuel Subsidy Reform, SURE Program and its Reversal

### Nigeria’s 2012 fuel subsidy reform
- In mid-2011 the government decided to radically curtail gasoline subsidies and pursued a public campaign through the rest of the year.
- On January 1, 2012, the government raised the gasoline price from NGN 65 to NGN 145 per liter (a 117 percent increase) to completely remove the subsidy.
- The proposal was initially supported by several state governors but was hotly debated in the press, civil society, and the National Assembly.

### The SURE program as a mitigating measure
- The SURE program was announced in November 2012, preceded by presidential statements and highlighted in budget documents.
- The program outlined social safety net programs and the creation of a specific subsidy savings fund to finance spending, overseen by an 18-person Board.
- Measures to protect the most vulnerable (main contents):
  - (i) “Urban mass transit”: increase mass transit availability by facilitating procurement of diesel-run vehicles and importing 1,600 buses within months.
  - (ii) “Maternal and child health services”: expand the conditional cash transfer program for pregnant women in rural areas and upgrade facilities at clinics.
  - (iii) “Public works”: provide temporary employment to youth and women from the poorest and maintain education and health facilities.
  - (iv) “Vocational training”: establish vocational training centers across the country to tackle youth unemployment.
- Subsidy savings fund:
  - The program envisaged creation of a specific subsidy savings fund to finance its spending, overseen by an 18-person Board.

### Political resistance and reform reversal (2011–2012)
- December 2011: the National Assembly opposed the reform as premature and not supported by firm data.
- Trade unions opposed the reform, arguing proceeds would go to wasteful spending rather than projects benefiting ordinary Nigerians.
- The sudden gasoline price increase on January 1, 2012 set off widespread protests.
- January 9, 2012: two large union federations launched a national strike resulting in widespread violence and many deaths.
- January 15, 2012: the President announced a partial reversal; the new maximum retail price for gasoline was lowered to NGN 97 per liter. After the reversal, unions called off their strike.

### Subsequent attempts and subsidy re-emergence (2016–2021)
- May 2016: the government raised the petrol price from NGN 86.5 to NGN 145 per liter (66 percent increase).
  - At that time Nigeria experienced a severe fuel shortage with long queues and black-market prices above the official level.
- March 2020: the government lowered the pump price to NGN 130 due to falling global oil prices.
- May 2020: the government further lowered the pump price to NGN 108.
- June 2020: the government removed the price cap for PMS.
- After global oil prices rebounded, the government readjusted the pump price to NGN 167, which remained far below the imported (market) price of NGN 233, leading to large implicit fuel subsidy since January 2021.
- The fuel subsidy has constituted considerable (explicit or implicit) budget costs and an inefficient use of resources relative to pro-poor interventions.

### Petroleum Industry Act (PIA) and expected timeline
- The Petroleum Industry Act (PIA) was enacted into law in August 2021; it stipulates market-based pricing principles for petroleum products.
- PIA provisions and implications (selected):
  - 123(1) (f) and (g): avoid economic distortions, ensure competitive market, and avoid cross-subsidies — Market-based pricing principles for petroleum products.
  - 207: where authority regulates tariffs and prices of a licensee, the authority shall allow the seller to recover reasonably and prudently incurred costs, including a reasonable return on capital invested.
  - 371(6): Government may request NNPC Limited as supplier of last resort to ensure adequate supply and distribution of Premium Motor Spirit (PMS) for a period not exceeding 6 months; all associated costs shall be for the account of the federation.
    - PMS subsidy lasting up to 6 months is retained. (This would imply expiration by February 16, 2022).
- Despite PIA, fuel subsidies were expected to remain pending negotiations with labor unions; the federal government indicated retail price of PMS would remain regulated until a feasible framework is developed.
- In the Article IV mission (November 2021) the authorities expressed commitment to fully remove fuel subsidies by mid-2022 at the latest and planned temporary monthly cash transfers to vulnerable urban households while negotiating with labor unions.

### Nigeria’s conversion plan to natural gas vehicles (NGVs)
- December 2020: President Buhari launched the “National Gas Expansion Program (NGEP)” and “National Autogas Roll-out Initiative”.
- Early 2021: the federal government said it would convert one million vehicles from petrol (PMS) to gas (CNG or LNG) by the end of 2021 and aim to convert 40 percent of its fleets within 10 years.
- Financial support: the federal government (FGN) and the Central Bank of Nigeria (CBN) decided to introduce NGN 250 billion’s intervention fund for the conversion program.
- Conversion cost estimates:
  - DPR: conversion cost per vehicle is $400 (or around N164,000).
  - If converting 8 million public vehicles: 8 million × $400 = $3.2 billion.
  - Current vehicles: 22 million vehicles (including 14 million private vehicles). If converting all 22 million vehicles at $400 each: 22 million × $400 = $8.8 billion.
  - Additional infrastructure costs (CNG filling stations, storages, etc.) will add to total costs and vary by plan.
- Fiscal and implementation considerations:
  - Given Nigeria’s per-capita GDP of slightly above $2,000, $400 per vehicle (mainly for three wheelers) represents a sizable fiscal burden.
  - Detailed conversion plans were not available; presented estimates are ballpark illustrations.
- Cross-country lessons:
  - Successful NGV conversion programs have been implemented continuously over the medium term (since end-1990s or early-2000s) and used several incentive programs (examples: Argentina, China, India, Iran).
  - Some countries mitigated fiscal burden by gradually removing existing fuel subsidies at the same time (“subsidy swap”).

### Why reform attempts failed and lessons for strategy
- Main factors in past failures:
  - Lack of a well-designed “communication campaign”.
  - Public unawareness that the vast majority of the subsidy goes to better-off Nigerians.
  - Public perception that proceeds from subsidy removal would not be used for the general population.
- Specific recommendations drawn from empirical studies and past experience:
  - Conduct a well-designed, sustained communication campaign explaining reasons for reform, compensation for worst affected, and how benefits will be shared broadly.
  - Include information on the negative impact of fuel subsidy and the benefits from its removal plus compensating measures for the poor; emphasize that subsidy is “regressive”.
  - Establish government credibility that proceeds from subsidy removal will be used for the general population to overcome trust deficits linked to perceptions of corruption and weak capacity to implement compensation programs.
  - Build broad consensus across all tiers of government and institutions (federal, state, and local government, CBN, National Assembly, NNPC, etc.).

### Policy recommendations (summary)
- Implement simultaneously:
  - (i) Short-term fuel subsidy removal (market-based pricing) with mitigating measures to protect the poor.
  - (ii) Medium-term conversion plan from petroleum to natural gas vehicles (NGVs).
  - These two measures are complementary, not replaceable.
- Specific measures:
  - Adhere to the PIA’s market-based pricing provisions and reach agreement with labor unions by early next year.
  - Conduct a well-designed communication campaign to persuade the public and unions.
  - Put in place well-targeted cash transfer programs (in consultation with the World Bank to strengthen delivery via digitalization and registry integration).
  - Build broad consensus on the reform among all tiers of government and public institutions.

*Italic: Box 2. 2012 Fuel Subsidy Reform, SURE Program and its Reversal (consolidated from the source content).*

### Appendix I. The Petroleum Industry Act 2021

### Appendix I. The Petroleum Industry Act 2021

### Overview
- Enacted on 16 August 2021.
- The Act contains 5 chapters, 319 sections and 8 schedules.
- Overall objective: ensure good governance and accountability, create a commercially oriented national petroleum company, and foster a good business environment in the petroleum sector.

### Ch.1. Governance and Institutions
- Objective: ensure good governance and accountability; create a commercially oriented national petroleum company; foster a good business environment in the petroleum sector.
- Dual regulatory agencies created:
  - Nigerian Upstream Regulatory Commission (the “Commission”).
  - Midstream and Downstream Petroleum Regulatory Authority (the “Authority”).
- NNPC Limited:
  - To be incorporated within 6 months and replace the NNPC entirely within 18 months.
  - Operated on a commercial basis without government funding.
  - Must publish annual reports and audited accounts.
  - Government owns all shares in NNPC Limited through the Ministry of Finance & Ministry of Petroleum as shareholders while also controlling the selection of its management team.
  - Structure expected to pave the way for an invitation to the Nigerian public to own shares in the company in the future.

### Ch.2. Administration
- Objective: promote exploitation of petroleum resources for the benefit of Nigerian people and for sustainable development of the industry; ensure transparency in the administration.
- Market and pricing principles:
  - Avoid economic distortions and ensure a competitive market for the sale and distribution of petroleum products and natural gas in Nigeria; avoid cross-subsidies among different categories of consumers (market-based pricing principle for petroleum products).
  - When the Authority regulates tariffs and prices of a licensee, the Authority shall allow the seller to recover reasonably and prudently incurred costs, including a reasonable return on the capital invested in the business.

### Ch.3. Host community development
- Aim: foster sustainable prosperity within host communities and harmonious co-existence.
- Host community development trust fund:
  - Companies issued an oil prospecting license or mining lease or an operating company are required to set up a host community development trust fund.
  - Company contribution: 3% of its actual operating expenditure in the preceding calendar year in the upstream petroleum operations to the trust fund.

### Ch.4. Fiscal framework
- Objective: establish an adaptable fiscal framework to promote investment in the petroleum industry given the changing global outlook for the sector.
- Key fiscal changes and implications:
  - New fiscal terms intended to provide greater incentives to invest in the oil and gas industry but could reduce the government take from new and converted fields; short-term revenue impact dependent on the pace of conversion of existing fields to the new terms.
  - A new royalty combines a base rate with a variable rate linked to oil prices.
  - 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.
  - Frontier Exploration Fund: financed through a 30% deduction of profit oil and gas in the 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.
- Government take illustrative statistics (undiscounted, FID-fwd, in percent) for illustrative projects at $50.0 / bbl oil and $2.00 / MMBtu Gas:
  - Chart data points shown: 63.7, 56.5, 86.5, 70.3, 58.9 (labeled in the source figure as AETR components across project types).

### Ch.5. Miscellaneous provisions
- The PIA repeals about 10 laws including:
  - Associated Gas Reinjection Act
  - Hydrocarbon Oil Refineries Act
  - Motor Spirits (Returns) Act
  - NNPC (Projects) Act
  - NNPC Act
  - PPPRA Act

*Source: IMF staff estimates using FAD FARI model.*

### 2020. SSA’s average inflation rose less than Nigeria during 1984-95; so, it also managed to land

### 1ngaea2022002 - 2020. SSA’s average inflation rose less than Nigeria during 1984-95; so, it also managed to land

### Modeling approach and data
- Model choice: fixed effect panel regression on a cross-country panel covering all 130 EMDEs in the IMF WEO database for 1970-2020.
- Equation specification: baseline regression (1) with dependent variable log difference of annual CPI and regressors including DLOG(M3), DLOG(NEERINS_IMP), interaction terms with a structural break dummy (1 if t>93, 0 otherwise), public debt-to-GDP (D(DEBTGDP_WEO_IMP)), net energy import-to-GDP (D(ENERGYNET_SPL2010)), net food import-to-GDP (FOODNET_SPL2010), trade openness (D(TRADE_OPEN)), inflation targeting dummy (IT), de facto exchange rate regime dummy (XR_regime, 1=fixed, 0=flexible), and commodity price index for agricultural products (DLOG(CP_AGRICULTURE)).
- Data notes: splicing/backward extrapolation used to match series; M2 used in monthly Nigeria ARDL model for longer time series and cointegration properties.
- Monthly Nigeria model: ARDL for 1995M5-2021M7 with M2, BDC exchange rate (EXNNET_E_BDC), and exchange rate spread (BDC rate / CBN rate). Estimated model Adj R2=0.9998.

### Key findings — long-term drivers and historical decomposition
- Monetary expansion (M3) explains about one half of Nigeria’s long-term average inflation.
- NEER (nominal effective exchange rate) accounts for about a fourth of long-term inflation.
  - NEER depreciated 58 percent of the time for the whole sample.
  - During depreciations, NEER adjustments accounted for roughly one half of annual CPI inflation (caveat: possible endogeneity bias).
- Deterministic drift (country-specific fixed effect) explains about a quarter of historical inflation.
- Combined identifiable structural factors (excluding IT) contributed close to zero during 1971-2020.
- Estimated coefficient of IT dummy is -0.026, meaning adoption of IT permanently lowers inflation (log difference of annual CPI) by 2.6 percentage points (example: Ghana reduced average inflation from 28.5 percent (1971-2007) to 10.9 percent (2008-20); counterfactual without IT would be 13.5 percent).
- Nigeria’s private sector credit-to-GDP ratio is 12 percent, compared with SSA average 26 percent and EMDE average 45 percent.

### Two secular waves: Great inflation (1984-99) and Great disinflation (2000-2020)
- Great inflation (1984-99): average inflation rose by 9 percentage point.
  - Most attributed to NEER depreciation (+113 percent).
  - Partially offset by monetary tightening shocks (-30 percent).
  - Unidentified inflationary pressures added +10 percent.
- Great disinflation (2000-2020): period average inflation declined from 23.5 percent (1984-99) to 11.4 percent (2000-20).
  - Largest contributor to disinflation: NEER (50 percent).
  - M3 tightening contributed 45 percent initially.
  - Exchange rate anchoring (de facto fixed regime 2004-14) was abandoned in 2014 leading to large repeated depreciation.
  - If Nigeria had adopted IT in 2015 (counterfactual), it could have reduced its average inflation in the last decade by 1.5 percentage points (CPI Scenario figure).

### Recent inflation during the pandemic (supply, exchange rate, monetary factors)
- Major drivers since June 2019:
  - Other shocks (interpreted primarily as supply-side shocks: border closure August 2019, COVID-19 disruptions, October 2020 flood) explain 43 percent of total price shocks (Log(CPISA)-Log(CPI*)).
  - Exchange rate shock explains 38 percent of the overall price shock.
    - Estimated 62 percent of naira’s depreciation as reflected in BDC rate has been passed through to inflation.
  - Monetary shock explains 19 percent of the overall price shock (interpret cautiously due to structural changes in money aggregates and M2-M3 composition shift).
- Border closure (August 2019) coincided with sharp increases in staple food prices (rice), contributing to structural increase in food price inflation.
- M2 growth picked up since October 2019 partly due to CBN’s new OMO policy; structural convergence of M2 to M3 completed with implications for inflation sensitivity to M2.

### Counterfactual scenario analysis (monthly ARDL simulation)
- Four CPI simulation scenarios constructed using combinations of actual and counterfactual paths for M2, BDC rate, and exchange rate spread:
  - * : counterfactual M2, counterfactual BDC rate, counterfactual rate spread — Without any shock.
  - ** : actual M2, counterfactual BDC rate, counterfactual rate spread — With monetary shock only.
  - *** : actual M2, actual BDC rate, actual rate spread — With monetary and exchange rate shocks.
  - **** : actual M2, actual BDC rate, counterfactual rate spread — With all shocks and without MCP (assumes I&E has converged to BDC since June 2019).
- Decomposition interpretation examples:
  - Log(CPI***) - Log(CPI**) interpreted as exchange rate shock.
  - Log(CPI) - Log(CPI*) interpreted as total inflation shock.

### Scenario forecasts for next two years
- Scenario 1 (back to normal): M2 growth rate returns to 2018-2019 average.
  - Result: inflation stabilizes at 11-11½ percent range in the medium term.
- Scenario 2 (monetary acceleration): M2 growth rate stays permanently at 2020M1-2021M2 average (recent accelerated levels).
  - Result: CPI growth gradually rerises from mid-2022, reaching a higher steady state (about 15 percent) within the next 24 months.
  - Re-rise driven by persistent monetary shock that builds up gradually.

### Policy implications and recommendations
- Monetary policy stance:
  - No premature withdrawal of policy support due to fragility of economic recovery and downside risks.
  - Policy response should focus on strategic communication to clarify CBN’s stance and intentions given structural shifts within M3, discrepancy between M2 and M3 growth rates, and misalignment between policy and market interest rates.
  - Critical to restore M2 growth to normal (e.g., 2018-2019 average); continuation of elevated M2 growth is judged a policy mistake.
- Exchange rate policy:
  - Persistent reactiveness in rate adjustment is detrimental, especially under FX stress (parallel market spread over 30 percent noted).
  - Allowing I&E rates to converge toward parallel market rates is critical to rein in lingering FX stresses.
  - Predicted unwinding of exchange rate shock provides room for residual exchange rate adjustment; model predicts modest price impact that can be cushioned by other policies (example: a 15 percent depreciation in I&E rate eventually lifts price level by 5.8 percent with peak annual inflation impact of 2.2 percent).
- Monetary policy operational framework:
  - Priority: establish a credible and coherent monetary policy operational framework focusing on primacy of price stability.
  - Panel study suggests CBN can achieve inflation target by adopting IT now; due to less developed financial markets, pragmatic alternative is Flexible Monetary Targeting initially, then move gradually to full IT.

### Key statistics and exact numeric values (preserved as in source)
- Panel: 130 EMDEs, time span 1970-2020.
- IT country proportions rose from zero in early 1990s to 17 percent (EMDE) and 12 percent (SSAMIC).
- NEER depreciated 58 percent of the time for the whole sample.
- Nigeria private sector credit-to-GDP ratio: 12 percent.
- SSA average private sector credit-to-GDP ratio: 26 percent.
- EMDE average private sector credit-to-GDP ratio: 45 percent.
- Great inflation to great disinflation change: Nigeria average inflation declined from 23.5 percent (1984-99) to 11.4 percent (2000-20).
- Disinflation contributions: NEER accounted for 50 percent; M3 tightening contributed 45 percent.
- Counterfactual IT impact: adoption of IT reduces inflation by 2.6 percentage points (estimated coefficient -0.026); Nigeria hypothetical IT adoption in 2015 could have reduced average inflation in last decade by 1.5 percentage points.
- Pandemic-period decomposition since June 2019: other shocks 43 percent; exchange rate shock 38 percent; monetary shock 19 percent.
- Scenario forecast steady states: Scenario 1: 11-11½ percent; Scenario 2: about 15 percent.
- ARDL Nigeria model sample: 1995M5-2021M7; model Adj R2=0.9998.
- Table 2 sample means and stats (selected):
  - DLOG(CPI_SPL) mean 0.114341, Max 6.484239, Min -1.299368363.
  - DLOG(M3) mean 0.175057, Max 4.837324, Min -6.597936474.
  - DLOG(NEERINS_IMP) mean -0.06155, Max 2.245908, Min -8.224448338.
  - D(DEBTGDP_WEO_IMP) mean 0.341676, Max 604.3264, Min -657.9196375.
  - FOODNET_SPL2010 mean 0.385497, Max 156.5032, Min -92.98798371.
  - IT dummy mean 0.072157108925.
  - DLOG(CP_AGRICULTURE) mean 0.024853, Max 0.492264, Min -0.214119555.

*Source: 1ngaea2022002 - 2020. SSA’s average inflation rose less than Nigeria during 1984-95; so, it also managed to land (IMF staff estimates and analyses as presented in the supplied content).*

### References

### References

### Key references cited
- Bernanke B.S., and F.S. Mishkin, 1997, “Inflation Targeting: A New Framework for Monetary Policy?”, NBER Working Paper 5893 (https://www.nber.org/papers/w5893)
- Debelle G., Masson P.R., Savastano M., and S. Sharma, 1998, “Inflation Targeting as a Framework for Monetary Policy”, IMF Economic Issues (https://doi.org/10.5089/9781557757616.051)
- Gosh A.R., Gulde A., Ostry J.D., and H.C. Worf, 1997, “Does Nominal Exchange Rate Regime Matter?”, NBER Working Paper 5874 (https://www.nber.org/system/files/working_papers/w5874/w5874.pdf)
- Ilzetzki E., Reinhart C.M., and K.S. Rogoff, 2017, “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?”, NBER Working Paper 23134 (https://www.nber.org/papers/w23134)
- Ree J., 2020, “Nigeria—Strategy for a Monetary Policy Reset”, IMF, Nigeria Selected Issues, Country Report No. 2021/034 (https://www.imf.org/en/Publications/CR/Issues/2021/02/05/Nigeria-Selected-Issues-50065)
- Svensson L.E.O.,1997, “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets”, NBER Working Paper 5797 (https://www.nber.org/papers/w5797)
- World Bank, 2019, “Inflation in Emerging and Developing Economies, edited by Ha J., Kose, M.A., and Ohnsorge F. (https://www.worldbank.org/en/research/publication/inflation-in -emerging-and-developing-economies)

### A. Introduction — summary findings
- The chapter analyzes recent household and individual surveys (consumption and labor market characteristics) to assess welfare of those in the labor force in Nigeria, differentiating: agricultural workers, household enterprise workers outside agriculture, wage workers, and the unemployed.
- Unemployment:
  - About 3 percent of the labor force are unemployed (defined as someone who does not work at all) based on the latest household survey.
  - Under the Nigerian authorities’ definition (not working or working for less than 20 hours per week), the unemployment rate rises to 22 percent.
- Welfare comparisons:
  - The unemployed, measured by per capita family consumption, are much better off than agricultural workers due to family insulation.
  - Agricultural workers account for almost half of the labor force and have welfare levels (consumption per capita) at less than 50 percent of those unemployed with a college degree.
- Agriculture:
  - Agricultural sector measures about 26 percent of real GDP.
  - Only 5 percent of total private sector credit is allocated to the agricultural sector (though its share has risen over the past two years).
- Recommended three-pronged policy package to raise incomes in agriculture (aligned with government medium term development plan 2021-25):
  - Improving yields by combining inputs, especially inorganic fertilizer, and improved seeds;
  - Reducing food losses through improved storage facilities and development of a well-functioning warehouse receipt system;
  - Supporting collateral and interregional mobility through completing the land tenure registration system and strengthening the cooperative structure of farms.
- Financing note:
  - Additional financing is required; private sector funding for agriculture is limited. Recommendations should be read in tandem with chapters on fuel subsidies and assessments of Central Bank of Nigeria agricultural finance programs, and with World Bank work on electricity sector efficiency.

### B. Structure of the Nigerian labor force — key statistics and dynamics
- Labor force composition (Nigeria 2018/19 household survey):
  - Agriculture: about 45 percent of the labor force.
  - Household enterprises (outside agriculture): about 37 percent.
  - Wage employment: about 11 percent (dominated by public sector and other private services).
  - Unemployment rate (ILO definition): about 3-4 percent of the labor force.
- Definitions and measurement:
  - ILO definition: one hour of work counts as employed.
  - Nigerian authorities’ definition: not working or working less than 20 hours per week.
- Time series and COVID-19 impacts:
  - National quarterly unemployment estimate recorded at 23 percent for Q3 2018.
  - Unemployment rose to 30.2 percent at the start of the COVID-19 pandemic (average from phone interviews Q2 2020 and face-to-face interviews Q4 2020).
  - Employment level held steady in the upper 60 million jobs range through 2018, but after COVID-19 employment crashed with over 20 million jobs lost.
  - World Bank monthly COVID-19 telephone surveys since May 2020 indicate employment in early 2021 was back at pre-COVID employment levels and the unemployment rate was at 5 percent (survey has far fewer respondents and is not directly comparable to authorities’ survey).

### C. Welfare differences across employment categories — regression evidence and magnitudes
- Method:
  - Population-weighted regression of log household consumption on individual and family characteristics (age, gender, region, urbanization, education level, worker type) using Nigeria 2018/19 household survey.
  - Per capita consumption defined as household consumption divided by number of household members; expressed in nominal terms.
- Key regression coefficient estimates (Text Table 1: Nigeria: Family Per Capita Consumption Coefficients)
  - Household size: -0.34***, -0.34***
  - Age: 0.02***, 0.03***
  - Gender: 0.01**, 0.01**
  - Urbanization: 0.18***, 0.18**
  - Education:
    - Primary: 0.09***, 0.09***
    - Lower secondary: 0.15***, 0.15***
    - Upper secondary: 0.27***, 0.26***
    - College: 0.46***, 0.46***
    - Post-graduate: 0.82***, 0.81***
  - Worker type:
    - Agricultural: -0.09***, -0.11***
    - Household enterprise: 0.05***, 0.03***
    - Private sector wage: -0.03***, -0.02*
    - Public sector wage: 0, 0.02
    - Apprentice: -0.05***, -0.05***
    - Unemployed (ILO definition): -0.06***
  - Interaction terms (unemployed (ILO) with parental education):
    - College educated father: 0.02
    - High school educated father: -0.1***
    - Lower secondary school educated father: -0.11
    - Primary school educated father: -0.13***
  - Unemployed (Nigeria definition): 0
  - R squared: 0.54, 0.54
  - Nobs: 57627, 57627
- Interpretation and magnitudes:
  - Education premiums: primary education yields 9-10 percent higher consumption compared to the missing category; post-graduate yields 81-82 percent higher consumption.
  - Unemployed individuals have welfare levels about 6 percentage points lower than the control group (both ILO and Nigerian definitions: coefficient -0.06).
  - Parental education cushions unemployment:
    - An unemployed person with a college-educated parent does not exhibit lower welfare relative to the control group.
    - An unemployed individual with a parent having only primary school education has 13 percent lower consumption than the control group.
- Education distribution by worker type (Figure 6):
  - Two distinct groups: unemployed and wage workers (large majority with upper secondary or college) vs. household enterprises and agriculture workers (large element uneducated).
- Welfare comparisons (Figure 7):
  - An agricultural worker with no education is 10 percent worse off than those outside the labor force.
  - An unemployed person is between 33 and 46 percent better off than an agricultural worker depending on parental education.
  - A college-educated wage worker has a premium of 43 percent over a person out of the labor force.
- Household enterprises:
  - Household enterprise families earn slightly more than private sector wage-earning families, controlling for education.
  - The household enterprise–private wage differential is 5-6 percentage points in favor of household enterprises.
  - Household enterprises are considerably more productive than agricultural workers, notwithstanding similar education levels.

### D. Regional/state disparities, conflict, and policy implications
- State-level welfare variation:
  - State-specific welfare coefficients (relative to Abia State benchmark) show extremely large disparities; differences across states dwarf employment-category effects.
  - Example: differences in welfare between Ebonyi and Taraba versus Lagos are almost 90 percent; similar large gaps exist for Sokoto and Jigawa.
- Agriculture and regional poverty:
  - States with highest adverse welfare coefficients often contain the highest shares of agricultural employment.
  - Example: an uneducated agricultural worker in Ebonyi or Taraba consumes 147 percent less than an unemployed individual in Lagos.
- Violence and labor market:
  - Violence disrupts employment opportunities by destroying productive assets, diverting resources, and damaging health and education systems.
  - Five of the ten poorest states (2018 household survey) show high rates of violence measured by political deaths: Borno, Yobe, Adamawa, Kaduna, and Taraba.
  - The peak of the employment-population ratio in 2016 coincided with a sharp drop in armed conflicts that year; since then, increased insecurity, low oil prices, and lack of economic diversification have reduced job opportunities.

*Prepared by Alun Thomas (AFR).*

### Box 1. Job Availability Among Young People

### Box 1. Job Availability Among Young People

### Youth employment and schooling
- National data indicate the unemployment rate among those aged between 15 and 24 years old is very high and persistent.
- A large share of young people is still in education, which nuances the unemployment picture.
- Detailed household survey data from 2018:
  - About 40 percent of youth remain in education.
  - The employment rate among youth is below 50 percent, which can be explained by the 40 percent remaining in education.
- When aggregating the employment rate and the schooling rate for the youth and for the rest of the population, the figures are very similar.
- The discouraged worker effect is evident for youth but is comparable to the rest of the population.

### Agriculture, structural transformation, and implications for jobs
- Structural transformation beginning in agriculture—rising productivity and diversification—needed to generate rising incomes and facilitate movement into industry and services.
- Key constraints identified:
  - Low food yields associated with the lack of improved seeds, fertilizer, large absence of irrigation, and diminished extension services.
  - Inadequate storage facilities resulting in food and income loss for farmers, putting upward pressure on prices.
  - General absence of secure land titles and small average farm size that limits access to financing and restricts regional migration.
- Nigeria remains less productive than other large SSA countries; the Federal Ministry of Agriculture estimates the annual food import bill is $5 billion.
- Crop yield observations:
  - Nigeria yields remain below those of Ethiopia and South Africa and are only comparable to Rwanda and Uganda for pulses.
  - Rice yields improving with central bank support but remain far below other countries.
- Input use:
  - Less than 10 percent of farmers use improved seeds and inorganic fertilizer in combination, compared to 40 and 30 percent in Ethiopia and Kenya.
  - Proper use of these inputs can increase yields fourfold (Thomas 2020).
  - Nigeria already offers fertilizer subsidies but lacks knowledge on correct frequency and quantity and on combining fertilizer with improved seeds; a voucher system requiring purchase of fertilizer and improved seeds in tandem is suggested, alongside enhanced extension services.
- Digital technology:
  - Nigeria ranks third behind Kenya and South Africa in terms of the number of scalable disruptive agro-tech hubs (Kim et al. 2020).
  - Digital tools can help monitor climate risks, relay extension and advisory services, and diagnose agronomic problems.
- Post-harvest losses and storage:
  - Up to 40 percent of food is lost through rotting (World Bank 2020).
  - Government actions include supplying states with iced-fish boxes, smoking kilns, and solar dryers.
  - A warehouse receipt system (WRS) has been introduced but the legal and regulatory framework is incomplete because transfer of warehouse receipts is not yet accepted as equivalent to transferring the underlying asset.
  - Suggested additional measures: set up an insurance regulatory framework and separate body to cover warehouse content damages and to certify warehouse administration.
- Land tenure:
  - General absence of legal land titles reduces tenure security and fragments ownership.
  - A presidential Technical Committee for Land Reform was set up in 2009; implementation speed differs across states.
  - In a representative sample of six states, Kano, Cross Rivers and Jigawa have made considerable progress; Katsina and Ondo absent; Kaduna partially met.
  - Innovations in GIS and land digitization can reduce processing times (more than two years for some customers).
  - In discussions with authorities, uncertainty on land titling was not deemed a major constraint; emphasis placed on strengthening farm cooperative culture.

### Government initiatives and outcomes
- The government is formulating a medium-term strategy for 2021-25 and has initiated programs to enhance productivity and access to finance.
- Agro-processing productivity enhancement program (APPEALS) initiated in 2017 with a $200 million World Bank program supporting rice, maize, wheat, and cassava.
  - Outcomes in selected areas: yields per hectare increased between 20-37 percent and currently stand at:
    - 3500 kg for maize
    - 2160 kg for wheat
    - 20000 kg for cassava
    - 5500 kg for rice
- Central Bank initiatives:
  - Anchor Borrowing Program (ABP) created in 2016 to facilitate credit access and improve farm finance in rural areas; rice accounted for 80 percent of funding as of mid-2020.
  - Repayment metrics as of end-December 2020:
    - Repayment ratio for the commercial agriculture venture scheme initiated in 2009: 67 percent.
    - Repayment speed for ABP: 24 percent.
- Early indications of the 2021-25 agricultural strategy align with recommended priorities, including:
  - Increasing national output and productivity of six priority value chains (cassava, maize, rice, soya, tomato and yam) through capacity building, strengthening input industry associations, partnering with private logistics and distribution companies, and private sector finance groups to create an inputs fund.
  - Reducing post-harvest losses via efficient storage, logistics and market linkages through investments in collection infrastructure and leveraging digital tools.

### Conclusions and policy recommendations
- The economic situation of agricultural workers can be improved by well-supported policies; agricultural employment accounts for almost 50 percent of the labor force, making this a macro-critical issue.
- Key recommended actions:
  - Improving yields by combining inputs, especially inorganic fertilizer, and improved seeds.
  - Reducing the fraction of food that rots through improved storage facilities and development of a competent warehouse receipt system.
  - Support collateral and inter-regional mobility by completing the land tenure registration system and encouraging the development of farm cooperatives.
- The government has included many recommended policies in its 2021-25 medium term strategy for the agricultural sector; implementation and delivery are critical to improving welfare and reducing inequality.

*Source: Box 1. Job Availability Among Young People (from the provided IMF chapter content).*

### 2020. Scaling Up Disruptive Agricultural Technologies in Africa.  International Development in

### TRADE DIVERSIFICATION IN NIGERIA: HOW TO GET THERE?

### A. Introduction — dependence on oil
- Nigeria, the largest economy in Africa, produced 26 percent of the GDP of Sub-Saharan Africa (SSA) in 2020 and 63 percent of West Africa’s output in 2020.
- The oil sector’s direct share in total output averaged 11 percent over the past decade.
- At least 30 percent of the economy is indirectly dependent on the oil sector, reflecting strong positive correlation between oil price developments and the non-oil sector.
- High economic dependence on oil impedes diversification by overshadowing competitiveness of other tradable sectors, particularly manufacturing.

### B. Trade composition and trading partners
- Crude oil and gas continue to dominate Nigeria’s exports.
- Fuel exports:
  - Peaked at $111 billion in 2011.
  - Dropped to $27 billion in 2016.
  - Reached $31 billion in 2020.
- Non-oil exports were $4 billion in 2020, representing 11 percent of total exports in 2020.
- Largest non-fuel export products (agricultural): cocoa beans and butter, sesamum seeds, cattle skin leather, cashew nuts, and tobacco — $1.2 billion in 2020.
- Exports of vehicles and machinery surged to $2.4 billion in 2020 (including helicopters and vessels) — caution: rising machinery exports include significant re-exports.
  - Re-exports were 83.5 percent of total manufactured goods exported from Nigeria in 2021Q1.
- Measured as percent of GDP:
  - Exports collapsed from 40 percent of GDP to 8 percent of GDP over the past two decades.
  - Imports rose from 9 percent of GDP to 12 percent of GDP over the same period.
- Main export destinations (mostly crude oil): India, USA, and Spain.
- Over one-third of all imports come from China (mostly machinery and equipment, textiles, and metals), followed by the Netherlands (mostly mineral fuels and other mineral distilled products), and India (mostly machinery, chemical and vehicles).

### C. Trade with Sub‑Saharan Africa (SSA) and complementarity
- In 2020:
  - Only 5.5 percent of Nigeria’s imports were from SSA.
  - Only 12.7 percent of Nigeria’s exports were to SSA.
  - 16 percent of SSA exports and 13 percent of SSA imports originated in/went to Nigeria.
- Nigeria’s trade with SSA has barely increased over the past two decades.
- Trade complementarity index indicates Nigeria’s export profile is more complementary with SSA than with the world, suggesting potential gains from greater intra-regional trade.

### D. Trade agreements and the AfCFTA
- Nigeria is a member of ECOWAS; its preferential trade agreement (PTA) under ECOWAS lacks depth compared with other regional trade blocks.
- Depth of PTAs is measured by coverage of core provisions and number of legally enforceable core policy areas (depth correlates with higher intraregional trade).
- Deep trade agreements reduce trade costs and discrimination via behind-the-border measures and are associated with more trade creation and positive spillovers.
- Nigeria ratified the African Continental Free Trade Area (AfCFTA) in December 2020.
  - AfCFTA:
    - Removes tariffs from at least 90 percent of trade within the continent.
    - Covers policy areas like trade facilitation and services, sanitary standards, and technical barriers to trade.
    - Phase structure: Phase 1 (rules of origin, tariff concession schedules, schedules of specific commitments on five priority service sectors); Phase 2 (intellectual property rights, investment, competition policy); Phase 3 (e-commerce).
- Estimated impacts of AfCFTA and related studies:
  - Could expand intraregional trade in SSA by more than 80 percent.
  - Welfare gains for the continent up to 2.1 percent in efficiency from reductions in tariff and non-tariff trade barriers.
  - Other studies estimate real income gains as high as 5 percent, or 7 percent ($450 billion) for the continent.
  - World Bank (2020a) estimates a 4.2 percent real income gain for Nigeria relative to baseline by year 2035 under assumptions of reducing both tariffs and non-tariff barriers and improving infrastructure.
  - Full implementation could lift 68 million in Africa out of moderate poverty by 2035; estimated beneficiaries include Nigeria (7 million).
  - Sectoral employment shifts: agriculture and wholesale and retail trade would provide half of employment in the continent by 2035; agriculture’s share expected to decline from 36 percent to less than 30 percent between 2020 and 2035; wholesale and retail trade share expected to rise from less than 17 percent to 20 percent.
  - Nigeria’s trade employment share gains expected to be twice as high as the continent average at 41 percent.
  - Olapade and Onyekwena (2021) estimate for Nigeria real wage increases and welfare gains at 1.4 and 1.6 percent, respectively, over 2014 levels, with larger gains for countries with prior larger shares of imports from the region.

### E. Export diversification and global value chain (GVC) integration
- Nigeria achieved little export diversification over past decades:
  - Between 1990 and 2020 Nigeria added 47 new products to its export basket.
  - Comparator countries (Bangladesh, Cameroon, Pakistan, Tanzania) averaged 95 new products over the same period.
  - Total number of export products for Nigeria in 2020: 205.
  - Average for Sub‑Saharan Africa (SSA) in 2020: 258.
- Export diversification index for Nigeria remained flat as of the 1970s after collapsing from higher levels in earlier decades.
- Nigeria increased overall engagement in global value chains (GVCs) between 1990 and 2015, but the nature of its integration is skewed:
  - Increase in GVC participation is attributable to greater forward (upstream) integration only — Nigeria mostly provides primary products used by foreign firms to produce final goods for export.
  - Backward (downstream) linkages are low and have weakened over time.
  - Nigeria’s pattern contrasts with countries that have achieved both forward and backward integration (India, Indonesia, Kenya, Rwanda, Tanzania).
- Implications of GVC patterns:
  - Forward (upstream) integration tends to involve lower value-added activities and associates negatively with measures of structural change and diversification.
  - Developing backward GVC linkages (downstream integration) is important for development and higher wage growth.
  - Estimated effects:
    - A one percent increase in backward GVC participation is estimated to boost per capita income by almost 1.2 percent.
  - Transitioning into exporting basic or limited manufactured products using imported inputs has been associated with faster wage growth in several countries (Bangladesh, Cambodia, Ethiopia, Indonesia, Kenya, Nepal, Serbia, South Africa, Tanzania, Vietnam).

### F. Key analytical findings and implications
- Nigeria’s high and persistent dependence on oil — both direct and indirect — continues to hinder diversification of exports and competitiveness of other tradable sectors.
- Trade openness measured as trade relative to GDP has declined for exports (from 40 percent to 8 percent of GDP) while imports rose modestly (from 9 percent to 12 percent of GDP), reflecting the collapse in oil exports.
- Nigeria’s low intra‑African trade share and low number of export products suggest significant unrealized potential for diversification and intra-regional trade expansion.
- Depth of trade agreements matters: deeper agreements (covering behind-the-border measures) are associated with greater trade creation and less trade diversion; AfCFTA is a deep agreement with substantial potential benefits if fully implemented.
- Moving from upstream (forward) to greater downstream (backward) GVC integration is critical to raise per capita income and wages and to achieve structural transformation.

*International Monetary Fund, “Trade Diversification in Nigeria: How to Get There?”, prepared by Weronika Synak and Rima Turk (excerpt).*

### Box 1. Country Examples of Successful Diversification

### Box 1. Country Examples of Successful Diversification

### Country examples of successful diversification
- Indonesia: Reforms starting in the 1980s included creating free trade zones and providing tax incentives; replaced import substitution policies and dependency on labor-intensive manufacturing. Customs efficiency improved after introducing private sector-based pre-shipment inspection.
- Malaysia: Policy mix targeted high value-added industries and expansion beyond already exported products. Investments in research and development and education helped vertical diversification. The National Industrial Policy and Industrial Master Plans promoted natural resource processing industries, contributing to horizontal diversification.
- Mexico: Moved from industrial policies to economy-wide, horizontal reforms by eliminating most sector-specific subsidies and other incentives. NAFTA enabled inflows of foreign investment into the automotive industry and development of vertical supply chains. Historical programs: maquiladora (1950s), PITEX (1990), merged into IMMEX in 2006.
- Vietnam: Early reforms reduced barriers to entry, freed access to FX and external trade, abandoned rationing, production quotas, and subsidies. 1990s focus on liberalization of FDI, which initially flowed into primary products and later supported a more technologically advanced export base. Pursued geographic diversification across CIS, Asia, Europe, and the United States.
- Chile: Export diversification driven by strengthening governance, improving educational attainment and physical infrastructure, and liberalizing trade policies. Most trade falls under one of the 25 free trade agreements Chile signed. Chile excels in the quality of port and electricity infrastructure.

### Restrictions to trade in Nigeria — tariffs and backward integration
- Tariff context and impacts:
  - Average applied MFN tariff (aggregate, 2017): 10.5 percent on raw materials; 10.2 percent on semi-processed products; and 14.7 percent on fully processed products.
  - Tariff escalation present across many industries, including food and beverages, textiles and apparels, wood products, paper, printing, and publishing.
  - High tariffs on raw materials, intermediates, and consumer goods are higher than in SSA on average and imply Nigeria is expected to undergo large liberalization under the AfCFTA, with highest declines likely in manufacturing followed by agriculture.
- Backward integration and tariff escalation:
  - Tariff escalation increases cost to final consumers when production stages cross tariff-ridden borders, braking backward participation in GVCs and hindering trade integration.
- Comparative indicators shown in source figures (selected):
  - Backward integration (percent of exports) and Weighted Average Applied Tariff (percent) for a set of countries including Nigeria and peers (figures in source).

### Non-tariff trade measures (NTMs) and trade logistics
- Scope and prevalence of NTMs in Nigeria:
  - Almost 4,000 products are affected by at least one NTM (86 percent of all traded products; 95 percent of value traded).
  - Top NTM: pre-shipment inspection — affecting 75 percent of products and 84 percent of traded value.
  - Nigeria aborted pre-shipment inspection in 2019 in favor of inspecting imports on arrival; ports inspection processes and costs associated with port storage and demurrage likely increased.
  - The list of import goods for which access to FX is prohibited includes 42 items.
- Trade logistics and infrastructure constraints:
  - Shipping connectivity is better in Nigeria than in other countries on average, but trade logistics suffer from poor port infrastructure quality and high transportation costs.
  - Anecdotal evidence: price of shipping a container from Apapa port in Lagos to the mainland (distance ~20 kilometers) can be almost the same as shipping one container from Nigeria to China.
  - Liner Shipping Connectivity Index and Logistic Performance Index metrics are presented in the source to illustrate Nigeria’s relative standing.
- Customs and administrative burdens:
  - Onerous customs procedures lead to inefficient border clearance and delays. The Nigeria Customs Service (NCS) has taken steps to improve service but scope remains to reduce high burden of customs and accompanying administrative requirements.

### Trade facilitation potential and trade-enabling reforms
- Trade facilitation under AfCFTA:
  - Nigeria is among the top countries that would benefit from TFA implementation. The TFA provides a framework to simplify and harmonize trade procedures and logistics, and to expedite movement, clearance and release of goods, including goods in transit.
  - Benefits from implementing trade facilitation under AfCFTA are expected to rise as neighboring countries implement it, decreasing trade costs along all borders.
  - Source estimates (figure): Reduction of time in customs due to TFA implementation and Reduction in trade costs by country (Nigeria among those with highest expected gains).
  - The NCS launched a trade facilitation initiative in February 2021 in partnership with government, local businesses, and business associations to identify sources of delays at border controls in Lagos and simplify burdensome processes. The initiative initially focuses on exports of processed leather, edible fruits, and chemicals/pharmaceuticals, and imports of pharmaceuticals, electronics, and industrial spare parts.
- Policy recommendations to reap AfCFTA benefits (listed in source):
  - reduce tariff escalation and average tariffs in line with agreement under the AfCFTA, bringing down tariffs on raw materials, intermediate goods, and finished goods;
  - streamline import documentation requirements and enhance the transparency and efficiency of custom procedures, speeding up clearance time;
  - address bottlenecks such as port processes and transportation costs, while continuing to expand port capacity and upgrade roads near ports;
  - harmonize essential rules of origin with other African countries to arrive at a common continental set (as part of Phase I of AfCFTA negotiations);
  - improve customs capacity to enforce preferential rules of origin and detect abuse;
  - permanently lift border closures, while addressing security concerns and smuggling;
  - enhance digital connectivity to facilitate firms’ communications in GVCs through cost-efficient and reliable internet-based technologies.
- Additional reform priorities noted:
  - Remove multiple foreign exchange windows and allow all FX transactions at a unified and market-clearing exchange rate to ensure FX convertibility and help the private sector foster competitiveness.
  - Eliminate or rationalize lists of prohibited goods to access FX.

### Awareness, information costs, and complementary measures
- Awareness and information barriers:
  - A survey shows that over 60 percent of Nigeria’s small and medium-sized firms are unaware of the AfCFTA.
  - Information costs and differing levels of awareness would prevent businesses from taking advantage of reductions in trade barriers and improved trade logistics even when potential gains exist.
  - Firms aware of AfCFTA expect benefits (reduction in material and labor costs, increase in production capacity, expansion of market and consumer size, and reduction of prices) but have concerns about rising foreign competition and dumping of substandard goods.
- Complementary investments and private initiatives mentioned:
  - The MTN Group (South Africa) announced in August 2021 an investment of $1.6 billion to strengthen its 4G network services in Nigeria.
  - The Nigerian Ports Authority has been working to digitalize operations at all port locations, with a reported aim for optimal efficiency and elimination of corrupt practices (Voice of Nigeria, October 15, 2021).

*Source: Box 1. Country Examples of Successful Diversification (excerpt).*

### References

### References

### African Continental Free Trade Area (AfCFTA) and Africa-focused studies
- Abrego, Lisandro, Mario de Zamaróczy, Tunc Gursoy, Salifou Issoufou, Garth P. Nicholls, Hector Perez-Saiz, and Jose-Nicolas Rosas. 2020. “The African Continental Free Trade Area: Potential Economic Impact and Challenges”. IMF Staff Discussion Note SDN/20/04.
- African Development Bank. 2014. African Economic Outlook: Global Value Chains and Africa’s Industrialization. African Development Bank, Organisation for Economic Co-operation and Development, United Nations Development Programme.
- Centre for the Study of the Economies of Africa. 2020. “The Effect of the African Continental Free Trade Area on Medium Small and Micro-scale Enterprises in Nigeria”. Policy Brief.
- Chauvin, D., N. Ramos, and G. Porto. 2016. “Trade, Growth, and Welfare Impacts of the CFTA in Africa.”
- de Melo, Jaime and Anna Twum. 2020. "Supply chain trade in East Africa: Prospects and challenges", FERDI Working paper P263.
- McGregor, Neil Foster, Florian Kaulich and Robert Stehrer. 2015. “Global Value Chains in Africa”. United Nations Industrial Development Organization Working Paper Series WP/04/2015.
- Olapade, Yewande and Chukwuka Onyekwena. “Quantifying the Impact on Nigeria of the African Continental Free Trade Area.” Brookings. Brookings, October 12, 2021.
- UNCTAD. 2019. Economic Development in Africa Report 2019 Made in Africa – Rules of Origin for Enhanced Intra-African Trade. Geneva, Switzerland: United Nations Conference on Trade and Development.
- UNCTAD. 2021. Implications of the African Continental Free Trade Area for Trade and Biodiversity: Policy and Regulatory Recommendations. Geneva, Switzerland: United Nations Conference on Trade and Development.
- World Bank. 2020a. The African Continental Free Trade Area: Economic and Distributional Effects. Washington, DC: World Bank.

### Export diversification, industrial policy, and macroeconomic implications
- Cadot, Olivier, Celine Carrere and Vanessa Strauss-Kahn. 2011. “Export Diversification: What’s Behind the Hump?” Review of Economics and Statistic, Vol. 93, No. 2, pp. 590–605.
- Callen, Tim, Reda Cherif, Faud Hasanov, Amgad Hegazy, and Padamja Khandelwal. 2014. “Economic Diversification in the GCC: Past, Present, and Future”. IMF Staff Discussion Note SDN/14/12.
- Cherif, Reda and Faud Hasanov. 2014. “Soaring of the Gulf Falcons: Diversification in the GCC Oil Exporters in Seven Propositions”. IMF Working Paper WP/14/177.
- Cherif, Reda and Fuad Hasanov. 2019. “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy”. IMF Working Paper WP/19/74.
- Cherif, Reda, Fuad Hasanov and Min Zhu. 2016. Breaking the Oil Spell : The Gulf Falcons' Path to Diversification. Washington, DC: International Monetary Fund.
- Hausman, Ricardo, Jason Hwang, and Dani Rodrik. 2005. "What you export matters," Journal of Economic Growth, Springer, vol. 12(1), pages 1-25.
- International Monetary Fund (IMF). 2016. “Economic Diversification in Oil-Exporting Arab Countries.” Manama, Bahrain: Annual Meet of Arab Ministers of Finance.
- Papageorgiou, Chris, Nikola Spatafora, and Ke Wang. 2015. “Diversification, Growth, and Volatility in Asia”. World Bank Policy Research Working Paper 7380.
- Salinas. 2021a. “Chile: A Role Model of Export Diversification Policies?”. IMF Working Paper No. 2021/148.
- Salinas. 2021b. “Proximity and Horizontal Policies: The Backbone of Export Diversification”. IMF Working Paper No. 2021/064.
- Yao, Jiaxiong and Yang Liu. 2021. “Diversification of The Nigerian Economy”. Nigeria: Selected Issues. IMF Country Report No. 21/34.

### Global value chains, trade facilitation, and tariffs
- Baldwin, Richard. 2013. "Global supply chains: Why they emerged, why they matter, and where they are going", in Elms, D. and P. Low (eds.), Global Value Chains in a Changing World. Geneva, Switzerland: WTO/TFCTN.
- Handley, Kyle, Fariha Kamal and Ryan Monarch. 2020. “Rising Import Tariffs, Falling Export Growth: When Modern Supply Chains Meet Old-Style Protectionism.” National Bureau Of Economic Research (NBR) Working Paper 266611.
- Mattoo, Aaditya, Alen Mulabdic, and Michele Ruta. 2017. “Trade Creation and Trade Diversion in Deep Agreements.” World Bank Policy Research Working Paper 8206.
- Meyers, Jeff and Julia Oliver. 2015. “Customs Reform in Indonesia.” Stanford Freeman Spogli Institute for International Studies.
- World Bank. 2020b. World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank.
- Global Alliance for Trade Facilitation. “A New Collaborative Project Aims to Streamline Trade Procedures in Nigeria”. February 16, 2021.

### Country and sector case studies, policy notes, and reviews
- “Mexico's Government Looks to Diversify Trade Partners.” April 18, 2017. Oxford Business Group.
- Dallas FED. 2007. “Mexico Regulatory Change Redefines Maquiladora”. Crossroads: Economic Trends In The Desert Southwest, vol 1.
- Moreno-Brid, Juan Carlos, Juan Carlos Rivas Valdivia and Jesús Santamaría. 2015. “Mexico: Economic growth exports and industrial performance after NAFTA.” United Nations Economic Development Unit Estudios y Perspectivas.
- Fr azer, Garth. 2012. “The EAC Common External Tariff (CET) and Rwanda”. School of Public Policy and Governance.
- World Trade Organization. 2017. Nigeria: trade Policy Review.

*References (1ngaea2022002) — IMF*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ngaea2022002.pdf_