## _cr12194

## Source details

**Canonical URL:** [_cr12194](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12194.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12194.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12194.pdf.json)

---

### ECONOMIC CONTEXT — Recent Developments
- Non-oil GDP growth held relatively stable at 8.3 percent in 2011.
- Overall real GDP growth is expected to have been about 6.7 percent in 2011.
- Inflation declined to 10.2 percent in December 2011 (y-o-y), compared with 11.7 percent a year earlier.
- International reserves remained flat in 2011 despite an estimated sharp improvement in the external current account.
- In November 2011, the authorities adjusted the soft exchange rate band (+/-3 percent) around the naira-US$ bilateral rate by some 3 percent.
- The non-oil primary deficit (NOPD) of the consolidated government is estimated to have narrowed from about 34.6 percent of non-oil GDP in 2010 to 32.9 percent in 2011.
- Higher oil prices helped shrink the overall fiscal deficit from 7.7 percent of GDP in 2010 to about 0.2 percent of GDP in 2011.
- The gasoline subsidy cost about 4 percent of GDP in 2011; the January 1 removal raised the gasoline price by 116 percent but was partially rescinded two weeks later, rolling back the price to 50 percent above the old subsidized price of N65 per liter.
- Monetary policy: after lowering its overnight deposit rate to one percent in mid-2010, the CBN increased the rate by 900 bps since September 2010. Real short-term interest rates fluctuated around 4-6 percent.
- Financial soundness indicators: non-performing loans declined sharply following AMCON purchases; credit decline has stopped.

### OUTLOOK AND RISKS
- Baseline projections and targets:
  - Non-oil GDP growth projected at 7.8 percent in 2012.
  - Overall GDP growth projected at 6.9 percent in 2012.
  - Medium-term non-oil growth projected to level off at about 7 percent.
  - Oil production projected to grow from 2.4 million barrels per day in 2011 to 2.6 million barrels per day in 2015.
  - NOPD of consolidated government projected to decline to 27.9 percent of non-oil GDP in 2012; MTEF projects NOPD to 18 percent of non-oil GDP in 2015.
  - International reserves projected to rise from US$33 billion in 2011 to US$61 billion in 2015.
  - Inflation projected to peak around 12–13 percent in mid-year 2012, then decline to 11–12 percent by year-end 2012; medium-term inflation projected to fall to the 5–8 percent range.
- Downside risks:
  - A larger deterioration in the global environment could cause substantially lower world oil prices.
  - Failure to implement planned fiscal adjustment measures would result in faster accumulation of domestic debt and pressure on monetary policy and reserves.
  - Ongoing violence in northern Nigeria could adversely impact growth prospects.
- Authorities revised down the MTEF budget reference price to US$70 per barrel for 2012–15 from a previously announced US$75 per barrel.

### REBUILDING FISCAL BUFFERS — Findings and Policy Measures
- Fiscal objectives:
  - Rebuild fiscal buffers, reorient spending from recurrent to capital, and keep debt levels low.
  - Projected medium-term NOPD aligned with staff’s estimates of the long-run sustainable NOPD.
- Staff-endorsed measures:
  - Eliminating or substantially reducing the gasoline subsidy is essential.
  - Medium-term adjustment driven mainly by restricting growth of recurrent spending; wage bill (real) projected to decline on average by 2 percent a year after rising by 23 percent in 2010.
  - Setting a budget oil reference price at US$70 per barrel to induce fiscal restraint.
  - Intensify non-oil revenue collection efforts.
- Authorities’ mitigation and communication:
  - Launched public information campaign and established the Subsidy Reinvestment and Empowerment (SURE) program with a transparent monitoring framework.
  - SURE projects include road, railway, and petroleum refinery construction; expansion of urban mass transit systems; youth employment programs; and conditional cash transfers for pregnant women.
- Fiscal risk:
  - Staff analysis indicates Nigeria is at low risk of debt distress but a prolonged oil price shock without offsetting measures could undermine sustainability.

### FUEL SUBSIDY, PARTIAL REINSTATEMENT, AND SURE
- Partial reinstatement:
  - Partial reinstatement of the subsidy estimated to cost 2 percent of GDP in 2012.
  - Staff recommends offsetting at least half of this cost to avoid jeopardizing SWF reserve buildup.
  - Authorities committed publicly to full removal but did not specify a timeline; consultations with stakeholders were deepened.
- Appendix II key subsidy facts:
  - 2011 total subsidy cost estimated at about US$9 billion (4.1 percent of GDP), with gasoline over 75 percent of total.
  - On January 1, 2012 gasoline price rose from N65 (US$0.42) to N141 (US$0.91); after protests, price scaled back to N97 (US$0.60) per liter (50 percent higher than N65).
  - Staff’s preliminary estimate: reduced gasoline subsidy plus continued kerosene subsidy will cost close to US$6 billion (2.2 percent of GDP) in 2012, assuming gasoline consumption drops by 10 percent.
- SURE program components and targets:
  - Governance: board of government and civil society representatives to monitor allocations.
  - Social safety nets: Urban Mass Transit (import/distribution of 1600 buses), conditional cash transfers for pregnant women, public works, vocational training.
  - Infrastructure identified for SURE financing: roads (six core inter-urban projects), railway (six rehabilitation projects), water and irrigation, electricity generation (Mambilla hydro counterpart funding), petroleum (counterpart funding to build three new refineries (400 thousand barrels per day) and rehabilitate 2,500 km of pipelines).

### SOVEREIGN WEALTH FUND (SWF), FISCAL SURPLUSES, AND DOMESTIC DEBT
- SWF design and operation:
  - SWF launched October 2011, jointly owned and supervised by federal, states, and local governments with three components: stabilization, infrastructure, inter-generational saving.
  - Each component allocated 20 percent of “excess” oil revenue above the budget benchmark; governing board may allocate the remaining 40 percent.
  - Stabilization fund has stricter withdrawal rules than ECA; legislation silent on mechanism to determine how much oil revenue is allocated to the SWF because the benchmark budget oil price remains subject to executive-legislative negotiation.
- Fiscal dynamics and concerns:
  - With flat oil revenue outlook, projected accumulated fiscal surpluses fall short of formula-driven SWF inflows.
  - Federal government domestic debt projected to rise from 15 percent of GDP in 2011 to 17 percent in 2015.
  - Cost of servicing domestic debt substantially exceeds projected return from SWF financial assets; staff suggests linking SWF inflows to fiscal surpluses.
- Short-term SWF operational recommendations:
  - Prioritize building SWF precautionary balances; for 2012-13 allocate close to the maximum allowable 60 percent of gross SWF inflows to the stabilization fund.
  - Short-term options to minimize domestic issuance:
    - Utilize substantial federal government bank deposits (around 8 percent of GDP) instead of borrowing.
    - Replace debt financing with funding from the infrastructure fund to finance capital projects in the budget.
- November 2011 capitalization: SWF was capitalized with a transfer of US$1 billion from the Excess Crude Account.

### NON-OIL REVENUES AND TAX REFORM
- Importance: erosion of oil revenues relative to non-oil GDP highlights need to strengthen non-oil revenues.
- Administrative focus: improve tax administration; new rules require income-generating government agencies and enterprises to remit to the treasury based on gross instead of net revenues.
- Policy advice: staff recommended accelerating tax policy reform (incorporating Fund TA) so implementation could begin in the next few years.
- Authorities’ near-term view: prioritize tax administration reforms and maximize allocation to SWF stabilization fund; confident measures to boost collections—particularly from government agencies—would surpass staff projections.

### MONETARY POLICY, INFLATION, AND EXCHANGE RATE MANAGEMENT
- Staff view:
  - Supported tightening of monetary policy and adjustment of soft exchange rate band to contain inflation and counter reserve pressures.
  - Noted heavy CBN intervention in 2011 that risked reserve depletion.
  - Recommended focus on a clear inflation objective and allowing gradual naira adjustment over time.
  - Recommended more empirical work on exchange rate pass-through to inflation.
  - After a 275 basis point increase in policy rate in October, staff recommended a “wait and see” approach before further rate action.
  - Advised not to react to temporary inflation rise from fuel subsidy removal unless second-round effects materialize.
  - Supported scaling back reliance on cash reserve ratio and using open market operations to guide short-term rates.
- Authorities’ stance:
  - Early 2011 policy focused on supporting fragile banking system; CBN not in favor of defending exchange rate at all costs and reiterated commitment to bring inflation down into single digits.

### FINANCIAL SYSTEM STABILITY, AMCON, AND REGULATORY REFORMS
- Banking sector cleanup:
  - Recapitalization of intervened banks completed in late 2011.
  - AMCON purchased NPLs using about N3.6 trillion (face value), equal to 16 percent of 2011 non-oil GDP; AMCON requested increase in borrowing limit to N4.5 trillion.
  - CBN guarantees on interbank liabilities were removed at end-2011.
- AMCON operations and risks:
  - Staff urged minimizing fiscal and moral hazard risks; supported halt of new NPL purchases.
  - Staff recommended AMCON aim to wrap up crisis operations in 12 years as planned and explore private distressed asset firm development.
  - AMCON repayment plan envisages repayment after 12 years funded by:
    - A 0.3 percent levy on bank assets;
    - Sale of assets securing acquired NPLs;
    - Grants (N500 billion over 10 years) funded from CBN net profits.
- Regulatory reforms:
  - Support for stricter corporate governance and risk management rules, improved CBN systemic risk assessment, and enhanced cross-agency and cross-border cooperation.
  - Authorities urged to address AML/CFT deficiencies and continue implementing action plan agreed with FATF.
  - CBN expressed interest in an FSAP Update in 2012.

### STRUCTURAL REFORMS, COMPETITIVENESS, AND INCLUSIVE GROWTH
- Priorities:
  - Economic diversification and competitiveness are vital; recent growth driven by agriculture and wholesale/retail trade.
  - Policy initiatives focus on boosting infrastructure (transportation, electricity) and improving business climate.
  - Staff supported energy sector reforms including planned cost-reflective pricing (scheduled for the first half of 2012) and lifeline electricity tariffs for vulnerable users.
  - Support for scaling up public investment within MTEF envelope and reforms to commercialize agriculture.
  - Challenge: increase credit access for productive sectors; supported strengthening credit bureaus, expanding collateral options, and developing domestic capital markets.

### SCENARIOS, DEBT SUSTAINABILITY, AND RESERVE ADEQUACY
- Scenario highlights (2011–15):
  - Oil price shock: 20 percent price decline scenario; oil price remains above budget reference so no public spending adjustment assumed.
  - Alternative scenario: key reforms not implemented (real recurrent spending held constant; remaining fuel subsidies not removed and financed through SWF).
- Key projection figures and ranges (selected exact series and table highlights preserved):
  - Real GDP (1990 factor cost, 2007–15): 6.4, 6.0, 7.0, 7.8, 6.7, 6.9, 6.4, 6.3, 6.3.
  - Non-oil GDP (2007–15): 9.5, 9.0, 8.3, 8.4, 8.3, 7.8, 7.0, 7.0, 7.0.
  - Production of crude oil (mbd): 2.22, 2.09, 2.16, 2.46, 2.44, 2.48, 2.54, 2.58, 2.60.
  - Gross international reserves (US$ billions memo across 2007–15): 51.3, 53.0, 42.4, 32.4, 32.3, 29.3, 39.2, 44.9, 53.2, 60.9.
  - Excess Crude Account / SWF (US$ billions): 14.2, 19.7, 7.1, 2.7, 4.7, 14.8, 25.8, 33.6, 39.4.
  - Budget oil price used in projections (US$ a barrel): 45.0, 60.0, 75.0, 70.0, 70.0, 70.0, 70.0.
- Debt sustainability and external risk:
  - Nigeria judged at low risk of external debt distress in baseline and standardized stress tests.
  - Consolidated government gross debt estimated about 18 percent of GDP at end-2011; projected to decline to about 3½ percent of GDP by 2031 under baseline.
  - Under adverse scenarios (prolonged oil price shock or weaker growth), indicators worsen but remain within policy-dependent thresholds relevant for Nigeria; policy responses would be required.
- Reserve adequacy (Appendix III):
  - Baseline optimal reserves vary from 3.7 months to 7.4 months of next year’s imports depending on the unit cost of holding reserves.
  - Staff projection: projected reserves between 4¾ and 6½ months of prospective imports appropriate if fiscal consolidation proceeds as planned.
  - Opportunity cost of reserve holding could be relatively high, say 4 to 5 percent, given infrastructure needs.

### REAL EXCHANGE RATE ASSESSMENT (Appendix V and Macroeconomic Balance)
- Macroeconomic balance approach:
  - Estimated current account norm: -2.1 percent of GDP.
  - Nigeria’s projected current account balance (2016): +0 .4 percent of GDP.
  - Given elasticity, exchange rate estimated undervalued by 10.3 percent (macro balance).
- External sustainability approach:
  - External surplus required to stabilize NFA: 2.4 percent of GDP.
  - Staff projected medium-term current account surplus: 0.4 percent of GDP.
  - Implied exchange rate overvaluation: 8.5 percent.
- Equilibrium REER approach:
  - Marginal overvaluation of 0.7 percent in 2011.
- Overall: mixed results across methods; staff concluded no fundamental misalignment overall but results treated with caution.

### STAFF APPRAISAL, BOARD VIEWS, AND POLICY RECOMMENDATIONS
- Staff appraisal summary:
  - Nigeria exhibited robust growth; projected to remain strong in 2012 though risks are skewed to the downside.
  - Implementation of MTEF key to rebuilding fiscal buffers, lowering inflation, and maintaining stability.
  - Staff supports fiscal adjustment measures, in particular:
    - Setting budget oil reference price at US$70 per barrel for 2012-15;
    - Phasing out fuel subsidy with social safeguards;
    - Restricting growth of recurrent spending;
    - Intensifying non-oil revenue collection efforts.
- Executive Directors and authorities:
  - Directors commended countercyclical policies, endorsed rebuilding buffers and subsidy reduction, welcomed SWF establishment and recommended a rules-based budget oil price.
  - Authorities agreed with main conclusions and reiterated commitment to fiscal consolidation, monetary prudence, financial stability measures, and structural reforms.
- Staff procedural recommendation:
  - Staff recommends Nigeria remain on the standard 12-month Article IV consultation cycle.

*Source: INTRODUCTION and selected chapters and appendices, NIGERIA 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND (content unit _cr12194).*

### INTRODUCTION ___________________________________________________________________________________4

### INTRODUCTION

### ECONOMIC CONTEXT — Recent Economic Developments
- Non-oil GDP growth held relatively stable at 8.3 percent in 2011.
- Overall real GDP growth is expected to have been about 6.7 percent in 2011 due to a decline in oil and gas output in the first half of the year.
- Inflation declined to 10.2 percent in December 2011 (y-o-y), compared with 11.7 percent a year earlier, in response to monetary tightening by the Central Bank of Nigeria (CBN) and moderation of food prices.
- International reserves remained flat in 2011 despite an estimated sharp improvement in the external current account, reflecting net capital outflows, political uncertainty prior to the April 2011 general elections, a global flight to safety in the second half of the year, and CBN intervention during the first three quarters to avoid depreciation.
- In November 2011, the authorities adjusted the soft exchange rate band (+/-3 percent) around the naira-US$ bilateral rate by some 3 percent.
- The non-oil primary deficit (NOPD) of the consolidated government is estimated to have narrowed slightly from about 34.6 percent of non-oil GDP in 2010 to 32.9 percent in 2011, mainly due to expenditure restraint at the federal government level.
- Higher oil prices helped shrink the overall fiscal deficit from 7.7 percent of GDP in 2010 to about 0.2 percent of GDP in 2011.
- The gasoline subsidy cost about 4 percent of GDP in 2011; the January 1 removal raised the gasoline price by 116 percent but was partially rescinded two weeks later, rolling back the price to 50 percent above the old subsidized price of N65 per liter.
- Monetary policy: after lowering its overnight deposit rate to one percent in mid-2010, the CBN increased the rate by 900 bps since September 2010. Real short-term interest rates are now positive for the first time in nearly four years, fluctuating at around 4-6 percent.
- Financial soundness indicators: non-performing loans declined sharply following purchases by the Asset Management Company of Nigeria (AMCON) and credit has stopped declining.

### ECONOMIC CONTEXT — Outlook and Risks
- Baseline projections:
  - Non-oil GDP growth projected at 7.8 percent in 2012 reflecting tighter monetary and fiscal policies and a softer global economy.
  - Overall GDP growth projected to rise slightly to 6.9 percent in 2012 on the basis of a moderate rebound in oil output.
  - Over the medium term, non-oil growth projected to moderate and then level off at about 7 percent.
  - Oil production projected to grow from 2.4 million barrels per day in 2011 to 2.6 million barrels per day in 2015.
  - Under the authorities’ fiscal consolidation plan, the NOPD of the consolidated government would decline to 27.9 percent of non-oil GDP in 2012 (based on the draft 2012 budget and the partial removal of the fuel subsidy).
  - The authorities’ 2012–15 Medium Term Expenditure Framework (MTEF) projects the NOPD to reduce further to 18 percent of non-oil GDP in 2015.
  - International reserves projected to rise from US$33 billion in 2011 to US$61 billion in 2015.
  - Inflation is projected to rise temporarily due to the gasoline price increase, peaking at around 12–13 percent in mid-year 2012, then declining to 11–12 percent by year-end 2012; medium-term inflation projected to fall to the 5–8 percent range.
- Risks (skewed to the downside):
  - A larger than envisaged deterioration in the global environment could cause substantially lower world oil prices, limiting fiscal consolidation and reserve buildup.
  - Failure to implement planned fiscal adjustment measures would result in faster accumulation of domestic debt and place undue burden on monetary policy to contain inflation and prevent pressures on the naira and international reserves.
  - Ongoing violence in northern Nigeria could adversely impact growth prospects, particularly if it spreads.
- Authorities’ views:
  - Authorities shared concerns about heightened global uncertainty and contagion risks; they revised down the budget reference price in the MTEF to US$70 per barrel for 2012–15 from a previously announced US$75 per barrel.

### REBUILDING FISCAL BUFFERS — Findings and Policy Measures
- Fiscal strategy objectives:
  - Rebuild fiscal buffers, reorient spending from recurrent to capital, and keep debt levels low.
  - Projected medium-term NOPD is in line with staff’s estimates of the long-run sustainable NOPD (Appendix IV).
- Staff endorsement of key policy measures:
  - Given its high cost, eliminating, or at least substantially reducing the gasoline subsidy is essential to the success of any fiscal adjustment effort.
  - Medium-term fiscal adjustment is to be driven mainly by restricting the growth of recurrent spending; the wage bill, when adjusted for inflation, is projected to decline on average by 2 percent a year after having risen by 23 percent in 2010.
  - Setting a budget oil reference price at US$70 per barrel will induce fiscal restraint at the state and local government levels, given their relatively limited borrowing capacity.
  - Intensified efforts to improve non-oil revenue collections will help reduce fiscal vulnerability to oil price shocks.
- Authorities’ rationale and mitigating measures:
  - Authorities acknowledged subsidy removal would be unpopular but viewed the subsidy as fiscally unsustainable and highly distortionary.
  - The subsidy discouraged private investment in domestic refining capacity and led to foreign reserve drains via petroleum imports; smuggling and rent-seeking meant a significant portion of subsidy benefits accrued to people in neighboring countries.
  - To address opposition concerns, authorities launched a public information campaign and established the Subsidy Reinvestment and Empowerment (SURE) program with a transparent monitoring framework; SURE projects include road, railway, and petroleum refinery construction; expansion of urban mass transit systems; youth employment programs; and conditional cash transfers for pregnant women.
- Fiscal risk assessment:
  - Staff analysis indicates Nigeria is at low risk of debt distress; however, a prolonged oil price shock without offsetting measures could undermine recent progress in public debt sustainability.

### BOX 1 — The Fiscal Framework in Nigeria (Key Structural Features)
- Fiscal federalism:
  - Three tiers of government: federal, states, and local governments (SLGs); many extra-budgetary funds.
  - All oil and gas revenue and most non-oil revenues are pooled and shared across tiers.
  - Oil and gas revenue sharing after allocating 13 percent to producing areas: federal government 48.5 percent, states 26.7 percent, local governments 20.6 percent, extra-budgetary funds 4.2 percent.
- Historical instruments:
  - 2004 budget oil price rule and the Excess Crude Account (ECA) were intended as a stabilization mechanism; inflows/outflows tied to budget benchmark revenue.
  - ECA was eroded by discretionary withdrawals and nearly depleted by end-2010; replaced by the Sovereign Wealth Fund (SWF) launched October 2011.
- Sovereign Wealth Fund (SWF) design:
  - Jointly owned and supervised by all three tiers of government.
  - Three components: stabilization fund; infrastructure fund; inter-generational saving fund.
  - Each component allocated 20 percent of “excess” oil revenue above the budget benchmark revenue; governing board may allocate the remaining 40 percent among the three funds.
  - Stabilization fund has stricter withdrawal rules than ECA; legislation silent on the mechanism to determine how much oil revenue is allocated to the SWF because the benchmark budget oil price remains subject to executive-legislative negotiation.
- Fiscal anchor and governance implications:
  - The non-oil primary deficit (NOPD) should ideally serve as the fiscal anchor, and authorities use NOPD in analysis; however, lack of control over SLG spending (around 50 percent of total general government spending) limits direct targeting of NOPD.
  - Existing anchors: budget oil price-based rule, ceilings on federal government deficit (3 percent of GDP) and debt (25 percent of GDP) prescribed by the 2007 Fiscal Responsibility Act.
  - Future priorities: adopt a rules-based approach to setting the budget benchmark revenue and strengthen compliance provisions for the Fiscal Responsibility Law.

*Source: INTRODUCTION, NIGERIA 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND*

### 17.      The partial reinstatement of the

### _cr12194 - 17.      The partial reinstatement of the

### Cost of partial subsidy reinstatement and fiscal implications
- The partial reinstatement of the subsidy is estimated to cost 2 percent of GDP in 2012.
- Staff recommends the authorities come up with additional measures to offset at least half of this cost in order not to jeopardize the buildup of reserves in the Sovereign Wealth Fund (the likely source of funding for the subsidy).
- Authorities have publicly announced commitment to a full removal of the subsidy but have not specified any timeline.
- A formal process to deepen consultations with stakeholders (including labor unions) was established; actions begun include fast-tracking the rehabilitation of refineries and initiating an audit of the state-owned petroleum company.
- At the time the staff report was written, the authorities were still determining their revised fiscal strategy for 2012.

### Recurrent spending, wage bill, and public expenditure management
- Staff noted that the planned contraction of the real wage bill and other recurrent spending would need to be handled carefully.
- Measures should be underpinned by comprehensive reforms to ensure fiscal savings are sustainable and consistent with improved public service delivery.
- Reforms currently being implemented to improve public expenditure management systems are crucial.
- Authorities have completed an inventory of all government bank accounts, and have set up a Treasury Single Account (TSA) technical committee under the Accountant General; more work is required to articulate the scope and structure of the TSA and formulate and approve a cash management policy.
- Footnote: Some savings may come from scaling back infrastructure programs whose funding was tied to the subsidy savings.

### Sovereign Wealth Fund (SWF), fiscal surpluses, and domestic debt dynamics
- With a flat outlook for oil revenues, limited growth in government spending will not result in a substantial improvement in the overall fiscal balance.
- Projected accumulated fiscal surpluses would fall well short of the formula-driven inflows into the Sovereign Wealth Fund (SWF).
- Federal government domestic debt is projected to rise from 15 percent of GDP in 2011 to 17 percent in 2015.
- The cost of servicing domestic debt substantially exceeds the projected return from the SWF financial assets.
- Staff noted the asset-liability mix might not be optimal and suggested linking inflows into the intergenerational savings and infrastructure components of the SWF to the generation of fiscal surpluses; but SWF legislation was passed only last year, making it too soon to propose revisiting the framework.

### Priorities for SWF precautionary balances and short-term options
- In light of global economic risks, staff recommended priority be given to rapidly building up the SWF’s precautionary balances.
- For 2012-13, the SWF’s stabilization fund should be allocated close to the maximum allowable 60 percent of gross SWF inflows.
- Short-term options to minimize issuance of domestic debt discussed by staff include:
  - Utilizing some of the substantial federal government bank deposits (around 8 percent of GDP) instead of borrowing.
  - Replacing debt financing with funding from the infrastructure fund to finance the capital projects in the budget.

### Non-oil revenues and tax reform
- The erosion of oil revenues (in terms of non-oil GDP) over the medium term highlights the importance of strengthening focus on non-oil revenues.
- Authorities’ efforts appropriately focus on improving tax administration; anticipated substantial gains in collections from operational improvements and reforms at tax collection agencies.
- New rules will require income-generating government agencies and enterprises to make remittances to the treasury based on their gross instead of net revenues.
- Staff argued tax policy measures would also be needed in the medium term: tax rates on the non-oil sector are substantially below the African average and there are widespread exemptions.
- Staff recommended accelerating work on tax policy reform, incorporating Fund TA advice, so implementation could begin in the next few years.
- Authorities’ views: they will seek to maximize allocation to the SWF’s stabilization fund in the near term and prioritize successful implementation of tax administration reforms before tax policy reform; they were confident measures to boost revenue collections—particularly from government agencies—would surpass staff projections.

### Monetary policy, inflation, and exchange rate management
- Staff supported tightening of monetary policy over the past year and the adjustment of the soft exchange rate band last October to contain inflation and counter pressures on international reserves.
- Staff noted heavy CBN intervention in the foreign exchange market during much of 2011 to avoid depreciation, a policy that could have risked excessively depleting reserves.
- Staff recommended focusing on a clear inflation objective and allowing gradual adjustment of the naira over time in response to market conditions.
- More empirical work on the pass-through from exchange rates to inflation was recommended to strengthen the CBN’s ability to detect and respond to inflationary pressures.
- Staff’s CGER-based analysis suggests the currency is broadly in line with fundamentals.
- Following the 275 basis point increase in the policy rate in October, staff sees merit in a “wait and see” approach before further action on interest rates, noting October’s tightening and November’s shift of the exchange rate band may not yet have fully impacted the economy.
- Authorities should not react to the temporary rise in inflation caused by the partial removal of the fuel subsidy provided second round effects do not materialize.
- Staff supports the CBN’s intentions to scale back reliance on the cash reserve ratio and more actively use open market operations to guide short-term interest rates.
- Authorities’ views: early 2011 monetary policy focused on supporting the fragile banking system; accommodative conditions may have contributed to high inflation and FX demand. CBN emphasized it was not in favor of defending the exchange rate at all costs and agreed the naira should be allowed to adjust; it reiterated commitment to bring inflation down into the single digits and argued government fiscal adjustment was needed to share macroeconomic management burdens. CBN regards elimination of the fuel subsidy as crucial for relieving pressures on the currency and facilitating accumulation of international reserves.

### Financial system stability, AMCON, and regulatory reforms
- The recapitalization of intervened banks was completed in late 2011, largely resolving the 2009 banking crisis.
- In 2009, 8 out of 24 banks had to be intervened; AMCON purchased NPLs in exchange for tradable three-year zero coupon bonds; about N3.6 trillion (face value), equal to 16 percent of 2011 non-oil GDP, was issued to finance these operations; AMCON requested an increase in its borrowing limit to N4.5 trillion.
- Authorities removed the CBN guarantees on all interbank liabilities at the end of 2011.
- Staff stressed AMCON operations need to minimize fiscal and moral hazard risks and supported AMCON’s decision to halt purchases of new NPLs.
- Staff expressed concern about absence of a sunset clause for AMCON and recommended AMCON aim to wrap up all operations associated with the recent crisis in 12 years as planned.
- To address NPL purchases outside a crisis framework, staff recommended exploring options to facilitate development of private distressed asset firms.
- AMCON’s repayment plan envisages repayment of its financial liabilities after 12 years with no need for cashflow support by the government; funds expected from:
  - A 0.3 percent levy on bank assets;
  - The sale of assets securing the acquired NPLs;
  - Grants (N500 billion over 10 years) funded from the CBN’s net profits.
- Staff considered AMCON’s projection of no funding gap based on reasonable assumptions but urged continued focus on strengthening AMCON’s operational capabilities to maximize asset recoveries.
- Staff welcomed initiatives to strengthen regulatory and supervisory framework: stricter regulations on corporate governance and risk management; programs to improve the CBN’s ability to assess systemic risks; initiatives to boost cross-agency and cross-border cooperation among regulators.
- Staff encourages authorities to address remaining AML/CFT-related deficiencies and continue implementing the action plan agreed with the Financial Action Task Force (FATF).
- Authorities’ views: CBN expressed strong interest in undergoing an FSAP Update in 2012; noted absence of private distressed asset firms was due to a legal framework making collateral difficult to secure; absence of a sunset clause for AMCON was intended to avoid time-consuming legislative processes in case of future need; staff saw merit in “mothballing” AMCON as a readily available crisis tool.

### Reforms agenda: Oil sector, SWF operationalization, and competitiveness
- Staff welcomed establishment of the Sovereign Wealth Fund last year given its stronger legal framework compared with that of the ECA.
- In November 2011, the SWF was capitalized with a transfer of US$1 billion from the Excess Crude Account, which will be gradually wound down.
- Hiring of the SWF management team is underway; operating rules governing withdrawals from the infrastructure fund and investment of SWF resources still need to be articulated (Fund technical assistance scheduled for early 2012).
- Authorities expected the SWF to be fully operational by June 2012.
- Staff emphasized importance of ensuring the SWF improves transparency of administration and use of oil revenues, including revenues accruing to sub-national governments, and reiterated that spending funded from the SWF should be channeled through the budget.
- Authorities plan to move ahead on the Petroleum Industry Bill, stalled in the National Assembly for about three years; the draft bill redefines roles of executive and regulatory agencies and the national oil company, and outlines a new fiscal regime governing oil and gas with the objective to increase government take from operations under production sharing contracts.

- On competitiveness and inclusive growth:
  - Authorities view economic diversification and increased competitiveness as vital for strong, sustainable inclusive growth.
  - Recent main sources of growth have been agriculture and wholesale/retail trade, both predominantly informal sectors.
  - Policy initiatives focus on (i) boosting infrastructure, particularly transportation and electricity generation; and (ii) improving the business climate.
  - The 2012 World Bank Doing Business Report noted difficulties in paying taxes, registering property, and carrying out international trade, and the high cost and inadequate supply of electricity.
  - Staff supported reforms in the energy sector, including planned introduction of cost-reflective pricing (scheduled for the first half of 2012) and protection of vulnerable users through lifeline electricity tariffs.
  - Staff endorsed efforts to scale up public investment within the MTEF envelope and reforms to transform agriculture into a commercial sector with strong linkages to manufacturing.
  - A key medium-term challenge is increasing credit access for productive sectors; staff welcomed initiatives to strengthen credit bureaus, expand options to collateralize credit, and develop domestic capital markets. The FSAP update could flesh out proposals to enhance credit access.

### Staff appraisal and policy recommendations
- Nigeria has shown robust growth during the past decade, with rates among the highest in sub-Saharan Africa, and emerged largely unscathed from the global financial crisis as government used large buffers accumulated during the previous oil boom.
- Economic growth is projected to remain strong in 2012 but risks are skewed to the downside: a larger deterioration in the global environment could result in substantially lower world oil prices, limiting fiscal consolidation and buildup of international reserves.
- Failure to implement politically difficult fiscal adjustment measures could result in faster accumulation of domestic debt and place undue burden on monetary policy to contain inflation and prevent pressures on the naira and international reserves.
- Implementation of the MTEF is key to rebuilding fiscal buffers, lowering inflation, and maintaining economic stability.
- Staff believes the planned fiscal adjustment path will allow rebuilding of precautionary reserves in the SWF and keep debt at appropriately low levels.
- Staff supports the fiscal adjustment measures, in particular:
  - Setting the budget oil reference price at US$70 per barrel for 2012-15;
  - Phasing out the fuel subsidy with due social safeguards;
  - Restricting the growth of recurrent spending;
  - Intensifying efforts to improve non-oil revenue collections.

*Source: _cr12194 - 17.      The partial reinstatement of the*

### 40.      Given the global risks, the decision

### 40.      Given the global risks, the decision

### Fiscal policy and Sovereign Wealth Fund (SWF)
- Decision to set the budget reference oil price at the relatively conservative level is appropriate.
- Excess revenues that accrue to the SWF should be allocated to build up the stabilization fund as rapidly as possible.
- Once stabilization fund is built up, proportionately more of the SWF inflows can be allocated to the infrastructure fund.
- The infrastructure fund should be used to finance projects that are included in the budget.
- Important SWF operational procedures remain to be clarified to ensure the government can improve its control of the overall stance of fiscal policy.
- A rules-based approach to setting the budget oil price would further strengthen the fiscal framework and the SWF.

### Fuel subsidy reduction and public financial management
- Reduction in the gasoline subsidy in January 2012 and planned use of some of the savings to fund better targeted safety net programs and high priority infrastructure projects has a number of potential benefits.
- The subsidy has been costly, poorly targeted, and has led to major economic distortions, such as:
  - discouraging investment in domestic refining capacity;
  - rent-seeking behavior, including smuggling to neighboring countries.
- Efforts to further reduce fuel subsidies could be guided by an evaluation of the experience in early 2012.
- The reduction in the gasoline subsidy should be supported by aggressively following through on reforms aimed at improving public financial management systems and the management of the country’s oil resources.
- The authorities should prioritize the passage of the Petroleum Industry Bill (PIB), making sure it retains the key objectives of the original bill, including better transparency and accountability.

### Revenue diversification and tax reform
- The projected decline of oil revenues relative to the non-oil GDP over the medium term highlights the importance of strengthening the focus on non-oil revenues.
- Current focus on strengthening tax administration is well founded.
- Staff recommends that work on tax policy reform, incorporating Fund TA advice, be accelerated so that it could begin to be implemented in the next few years.

### Monetary policy and exchange rate stance
- The tightening of monetary policy over the past year and the recent adjustment of the soft exchange rate band are welcome responses after a period of overly accommodative monetary policy.
- Staff sees merit in a “wait and see” approach before taking further action on interest rates and sees no need to react to the first round increase in inflation arising from the reduction in the fuel subsidy.
- The decision in late November to adjust the soft exchange rate band around the naira-US$ bilateral rate by some 3 percent was a sensible move to accommodate foreign exchange market pressures, which have since abated.
- Staff’s analysis does not point to a fundamental misalignment of the exchange rate.
- Looking ahead, staff recommends focusing on a clear inflation objective and allowing a gradual adjustment of the naira over time in response to market conditions.

### Banking sector cleanup and AMCON
- The authorities’ actions to resolve the recent banking crisis have been commendable.
- The recapitalization process is complete and financial soundness indicators point to continued improvements in the health of the banking system.
- Based on the limited data available to staff, spillovers from potential eurozone banking problems appear small.
- AMCON’s operations need to minimize fiscal and moral hazard risks.
- The operational capabilities of AMCON should continue to be strengthened in order to maximize asset recoveries.
- With the cleanup of financial institutions virtually completed, the staff supports AMCON’s decision to halt purchases of new NPLs.
- AMCON should aim to winding up all operations associated with the recent crisis within the envisaged 12-year period.
- Staff sees merit in mothballing AMCON, so as to have it as a readily available tool to respond quickly to future eventual banking crises.

### Financial regulation, supervision, and AML/CFT
- Initiatives underway to strengthen regulation and supervision are welcomed.
- Measures include:
  - Stricter regulations on corporate governance and risk management;
  - Programs to improve the CBN’s ability to assess systemic risks;
  - Initiatives to boost cross-agency and cross-border cooperation among regulators.
- Reforms to strengthen the AML/CFT framework are positive; authorities should continue to implement the action plan agreed with the FATF.
- Staff shares the authorities’ view that an FSAP update in 2012 would serve as an excellent means to take stock of all reforms undertaken and provide a road map for remaining reforms.

### Structural reforms and public investment
- Initiatives underway to improve the business climate and reform sectors with high employment potential can substantially boost prospects for inclusive growth.
- Staff supports:
  - Scaling up of public investment within the expenditure envelope envisaged in the MTEF;
  - Initiatives to reform the energy sector, in particular increasing power supply and the introduction of cost-reflective pricing;
  - Market-based reforms to improve access to credit for productive sectors.

*Source: _cr12194 - 40.*

### 48.      Staff recommends that Nigeria

### _cr12194 - 48.      Staff recommends that Nigeria

### Staff recommendation
- Staff recommends that Nigeria remains on the standard 12-month Article IV consultation cycle.

### Macroeconomic performance: inflation and growth
- Inflation:
  - Consumer price index (annual average) series shown: 5.4, 11.6, 12.5, 13.7, 10.8, 10.8, 10.2, 8.2, 7.0 (years across table).
  - Consumer price index (end of period) series shown: 6.6, 15.1, 13.9, 11.7, 10.3, 11.0, 9.5, 7.0, 7.0 (years across table).
  - Headline and “Less Food & Energy” CPI trends plotted; inflation declined in 2011 but remained high compared with other countries.
- Growth:
  - Real GDP (at 1990 factor cost) series: 6.4, 6.0, 7.0, 7.8, 6.7, 6.9, 6.4, 6.3, 6.3 (2007–15 sequence).
  - Oil and Gas GDP series: -4.5, -6.2, 0.5, 5.0, -2.2, 1.9, 2.1, 1.4, 1.2.
  - Non-oil GDP series: 9.5, 9.0, 8.3, 8.4, 8.3, 7.8, 7.0, 7.0, 7.0.
  - Production of crude oil (million barrels per day): 2.22, 2.09, 2.16, 2.46, 2.44, 2.48, 2.54, 2.58, 2.60.
  - Nigeria among the fastest growing economies in Sub-Saharan Africa on non-oil growth (2010–11 average).

### External sector and exchange rate developments
- Current account:
  - Change in current account as percent of GDP: decline from 2009 to 2010; widening from 2010 to 2011 partly supported by fiscal consolidation.
  - Current account balance series (Table 2 memo): 13.3, 2.5, 16.4, 16.4, 11.4, 6.6, 3.3 (2009–15 rows header).
  - Current account (percent of GDP) memo: 7.9, 1.3, 6.9, 6.4, 4.2, 2.3, 1.0.
  - Large errors and omissions in the balance of payments suggest the current account surplus is overestimated by a significant (but unknown) amount.
- Reserves and FX:
  - Gross official reserves (billions of US$) series: 51.3, 53.0, 42.4, 32.4, 32.3, 29.3, 39.2, 44.9, 53.2, 60.9 (table series across 2007–15).
  - After 2008, Nigeria's foreign reserves failed to rebound unlike most other oil exporters.
  - Large foreign exchange sales were used to stabilize the Naira/dollar exchange rate; NEER depreciated significantly.
  - Price of Nigerian oil (US$ per barrel) series: 71.1, 97.0, 61.8, 79.0, 109.2, 103.7, 99.9, 96.3, 95.3.

### Fiscal developments and consolidation
- Fiscal stance:
  - In 2010, government spending growth was among the highest of all oil exporting countries (real primary spending growth, 2010).
  - Fiscal consolidation in 2011 was driven by expenditure restraint, but more adjustment needed to strengthen fiscal position to pre-crisis levels.
- Key fiscal aggregates (Tables 3a–3d):
  - Total revenues and grants (federal, billions of naira): 1,701, 2,229, 2,712, 3,183, 3,569, 3,885, 4,090 (2009–15 series).
  - Oil and gas revenue (federal, billions of naira): 1,166, 1,555, 1,924, 2,180, 2,326, 2,429, 2,413.
  - Non-oil revenue (federal, billions of naira): 535, 675, 788, 1,003, 1,243, 1,456, 1,677.
  - Total expenditure and net lending (federal, billions of naira): 2,768, 3,980, 4,145, 4,522, 4,842, 5,038, 5,199.
  - Overall balance (federal, billions of naira): -1,067, -1,751, -1,434, -1,339, -1,273, -1,153, -1,109.
  - Overall balance (percent of GDP) series: -4.2, -5.9, -4.0, -3.3, -2.5, -2.3, -2.0.
  - Consolidated government: Total revenue (percent of GDP) series: 17.8, 23.3, 28.2, 27.3, 25.8, 24.2, 22.6.
  - Non-oil primary balance (percent of non-oil GDP) series: -28.2, -29.9, -27.2, -34.6, -32.9, -27.9, -23.2, -20.9, -18.6 (2007–15).
  - Excess Crude Account / Sovereign Wealth Fund (US$ billions) series: 14.2, 19.7, 7.1, 2.7, 4.7, 14.8, 25.8, 33.6, 39.4.
  - Budget oil price used in projections (US$ a barrel) series (Table 3b memo): 45.0, 60.0, 75.0, 70.0, 70.0, 70.0, 70.0 (2009–15 row).
- State and local governments (Table 3e–3f):
  - State and local government revenue (percent of GDP projection series): 10.1, 8.6, 7.3, 6.1, 5.3 (2011–15).
  - Extrabudgetary funds and SWF balances appear in consolidated accounting; SWF foreign investment balances end-of-period projection series: 5.5, 12.1, 16.8, 20.2 (memo).

### Monetary and financial developments
- Monetary aggregates:
  - Broad money (annual % change) moderated since late 2010. Broad money series (billions of naira) in monetary survey: 9,167; 10,767; 10,845; 11,225; 11,526; 11,654; 12,177; 12,621; 12,653; 15,001; 17,646; 20,758; 24,167 (2008–15 across table).
  - Broad money (y-o-y, %) series in memo: 57.8, 17.5, 19.5, 18.7, 7.0, 5.8, 12.3, 12.4, 9.8, 18.6, 17.6, 17.6, 16.4.
  - Credit to the private sector (y-o-y, % memo): 61.5, 22.2, 18.1, 4.3, -5.2, -6.7, -6.1, 4.3, 15.3, 20.2, 15.4, 15.0, 14.3.
- Monetary policy and interest rates:
  - Central Bank interest rates shown: Monetary Policy Rate, Overnight OBB rate, Discount Deposit, Discount Lending (charts indicate tightening since Jan-11).
  - Inflation and interest rates chart: overall inflation (m.a.) and 3 month T-bill rate plotted; period of policy tightening indicated.
  - Treasury bill rate (percent; end of period) shown as 7.8, 5.6, 4.0, 7.5, 15.1 (table noted).
- Banking sector and credit:
  - Growth of credit to private sector contracted following authorities' intervention in problem banks; credit bubble appears to have fully deflated.
  - Non-performing loans reduced to single-digit levels (Nonperforming loans percent of total gross loans: series 9.5, 7.2, 36.1, 20.1, 11.6 across 2007–11 table).
  - Loans to private sector from commercial banks (trillion naira) series plotted with trend growth; private credit (percent of non-oil GDP) and private credit growth (y-o-y percent) tracked in figures.

### Scenarios and projections (Figure 6)
- Baseline, Oil price shock, and Alternative scenario comparisons shown for 2011–2015 across several indicators:
  - Oil price shock scenario: assesses impact of a 20 percent price decline (around $20 a barrel) relative to the baseline. Resulting oil price remains above the budget reference price for oil, so no adjustment in public spending is assumed; non-oil GDP and non-oil exports assumed unchanged.
  - Alternative scenario: assumes some key reforms are not implemented, specifically:
    - (a) real recurrent spending held constant instead of the real reduction in authorities' MTEF;
    - (b) remaining fuel subsidies not removed and financed through the SWF; while building the SWF, preference is given to stabilization fund.
- Selected projected differences (2011–15, charted):
  - Non-oil primary balance (percent of non-oil GDP): chart shows Baseline, Alternative, and Oil Shock lines ranging from about -35 to -15 across 2011–15.
  - Overall fiscal balance (percent of non-oil GDP): chart range about -6 to 1 across 2011–15.
  - Domestic debt (percent of GDP): chart range about 16 to 25 across 2011–15.
  - SWF balances (US$ billion): chart range about 0 to 45 across 2011–15.
  - Current account balance (percent of GDP) and Gross Reserves (US$ billion) charted for Baseline and Oil Shock.

### Financial soundness and social indicators (selected)
- Financial soundness indicators (Table 5, 2007–11):
  - Regulatory capital to risk weighted assets: 23.4, 22.6, 20.9, 7.0, 9.9 (2007–11 sample).
  - Nonperforming loans to total gross loans: 9.5, 7.2, 36.1, 20.1, 11.6 (2007–11 sample).
  - Return on assets: 0.5, 0.4, -1.5, 2.1, 0.2.
  - Liquid asset to total assets: 24.2, 18.8, 17.3, 18.0, 23.3.
- Millennium Development Goals indicators (Table 6, selected series 1990–2009):
  - Poverty headcount ratio at $1.25 a day (PPP) (% of population) entries include ..69..64..
  - Literacy rate, youth female and male, ratios of female to male enrollment, maternal and infant mortality statistics, immunization and health service indicators shown across rows.

### Key statistics (selected table highlights, preserve numeric precision)
- Real GDP (at 1990 factor cost): 6.4, 6.0, 7.0, 7.8, 6.7, 6.9, 6.4, 6.3, 6.3 (2007–15).
- Non-oil GDP: 9.5, 9.0, 8.3, 8.4, 8.3, 7.8, 7.0, 7.0, 7.0.
- Nominal GDP at market prices (trillions of naira): 20.9, 24.6, 25.1, 29.6, 36.3, 40.7, 45.9, 50.9, 56.4.
- Gross international reserves (US$ billions, memo): 51.3, 53.0, 42.4, 32.4, 32.3, 29.3, 39.2, 44.9, 53.2, 60.9.
- Excess Crude Account / SWF (US$ billions): 14.2, 19.7, 7.1, 2.7, 4.7, 14.8, 25.8, 33.6, 39.4.

*Source: NIGERIA 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND.*

### Appendix I—Transformation Agenda

### Appendix I—Transformation Agenda

### Macroeconomic Policy and Objectives
- Inclusive growth: Maintain real GDP growth in the 7–8 percent range, with substantially better results in job growth (unemployment rate is 24 percent).
- Fiscal consolidation:
  - Reduce the deficit of the federal government from 3½ percent in 2010 to 1½ percent by 2015.
  - Maintain domestic debt at 16½ percent of GDP.
- Other key fiscal policy objectives:
  - Remove the fuel subsidy, which cost over 4 percent of GDP in 2011.
  - Increase capital spending from 25 percent to 32 percent of total spending by 2015, including by containing the growth of the public sector wage bill.
  - Boost non-oil revenues, including through administrative reforms, and requiring autonomous government entities to transfer 25 percent of their gross revenues to the federal government.
  - Establish a Sovereign Wealth Fund as a vehicle to promote acyclical spending, intergenerational saving, and funding of infrastructure projects.

### Structural reforms
- Improving the business climate:
  - Boost power infrastructure (via privatization, public investment, reform of the tariff regime, and removal of subsidies).
  - Invest in transportation networks (including with Public-Private Partnerships).
  - Address areas flagged by the World Bank Group’s “Doing Business Indicators” to raise Nigeria’s ranking by 10 places.
- Promoting investment in sectors that foster economic diversification and job creation:
  - Highlighted sectors: power; transportation; agriculture (focusing on R&D, marketing reform, and promoting value chains); and security (labor-intensive, primary objective to provide a safer environment).
- Improving human development and MDG progress:
  - Education target: increase secondary school enrollment and completion rates by 10 percent (with a focus on females).
  - Initiatives to improve healthcare and targeting/delivery of social safety net programs (e.g., school feeding, youth employment, maternal and child services).
- Tackling Corruption—early actions:
  - Strengthen the Extractive Industries Transparency Initiative.
  - Government procurement reform.
  - Publication of detailed fiscal data for all levels of government.
  - A “name and shame” program aimed at large tax delinquents.

*Italic line: Source: Appendix I—Transformation Agenda (content unit).*

### Appendix II—The Fuel Subsidy

### Developments in Fuel Subsidy
- Key points:
  - Diesel was deregulated some years ago; gasoline and kerosene remained subsidized.
  - Regulated prices for gasoline and kerosene remained almost constant for the last 6 years, while international prices rose; subsidy cost almost quadrupled over that period.
  - 2011 total subsidy cost estimated at about US$9 billion (4.1 percent of GDP), with gasoline accounting for over 75 percent of the total.
  - Subsidy is poorly targeted; poor derive relatively little direct benefit except via public transportation.
  - Subsidy discouraged private investment in domestic refining; significant portion of benefits accrue to people in neighboring countries because of smuggling and rent-seeking.
- Policy action and immediate effects:
  - On January 1, 2012, the government eliminated the subsidy on gasoline; kerosene subsidy not adjusted.
  - Price of a liter of gasoline rose from N65 (US$0.42) to N141 (US$0.91) after initial removal.
  - Government expected to use some savings for targeted social safety net programs and key infrastructure projects; an independent board was appointed to oversee use of resources.
  - Widespread criticism and protests led to a nationwide strike starting January 9; one week later government scaled back the price increase and reinstated a portion of subsidy.
  - After scaling back, new regulated gasoline price fixed at N97 (US$0.60) per liter (50 percent higher than old regulated price of N65 (US$0.42) but below deregulated price of N140-N145).
- Fiscal cost projection for 2012:
  - Staff’s preliminary estimate: reduced gasoline subsidy plus continued kerosene subsidy will cost close to US$6 billion (2.2 percent of GDP) in 2012.
  - Estimate assumptions: projected slight decline in oil prices in 2012; anti-corruption measures generate savings; gasoline consumption assumed to drop by 10 percent.

Text Table (selected figures from source):
- Fuel subsidy (billion Naira): 2006–2012 Est.Proj. = 25, 129, 0, 637, 399, 804, 1,148, 2,900 (as presented in source table).
- Fuel subsidy (in percent of GDP): 2006–2012 = 1.3, 1.4, 2.6, 1.6, 2.7, 4.1, 2.2.
- Fuel prices (Naira per litre):
  - Diesel (deregulated): 8, 19, 0, 11, 8, 41, 22, 44 (as presented in source table).
  - Kerosene (subsidized): 50, 50, 50, 50, 50, 50, 50.
  - Gasoline (subsidized): 65, 70, 70, 65, 65, 65, 97.

### The Subsidy Reinvestment and Empowerment (SURE) Program
- Objectives:
  - Mitigate immediate impact of subsidy removal on the poor and lay foundation for a better-targeted national safety net program.
  - Accelerate economic transformation through investments in critical infrastructure.
- Governance:
  - Board composed of government officials and representatives from civil society to oversee calculation of subsidy savings, monitor allocations, and evaluate project execution.
- Social safety net components:
  - Urban Mass Transit: facilitate procurement of diesel-run vehicles (subsidized loans, reduced import tariffs, etc.); government expected to import and distribute 1600 buses within months.
  - Maternal and child health services: expand conditional cash transfer program for pregnant women in rural areas; increase basic equipment, supplies, and trained midwives at clinics.
  - Public works: temporary employment to youth and women from poorest populations in environmental projects and rehabilitation and maintenance of education and health facilities.
  - Vocational training: establish vocational training centers across the country to tackle youth unemployment.
- Identified infrastructure projects for SURE financing:
  - Roads: completion of six specific core inter-urban highway and bridge projects.
  - Railway: completion of six specific railway rehabilitation and restoration projects.
  - Water and Irrigation: irrigation projects to increase local rice and food crop production; water supply projects aimed at increasing national access from 58 to 75 percent.
  - Electricity generation: counterpart funding for the Mambilla hydroelectric plant and other smaller projects.
  - Petroleum: counterpart funding to build three new refineries (400 thousand barrels per day) and rehabilitate 2,500 km of pipelines.

*Italic line: Source: Appendix II—The Fuel Subsidy (content unit).*

### Appendix III—Staff Analysis of Reserve Adequacy

### Methodology and assumptions
- A new methodology for reserve adequacy assessment for low-income countries was applied to Nigeria.
- The method balances crisis prevention/mitigation benefits of reserves against net financial cost of reserves (foregone investment opportunities measured by the marginal product of capital).
- Shock variables (terms of trade, external demand, FDI to GDP ratio) were set at the bottom 10 percentile of the Nigeria-specific distribution over 2001-2010 to simulate “worst case” conditions. Foreign aid shocks assumed to be zero.
- Fundamentals under the baseline:
  - CPIA set at 2009 level.
  - Fiscal balance set at the 2007–10 average.
  - Exchange rate regime classified as “not flexible.”

### Results and scenarios
- Baseline optimal reserves:
  - Optimal level of reserves varies from 3.7 months to 7.4 months of next year’s imports of goods and services, depending on the unit cost of holding reserves.
- Alternative scenarios:
  - (i) Strong fiscal consolidation: fiscal balance set at the 2011-15 average projected in the Staff Report → optimal level of reserves lower than baseline.
  - (ii) Weaker fiscal scenario: fiscal deficit more than twice as high as in baseline → optimal level of reserves higher than baseline.
- Opportunity cost considerations:
  - Given large infrastructure investment needs, opportunity cost of reserve holding could be relatively high, say 4 to 5 percent.
- Staff projection vs. optimal:
  - As long as fiscal consolidation takes place as planned, projected level of reserves in the Staff Report (between 4¾ and 6½ months of prospective imports) would be appropriate.
- Caution: results should be interpreted with caution due to uncertainty in macroeconomic outlook and fiscal policy.

*Italic line: Source: Appendix III—Staff Analysis of Reserve Adequacy (content unit).*

### Appendix IV—Permanent Income Hypothesis: the Permanently Sustainable Non-oil Primary Deficit

### Concept and use
- The Permanent Income Hypothesis (PIH) approach assesses long-term fiscal sustainability for countries with finite oil reserves by smoothing government spending in line with expected permanent income from oil reserves (net present value of oil revenue).
- The approach translates into a sustainable path for the non-oil primary deficit (PSNOPD), providing an upper bound for permissible government deficit financed from oil revenue.
- PSNOPD can be used as a benchmark to assess sustainability of actual policies or alternative policy scenarios consistent with long-term fiscal sustainability.

### Model description and caveats
- Infinite horizon PIH: government spending G equals the return on net present value of all future oil and gas revenue (plus non-oil revenue).
- Finite horizon PIH: oil wealth consumed over a finite period; in the source example oil wealth assumed to be consumed after 75 years, which is equal to N.
- Cautionary notes:
  - Benchmark based on constant distribution criteria aiming to maintain purchasing power of oil wealth per year with constant real government spending.
  - All government spending treated as consumption; spending on infrastructure and human capital could raise non-oil GDP growth and a larger sustainable NOPD.
  - PSNOPD estimates are sensitive to underlying assumptions and parameters.
  - PIH-based NOPD benchmark may be too stringent because it smooths consumption spending and does not treat investment spending separately.

*Italic line: Source: Appendix IV—Permanent Income Hypothesis (content unit).*

### Appendix V—Staff Analysis of the Real Exchange Rate

### Assessment approach
- CGER methodologies used to assess whether Nigerian real exchange rate is in line with fundamentals, accounting for key characteristics of the Nigerian economy.
- Assessment based on data as of December 2011.
- Three methodologies provide complementary perspectives; results must be treated with caution due to modeling difficulties for low-income and oil-exporting countries and BOP data quality issues.

### Key findings
- No fundamental misalignment overall, but mixed results across methods:
  - Macroeconomic balance approach suggests an undervaluation of 10¼ percent, reflecting a projected current account balance stronger than the norm.
  - External sustainability approach suggests the naira is overvalued by 8½ percent, comparing projected current account surplus with level needed to stabilize net foreign assets.
  - Equilibrium REER approach (using panel DOLS estimates for oil exporters) resulted in a marginal overvaluation of 0.7 percent in 2011.
- Equilibrium REER approach details:
  - Determinants included commodity terms of trade, government consumption to GDP, net foreign assets to GDP, and relative productivity differentials.
  - 2011 estimates reported in the Staff Report used for Nigeria; projections for 2011 from September 2011 WEO used for global variables and trading partners.
  - Average REER during first nine months of 2011 used as proxy for 2011 REER.

*Italic line: Source: Appendix V—Staff Analysis of the Real Exchange Rate (content unit).*

### 4.      Macroeconomic balance approach

### 4.      Macroeconomic balance approach

### Macroeconomic balance (current account norm) — key findings
- Method: Applied panel regression results for oil exporting countries from Bems and de Carvalho Filho (2009, IMF WP/09/281) to Nigeria, using determinants: non-oil fiscal balance, oil balance, relative income, lagged current account, relative growth, dependency ratio, and population growth. Projections for 2016 underlying this Staff Report were used for Nigeria; projections for 2016 from the September 2011 WEO were used for trading partners.
- Estimated current account norm for Nigeria: -2.1 percent of GDP.
- Nigeria’s projected current account balance (2016): +0 .4 percent of GDP.
- Given the estimated elasticity of current account balance in Nigeria, the exchange rate is estimated to be undervalued by 10.3 percent.
- Qualification: “This result should be treated with caution, however, given uncertainties about the estimated current account norm.”

### External sustainability approach — key findings and interpretation
- Stabilizing net foreign assets at end-2011 level over the medium term would require an external current account surplus of 2.4 percent of GDP (based on medium-term projections for real growth and inflation).
- Staff’s projected medium-term current account surplus: 0.4 percent of GDP.
- Implication: The difference suggests the currency is overvalued by 8.5 percent.
- Policy trade-off noted:
  - As an oil producer seeking to preserve oil wealth for future generations, Nigeria should seek to accumulate financial assets via a higher current account surplus.
  - As a low-income country with substantial investment needs, there is a case for using oil savings for infrastructure investments.
- Data note: Determining the appropriate target level for net foreign assets in Nigeria is not straightforward.

### Key numeric values (preserved exactly)
- Estimated current account norm: -2.1 percent of GDP
- Projected current account balance (2016): +0 .4 percent of GDP
- Exchange rate undervaluation (from macro balance): 10.3 percent
- External current account surplus to stabilize NFA: 2.4 percent of GDP
- Staff projected medium-term current account surplus: 0.4 percent of GDP
- Implied exchange rate overvaluation (external sustainability approach): 8.5 percent

*Source: _cr12194 - 4.      Macroeconomic balance approach*

### 5.      The assessment makes the assumption

### _cr12194 - 5.      The assessment makes the assumption

### External sector data caveats
- Large errors and omissions remain in the presentation of the balance of payments statistics, which may reflect an underestimation of current account debit transactions and lead to large residuals in the DSA presentation.
- There is a break in the balance of payments series between 2009 and 2010 due to the change in 2010 of the methodology to estimates imports.

### External sustainability — Baseline
- Assumption: the Nigerian authorities would not issue another Eurobond in the near term, but draw on the infrastructure loan from the Chinese authorities in the amount of about US$ 500 million during 2012–13. It also assumes that the China loan would be on concessional terms.
- Note (footnote): As planned, the authorities issued a US$500 million Eurobond in early 2011. The loan from China would be for 20 years with a 2.5 percent interest rate.
- Baseline projections (Table 1 and Figure 1):
  - The nominal external debt burden is projected to be broadly unchanged throughout the projection period.
  - The present value (PV) of external debt falls consistently throughout the projection period.
  - The PV of debt-to-GDP ratio averages less than 2 percent over the period.
  - The debt service to exports and the debt service to revenue ratios decline gradually throughout the projection period.
  - All debt and debt service indicators remain well below their respective policy-dependent threshold levels throughout the projection period.

### External sustainability — Stress tests and alternative scenarios
- Standardized stress tests (Table 2 and Figure 1):
  - Under the most extreme case (export shock):
    - The PV of the debt-to-GDP ratio is not likely to exceed 15 percent of GDP throughout the projection period.
    - The PV of debt-to-exports ratio reaches a peak of around 58 percent, far below its indicative policy-dependent debt burden threshold of 150 percent.
- Country-specific alternative scenario (prolonged large oil price shock):
  - Oil price is assumed to be 30 percent below the baseline during 2012–16 and to go back to the baseline level in 2017.
  - All indicators worsen considerably relative to the baseline but remain within the policy-dependent thresholds relevant for Nigeria.
  - Context for thresholds: Given Nigeria’s rating of 3.5 (medium performer), which is the three year average of the World Bank’s Country Policy and Institutional Assessment (CPIA), the relevant country-specific thresholds are a PV of external debt to GDP of 40 percent, a PV of external debt to exports of 150 percent, and an external debt service to exports ratio of 20 percent.

### Fiscal sustainability — Baseline and projections
- Consolidated government gross debt outstanding:
  - Estimated at about 18 percent of GDP at end-2011.
  - Projected to decline to about 3½ percent of GDP by 2031.
- Domestic debt maturity structure: short-term debt accounts for only a quarter of total debt.
- Under the baseline (Table 3 and Figure 2):
  - Consolidated government debt to GDP ratio would steadily increase slightly from 18 percent in 2011 to about 19¾ percent in 2014, because projected accumulated fiscal surpluses would fall short of the accumulation of external assets in the sovereign wealth fund (SWF).
  - After 2015, the public debt to GDP ratio would gradually decline and come down to single digits by 2023.
  - Drivers: continued fiscal consolidation at the general government level and sustained growth assumed under the baseline scenario.

### Fiscal sustainability — Stress tests and policy implications
- Standardized stress tests indicate vulnerability:
  - Present value of public debt to GDP ratio would creep up to 25 percent throughout the projection period under a permanently lower real GDP growth scenario.
  - With oil prices stabilizing over the medium term, public debt dynamics would become more susceptible to negative economic growth shocks.
  - Policy response required: fiscal policy will need to adjust by about 1 percent of GDP each year to bring the public debt stock path to the same path under the baseline (Table 4 and Figure 2).

### Conclusion — Risk assessment and policy message
- Nigeria is at low risk of external debt distress.
- In the baseline scenario and in the standardized stress tests, Nigeria’s debt outlook remains robust throughout the projection period.
- However, stress scenarios show that, without significant compensating policy measures, a prolonged oil price shock or deterioration in growth could undermine recent progress on macroeconomic and public debt sustainability.
- Given Nigeria’s strong financial starting position, timely policy action should be able to avert future sustainability problems.

*Source: _cr12194 - 5.      The assessment makes the assumption*

### 13.      The authorities were in agreement

### 13.      The authorities were in agreement

### Main findings and staff assessment
- The authorities agreed with the staff’s main conclusions.
- Staff’s finding of low external debt risk was consistent with the authorities’ views.
- The authorities and staff agreed that timely policy adjustments would need to be made in the event of a prolonged negative oil price shock.
- Under the alternative scenario in the Staff Report, which assumes that some key fiscal reforms are not implemented during 2012–15, the public debt to GDP ratio would rise to about 24 percent of 2015.

### Debt sustainability analysis — summary implications
- Staff and authorities judged external debt risk to be low for the baseline and a range of stress scenarios.
- The most extreme stress tests (those yielding the highest ratio in 2021 across panels) generally correspond to Exports shocks (figures noted: in figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a  shock).
- Key baseline and sensitivity indicators covered in the analysis include:
  - PV of debt-to-GDP ratio (projections 2011–2031).
  - PV of debt-to-exports ratio.
  - PV of debt-to-revenue ratio (revenues defined inclusive of grants).
  - Debt service-to-exports ratio and debt service-to-revenue ratio.
  - Debt service-to-revenue ratio shown in figure f. (panels a–f across 2011–2031).
- Sensitivity analysis scenarios highlighted:
  - A1. Key variables at their historical averages in 2011-2031.
  - A2. New public sector loans on less favorable terms in 2011-2031.
  - A3. Alternative scenario: Oil Shock (oil price 30 percent lower than the baseline during 2012-16).
  - Bound tests including B1–B6 (real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combination shocks, one-time 30 percent nominal depreciation).

### Key macroeconomic and fiscal indicators (select figures from report)
- Real GDP growth (percent): 2011 estimate 6.7; 2012 projection 6.9.
- Non-oil real GDP growth (2011 estimate) 8.3 percent; 2012 projection 7.8 percent.
- Consumer price index (end of period): 2011 10.3 percent; December 2011 10.3 percent (headline inflation).
- Overall fiscal balance (percent of GDP): 2011 estimate -0.2; 2012 projection 0.3.
- Non-oil primary deficit (percent of non-oil GDP): 2010 about 34.6 percent; 2011 estimate 32.9 percent; 2012 projection -27.9 percent (table shows non-oil primary balance series and projections).
- Total revenues and grants (percent of GDP): 2011 estimate 28.2; 2012 projection 27.3.
  - Of which: oil and gas revenue (percent of GDP): 2011 21.6; 2012 projection 20.0.
- Total expenditure and net lending (percent of GDP): 2011 estimate 31.0; 2012 projection 28.4.
- Production of crude oil (million barrels per day): 2011 2.44; 2012 projection 2.48.
- Price of Nigerian oil (US$ per barrel): 2009 61.8; 2010 79.0; 2011 109.2; 2012 projection 103.7.
- Current account balance (percent of GDP): 2011 estimate 6.9; 2012 projection 6.4. (Note: large errors and omissions in the balance of payments suggest that the current account surplus is overestimated by a significant (but unknown) amount.)
- Gross international reserves (US$ billions): 2011 32.9; 2012 projection 39.2 (equivalent months of imports of goods and services: 2011 4.5; 2012 5.1).
- Broad money growth (change in percent of broad money at beginning of period): 2011 9.8; 2012 projection 18.6.
- Treasury bill rate (percent; end of period): 2011 15.1.

### Policy recommendations and authorities’ strategy
- Fiscal policy
  - Rebuild fiscal buffers through better prioritization of public expenditure, continued subsidy reform, and improved tax administration.
  - Use conservative oil price assumptions in the budget preparation.
  - Increase non-oil revenue, reduce recurrent expenditure, increase the effectiveness of capital expenditure, and limit fiscal deficit to below 3 percent of GDP in line with the Fiscal Responsibility Act (FRA).
  - Remove the remaining subsidy on petroleum products and deregulate the downstream sector; savings to be invested in capital projects and safety nets under the Subsidy Reinvestment and Empowerment (SURE) program.
  - Aim for a sustainable debt-GDP ratio of no more than 30 percent.
- Monetary policy
  - Maintain price and exchange rate stability; target a single digit inflation rate as appropriate.
  - Executive Directors considered a pause in the tightening cycle warranted at the time of the assessment but urged a monetary framework focused on a clear inflation objective.
  - Greater exchange rate flexibility recommended to facilitate price stability.
- Financial sector and stability
  - Continue strengthening bank supervision, regulatory framework, and resolution mechanisms; limit fiscal risks and moral hazard in asset management corporation operations.
  - Complete recapitalization and mergers/acquisitions; continue macro- and micro-prudential policies; increase cross-border supervisory agreements.
  - Conduct a Financial Sector Assessment Program (FSAP) update to consolidate reforms and provide a reform roadmap.
- Structural reforms and inclusive growth
  - Diversify the economy (focus on agriculture, entertainment, non-oil minerals, real estate) and invest in enablers (infrastructure, power, roads, ports, education, health).
  - Prioritize power sector liberalization and privatization (unbundling of PHCN; privatization of distribution and generating companies).
  - Implement ports and customs reforms to reduce cost and time of goods clearance (target 48 hours cargo clearance).
  - Pass the Petroleum Industry Bill (PIB) to enable full deregulation of the oil sector.
  - Improve governance, transparency, and institutions (Freedom of Information Act, strengthen ICPC and EFCC).
  - Invest in job-creating programs and modernize agriculture (including risk-sharing guarantee of 70% of bank loans for agricultural activities; zero import duty on specified agricultural machinery effective January 31st 2012).
- Data and statistical capacity
  - Improve data on subnational public finances and balance of payments to reduce large errors and omissions.
  - Update national accounts base year (currently 1990); improve agriculture measurement and introduce producer price index.
  - Extend Debt Management Office (DMO) database to include private sector liabilities and foreign investment in domestically issued debt securities.
  - Compile international reserves data in line with the Data Template on International Reserves and Foreign Currency Liquidity.

### Executive Board and authorities’ views (summary points)
- Executive Directors commended countercyclical policies and considered the medium-term growth outlook favorable but subject to external downside risks.
- Directors endorsed the authorities’ strategy to rebuild fiscal buffers, reduce subsidy reliance, and improve tax administration; they emphasized comprehensive tax reform to reduce budget dependence on oil revenues.
- Directors welcomed the establishment of a Sovereign Wealth Fund (SWF) and recommended a rules-based approach to set the budget reference oil price and integrate SWF infrastructure fund outlays into the budget and medium-term plans.
- Directors supported the central bank’s focus on reducing inflation and strengthening supervision but suggested a temporary pause in tightening.
- The authorities reported that public debt remained low and sustainable and affirmed commitment to fiscal consolidation, monetary prudence, financial stability measures, and structural reforms to promote inclusive growth.

*Source: _cr12194 - 13.      The authorities were in agreement*

### Conclusion

### Conclusion

### Commitment to economic development and stability
- "In the past year, my Nigerian authorities have shown tremendous commitment towards developing the Nigerian economy and ensuring macroeconomic stability."
- "The economic transformation agenda has been put in place and an Economic Management Team (EMT) chaired by the President, and an Economic Management Implementation Team (EMIT) have been established to drive the process."

### Authorities' assessment and outcomes
- "The authorities are confident that the policies implemented so far and those proposed are generally in the right direction."
- "This has resulted in the recent upgrade of Nigeria by Fitch Ratings and Standard & Poor’s."

### Challenges and international cooperation
- "No doubt the challenges are enormous but the authorities would persevere."
- "The Fund’s role in the transformation process especially through policy advice is highly appreciated by my authorities."

*Source: _cr12194 - Conclusion*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12194.pdf_