## 1ngaea2025002-print-pdf ## Source details **Canonical URL:** [1ngaea2025002-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1ngaea2025002-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1ngaea2025002-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1ngaea2025002-print-pdf.pdf.json) --- ### Fiscal Forecasting Errors in Nigeria — motivation and scope - Analysis period: 2011-23. - Forecast errors estimated by comparing budget appropriations with budget execution data from Nigeria’s Ministry of Budget and Economic Planning. - Objective: identify aggregates most likely to deviate from budget appropriations, measure impact on fiscal deficit and debt trajectory, and inform improvements to fiscal forecasting and budget credibility. - Prepared by Salma Khalid (FAD). ### Fiscal Forecasting Errors — revenues (key findings) - Total revenue forecast errors: - Consistent optimism bias over 2011-2023, with budget forecasts exceeding outturn for all years except 2020. - Average forecast error: 1.8 percent of GDP or 36 percent of actual revenues (2011-2023). - Over 2021-23, forecast errors average 1.1 percent of GDP or 28 percent of revenues. - Oil revenues: - Oil revenue forecast errors explain most of total revenue forecast errors. - Oil revenues are consistently overestimated except for 2020. - Average oil revenue forecast error: 1.1 percent of GDP and 61 percent of oil revenues (2011-2023). - Actual oil production failed to achieve budget targets in 11 of the 13 years studied — production forecast optimism is a key driver. - Benchmark oil prices used by authorities are systematically more conservative than actual oil prices; conservative price benchmarks offset some optimism in oil revenue forecasts. - Implementation reports cite low oil lifting volumes, crude oil theft and pipeline vandalism, illegal bunkering, and occasionally low international oil prices as causes. Reports lack breakdown attributing shortfalls to operational capacity constraints versus security-related leakages. - Fiscal deductions (including PMS under-recovery deductions) contribute to net oil revenue underperformance; large subsidies (e.g., 2011 and 2021/2022) coincide with large forecast errors. - Non-oil revenues: - Main non-oil taxes: VAT, CIT and Customs. - VAT forecast errors: optimism bias pre-2020; VAT overperformance after 2020. Forecast errors average 25 percent of VAT revenue but only 0.2 percent of GDP (2011-23). - CIT forecast errors: optimism bias 2015-2020, then pessimism bias as CIT outturns grew faster than projections. - Customs revenues: persistent optimism bias in recent years, particularly in 2022 and 2023. - Net non-oil revenue forecast errors exceed errors in tax-based non-oil revenues, indicating deductions and non-tax lines compound forecasting errors. - Implementation reports attribute non-oil shortfalls to lack of remittances from MDAs, weaknesses in tax collection, administrative challenges at FIRS, and delays in revenue-enhancing measures; reports generally lack in-depth analysis of error sources. - Nominal GDP assumptions from MTEF documents show no systematic optimism bias; outturn often exceeds authorities’ projections. ### Fiscal Forecasting Errors — expenditures (key findings) - Total expenditures: - Budget forecasts for total federal government expenditures show consistent positive forecast errors, averaging 0.8 percent of GDP over 2011-23, with an upwards trend since 2020. - Budgets tend to overestimate total expenditures, consistent with optimism in revenue forecasts. - Recurrent expenditures: - Forecast errors in recurrent expenditures are a small proportion of total expenditure forecast errors. - Personnel expenditures: very small forecast errors on average, though errors have increased in recent years. - Overheads and other non-debt/non-personnel: large errors relative to those categories but average only 0.2 percent of GDP over 2011-23. - Debt service payments: mostly negative forecast errors (budgets frequently underestimate interest payments). Average debt service forecast error: -0.1 percent of GDP over 2011-2023. - Implementation reports indicate government prioritization of limiting recurrent expenditures in response to weak revenue performance; administrative reforms (payroll database, recruitment restrictions, Treasury Single Account, IT systems, efficiency units) are cited as contributing to lower recurrent outturns relative to budgets. - Capital expenditures: - Capital expenditure forecasts are very optimistic relative to execution. - Forecast errors in capital expenditures average over 70 percent of actual executed values and 0.8 percent of GDP over 2011-2023. - Budgeted capex far exceeds actual execution in all but one year of the period examined. ### Implications of forecast errors - Large and systematic forecast errors reduce the usefulness of the budget as a framework for fiscal policy, contributing to fiscal imbalance, unplanned debt accumulation, and misallocation of resources. - Persistent optimism bias, especially in oil production forecasts and capex projections, undermines budget credibility and increases fiscal policy uncertainty. - Forecast errors in one year have a snowball effect, generating larger forecast errors in subsequent years and contributing to concurrent budgets through extensions of appropriations. - Part of the reason for shrinking fiscal balance forecast errors post-2021 is under execution of budgeted expenditures which offsets revenue underperformance. - Large, offsetting errors in fiscal components mask gaps in the government’s ability to project revenues and needs accurately. - Forecast errors may contribute to resorting to central bank financing (ways and means), proxied by the change in net central bank claims on the central government. ### Policy recommendations and remedies (cross-country evidence and suggested measures) - Enhance capacity of the macro-fiscal unit responsible for forecasting. - Publish internal and external forecast performance reviews to increase transparency and accountability. - Enhance political commitment to budget targets and tie budget execution more tightly to fiscal needs and targets. - Strengthen public financial management reforms that have yielded recurrent expenditure savings and apply lessons to improve capex execution and monitoring (e.g., payroll databases, Treasury Single Account). - Improve documentation in budget implementation reports to provide detailed breakdowns of causes of revenue shortfalls (e.g., separating operational shortfalls from leakages in oil sector). - Best practices highlighted: - Place macro-fiscal departments responsible for budget forecasts on par with other MoF and Budget departments. - Ensure coordination between fiscal departments and data sharing, including formal memoranda of understanding. - Ensure staff training and forecasting tools compatible with staff skill sets. - Conduct and publish forecast performance reviews. - Enhance political commitment via periodic reviews, internal costing of policy choices, and external reviews (e.g., Fiscal Responsibility Council presentations to Ministries and Parliament). - Expected benefits of reducing forecasting errors: - Better alignment of annual spending with medium/long-term priorities. - Avoidance of unanticipated debt accumulation and lowered borrowing-cost risk. - Reduced uncertainty for investors and enhanced public trust in government institutions. --- ### Capital budget utilization and execution constraints - Appropriations being extended to the following fiscal year give rise to concurrent budgets, yet underutilization is persistent. - Extension of capital budgets delays implementation of the current year’s capital expenditures, suggesting MDAs lack capacity to execute both budgets simultaneously. - Budget implementation reports note financing constraints at the project level despite underutilization of the budget. - Frequent recommendations for MDAs to prioritize project completion indicate capacity constraints leading to incomplete and abandoned projects. - With capital expenditures constrained by MDA capacity, correctly budgeting limited resources to the most pressing needs and most capable ministries is critical. --- ### Fiscal Deficit: forecast errors and components - Fiscal balance forecast errors rose between the 2017-2021 period, but have shrunk thereafter, with the fiscal balance outturn being higher than budgeted in the most recent year of data. - Years with large fiscal balance forecast errors are characterized by strong optimism bias in revenue projections, both oil-and non-oil. - Following 2021, oil revenue forecast errors — though sizable — have been on a declining trend, helping reduce fiscal balance forecast errors. - The relationship between fiscal balance forecast errors and central bank financing of the deficit is not consistent, though a period of large forecast errors (2017-2021) coincides with increasing use of ways and means during 2018-2023. --- ### Conclusion and reiterated policy advice - Forecast errors indicate persistent optimism in revenue mobilization capacity; Nigeria’s revenue forecast errors rank among the largest in an analysis of 16 economies in Eastern and Southern Africa. - Positive revenue forecast errors have had limited impact on the fiscal deficit due to expenditure compression in-year. - Risks of persistent forecast errors: - Underfunding essential expenditures when shortfalls occur, given constrained borrowing envelopes. - Harm to MDAs’ ability to finance personnel and operational needs, compromising capital expenditure execution and spending quality. - Recommended practices for improvement include ex post forecast assessments, coordination, data sharing, capacity building, published forecast reviews, and political commitment to credible budgeting. *Source: IMF staff analysis of Nigeria’s budget implementation reports and related sections (Fiscal Forecasting Errors in Nigeria, 2011-2023).* --- ### Regulating the Crypto Market in Nigeria — overview and market size - Rapid surge in crypto trading among individuals and businesses; authorities strengthening regulatory and supervisory framework to address risks: undetected capital outflows and currency speculation, money laundering, terrorism financing and consumer fraud. - Authorities should identify unlicensed crypto firms, prevent them from operating in Nigeria, collect taxes on capital gains, and prevent crypto platforms from serving as informal channels to bypass capital flow restrictions. - Global market capitalization of crypto assets increased from US $211 billion in January 2020 to $3.4 trillion at the end of December 2024 (Coingecko). - Nigeria: one of the top three countries globally in crypto adoption (Chainalysis 2023 Global Report); July 2023 to June 2024 crypto transaction volume: $59 billion (Chainalysis). - Consensys and YouGov 2024 Global Survey — asset ownership shares among Nigerian crypto investors: - Bitcoin: about 62% - Binance: 51% - Ethereum: 41% - Dogecoin: 30% - Tether: 28% - Solana: 25% - USD coin: 22% - Shiba Inu: 18% - XRP: 18% - cNGN: first stablecoin issued in Nigeria authorized by SEC in early 2025, traded via two licensed local crypto exchanges. - Trade-size distribution (July 2023–June 2024, Chainalysis): - 12.6 percent of all trades were below the equivalent of $1,000 per trade - 11.6 percent were between $1,000 and $10,000 - 60.4 percent fell between $10,000 and $1 million - 15.2 percent ranged from $1 million to $10 million - 0.2 percent exceeded $10 million per trade - Reportedly, most Nigerian investors (73%) purchase crypto assets using local currency. ### Regulatory stance, payment systems, and central bank digital currency - Naira remains official currency; CBN has no intention of granting crypto assets legal tender status. - Banks and licensed financial intermediaries are prohibited from holding assets or liabilities denominated in or linked to crypto assets; crypto assets cannot be used as collateral for loans. - CBN circular (February 5, 2021) barred banks from offering deposit accounts and other financial services to crypto exchanges; revised December 2023 allowing banks to provide accounts to SEC-licensed crypto firms. - Payment system regulations prohibit use of crypto assets to pay for goods and services; preventing use in informal sectors remains challenging. - eNaira launched in 2021: digital currency issued by CBN, not a crypto asset, linked one-to-one to the naira; accessible via mobile app, web wallet, USSD. ### Risks from cross-border transfers, stablecoins, and market impacts - Crypto can facilitate cross-border transfers bypassing capital controls, enabling undetected capital outflows. - Example scheme: naira-top-up to wallet via unlicensed exchange → purchase assets → match or re-route orders to overseas exchanges → sell to foreign investor with USD paid to offshore bank account — resulting in cross-border transfer without naira/USD settlement detectable domestically. - Transfers to fx-denominated stablecoins (e.g., Tether/USDT) can reduce bank deposits and effect capital outflows from local banks to reserve assets managed by custodians in advanced economies. - Purchase of USD-linked stablecoins became attractive end-2023 and H1 2024 when USD availability was limited in banks. - USD/Naira exchange rate on global crypto exchanges sometimes diverged widely from formal FX market, opening arbitrage/speculation against the naira. - Authorities acknowledged approximately $26 billion in crypto transactions had passed through exchanges from sources and users the authorities could not properly identify. ### Supervisory actions, monitoring, and enforcement - Authorities shut down some global crypto platforms operating without a license in 2024 and banned peer-to-peer (P2P) crypto transactions in 2024. - Authorities monitor crypto markets daily and use Chainalysis data to monitor turnover (inflows, outflows, domestic trading volumes). - Authorities defined a pricing band for naira/USD on licensed crypto platforms at +/-5 percent around the CBN announced exchange rate. - In absence of detailed data, validating extent to which crypto influenced exchange rate movements is difficult. ### Fiscal, taxation, and legal framework - Finance Act of 2023: introduced a 10% tax on gains from the disposal of digital assets, including crypto assets. - FIRS lacks a formal approach to track crypto ownership and relies on individual self-reporting of gains. - Recommendations: - FIRS should strengthen capacity to enforce tax regulations on crypto. - Collaborate with major crypto intermediaries to identify traders and ensure tax collection. - Consider mandating firms to withhold taxes on capital gains. - Enhance cooperation with international agencies to identify and penalize tax defaulters. - SEC is designated regulator for crypto industry; SEC classifies all digital crypto assets as securities and defines crypto asset as a digital representation of value that can be digitally traded and functions as a medium of exchange and/or a unit of account and/or a store of value but does not have legal tender status. - SEC regulatory framework covers issuance, offering platforms, custody, transparency, and investor protection; SEC oversees VFAs exchanges targeting Nigerian investors. ### Licensing, incubation, and enforcement specifics - Since 2024, all crypto exchanges must be incorporated in Nigeria and licensed by SEC; licensed entities may open bank accounts. - SEC licensing requires platforms to have a license issued by a financial sector authority in their home country; foreign platforms must incorporate as Nigerian subsidiaries to be eligible. - SEC programs and approvals: - Accelerated incubation programs to enable local platforms to comply. - Two firms, Busha and Quidax, granted provisional authorization to operate. - August 2024: SEC granted an Approval-in-Principle to Quidax and Busha. - Four firms admitted to Regulatory Incubation (RI) Program: Trovotech, Wrapped CBDC, Dream City Capital, HousingExhangeNG. - Enforcement recommendations include shutting down unlicensed exchanges in collaboration with foreign authorities and strengthening cross-border cooperation to counter VPN- and jurisdiction-based evasion. ### Surveillance, AML/CFT, and consumer protection - Surveillance: - SEC and CBN established specialized units to monitor flows and market activity and subscribe to Chainalysis for daily transaction monitoring. - AML/CFT: - Nigeria amended legal/regulatory framework to require crypto asset service providers to apply AML/CFT preventive measures (customer due diligence, record-keeping, reporting suspicious transactions). - SEC mandates a compliance officer, compliance manual, and employee education/training. - Nigeria was publicly listed by FATF in 2023 for strategic AML/CFT deficiencies (grey listing). - Travel Rule: any crypto transaction exceeding $1,000 must include detailed originator and beneficiary information; transactions below $1,000 exempt from that requirement but must still include names and wallet addresses of originator and beneficiary. - Recommendations: ensure licensed providers comply via risk-based supervision and tailor AML/CFT supervisory tools to ML/TF risk levels. - Consumer protection: - SEC regulations aim to protect investors from fraud and scams. - Crypto exchanges and wallets face cyberattack risks; tracing and recovering funds is challenging. - January 2025 SEC updates: - VASPs must obtain prior SEC approval before engaging third-party promoters and ensure compliance with SEC marketing regulations. - Rules apply to any VASP offering services to Nigerian residents and take effect on June 30, 2025. - Crypto influencers (“Finfluencers”) must obtain a “no-objection authorization” from SEC before publishing digital asset ads and must verify the promoted company’s SEC license status. ### Inter-agency and international cooperation - Inter-governmental group coordinates crypto actions: SEC (main regulator), CBN, FIU, and Office of the National Security Adviser; group meets regularly and shares information. - SEC participates in IOSCO and international fora; authorities analyze other jurisdictions’ approaches and envision regulatory enhancements in line with IOSCO’s Policy Recommendations for Crypto and Digital Assets. - Recommendation: build and implement a formal monitoring framework covering a wide range of risks, supported by relevant market data availability. ### IMF monitoring and policy recommendations on crypto and payments - IMF recommended monitoring areas for systemic implications: - (i) crypto assets’ impacts on gross and net cross-border capital flows; - (ii) changes in financial intermediation, currency substitution, and international currency use; - (iii) effects of exchange rate and capital account regimes and capital flow management measures; - (iv) financial integrity risks; and - (v) demand for and supply of global financial safety net resources. - Policy actions highlighted: - Put in place an effective policy framework for crypto assets and shut down non-compliant firms. - Strengthen market surveillance and publish key market statistics (licensed institutions, number of crypto accounts, daily turnover). - Ensure enforcement of taxation regime for crypto investors. - Use digital technology to advance financial inclusion and build interoperable digital platforms, digital identification, digital payments, and trusted data sharing to address cross-border payment inefficiencies. *Source: Excerpt from supplied IMF PDF content.* --- ### Climate challenges and macro-economic implications — executive summary findings - Growth impact: - Worst-case scenario (fastest global warming and slow adaptation): GDP projected to be 8 percent lower by 2100 than in a hypothetical scenario without global warming. - Adaptation investments in agriculture and resilient infrastructure can reduce this impact to 3 percent, at a fiscal cost. - Sea level rise estimated to cost between 0.1 and 0.4 percent of GDP annually due to loss from storm surges in coastal areas. - Pursuing Nigeria’s mitigation objectives would take another 0.06 to over 0.4 percentage points off GDP growth, depending on policy design. - Fiscal impact: - Fiscal revenues would be reduced with lower growth (unit buoyancy). - Government spending for disaster relief could reach up to 1½ percent of GDP. - Adaptation investments of 1 percent of GDP are identified; authorities’ adaption costs up to 3 percent of GDP. - If Nigeria proceeds with its 2030 mitigation objectives, associated policy changes could generate 0.2 to 0.6 percent of GDP in additional revenue. - Balance of payments impact: - Extreme weather events can disrupt agricultural and hydrocarbon production, lowering exports and increasing imports, pressuring exchange rate and reserves. - Financial sector impact: - Extreme weather and sea level rise would damage physical assets, increase insurance claims, worsen private sector balance sheets, and potentially stress banks’ asset quality. - Investment needs: - Nigeria’s Energy Transition Plan (ETP) estimated additional investment of USD 410 billion to achieve climate targets. ### Climate trends, projections, and quantified impacts - Temperature and precipitation projections: - Average annual mean temperature: 27-28 °C. - Historical warming: total increase of 0.7 °C through 2020 relative to 1901-1930. - Projected temperature increases: - Between 1.2 and 1.6 °C in 2036-2065 (relative to 1985-2014). - Between 1.4 and 3.2 °C in 2071-2100 (relative to 1985-2014). - Precipitation regimes: - Southern coastal: 2,000-3,000 mm per year on average. - Central areas: 1,000-1,500 mm per year on average. - Northern regions: around 500-1,000 mm per year on average. - Extreme weather indicators: increases in “hot” days (maximum daily temperature above 35 °C), longer consecutive dry periods along the coastline, and increased intense precipitation events. - Sea-level rise (SLR) projections (median, relative to 2000): - Moderate emission scenario (RCP 4.5): 0.71 m by end of century. - RCP 2.6 (Paris-aligned): 0.60 m by end of century. - RCP 8.5 (very high emissions): 0.90 m by end of century. - Staff estimate of annual average cost of SLR without adaptation: about 0.3 percent of GDP for Nigeria between 2020 to 2099 under moderate emission scenario. - Costs range between 0.1 and 0.4 percent of GDP annually with best and worst SLR projections. - Macro impacts of extreme weather on GDP: - Prolonged consecutive dry days, extremely wet conditions, and intense precipitation events reduce GDP growth by 1 to 2.5 percentage points for each standard deviation above normal levels. - Under the fastest global warming scenario and with slow adaptation, GDP projected to decline by up to 8 percent annually by 2100. ### Sea-level rise impacts, adaptation, and fiscal/external implications - Sea-level rise increases storm-surge damages, raising insurance claims and stressing the insurance sector. - Adaptation strategies: - Hard protection (beach nourishment, coastal dunes, dykes): avoids land loss and storm-surge losses but requires investment and can be environmentally disruptive. - Planned retreat: reduces costs relative to no adaptation, requires long-term planning, land use regulations, and scrutiny of distributional impacts. - Adaptation can substantially reduce costs but requires financing and institutional capacity. - Fiscal and external financing implications: - Authorities mainstreaming 2021 Climate Change Act; project steering committee established. - Financing strategy includes private funding via PPPs. - Challenges: inadequate financing, weak infrastructure, and need for inclusive planning; adaptation spending increases fiscal financing needs and import demand, generating additional external financing needs requiring external low-cost climate funding. ### Adaptation investment needs (authorities’ estimates and staff estimates) - Authorities' estimates: - $3.6 billion per year for agriculture and water - $3.6 billion per year for health - $6.5 billion per year for transportation - Rising to $24.3 billion per year by 2050 - Totalling about 3 percent of 2020 GDP - These figures are additional to broader development spending. - IMF staff estimate: reinforcing new infrastructure exposed to floods is estimated to cost 0.02 percent of GDP annually. ### Role of cost-benefit analysis (CBA) and integration with development planning - Adaptation is most effective when integrated into development planning and prioritized for policies with positive externalities. - Removing market inefficiencies and promoting reforms (improving access to credit and agricultural extension services) facilitate private adaptation. - National Adaptation Plan (NAP) emphasizes evidence-based adaptation and CBA to assess trade-offs, distributional impacts, and maximize social welfare. ### Emissions, mitigation context, and policy design implications - Nigeria accounts for 0.9 percent of global emissions. - About half of emissions from fossil fuel extraction and agriculture; power generation, transport, buildings, LULUCF, and waste account for the other half. - Methane and flaring-intensity of oil and gas production are above that of many other hydrocarbon producing countries. - Baseline emissions increase around 2 percent per year and reach 515 mt of CO2e in 2030. - Under current policies, emissions are 10 percent below baseline, mostly due to oil and gas sector regulations and fossil fuel price increases. - A further 10 percent reduction in emissions would be needed to achieve the NDC. ### Mitigation policy instruments, costs, and distributional considerations - Instruments and trade-offs: - Emissions pricing minimizes economic costs and raises fiscal revenue but can affect competitiveness and social equity. - Emissions-intensity pricing taxes dirtier firms and subsidizes cleaner ones; higher economic costs but smaller price impacts. - Subsidies are fiscally costly and economically inefficient; regulatory approaches are more costly than pricing with limited end-user price increases. - A combination of policies preferred, varying across sectors. - Estimated macroeconomic costs to achieve Nigeria’s emissions reduction target: - Costs range from 0.06 to at least 0.40 percent of GDP annually depending on policy design. - Broad-based emissions pricing to meet the NDC: marginal economic costs of 0.06 percent of GDP per year with an emissions price of $10 per ton of CO2e. - Excluding forestry and agricultural emissions pricing doubles cost to around 0.13 percent of GDP and requires an emissions price of $36 per ton in other sectors. - Exemptions for LPG have minimal fiscal and economic impact. - Fiscal revenue and price impacts: - Emissions pricing improves fiscal position; emissions-intensity pricing results in a small revenue loss. - Revenues under emissions pricing range from 0.2 to 0.6 percent of GDP depending on covered sectors. - A $20 per ton emissions price increases oil product prices by 3 percent, electricity by 5 percent, and natural gas by 25 percent. - Production costs in emissions-intensive sectors estimated to rise by 2 to 10 percent; price increases especially large for livestock (above 20 percent). ### Trade-offs across policy options and recommended sequencing - Broad-based emissions pricing allows Nigeria to achieve its NDC with a cost of "0.05 percent of GDP" and price increases of "2 percent" for oil products (staff illustration). - Limiting sectoral coverage increases effort in covered sectors; costs and price increases can triple if agriculture and forestry exempt. - Emissions-intensity pricing results in about double the economic costs of emissions pricing but causes negligible price increases, improving acceptability. - Recommended sequencing and complementarities: - Introduce emissions pricing in strong macroeconomic conditions and low international fuel prices. - Start with a low price that gradually increases. - Complement with strengthened social protection, improved emissions measurement, and increased availability of low carbon alternatives. - Use emissions-intensity pricing and non-pricing instruments as preliminary steps in some sectors. - Sectoral instrument fit: - Emissions-intensity pricing and standards may suit export-competitive, emissions-intensive sectors. - Forestry, agriculture, oil, and gas require preliminary measures for pricing feasibility. - Waste sector: weaker case for pricing; consider deposit-refund systems. - Power sector: use competitive tenders, guarantees, and secured land tenure to reduce investment risks. ### Financing and public spending guidance - Facilitate private and concessional financing to reduce emissions-reduction costs and promote green growth. - Emissions pricing can direct private capital to low-carbon activities; complementary policies and high-quality climate data (green taxonomies) help mobilize investment and green bonds. - Public spending should target public goods, mitigation for vulnerable households, and projects with high developmental co-benefits (e.g., electricity access and clean cooking fuels). - Substantial emissions pricing revenue should remain available for general development spending when public spending is appropriately targeted. *Source: IMF Staff using CIAM model and CPAT estimates, Nigeria chapter.* *Source: Excerpt from supplied IMF PDF content.* ### References ______________________________________________________________________________ 14 ### Fiscal Forecasting Errors in Nigeria ### Motivation and scope - Analysis period: 2011-23. - Forecast errors estimated by comparing budget appropriations with budget execution data from Nigeria’s Ministry of Budget and Economic Planning. - Objective: identify aggregates most likely to deviate from budget appropriations, measure impact on fiscal deficit and debt trajectory, and inform improvements to fiscal forecasting and budget credibility. - Prepared by Salma Khalid (FAD). ### Key findings — Revenues - Total revenue forecast errors: - Consistent optimism bias over 2011-2023, with budget forecasts exceeding outturn for all years except 2020. - Average forecast error: 1.8 percent of GDP or 36 percent of actual revenues (2011-2023). - Over 2021-23, forecast errors average 1.1 percent of GDP or 28 percent of revenues. - Oil revenues: - Oil revenue forecast errors explain most of total revenue forecast errors. - Oil revenues are consistently overestimated except for 2020. - Average oil revenue forecast error: 1.1 percent of GDP and 61 percent of oil revenues (2011-2023). - Actual oil production failed to achieve budget targets in 11 of the 13 years studied — production forecast optimism is a key driver. - Benchmark oil prices used by authorities are systematically more conservative than actual oil prices; conservative price benchmarks offset some optimism in oil revenue forecasts. - Narratives in implementation reports cite low oil lifting volumes, crude oil theft and pipeline vandalism, illegal bunkering, and occasionally low international oil prices as causes of shortfalls. Reports lack breakdown attributing shortfalls to operational capacity constraints versus security-related leakages. - Fiscal deductions (including PMS under-recovery deductions) are cited as contributing to net oil revenue underperformance; where subsidies are large (e.g., 2011 and 2021/2022), forecast errors are correspondingly large. - Non-oil revenues: - Main non-oil taxes: VAT, CIT and Customs. - VAT forecast errors: optimism bias pre-2020; VAT overperformance after 2020. Forecast errors average 25 percent of VAT revenue but only 0.2 percent of GDP (2011-23). - CIT forecast errors: optimism bias 2015-2020, then pessimism bias as CIT outturns grew faster than projections. - Customs revenues: persistent optimism bias in recent years, particularly in 2022 and 2023. - Net non-oil revenue forecast errors exceed errors in tax-based non-oil revenues, indicating deductions and non-tax lines compound forecasting errors. - Implementation reports attribute non-oil shortfalls to lack of remittances from MDAs, weaknesses in tax collection, administrative challenges at FIRS, and delays in revenue-enhancing measures; reports generally lack in-depth analysis of error sources. - Nominal GDP assumptions from MTEF documents show no systematic optimism bias; outturn often exceeds authorities’ projections. ### Key findings — Expenditures - Total expenditures: - Budget forecasts for total federal government expenditures show consistent positive forecast errors, averaging 0.8 percent of GDP over 2011-23, with an upwards trend since 2020. - Budgets tend to overestimate total expenditures, consistent with optimism in revenue forecasts. - Recurrent expenditures: - Forecast errors in recurrent expenditures are a small proportion of total expenditure forecast errors. - Personnel expenditures: very small forecast errors on average, though errors have increased in recent years. - Overheads and other non-debt/non-personnel: large errors relative to those expenditure categories but average only 0.2 percent of GDP over 2011-23. - Debt service payments: mostly negative forecast errors (budgets frequently underestimate interest payments). Average debt service forecast error: -0.1 percent of GDP over 2011-2023. - Implementation reports indicate government prioritization of limiting recurrent expenditures in response to weak revenue performance; administrative reforms (payroll database, recruitment restrictions, Treasury Single Account, IT systems, efficiency units) are cited as contributing to lower recurrent outturns relative to budgets. - Capital expenditures: - Capital expenditure forecasts are very optimistic relative to execution. - Forecast errors in capital expenditures average over 70 percent of actual executed values and 0.8 percent of GDP over 2011-2023. - Budgeted capex far exceeds actual execution in all but one year of the period examined. ### Implications - Large and systematic forecast errors reduce the usefulness of the budget as a framework for fiscal policy, contributing to fiscal imbalance, unplanned debt accumulation, and misallocation of resources. - Persistent optimism bias, especially in oil production forecasts and capex projections, undermines budget credibility and increases fiscal policy uncertainty. ### Policy recommendations and remedies (cross-country evidence and suggested measures) - Enhance capacity of the macro-fiscal unit responsible for forecasting. - Publish internal and external forecast performance reviews to increase transparency and accountability. - Enhance political commitment to budget targets and tie budget execution more tightly to fiscal needs and targets. - Strengthen public financial management reforms that have yielded recurrent expenditure savings (e.g., payroll databases, Treasury Single Account) and apply lessons to improve capex execution and monitoring. - Improve documentation in budget implementation reports to provide detailed breakdowns of causes of revenue shortfalls (e.g., separating operational shortfalls from leakages in oil sector, and detailing sources of fiscal deductions). *Source: IMF staff analysis of Nigeria’s budget implementation reports and related sections (Fiscal Forecasting Errors in Nigeria, 2011-2023).* ### 19. Despite capital budgets ### 19. Despite capital budgets ### Capital budget utilization and execution constraints - Appropriations being extended to the following fiscal year give rise to concurrent budgets, yet underutilization is persistent. - Underutilized capital budgets from the year can be extended to the subsequent year to allow MDAs greater time to execute on their capital projects. - Extension of capital budgets comes at the expense of delaying implementation of the capital expenditures budget of the current year, suggesting that MDAs do not have the capacity to execute both budgets simultaneously. - Forecast errors in one year have a snowball effect of generating larger forecast errors in the subsequent year. - Budget implementation reports note financing constraints at the project level despite underutilization of the budget. - Frequent recommendations for MDAs to prioritize project completion over managing recurrent projects indicate MDAs are capacity constrained in their ability to effectively manage multiple recurrent projects, leading to incomplete and abandoned projects. ### Fiscal Deficit: forecast errors and components - Forecast errors in the fiscal balance rose between the 2017-2021 period, but have shrunk thereafter, with the fiscal balance outturn being higher than budgeted in the most recent year of data. - Years with large fiscal balance forecast errors are characterized by strong optimism bias in revenue projections, both oil-and non-oil. - Following 2021, oil revenue forecast errors – though sizable – have been on a declining trend, which has helped reduce fiscal balance forecast errors. - Part of the reason for shrinking fiscal balance forecast errors is under execution of budgeted expenditures which offsets revenue underperformance. - The relatively small fiscal balance errors mask large, off-setting errors in their components, suggesting gaps in the government’s ability to project its revenues and needs accurately. - The relationship between fiscal balance forecast errors and central bank financing of the deficit is not consistent. - A period of large fiscal balance forecast errors during 2017-2021 coincides with an increasing trend in the use of ways and means during the 2018- 2023 period; hence, fiscal forecast errors may contribute to resorting to central bank financing due to unbudgeted shortfalls in revenue. - Note: Use of ways and means is proxied by evaluating the change in net central bank claims on the central government, in the monetary and financial account statistics. ### Conclusion and policy advice — findings and risks - Forecast errors indicate persistent optimism with respect to the government’s ability to mobilize revenue. - An analysis of 16 economies in Eastern and Southern Africa indicates the presence of positive forecast errors in revenue projections across the majority of the countries; the size of forecast errors in Nigeria’s revenue place it at the top by size of average revenue forecast errors. - Positive revenue forecast errors have had limited impact on the fiscal deficit due to expenditure compression. - Despite revenue shortfall, forecast errors in the deficit are relatively contained in most years because of in-year expenditure reduction. - Evidence of expenditure compression is seen in payroll and overheads and is indicated in budget implementation reports. - Large and persistent forecast errors in budget revenue projections run the risk of underfunding essential expenditures during the budget year when shortfalls occur, due to constraints on the borrowing envelope. - Expenditure compression on overheads and personnel can harm MDAs’ ability to finance personnel and operational needs and directly impact MDAs’ ability to execute on capital expenditure allocations and compromise the quality of spending and investment. - Persistent shortfall of capital expenditure execution, and the use of concurrent budgets, indicate capacity constraints at the level of executing agencies, with budget implementation reports indicating weakness in expenditure management and cash flow. - With capital expenditures constrained by MDA capacity, correctly budgeting limited resources to the most pressing needs and the most capable ministries for execution is critical; this requires more accurate and realistic accounting of government revenues and expenditures. ### Recommended practices to improve forecasting and budgeting (cross-country lessons and best practices) - Cross-country experience indicates forecasting performance can be improved if the macro-fiscal unit conducts ex post assessments of the accuracy and quality of their budget forecasts (examples: Kenya, Malawi practices described). - Best practices for improving the budget forecasting function include: - Recognizing the importance of producing clear and credible forecasts of fiscal aggregates and placing the macro-fiscal departments responsible for budget forecasts on par with other MoF and Budget departments - Ensuring coordination between all fiscal departments to ensure data sharing and collaboration and enhancing quality and timeliness of data. Formal memoranda of understanding for data exchange can be drawn up between relevant agencies. - Ensuring staff training and use of tools for forecasting which are compatible with the skill sets of staff. - Conducting and publishing forecast performance reviews, to enhance transparency, create incentives for improving accuracy, and build public and market confidence in the credibility of the budget documents as a guide for fiscal policy. - Enhancing political commitment to budget targets, by conducting periodic reviews of forecasts, internally highlighting the fiscal cost of different policy choices, and encouraging reviews by external consultants or stakeholders to mitigate political pressure on forecasters. In the case of Nigeria, these reviews can be conducted by the Fiscal responsibility Council on a regular basis and presented to the Ministries and to Parliament. - Reducing errors in the budget forecasting process can: - Enhance public expenditure management by aligning annual spending with medium and long-term spending priorities and ensuring spending plans are subject to macroeconomic constraints. - Enhance debt management by avoiding unanticipated debt accumulation and lowering borrowing-cost risk from lack of fiscal transparency. - Reduce uncertainty among investors regarding the direction of economic policies through timely, transparent, and credible budgeting and effective implementation. - Enhance public trust in government institutions and the budget process by upholding budget commitments and clearly demonstrating why deviations from commitments occur. *Source: Excerpt from supplied IMF PDF content.* ### REGULATING THE CRYPTO MARKET IN NIGERIA ### Overview and recent developments - The trading of crypto assets has surged among individuals and businesses in Nigeria; authorities are strengthening the regulatory and supervisory framework to address risks including undetected capital outflows and currency speculation, money laundering, terrorism financing and consumer fraud. - Authorities should enforce this framework by identifying unlicensed crypto firms and preventing them from operating in Nigeria, collecting taxes on capital gains, and preventing crypto platforms from serving as informal channels to bypass capital flow restrictions. - Authorities should continue to develop robust analytical tools for effective market surveillance, ensure AML/CFT supervisory activity commensurate with money laundering and terrorism financing risks, and actively cooperate and share information with international counterparts. ### Market size, adoption, and assets - Global market capitalization of crypto assets increased from US $211 billion in January 2020 to $3.4 trillion at the end of December 2024 (Coingecko). - Nigeria is considered one of the top three countries globally in terms of crypto adoption (Chainalysis 2023 Global Report); Chainalysis’ data reveals that from July 2023 to June 2024, Nigeria recorded a volume of $59 billion in crypto transactions. - According to the 2024 Global Survey by Consensys and YouGov: - about 62% of Nigerian crypto investors own or have owned Bitcoin - Binance: 51% - Ethereum: 41% - Dogecoin: 30% - Tether: 28% - Solana: 25% - USD coin: 22% - Shiba Inu: 18% - XRP: 18% - Until recently, all crypto assets traded by Nigerians were assets issued overseas; in early 2025, the Securities and Exchange Commission (SEC) of Nigeria authorized the launch of cNGN, the first stablecoin issued in Nigeria, which is being purchased and sold via the two licensed local crypto exchanges. - Most crypto asset trades are of relatively small value (Chainalysis, July 2023 to June 2024): - 12.6 percent of all trades were below the equivalent of $1,000 per trade - 11.6 percent were between $1,000 and $10,000 - 60.4 percent fell between $10,000 and $1 million - 15.2 percent ranged from $1 million to $10 million - 0.2 percent exceeded $10 million per trade - Reportedly, most Nigerian investors (73%) purchase crypto assets using local currency. ### Regulatory stance and payment systems - The naira remains the country’s official currency; the CBN has no intention of granting any crypto asset official currency or legal tender status. - Banks and other licensed financial intermediaries are prohibited from holding assets or liabilities denominated in or linked to crypto assets; crypto assets cannot be used as collateral for loans. - On February 5, 2021, the CBN issued a circular barring banks from offering deposit accounts and other financial services to crypto exchanges or related firms; in December 2023, this circular was revised allowing banks to provide accounts to crypto firms that are licensed by the SEC. - Current payment system regulations in Nigeria prohibit the use of crypto assets to pay for goods and services; preventing the use of crypto assets to pay for goods and services in the informal sectors is likely to remain a challenge. - The CBN launched the eNaira in 2021; the eNaira is not a crypto asset but a digital currency issued by CBN linked to the value of the naira on a one-to-one relation. The eNaira can be accessed through a mobile app, web wallet, and USSD code and is intended for retail transactions, bill payments, and to enhance financial inclusion. ### Risks from cross-border transfers and illicit flows - The use of crypto assets to transfer money across borders while bypassing existing capital control measures poses a significant risk; the global crypto market has introduced channels that enable investors to move funds internationally without detection. - Example scheme described: - Investor A in Nigeria tops up a digital wallet with naira via an unlicensed crypto exchange and purchases assets from anonymous sources in Nigeria or abroad. - The unlicensed crypto exchange can match the order with another investor or re-route the order to another exchange overseas. - Investor A subsequently contacts investor B in a foreign jurisdiction to sell this asset at an agreed price, with investor B paying investor A in USD at an offshore bank account of investor A. - Under such schemes, money is transferred across borders without the physical movement of cash or a naira/USD settlement; in jurisdictions where crypto exchanges are unlicensed or unregulated, financial authorities may see only one leg of the transaction and may not detect the full cross-border transfer. - By using such methods—or more sophisticated variations—investors have been able to move money overseas through the crypto market, effectively circumventing capital flow regulations. *Source: Excerpt from supplied IMF PDF content.* ### 14. The movement of funds from deposit accounts in local banks to digital wallets offered ### 14. The movement of funds from deposit accounts in local banks to digital wallets offered by crypto exchanges can also pose risks. ### Risks from transfers to digital wallets and stablecoins - Transferring funds from deposit accounts in domestic banks to fx-denominated stablecoins (e.g. Tether or USDT) in digital wallets in crypto exchanges often creates a decline in bank deposits and capital outflows from local banks in emerging economies to the reserve assets managed by the custodian in advanced economies. - When such outflows become significant, they could potentially trigger higher volatility of the local currency and exert pressure on macroeconomic growth. - These dynamics could potentially undermine the effectiveness of monetary policy, as people prefer to save and invest in assets that are not denominated in local currency. ### Nigerian investors’ use of stablecoins and market impacts - Nigerian investors can transfer funds to their digital wallets in crypto exchanges and purchase stablecoins linked to the USD, such as Tether (USDT), USD Coin (USDC), and Pax Dollar (USDP), thereby practically acquiring and holding “foreign currency”. - The purchase of USD-linked stablecoins became attractive for small businesses and investors in Nigeria at the end of 2023 and the first half of 2024 when the availability of USD became limited in banks and other licensed financial institutions. - The USD/Naira exchange rate quoted in global crypto exchanges diverged, sometimes by wide margins, from the exchange rate in the formal FX market, opening opportunities to arbitrage and speculate against the naira through the crypto market. - Authorities acknowledged that approximately $26 billion in crypto transactions had passed through those exchanges from sources and users that the authorities could not properly identify. ### Authorities’ actions and market monitoring - Authorities shut down some global crypto platforms that operated in Nigeria without a license in 2024 and banned peer-to-peer (P2P) crypto transactions in 2024, citing concerns that these platforms obscure identities and create opportunities for illegal activities and fraud. - The authorities monitor crypto markets daily and have issued guidance for the use of the exchange rate in licensed crypto platforms. - The authorities access daily data provided by Chainalysis to monitor daily turnover in the crypto market, including inflows, outflows, and domestic trading volumes. - The authorities have defined a band for pricing crypto assets in naira/USD at +/-5 percent around the CBN announced exchange rate. - In the absence of detailed data, it is difficult to validate the extent to which crypto markets influenced exchange rate movements in Nigeria. ### Policy recommendations on market supervision and regulation - Continue to monitor developments in the crypto marketplace and ensure that all exchanges operating in Nigeria meet the regulatory standards set by the SEC. - Require exchanges to provide timely and comprehensive information about their business activities to relevant authorities, including suspicious transactions. - Continue building supervisory and enforcement capacity. - Implement sound macroeconomic policies and improve the efficiency and transparency of the formal FX market, while addressing the still large informal FX market, to strengthen confidence in Nigeria’s currency. ### Fiscal risks and tax treatment of crypto assets - The Finance Act of 2023 introduced a 10% tax on gains from the disposal of digital assets, including crypto assets. - The Federal Inland Revenue Service (FIRS) does not have a formal approach to track crypto ownership and usage and relies on individual self-reporting of gains. - Recommendations: - FIRS should strengthen its capacity to enforce existing tax regulations on crypto assets. - Collaborate with major crypto intermediaries to identify individuals and firms engaged in crypto trading and ensure proper tax collection. - Consider mandating firms to withhold taxes on capital gains. - Enhance cooperation with international agencies to identify and penalize tax defaulters as many traders use offshore exchanges. ### Legal certainty and SEC regulatory framework - The legal framework for crypto assets has the following characteristics: - The SEC is the designated government entity responsible for regulating and supervising the crypto asset industry. - The SEC classifies all digital crypto assets as securities and defines a crypto asset as a digital representation of value that can be digitally traded and functions as a medium of exchange and/or a unit of account and/or a store of value but does not have legal tender status in any jurisdiction; it is neither issued nor guaranteed by any jurisdiction and is distinguished from national currency and e-money. - The SEC established a regulatory framework for digital assets covering issuance, offering platforms, custody, transparency, and investor protection. - The SEC oversees Virtual Financial Assets (VFAs) exchanges operating within Nigeria, including domestic and foreign exchanges targeting Nigerian investors. - Entities dealing with digital assets must comply with SEC rules, including AML and CFT obligations. ### Licensing, incubation, and enforcement - Since 2024, all crypto exchanges are required to be incorporated in Nigeria and be licensed by the SEC; licensed entities are allowed to open accounts at banks. - SEC licensing requires platforms to have a license issued by a financial sector authority in their home country; foreign platforms must incorporate as a Nigerian subsidiary to be eligible. - SEC programs: - Accelerated incubation programs to enable local platforms to comply and obtain authorization. - Two firms, Busha and Quidax, have been granted provisional authorization to operate. - In August 2024, the SEC granted an Approval-in-Principle to Quidax and Busha. - Four firms were admitted to the Regulatory Incubation (RI) Program: Trovotech, Wrapped CBDC, Dream City Capital, and HousingExhangeNG. - Enforcement recommendations: - Continue shutting down operations of unlicensed exchanges operating in Nigeria in collaboration with foreign authorities. - Strengthen cooperation with foreign counterparts to prevent the operation of unlicensed crypto firms and counter evasion via VPNs and neighboring jurisdictions. ### Surveillance, AML/CFT, and consumer protection - Surveillance: - SEC and CBN have established specialized units to monitor flows and market activity. - Data is collected from registered local exchanges and fintech firms; authorities have subscribed to Chainalysis to monitor daily transactions into and out of Nigeria. - AML/CFT: - Nigeria amended its legal and regulatory framework to require crypto asset service providers to apply AML/CFT preventive measures (customer due diligence, record-keeping, and reporting suspicious transactions). - The SEC mandates entities to appoint a compliance officer, maintain a compliance manual, and implement employee education and training programs. - Nigeria was publicly listed by the FATF in 2023 for strategic AML/CFT deficiencies (FATF’s “grey listing”). - The Travel Rule in Nigeria mandates that any crypto transaction exceeding $1,000 must include detailed information about the originator and beneficiary; transactions below this threshold ($1,000) are exempt but must still include the names and wallet addresses of both the originator and the beneficiary. - Recommendations: - Ensure licensed crypto asset service providers comply with new AML/CFT requirements through risk-based AML/CFT supervision. - Tailor AML/CFT supervisory tools for effective engagement and undertake supervisory activity commensurate with ML/TF risk levels. - Consumer protection: - Existing SEC regulations aim to safeguard investors from fraud and scams. - Crypto exchanges and wallets face cyberattack risks; tracing and recovering funds can be extremely challenging. - In January 2025, the SEC updated crypto regulations to strengthen oversight of crypto-related marketing by virtual asset service providers (VASPs) and social media influencers: - VASPs must obtain prior approval from the SEC before engaging third-party service providers to promote crypto products and ensure compliance with SEC marketing regulations. - These rules apply to any VASP offering services to Nigerian residents and are scheduled to take effect on June 30, 2025. - Crypto influencers (“Finfluencers”) must obtain a “no-objection authorization” from the SEC before publishing digital asset ads and must verify whether the company they promote is licensed by the SEC. ### Inter-agency and international cooperation - Inter-governmental coordination: - An inter-governmental group coordinates crypto actions: SEC (main regulator), CBN, the Financial Intelligence Unit (FIU), and the Office of the National Security Adviser. - The working group meets regularly and shares information. - Authorities should build and implement a formal monitoring framework covering a wide range of risks and supported by availability of relevant market data. - International engagement: - The SEC is an active member of IOSCO and participates in international fora on crypto policy and regulation. - Authorities are analyzing regulatory approaches in other jurisdictions and discussing cooperation with foreign authorities. - Authorities are envisioning regulatory enhancements in line with IOSCO’s Policy Recommendations for Crypto and Digital Assets. ### Monitoring global market developments and systemic implications - Global crypto market statistics: - At the end of December 2024, the global cryptocurrency market capitalization amounted to $3.9 trillion. - This represents a growth of 97 percent over the previous year. - Bitcoin (BTC) held a dominant share of around 55.72%. - IMF recommended monitoring areas for potential amplification of vulnerabilities and risks to global financial stability: - (i) crypto assets’ impacts on gross and net cross-border capital flows; - (ii) changes in financial intermediation, currency substitution, and international currency use; - (iii) effects of exchange rate and capital account regimes as well as capital flow management measures; - (iv) financial integrity risks; and - (v) demand for and supply of global financial safety net resources. ### Financial infrastructure and fintech ecosystem - Nigeria’s marketplace: - Nigeria has an innovative marketplace composed of more than 600 Fintech firms providing financial services ranging from retail payments to loans and insurance products. - In cross-border payments, Fintech firms offer products enabling individuals and firms to receive payments from overseas at attractive fees; money transfer operators (MTOs) also play an important role in remittances. *NIGERIA — INTERNATIONAL MONETARY FUND.* ### 35. However, there are various challenges that hinder the development of more robust ### However, there are various challenges that hinder the development of more robust and digitalized cross-border payment system for Nigeria ### Challenges to cross-border payments and crypto uptake - Correspondent banking: - Fintech firms and other non-bank financial intermediaries often have difficulties in finding correspondent banks willing to execute cross-border transactions due to perceptions (or assessment) of high ML/TF risks and/or significant weaknesses in their AML/CFT policies and procedures. - Prudential regulation and market trust: - Prudential regulation applicable to Fintech firms tends to be laxer than the regulation applied to commercial banks for similar products and services, causing distrust among banks and concerns about unfair competition and regulatory arbitrage. - Consumer protection and fraud: - The occurrence of scams and fraudulent activities for users of Fintech companies has created distrust among segments of the population. - Resulting user behavior: - Under this environment, crypto remains an attractive alternative for many users for their cross-border payment needs. ### IMF recommendations on crypto policy and digital public infrastructure - Regulatory and supervisory actions: - Put in place an effective policy framework for crypto assets. - Shut down all crypto firms that are unwilling or unable to meet the licensing requirements of the SEC. - Coordinate with foreign authorities to suspend the operations of institutions offering services to Nigerian residents from foreign jurisdictions. - Market surveillance and data transparency: - Strengthen market surveillance by monitoring daily market turnover, including inflows, outflows, and domestic trading volumes. - Gather and analyze data from existing market participants in Nigeria to establish an effective regulatory and supervisory regime. - The SEC should regularly publish key statistics on the Nigerian crypto market—such as the number of licensed institutions, the number of crypto accounts, and daily crypto asset turnover. - Taxation and enforcement: - Ensure enforcement of the taxation regime for crypto investors to make certain capital gains are accurately reported and to prevent use of the crypto market to evade tax obligations. - Use of digital technology for financial inclusion: - Authorities should take advantage of progress in digital technology to meet other financial inclusion objectives. - Underlying technologies of crypto assets could be used to facilitate development of digital infrastructures: interoperable digital platforms, digital identification systems, digital payments, and trusted data sharing to address inefficiencies in financial services, including persistent inefficiencies in cross-border payments. ### Conclusions on crypto-related risks - Financial stability and market integrity risks: - Widespread adoption of crypto assets in Nigeria presents serious potential challenges related to financial stability via capital outflows, currency speculation, money laundering, terrorism and proliferation financing, and consumer fraud. - Enforcement imperative: - Effective enforcement of the regulatory framework is essential and will require new efforts by regulators and coordinated foreign actions. ### Macro-economic implications of climate challenges — executive summary findings - Growth impact: - Under a worst-case scenario (the fastest global warming scenario and with slow adaptation), GDP is projected to be 8 percent lower by 2100 than in a hypothetical scenario without global warming. - Adaptation investments in agriculture and resilient infrastructure can reduce this impact to 3 percent, albeit at a fiscal cost. - Sea level rise is estimated to cost between 0.1 and 0.4 percent of GDP annually due to loss of life and capital from storm surges in coastal areas. - Pursuing Nigeria’s mitigation objectives would take another 0.06 to over 0.4 percentage points off GDP growth, depending on the policy design. - Fiscal impact: - Fiscal revenues would be reduced with lower growth (unit buoyancy). - Government spending for disaster relief could reach up to 1½ percent of GDP. - Adaptation investments of 1 percent of GDP are identified; adaption costs are up to 3 percent of GDP in the authorities’ estimates which may include other development spending. - If Nigeria proceeds with its 2030 mitigation objectives, associated policy changes could generate 0.2 to 0.6 percent of GDP in additional revenue. - Balance of payments impact: - Extreme weather events can significantly disrupt agricultural and hydrocarbon production, leading to lower export volumes and increased imports of food and other essentials, putting pressure on the exchange rate and reserves and potentially translating into external financing needs. - Financial sector impact: - Extreme weather events and sea level rise would damage physical assets leading to higher claims and financial losses for insurers and worsening private sector balance sheets, potentially stressing banks’ asset quality. - Investment needs: - Nigeria’s Energy Transition Plan (ETP) is estimated to require additional investment of USD 410 billion to achieve climate targets. ### Climate trends, projections, and quantified impacts - Temperature and precipitation projections: - Average annual mean temperature: 27-28 °C. - Historical warming: total increase of 0.7 °C through 2020 relative to 1901-1930. - Projected temperature increases: - Between 1.2 and 1.6 °C in 2036-2065 (relative to 1985-2014). - Between 1.4 and 3.2 °C in 2071-2100 (relative to 1985-2014). - Precipitation regimes: - Southern coastal precipitations: 2,000-3,000 mm per year on average. - Central areas: 1,000-1,500 mm per year on average. - Northern regions: around 500-1,000 mm per year on average. - Extreme weather indicators: - An increase in the number of “hot” days (maximum daily temperature above 35 °C), longer consecutive dry periods along the coastline, and increased intense precipitations (annual maximum rainfall recorded in one day), with most of the country expected to register significant increases in intense rainfall events. - Sea-level rise (SLR) projections and costs: - Median SLR projections using RCP scenarios (relative to level in 2000): - Moderate emission scenario (RCP 4.5): 0.71 m by end of century. - RCP 2.6 (Paris-aligned): 0.60 m by end of century. - RCP 8.5 (very high emissions): 0.90 m by end of century. - Staff estimate of annual average cost of SLR without adaptation: about 0.3 percent of GDP for Nigeria between 2020 to 2099 under moderate emission scenario. - Costs range between 0.1 and 0.4 percent of GDP annually with the best and worst sea-level rise projections. - Macro impacts of extreme weather on GDP: - Empirical analysis finds that prolonged consecutive dry days, extremely wet conditions, and intense precipitation events already reduce GDP growth in Nigeria by 1 to 2.5 percentage points for each standard deviation above normal levels. - Under the fastest global warming scenario and with slow adaptation, GDP is projected to decline by up to 8 percent annually by 2100. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1ngaea2025002-print-pdf.pdf* ### 14. Sea level rise would be damaging to growth and place significant pressure on the ### 14. Sea level rise would be damaging to growth and place significant pressure on the financial sector particularly insurance companies ### Sea-level rise impacts and insurance sector risk - Losses are mostly due to storm-surge events becoming more impactful as sea level rises, resulting in increased damages and higher insurance claims. - Figure 6 (CIAM model, RCP4.5) shows average annual cost in percentage of GDP; whiskers indicate the 5th and 95th percentile range of the probabilistic distribution of sea-level rise. - Due to the highly non-linear nature of coastal impacts, adaptation costs, and effectiveness of adaptation measures, ranges are not always symmetric around total costs. ### Adaptation strategies and their effects - Hard protection of the coastline (beach nourishment, coastal dunes, dykes) can avoid loss of land and storm-surge losses but requires additional investments and can be environmentally disruptive. - Planned retreat (allowing slow depreciation of existing capital, no construction of new capital, and slow relocation of the population): - Further reduces costs relative to no adaptation. - Does not require investment in physical, environmentally-disrupting protection measures. - Requires long-term planning, coastal land use regulations, and careful scrutiny of distributional impacts on the population. - Adaptation can reduce costs substantially but requires financing and institutional capacity. ### Fiscal and external financing implications of adaptation - The authorities are mainstreaming the 2021 Climate Change Act, enhancing agency cohesion, and improving stakeholder participation; a project steering committee is established to broaden ownership. - The Ministry of Finance and the Ministry of Budget and Planning aim to set realistic targets, with private funding through private public partnerships (PPPs) as a key part of the financing strategy. - Challenges include inadequate financing, weak infrastructure, and need for more inclusive planning; robust monitoring and evaluation systems are crucial. - With limited fiscal space, wider external current deficits due to higher imports for rehabilitation following more frequent climate events and large climate-related infrastructure spending would generate significant external financing gaps, which would require external low-cost climate funding and well designed project proposals. ### National adaptation strategy, local initiatives, and capacity building - Nigeria's climate adaptation strategy focuses on: - Climate-Smart Agriculture: integrating seed improvement, hybridization, and sustainable land management practices. - Expanding and conserving ecosystems and maintaining ecological structure of natural habitats. - Local adaptation initiatives: community-based projects promoting sustainable agriculture, water management, and disaster risk reduction. - Capacity building: training programs and workshops for local communities, government agencies, and other stakeholders to enhance implementation of climate adaptation measures. ### Adaptation investment needs and fiscal implications (estimates) - Authorities' estimates of adaptation needs: - $3.6 billion per year for agriculture and water - $3.6 billion per year for health - $6.5 billion per year for transportation - Rising to $24.3 billion per year by 2050 - Totalling about 3 percent of 2020 GDP - These figures represent spending needs additional to broader development spending. - IMF staff estimate: reinforcing new infrastructure exposed to floods is estimated to cost 0.02 percent of GDP annually. - Implementing adaptation expenditure of the authorities’ magnitude would increase fiscal financing needs and import demand, generating additional external financing needs. ### Role of cost-benefit analysis (CBA) and integration with development planning - Adaptation is most effective when integrated into development planning and priority is given to policies with positive externalities. - Removing market inefficiencies and promoting reforms (improving access to credit and agricultural extension services) facilitate private adaptation. - The National Adaptation Plan (NAP) highlights adaptation as a cross-cutting developmental issue and emphasizes evidence-based adaptation. - CBA can help decision makers collect, aggregate, and compare information on public adaptation projects, assess trade-offs between development and adaptation, and maximize social welfare when complemented by analysis and correction of distributional impacts. - Ethical choices about what to do, when, how, and at what cost should reflect societal preferences; CBA applied consistently across adaptation and development programs supports this objective. ### Emissions, mitigation context, and implications for fiscal and macro outcomes - Nigeria accounts for 0.9 percent of global emissions; emissions per-capita and per unit of GDP are broadly in line with neighboring and other lower middle-income countries. - About half of Nigeria’s emissions are from fossil fuel extraction and agriculture; power generation, transport, buildings, LULUCF, and waste account for the other half. - Methane and flaring-intensity of oil and gas production are above that of many other hydrocarbon producing countries. - Current policies and projections: - Baseline emissions increase by around 2 percent per year and reach 515 mt of CO2e in 2030. - Under current policies, emissions are 10 percent below the baseline, mostly due to oil and gas sector emissions regulations and fossil fuel price increases. - A further 10 percent reduction in emissions would be needed to achieve the NDC. ### Mitigation policy design, costs, and distributional considerations - Policy instruments and trade-offs: - Emissions pricing minimizes economic costs and raises fiscal revenue but can affect international competitiveness and social equity through higher prices. - Emissions-intensity pricing taxes dirtier firms and capital and subsidizes cleaner ones; it has higher economic costs but smaller price impacts. - Subsidies are fiscally costly and economically inefficient; regulatory approaches are more costly than pricing with limited end-user price increases. - A combination of policies is likely preferred, varying across sectors to balance economic, social, and environmental goals. - Estimated macroeconomic costs to achieve Nigeria’s emissions reduction target: - Costs range from 0.06 to at least 0.40 percent of GDP annually depending on policy design. - Broad-based emissions pricing to meet the NDC: marginal economic costs of 0.06 percent of GDP per year with an emissions price of $10 per ton of CO2e. - Excluding forestry and agricultural emissions pricing doubles cost to around 0.13 percent of GDP and requires an emissions price of $36 per ton in other sectors. - Exemptions for LPG have minimal fiscal and economic impact; combining emissions pricing with emissions-intensity pricing for competitiveness-sensitive sectors can limit adverse impacts. - Fiscal revenue and price impacts: - Emissions pricing substantially improves Nigeria’s fiscal position; emissions-intensity pricing results in a small revenue loss. - Revenues under emissions pricing range from 0.2 to 0.6 percent of GDP depending on covered sectors (highest receipts from charges on gasoline and natural gas). - A $20 per ton emissions price increases oil product prices by 3 percent, electricity by 5 percent, and natural gas by 25 percent. - Production costs in emissions-intensive sectors are estimated to rise by 2 to 10 percent, potentially affecting international competitiveness for traded products like oil, gas, cement, and fertilizers. - Price increases are especially large for livestock (above 20 percent) due to high emissions-intensity. - Emissions-intensity and well-designed regulatory policies result in much smaller price increases (e.g., oil and gas production costs increase by four times less with emissions-intensity pricing). *Source: IMF Staff using CIAM model and CPAT estimates, Nigeria chapter.* ### 28. The above analysis highlights the significant macro and acceptability trade-offs across ### 1ngaea2025002-print-pdf - 28. The above analysis highlights the significant macro and acceptability trade-offs across ### Trade-offs across policy options - Broad-based emissions pricing allows Nigeria to achieve its NDC with a cost of "0.05 percent of GDP" and price increases of "2 percent" for oil products. - Limiting sectoral coverage increases effort in covered sectors; for example, economic costs and price increases triple if agriculture and forestry are exempt. - Emissions-intensity pricing results in about double the economic costs of emissions pricing but causes negligible price increases, improving acceptability and reducing competitiveness impacts. - Regulatory policies are somewhat easier to administer but require careful design to avoid excessive economic costs. - Subsidies are the most costly policy option. - Emissions pricing aligned with Nigeria’s NDC can raise substantial fiscal revenue of "0.2 to 0.6 percent of GDP in 2030". - Other policies tend to slightly reduce fiscal space or, for spending-based policies, significantly reduce fiscal space. - Administrative feasibility varies; pricing is not a feasible near-term option in forestry and agricultural sectors (though it could be possible at limited scope, e.g., large farms and specific land parcels). *Source: IMF staff illustration.* ### Policy package to support fiscal revenue, exports and growth - A well-sequenced and carefully designed policy package is needed to promote durable, effective, and equitable reforms with limited or positive macroeconomic impacts. - Preparing the package requires: - Detailed policy analysis. - Complementary measures to protect vulnerable households. - Enhanced accessibility to alternatives to fossil fuels. - Promotion of financial flows. - The IMF can support authorities through training on analytical tools, such as CPAT, and dedicated capacity development. ### Emissions pricing: sequencing, design, and complementarities - Emissions pricing generates substantial fiscal benefits with limited economic impacts but, given recent energy price increases, is more of a medium-term priority. - Deciding on pricing levels, sectoral and fuel coverage, and the social protection response requires a more granular understanding of affected firms, households, and regions; analysis can partly use Nigeria’s household budget survey and input-output tables. - Complementary actions needed in tandem: - Strengthen social protection targeting and delivery. - Improve non-energy emissions measurement. - Increase availability of low carbon alternatives (e.g., reliable on-grid electricity, off-grid solutions). - Preferable implementation path: - Introduce emissions pricing in times of strong macroeconomic conditions and low international fuel prices. - Start with a low price that gradually increases. - Pay attention to public communication on rationale, stakeholder concerns, and use of revenue (including targeted compensation). - Emissions-intensity pricing and non-pricing instruments could be preliminary steps prior to emissions pricing because they likely do not require social protection support due to smaller price increases. ### Sectoral considerations and instrument fit - Emissions-intensity pricing and standards may be more appropriate for select sectors/fuels because of export competitiveness and administrative concerns. - Emissions pricing cost increases for emissions-intensive, traded sectors (oil, gas, fertilizers) can worsen competitiveness and the balance of payments absent international coordination. - Emissions-intensity pricing or partial exemptions may be more suitable for such sectors; emissions pricing is present in some comparable cases. - Administrative feasibility: - In some sectors, emissions-intensity pricing could be implemented in the near term (e.g., vehicles, power generation). - Forestry, agriculture, oil, and gas require preliminary measures to improve property rights, enforcement, and measurement before pricing is feasible. - Waste sector: case for pricing policies is weaker because of limited variation in abatement activities across the sector. - Emissions-intensity pricing can be a long-term complement to emissions pricing where political acceptability and competitiveness concerns limit pricing stringency. ### Near-term policy mix (recommendations) - Mix of emissions-intensity pricing, standards, and targeted tax policies to avoid fiscal costs: - Apply emissions-intensity pricing where administration is feasible (vehicles, power generation). - In agriculture and forestry, address emissions through: - Finalization of carbon credits legislation. - A tax on unsustainably produced timber. - Strengthened enforcement of forest protection. - Promotion of climate smart agricultural practices. - Continuation of tax expenditures (and emissions-pricing exemption) on LPG to support clean cooking fuels. - Waste sector: implement packaging and bottle deposit-refund systems to divert waste to formal landfills. - Power sector: use initial competitive tenders for renewable energy coupled with guarantees and secured land tenure to reduce offtake, land, and foreign exchange risk and increase renewable energy investment. ### Financing, private investment, and public spending guidance - Facilitating private and concessional financing is crucial to reduce emissions-reduction costs and promote green growth. - Emissions and emissions-intensity pricing provide price signals to direct private capital to low carbon activities but need complementary policies. - High-quality climate data (e.g., green taxonomies) helps investors and can increase green bond issuance. - General improvements in macroeconomic conditions and deeper domestic credit markets reduce capital costs, important due to high upfront costs of green technologies. - Power sector barriers (e.g., purchasers with poor credit, long payback periods) can be addressed with blended finance, well-designed auctions for power purchase agreements, and other measures. - Public spending should generally be limited to: - Public goods (e.g., associated infrastructure). - Mitigating impacts for vulnerable households. - Projects with high developmental co-benefits (e.g., electricity access and clean cooking fuels). - Substantial emissions pricing revenue should remain available for general development spending when public spending is appropriately targeted. *Source: IMF staff illustration.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1ngaea2025002-print-pdf.pdf_