## _cr14103

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---

### CONTEXT
- Despite strong growth, key social indicators remain below averages for sub-Saharan Africa.
- Structural constraints: large informal sector, income inequality, high unemployment, regional growth disparities, infrastructure gaps, and weak institutional capacity.
- Political environment: Transformation Agenda advancing, but increasing attention on the 2015 elections and security problems in the North could make consensus on structural reform difficult.
- Structural reform progress:
  - Fiscal: improved administration of the fuel subsidy, increased coverage of the Treasury Single Account, and developing information management modules for budgeting.
  - Financial sector: enhanced consolidated and cross-border bank supervision, capacity building for IFRS implementation, and adoption of a macroprudential framework.
  - Other: privatization of power generation and distribution completed; seed and fertilizer program increased rice production.
  - Gaps: access to finance for SMEs has lagged; petroleum sector legislation delayed.

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- Real economy and inflation:
  - Real GDP grew by 6.8 percent in Q3 2013 (y-o-y); staff projects the economy to grow 6.4 percent in 2013.
  - Non-oil sector growth: 7.9 percent (y-o-y) in Q3 2013.
  - Inflation ended December at 7.9 percent; food and utility prices comprise 68.5 percent of the consumption basket.
  - Core inflation rising since May, reflecting higher import prices.
- External sector and oil:
  - Current account surplus expected to decline to 3.1 percent of GDP from 7.8 percent at end-2012.
  - Oil production losses projected at 4 percent annually due to theft; fall in oil exports linked to production losses.
  - Imports rising rapidly driven by strong demand.
- Fiscal position and buffers:
  - Consolidated government non-oil primary deficit (NOPD) projected to narrow to 23½ percent of non-oil GDP from 27 percent at end-2012.
  - Excess Crude Account (ECA) and Sovereign Wealth Fund (SWF) balances declined from US$11 billion at end-2012 to US$3 billion at end-2013.
- Financial sector and capital flows:
  - Credit to the private sector remains sluggish; banks prefer low-risk government securities.
  - FDI and portfolio inflows increased to 7.9 percent of GDP in 2012 from 3.4 percent in 2010.
  - After May 22 Chairman Bernanke statement, some outflows projected at 5.5 percent of GDP in 2013; gross international reserves fell to US$43.6 billion at end-2013 from US$49 billion in mid-March 2013.

### MEDIUM-TERM OUTLOOK AND RISKS
- Baseline projections:
  - Growth expected to increase from 6.4 percent in 2013 to 7.3 percent in 2014, driven by rebound in oil production and reforms in power and agriculture.
  - Inflation expected to continue declining with tight monetary policy and fiscal consolidation.
  - Authorities’ 2014–16 MTEF consistent with a declining NOPD in 2014 relative to end-2013.
- Scenario-based risks (RAM highlights):
  - Scenario 1: Persistently lower oil price → substantial pressure on fiscal and external accounts; severely depleted buffers.
  - Scenario 2: Less prudent fiscal policy with increased non-targeted spending → depleted buffers; baseline policies unsustainable.
  - Scenario 3: High production losses from oil theft compounded by less favorable oil market dynamics → significant reduction in oil revenue; limited space for growth-enhancing spending.
- Other risks:
  - Security problems in the North could impair agriculture and trade.
  - Reversal of investor sentiment or reduced confidence could pressure the exchange rate and macro-financial stability.

### INWARD AND OUTWARD SPILLOVERS
- U.S. shale energy boom implications:
  - If U.S. unconventional energy production moves the United States to energy self-sufficiency over a 12-year period, lower global energy prices could harm oil exporters like Nigeria.
  - Nigeria exports about one-third of its oil production to the United States; since July 2010, U.S. imports from Nigeria have decreased by about half.
- Regional trade and integration:
  - Exports to Nigeria (2010–12) most important for Benin (3.21 percent of GDP), Côte d’Ivoire (3.06 percent), and Togo (1.58 percent).
  - Imports from Nigeria (2010–12) sizable for Côte d’Ivoire (8.56 percent), Senegal (4.31 percent), and Niger (2.38 percent).
- ECOWAS CET (starting January 1, 2015):
  - 5 percent duty for 2,146 tariff lines (basic raw materials and capital goods).
  - 10 percent duty for 1,373 tariff lines (intermediate products).
  - 20 percent duty for 2,165 tariff lines (final consumer products).
- Cross-border banking:
  - Resident bank subsidiaries licensed abroad: 3 in 2002; 44 at end-2010; 67 at end-October 2013.
  - United Bank of Africa had 21 subsidiaries as of end-October 2013.
  - In at least 15 host countries, a Nigerian subsidiary accounts for more than 10 percent of system-wide deposits or credit.

### AUTHORITIES’ VIEWS
- Broad agreement with staff on outlook and risks.
- Consensus need to rebuild fiscal buffers to mitigate oil revenue shocks, though achieving consensus with state and local governments is difficult ahead of elections.
- Commitment to fiscal consolidation as per the 2014–2016 MTEF.
- Emphasis on accelerating reforms in the oil and gas industry and urgent need to review tariff structure ahead of CET implementation on January 1, 2015.

### GDP REBASING: SCOPE, TIMING, AND IMPLICATIONS
- Base year updated from 1990 to 2010.
- Structural change example: agriculture share in employment fell from 70 percent to about 30 percent over 1990–2010.
- A material change in GDP would alter key indicators: tax, investment spending, and debt ratios.
- Tax revenue to GDP ratio example: current 20 percent; a significant increase in GDP could push Nigeria in the low range of low-income countries.
- Release delayed until after technical assistance missions from Fund, World Bank, and African Development Bank (started mid-December).

### ADDRESSING OIL THEFT AND PRODUCTION LOSSES: FINDINGS AND MEASURES
- Oil sector importance:
  - Oil accounts for 75 percent of government revenue and 95 percent of exports.
- Recent impact:
  - Between January 2012 and June 2013, revenues collected from NNPC fell by 47 percent and transfers to the ECA were reduced by 73 percent due to theft and pipeline sabotage.
- Mitigating measures taken:
  - Special naval exercises; collaboration with local leaders; international initiatives to discourage purchase of illegal oil; reopening of some pipelines improved production in H2 2013.
- Staff recommendations:
  - Strengthen governance in oil sector and international dimension (Appendix 3).
  - Strengthen regulatory framework of the prospective PIB with enhanced oversight, transparency, and stringent enforcement clauses.
  - Improve reconciliation of oil revenue collections; regularly audit and monitor exports and collection processes.
  - Apply AML/CFT framework to help combat oil-theft-related money laundering and conduct typology analysis.

### FISCAL CONSOLIDATION: RECENT PROGRESS AND PRESSURES
- Fiscal developments:
  - General government expenditure declined by about 1 percentage point of GDP in 2012-2013.
  - Actual capital expenditure below budget but relatively stable share of GDP.
  - Non-oil revenue share of GDP increased slightly.
  - NOPD narrowed from about 27 percent to 23½ percent of non-oil GDP over the past year.
  - ECA buffer reduced to about US$3 billion by end-2013 (equivalent to about one month of federally collected revenue).
- Institutional issues limiting fiscal anchor:
  - Budget oil price not formally instituted.
  - Full transition from the ECA to the Nigeria SWF has not occurred; excess crude revenues still deposited in the ECA and subject to discretionary withdrawals.
  - Fiscal Responsibility Law does not cover SLGs, which receive more than half of total oil revenue as prescribed in the constitution.

### 2014 BUDGET, MEDIUM-TERM PLAN, AND IMPLEMENTATION RISKS
- 2014 budget assumptions:
  - Budget reference price: US$77.5 per barrel (below US$79 used in 2013).
  - Oil production assumed at 2.388 million bpd (about 5 percent lower than in the 2013 budget).
  - Federal government capital expenditure targeted at about 2 percent of GDP.
  - MTEF implies NOPD decline from 23½ percent to 18 percent of non-oil GDP by 2016.
  - If implemented, ECA to increase from US$3 billion to US$15 billion in the next three years.
- Key implementation risks:
  - Assumed oil production is 3¾ percent above its 2013 level; containment of oil theft/production losses required.
  - Payroll savings depend on IPPIS expansion: about 20 percent of federal workforce (about 200,000 civil servants) targeted; more than 45,000 erroneous payroll records corrected.
  - Potential pressures to increase capital releases in election years (example: 2011 capital releases about 71 percent of budget levels vs average 52 percent in 2010, 2012, 2013).
  - Projected long-term decline in oil revenue will necessitate fiscal effort, particularly for SLGs whose revenues projected to decline by nearly ½ a percentage point of GDP over 2016-2018.
- Consolidation priorities (four pillars):
  - (i) Strengthening oil-revenue management.
  - (ii) Containing expenditure and increasing quality of spending while ensuring service delivery in education and health care.
  - (iii) Boosting non-oil revenue through enhanced tax administration, curtailing exemptions, reducing evasion, broadening the VAT base, extending automated tax collections, simplifying tax laws, and reducing transfer-pricing risks.
  - (iv) Establishing Fiscal Responsibility Laws for states, including possible state-level balanced-budget rules.

### PUBLIC FINANCIAL MANAGEMENT (PFM) AND AUTHORITIES’ POSITIONS
- Authorities:
  - Agree on need to strengthen fiscal framework and keep fiscal consolidation on track.
  - Expanded IPPIS starting December 2013 by including the police force (about 200,000 individuals); aim to expand to most federal workers by end-2014.
  - Non-oil revenue administration improvements could deliver up to US$500 million (a 6 percent increase in non-oil revenue) in 2014.
  - FRLs already approved by 12 states; states have limited capacity to borrow.
- PFM progress and needs:
  - GIFMIS supports TSA rollout; TSA implemented in 217 entities (about 60 percent of federal MDAs).
  - GIFMIS budget preparation module used in 2014 budget process.
  - Recommended priorities: expand TSA to remaining federal entities and establish protocols to add public entities outside federal government gradually, including SLGs.

### MONETARY, FINANCIAL, AND EXCHANGE RATE POLICY
- Monetary policy stance:
  - MPC set the inflation target for 2014 at 6-9 percent (above ECOWAS 5-percent Convergence Council target).
  - In 2013, CBN maintained policy interest rate corridor at 12 percent +/- 200 basis points.
  - In July 2013, CBN raised banks’ cash reserve requirement (CRR) on public deposits from 12 percent to 50 percent.
- Liquidity management:
  - Staff acknowledged Nigeria-specific reasons for CRR increase given limited TSA coverage (~half of public sector deposits in commercial banks) but recommended greater reliance on open market operations going forward.
  - Staff noted CRR costs to banks and concern over higher maximum real cost of borrowing increasing from 10 percent to 17 percent, constraining SME growth.
- Exchange rate and reserves:
  - Stable naira policy contributed to single-digit inflation and reserve accumulation.
  - Reserves: US$43.6 billion at end-2013 (5.7 months of prospective imports).
  - Staff finds a moderate overvaluation of the naira in 2013; recommended allowing exchange rate adjustment if persistent pressures emerge.

### BANKING SECTOR RESILIENCE AND SUPERVISORY RECOMMENDATIONS
- Financial soundness:
  - Banking sector well capitalized with low NPLs; however, net foreign liabilities increased from 26.2 percent of core capital at end-2011 to 69.5 percent at end-December 2013.
- Supervisory recommendations:
  - Monitor foreign exchange exposures and adequacy of bank equity.
  - Closer monitoring of interbank transactions, including with discount houses, and open FX positions.
  - Enhanced on-site inspections of Nigerian banks operating abroad.
- AMCON:
  - Directive for AMCON to redeem by end-2013 all its debt held by DMBs and not to purchase additional assets from banks.
  - All AMCON bonds held by DMBs to be redeemed by October 2014; AMCON bonds held by CBN to be bought back by AMCON using the Sinking Fund; DMBs contribute 0.5 percent of assets over next ten years.

### IMPROVING COMPETITIVENESS, PRODUCTIVITY, AND SME FINANCE
- Structural reform goals:
  - Deliver power, broaden agriculture, and increase SME access to finance to meet the 2020 vision and the Transformation Agenda.
- Power sector:
  - Physical handover to private tenders of 10 DisCos and 4 legacy GenCos on November 1, 2013.
  - Authorities allocated half of Nigeria Independent Power Producers’ privatization proceeds (US$1.3 billion) to fund critical transmission projects.
- Agriculture:
  - Support for the Growth Enhancement Support (GES) scheme; free zones and rice production potential noted.
  - Staff cautioned time-bound support measures and fiscal costs; recommended focus on structural bottlenecks and governance.
- SME finance:
  - Lending to SMEs is 5 percent of total lending; banks finance only 3 percent of SME working capital and 2 percent of fixed assets (2011 survey).
  - Staff recommends performance reviews of credit/guarantee schemes, expansion of financial education, improve credit reporting, and enforce lenders’ rights over collateral.

### STAFF APPRAISAL AND KEY POLICY RECOMMENDATIONS
- Macroeconomic assessment:
  - Broadly positive performance: solid non-oil growth, declining inflation, comfortable reserves notwithstanding UMP tapering uncertainties; shortfall in oil revenues drew down ECA.
  - Continued weaknesses: labor markets, electricity access, cost of doing business, SME finance.
- Policy priorities:
  - Rebuild external and fiscal buffers and use formula-based budget oil prices.
  - Contain recurrent expenditure and prioritize high-return infrastructure.
  - Strengthen oil-revenue management, pass a sound PIB with enhanced oversight and enforcement clauses.
  - Maintain tight monetary policy stance; shift toward open market operations for liquidity management.
  - Strengthen prudential supervision and full implementation of FSAP recommendations.
  - Expand TSA and transition fully to SWF framework; enhance non-oil revenue mobilization.
  - Implement AML/CFT measures to combat oil-theft-related money laundering and pursue multicountry partner strategy.

### KEY MACROECONOMIC PROJECTIONS AND INDICATORS (SELECTED)
- Real GDP (at 1990 basic prices): 6.6 (2013 Act.), 6.4 (2014), 7.3 (2015), 7.0 (2016), 6.8 (2017), 6.9 (2018), 6.6 (projection year labeling).
- Production of crude oil (million barrels per day): 2.339 (2013 Act.), 2.392 (2014), 2.300 (2015), 2.388 (2016), 2.463 (2017), 2.505 (2018).
- Nominal GDP at market prices (trillions of naira): 41.1 (2013 Act.), 44.8 (2014), 49.7 (2015), 54.8 (2016), 60.4 (2017), 67.2 (2018).
- Consumer price index (annual average): 12.2 (2013 Act.), 8.5 (2014), 7.3 (2015), 7.0 (2016–2018).
- Gross international reserves (US$ billions): 44.2 (2013 Act.), 43.6 (2014), 44.5 (2015), 44.3 (2016), 45.1 (2017), 46.5 (2018).
- ECA/SWF (US$ billions): 11.0 (2013 Act.), 3.0 (2014), 6.3 (2015), 11.3 (2016), 13.6 (2017), 16.4 (2018).
- Current account balance (percent of GDP): 7.8 (2013 Act.), 3.1 (2014), 3.7 (2015), 2.8 (2016), 2.2 (2017–2018).
- Banking indicators (selected): NPLs/Total Loans: 10.8 (Jun-11), 5.3 (Dec-11), 4.3 (Jun-12), 3.5 (Dec-12), 3.7 (Jun-13); Regulatory capital/RWA: 4.3 (Jun-11), 17.9 (Dec-11), 17.7 (Jun-12), 18.3 (Dec-12), 18.9 (Jun-13).

### DEBT, DSA, AND EXTERNAL SUSTAINABILITY
- External debt (end-September 2013): US$8.3 billion (2.9 percent of GDP); composition:
  - Multilateral: 5,887 (Millions of U.S. dollars)
  - Bilateral: 850 (Millions of U.S. dollars)
  - Commercial: 1,527 (Millions of U.S. dollars; includes US$1 billion Eurobond in 2013)
  - Total: 8,264 (Millions of U.S. dollars)
- Debt sustainability findings:
  - Nigeria remains at low risk of debt distress under current macro assumptions.
  - Baseline: PV of external debt and debt service indicators remain well below LIC-DSF thresholds.
  - Country-specific oil price shock (20 percent below baseline during 2014–18) worsens indicators but they remain within thresholds; more extreme shocks could breach thresholds.
- Fiscal sustainability:
  - Public sector debt: 15.5 (2010) → 19.0 (2013) percent of GDP; projected gradual decline to single digits by 2031 under baseline.
  - Findings highly sensitive to implementation of fiscal consolidation and recovery in oil revenue.
- Sinking Fund and AMCON assumptions:
  - Sinking Fund estimated worth at end-2023: N6.4 trillion; DMB contributions: 0.5 percent of total assets annually; CBN annual contribution: N50 billion.

### RISK ASSESSMENT MATRIX (HIGHLIGHTS)
- Oil price shock: Likelihood MEDIUM; Impact MEDIUM. Recommended: rebuild ECA, contain recurrent expenditure, boost non-oil revenues.
- Continued oil theft and production losses: Likelihood LOW to MEDIUM; Impact MEDIUM. Recommended: strengthen regulatory framework (PIB), security, multicountry partner strategy, boost non-oil exports.
- Weaker fiscal policy stance: Likelihood MEDIUM; Impact MEDIUM. Recommended: formula-based budget oil price, full transition to SWF, FRLs for states, expand TSA.
- Substantial deterioration of security in the North: Likelihood LOW; Impact MEDIUM. Recommended: ensure service delivery, strengthen social safety nets (SURE-P), continue agriculture reforms.
- Protracted economic and financial volatility (e.g., UMP exit): Likelihood HIGH; Impact MEDIUM. Recommended: enhance prudential supervision; allow exchange rate adjustment if persistent pressures.

### STRUCTURAL REFORMS, COMPETITIVENESS, AND DATA PRIORITIES
- Priority areas: deliver power, broaden agricultural base, increase SME finance access.
- Power: need timely public investment in transmission; authorities allocated US$1.3 billion from privatization proceeds to transmission.
- Agriculture: support for GES scheme; high agricultural tariffs should be temporary with clear exit strategies.
- Data: GDP rebasing (base year = 2010), planned business census, biometric registration, household living conditions survey to strengthen policymaking; balance of payments and state/local fiscal accounts need further improvement.

### CONCLUSION AND OUTLOOK
- Authorities have made progress laying a foundation for inclusive growth; translating progress to reduced unemployment, inequality, and poverty will take time.
- Strong growth has increased international confidence: one billion-dollar Eurobond four times oversubscribed; BB- sovereign rating reaffirmed.
- GDP rebasing expected to significantly enhance measured market size.
- Authorities committed to continued structural reform implementation.

*Source: IMF staff report content (page excerpts provided).*

### 2013. The staff team comprised Messrs. Leon (head of the mission),

### _cr14103 - 2013. The staff team comprised Messrs. Leon (head of the mission),

### CONTEXT
- Despite strong growth in recent years, key social indicators remain below averages for sub-Saharan Africa.
- Structural constraints: large informal sector, income inequality, high unemployment, regional growth disparities, infrastructure gaps, and weak institutional capacity.
- Political environment: Transformation Agenda advancing, but increasing attention on the 2015 elections and security problems in the North could make consensus on structural reform difficult.
- Structural reform progress:
  - Fiscal: improved administration of the fuel subsidy, increased coverage of the Treasury Single Account, and developing information management modules for budgeting.
  - Financial sector: enhanced consolidated and cross-border bank supervision, capacity building for IFRS implementation, and adoption of a macroprudential framework.
  - Other: privatization of power generation and distribution completed; seed and fertilizer program increased rice production.
  - Gaps: access to finance for SMEs has lagged; petroleum sector legislation delayed.

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
A. Recent Economic and Policy Developments
- Real economy and inflation:
  - Real GDP grew by 6.8 percent in Q3 2013 (y-o-y), driven by non-oil sector growth of 7.9 percent (y-o-y).
  - Staff projects the economy to grow 6.4 percent in 2013.
  - Inflation ended December at 7.9 percent; food and utility prices comprise 68.5 percent of the consumption basket.
  - Core inflation rising since May, reflecting higher import prices.
- External sector and oil:
  - Current account surplus expected to decline to 3.1 percent of GDP from 7.8 percent at end-2012.
  - Fall in oil exports is a consequence of production losses associated with oil theft; oil production losses projected at 4 percent annually.
  - Imports have continued to rise rapidly due to strong demand.
- Fiscal position and buffers:
  - Consolidated government non-oil primary deficit (NOPD) projected to narrow to 23½ percent of non-oil GDP from 27 percent at end-2012, driven by expenditure restraint and lower-than-budgeted capital expenditure.
  - Excess Crude Account (ECA) and Sovereign Wealth Fund (SWF) balances declined from US$11 billion at end-2012 to US$3 billion at end-2013 due to below-budget oil revenue largely from oil theft/production losses.
- Financial sector and capital flows:
  - Credit to the private sector remains sluggish; banks prefer low-risk government securities.
  - Prudential indicators suggest a well-capitalized banking system with low NPLs, but deposits are short-term and lending is insufficiently diversified.
  - FDI and portfolio inflows increased to 7.9 percent of GDP in 2012 from 3.4 percent in 2010.
  - After May 22 Chairman Bernanke statement, some outflows projected at 5.5 percent of GDP in 2013; naira weakened versus the U.S. dollar.
  - CBN intervened; gross international reserves fell to US$43.6 billion at end-2013 from US$49 billion in mid-March 2013.
  - Bond yields rose; pressure on the naira was contained and capital inflows stabilized.

B. Medium-Term Outlook and Risks
- Baseline projections:
  - Growth expected to increase from 6.4 percent in 2013 to 7.3 percent in 2014, driven by rebound in oil production and positive effects of power and agriculture reforms.
  - Inflation expected to continue declining with tight monetary policy and fiscal consolidation.
  - Authorities’ 2014–16 MTEF proposal consistent with a declining NOPD in 2014 relative to end-2013.
- Political and implementation risks:
  - Early start to the 2015 general elections and past election-cycle fiscal performance create uncertainty about continued implementation of the MTEF and structural reforms.
- Scenario-based risks (Risk Assessment Matrix, Table 7):
  - Scenario 1: Persistently lower oil price → substantial pressure on fiscal and external accounts; severely depleted buffers.
  - Scenario 2: Less prudent fiscal policy with increased spending not targeted to human capital/infrastructure → depleted buffers; baseline policies unsustainable.
  - Scenario 3: High production losses from oil theft compounded by less favorable oil market dynamics and emerging market slowdown → significant reduction in oil revenue; limited space for growth-enhancing spending.
- Other risks:
  - Security problems in the North could impair agriculture and trade (as in 2012).
  - Reversal of investor sentiment or reduced confidence in policy stance could pressure the exchange rate and macro-financial stability (e.g., prospective exit from UMP).

### INWARD AND OUTWARD SPILLOVERS
- U.S. shale energy boom implications:
  - If U.S. unconventional energy production moves the United States to energy self-sufficiency over a 12-year period, lower global energy prices could harm oil exporters like Nigeria.
  - Nigeria exports about one-third of its oil production to the United States.
  - Since July 2010, U.S. imports from Nigeria have decreased by about half; competition from U.S. tight/shale oil affected premium on Bonny Light.
- Regional trade and integration:
  - Exports to Nigeria (2010–12) were most important for Benin (3.21 percent of GDP), Côte d’Ivoire (3.06 percent), and Togo (1.58 percent).
  - Imports from Nigeria (2010–12) more sizeable for Côte d’Ivoire (8.56 percent), Senegal (4.31 percent), and Niger (2.38 percent).
  - Informal trade links are important: Nigeria meets 70 percent of cereal needs of Niger and Chad; subsidized gasoline accounts for more than 80 percent of gasoline consumed in Benin.
- ECOWAS Common External Tariff (CET) implementation (starting January 1, 2015):
  - 5 percent duty for 2,146 tariff lines (basic raw materials and capital goods).
  - 10 percent duty for 1,373 tariff lines (intermediate products).
  - 20 percent duty for 2,165 tariff lines (final consumer products).
  - CET expected to improve tariff transparency/coherence, increase formal trade ties, and reduce incentives for informal trade.
- Cross-border banking:
  - Number of subsidiaries of resident banks licensed in foreign jurisdictions: 3 in 2002; 44 at end-2010; 67 at end-October 2013 (operating in 21 sub-Saharan African countries outside Nigeria).
  - United Bank of Africa had 21 subsidiaries as of end-October 2013.
  - In at least 15 host countries, at least one Nigerian subsidiary accounts for more than 10 percent of system-wide deposits or credit.
  - Contagion has been limited: 2009–10 Nigerian banking crisis did not produce systemic contagion across the region due to composition of troubled banks and host-country funding structures.
- Growth linkages:
  - Correlations between Nigerian GDP and neighboring countries' GDP are generally weak; shocks to Nigerian GDP have negligible impact on neighboring countries’ GDP after controlling for common global factors.

### AUTHORITIES’ VIEWS
- Broad agreement with staff on outlook and risks.
- Consensus need to rebuild fiscal buffers to mitigate oil revenue shocks; difficulty in achieving consensus with state and local governments on buffer levels given political environment ahead of elections.
- Authorities reiterated commitment to fiscal consolidation as per the 2014–2016 MTEF.
- Emphasis on accelerating reforms in the oil and gas industry given changing international oil market dynamics.
- Urgent need to review tariff structure ahead of CET implementation on January 1, 2015.

*Source: IMF staff report content (page excerpts provided).*

### 15.      A GDP rebasing exercise is underway that could significantly increase the level of GDP

### 15.      A GDP rebasing exercise is underway that could significantly increase the level of GDP

### GDP rebasing: scope, timing, and implications
- The base year for the national accounts is being updated from 1990 to 2010.
- Structural changes over 1990–2010 include the share of agriculture in employment falling from 70 percent to about 30 percent.
- A material change in GDP would alter key performance indicators in the macroeconomic framework, including tax, investment spending, and debt ratios.
- Example: the tax revenue to GDP ratio of 20 percent puts Nigeria in the middle range of low-income countries; a significant increase in GDP could push Nigeria in the low range of low-income countries.
- Authorities stressed credibility for the rebasing; release of revised GDP data has been delayed until after technical assistance missions from the Fund, World Bank, and African Development Bank, which started in mid-December.
- Authorities noted the expected higher nominal GDP would have little impact on their borrowing strategy, which is based on the ratio of debt service to revenue.

*Source: IMF staff report (section 15).*

### Addressing oil theft and production losses: findings and measures
- Oil sector importance:
  - Oil accounts for 75 percent of government revenue and 95 percent of exports.
- Recent impact:
  - Oil production declined sharply in early 2013 from increased oil theft amplified by pipeline closures after sabotage.
  - Between January 2012 and June 2013, revenues collected from NNPC fell by 47 percent and transfers to the ECA were reduced by 73 percent.
- Mitigating measures taken:
  - Special naval exercises.
  - Collaboration with local leaders in oil-producing communities.
  - International initiatives to discourage purchase of illegal oil by foreign refineries.
  - Reopening of some major pipelines contributed to improved production in H2 2013.
- Remaining gaps and staff recommendations:
  - Strengthen governance issues in the oil sector and address the international dimension (Appendix 3).
  - Strengthen regulatory framework of the prospective PIB with enhanced oversight, transparency provisions, and stringent enforcement clauses.
  - Further improve reconciliation of oil revenue collections; processes from pre-FAAC to postmortem FAAC are being strengthened.
  - Regularly audit and monitor exports and collection processes for oil revenues.
  - Apply the AML/CFT framework to help combat oil-theft-related money laundering.
- AML/CFT implications:
  - Presidential Committee on FATF matters could lead national coordination of AML measures to combat oil theft and related money laundering.
  - National NRA provides opportunity to include oil theft and related money-laundering risk.
  - IMF TA has helped enhance capacity for strategic analysis and typologies; staff recommended conducting such an exercise and disseminating results to AML/CFT stakeholders.
  - Financial and non-financial supervisors can require and enforce explicit oil theft money-laundering controls, including reporting suspicious activities.

*Source: IMF staff report (sections 16–20).*

### Fiscal consolidation: recent progress and pressures
- Fiscal adjustments and buffers:
  - General government expenditure declined by about 1 percentage point of GDP in 2012-2013.
  - Actual capital expenditure has been below budget but a relatively stable share of GDP.
  - Non-oil revenue as a share of GDP has increased slightly, reflecting rapid growth in non-oil GDP.
  - NOPD narrowed from about 27 percent to 23½ percent of non-oil GDP over the past year.
  - ECA buffer reduced to about US$3 billion by end-2013 (equivalent to about one month of federally collected revenue).
- Reforms and remaining weaknesses:
  - Nigeria SWF introduced mid-July 2012; first investment in September 2013 provided more than US$200 million to international banks for a fixed-income portfolio.
  - Key issues preventing the framework from being an effective fiscal anchor:
    - (i) the budget oil price is not formally instituted;
    - (ii) full transition from the ECA to the Nigeria SWF has not occurred—excess crude revenues are still deposited in the ECA and are subject to discretionary withdrawals; and
    - (iii) the Fiscal Responsibility Law does not cover SLGs, which receive more than half of total oil revenue as prescribed in the constitution.
  - These factors imply the federal government has only limited control over macrofiscal management.

*Source: IMF staff report (sections 21–22).*

### 2014 budget, medium-term plan, and implementation risks
- 2014 budget assumptions:
  - Budget crafted using a US$77.5 barrel reference price (below US$79 used in 2013).
  - Oil production assumed at 2.388 million barrels per day (bpd) (about 5 percent lower than in the 2013 budget).
  - Federal government capital expenditure targeted at about 2 percent of GDP.
  - MTEF implies NOPD to decline from 23½ percent to 18 percent of non-oil GDP by 2016 (Appendix 4).
  - If implemented as planned, ECA to increase from US$3 billion to US$15 billion in the next three years.
- Key implementation risks highlighted:
  - Assumed oil production is 3¾ percent above its 2013 level, implying oil theft/production losses must be at least partially contained; disruptions could require additional debt issuance.
  - Assumed payroll savings depend on sustained implementation of IPPIS:
    - About 20 percent of the federal workforce (about 200,000 civil servants) had been targeted.
    - More than 45,000 erroneous payroll records have been corrected.
    - Expanding IPPIS to armed and security forces, health care professionals, and educators may be difficult.
  - Potential pressures to increase capital releases in election years—example: in 2011 capital releases were about 71 percent of budget levels compared to an average of 52 percent in 2010, 2012, and 2013.
  - Projected long-term decline in oil revenue will necessitate fiscal effort, particularly for SLGs whose revenues are projected to decline by nearly ½ a percentage point of GDP over 2016-2018.
- Consolidation priorities (four pillars):
  - (i) Strengthening oil-revenue management.
  - (ii) Containing expenditure and increasing quality of spending while ensuring service delivery in education and health care.
  - (iii) Boosting non-oil revenue through enhanced tax administration, curtailing exemptions, reducing evasion, broadening the VAT base, extending automated tax collections, simplifying tax laws, and reducing transfer-pricing risks.
  - (iv) Establishing Fiscal Responsibility Laws for states, including possible state-level balanced-budget rules to limit budget slippages and ad hoc ECA withdrawals.

*Source: IMF staff report (sections 23–25).*

### Authorities’ positions on fiscal reforms and PFM
- Authorities’ stated views and commitments:
  - Agree on need to strengthen fiscal framework and keep fiscal consolidation on track.
  - Expenditure restraint central to 2014 budget; highlighted ability to contain salaries and clean up payroll in past two years.
  - Expansion of IPPIS started December 2013 by including the police force (about 200,000 individuals); aim to expand to most remaining federal workers by end-2014.
  - See 2014 capital budget level as reflecting capacity and prioritizing completion of existing projects.
  - Non-oil revenue administration improvements could deliver up to US$500 million (a 6 percent increase in non-oil revenue) in 2014.
  - Acknowledge states have limited capacity to borrow; FRLs already approved by 12 states.
- Public Financial Management (PFM) progress and needs:
  - GIFMIS supports rollout of the Treasury Single Account (TSA), implemented in 217 entities (about 60 percent of federal MDAs).
  - GIFMIS deployed budget preparation component, aiding the 2014 budget process.
  - Recommended PFM priorities:
    - Expand TSA to remaining federal entities, prioritized by size (e.g., armed and security forces).
    - Establish protocols to gradually add public entities outside the federal government to the TSA, including SLGs.
  - Authorities committed to continue TSA rollout in 2014 to remaining MDAs but noted challenges expanding outside Abuja and focus limited initially to the federal government due to fiscal federalism constraints.

*Source: IMF staff report (sections 26–28).*

### Monetary, financial, and exchange rate policy stance
- Monetary policy stance and targets:
  - MPC set the inflation target for 2014 at 6-9 percent (above the 5-percent target of the Convergence Council of the ECOWAS).
  - During 2013, CBN maintained policy interest rate corridor at 12 percent +/- 200 basis points.
  - In July 2013, CBN raised banks’ cash reserve requirement (CRR) on public deposits from 12 percent to 50 percent.
- Other CBN actions:
  - Sterilizing capital inflows via increased issuance of CBN bills.
  - Smoothing temporary exchange rate fluctuations to limit exchange rate pass-through on inflation.
- Policy rationale:
  - Maintaining high interest rates with a stable exchange rate reduces risk of destabilizing capital outflows and consequent exchange rate pressure, especially given risk of fiscal slippage and potential capital outflows associated with changing investor sentiment.

*Source: IMF staff report (section 29).*

*Source: IMF Country Report excerpt (sections 15–29).*

### 30.      Managing liquidity remains challenging. Staff acknowledged Nigeria-specific

### Managing liquidity remains challenging

### Liquidity management and monetary policy
- Staff acknowledged Nigeria-specific circumstances motivating an increase in the CRR on public sector deposits, notably the still limited coverage of the TSA with about a half of public sector deposits held in commercial banks.
- Staff noted costs to banks from the CRR increase and recommended more reliance, going forward, on open market operations to guide short-term interest rates to conduct monetary policy.
- Staff noted the current policy stance poses a concern about longer-term inclusive growth:
  - Inflation declined from 12½ percent at the beginning of 2012 to 8 percent at end-2013.
  - Lending rates remained unchanged reflecting no changes in the monetary policy rate established by the CBN.
  - The maximum real cost of borrowing increased from 10 percent to 17 percent, amplifying barriers to the growth of SMEs that have no access to the equity market.
- Authorities’ views:
  - Broad agreement with staff on the appropriateness of the tight monetary policy stance.
  - Agreed the CRR is blunt but argued a strong signal of CBN’s commitment to keep inflation low was critical given risks for capital flow reversals and fiscal slippages.
  - Argued CRR effectiveness should be assessed by broader economic impact, including benefit to managing liquidity in the banking system and capacity to contribute to broadening the coverage of the TSA.

### Exchange rate policy, reserves, and external assessment
- The stable naira policy contributed to:
  - Bringing inflation down to single digits.
  - Providing a conducive environment for investing in domestic government securities and the equity market.
  - Accumulating international reserves.
- Reserve buffers:
  - Current level of reserves: 5.7 months of prospective imports, close to the optimal level implied by standard metrics (Appendix 5).
  - Staff pointed to risks from medium-term oil price developments, potential capital outflows associated with expected UMP tapering, political uncertainty through the election cycle, and low fiscal buffers.
- External sector assessment:
  - Finds a moderate overvaluation of the naira in 2013, with caution due to quality of balance of payments data and a size of errors and omissions (outflow of 3 percent of GDP in 2012).
  - If underlying supply-demand imbalance continues and persistent pressures emerge, staff underscored that the exchange rate should be allowed to adjust.
  - Staff encouraged productivity-enhancing measures to improve non-price competitiveness and enforce security to curtail oil theft/production losses.
- Market developments and policy measures:
  - Increased demand for dollars and administrative limits in the last quarter of 2013 on sales to the Bureau de Change (BDC) segment (about 16 percent of the market as of September 2013) resulted in widening of the spread in the official-BDC rate from an average of 1.5 percent in the first half of 2013 to 9 percent at end-December.
  - The CBN lifted these limits, authorized dealers free to sell to BDCs subject to AML/FT laws and other foreign exchange regulations, and the spread narrowed.
- Authorities’ views:
  - Agreed on risks to the naira including asymmetric adjustment of fiscal policy: when oil revenues decline, the ECA is drawn down and borrowing and debt service increase because the size of the wage bill limits the government’s ability to reduce spending.
  - Stressed weakening of the fiscal position affecting the exchange rate is mainly owed to oil theft, to be addressed through security measures and introducing stringent rules to track oil revenue.

### Banking sector resilience and recommended supervisory actions
- Financial soundness and vulnerabilities:
  - Banking sector is well capitalized and with low NPLs.
  - Net foreign liabilities increased from 26.2 percent of core capital at end 2011 to 69.5 percent at end-December 2013.
  - Staff recommends CBN closely monitor foreign exchange exposures and adequacy of bank equity.
- Recommended supervisory focus:
  - Closer monitoring of level and nature of interbank transactions, including with discount houses, and open foreign exchange positions of banks.
  - Enhanced participation in on-site inspections of all Nigerian banks operating abroad, particularly in countries where the supervisory framework is not as developed as in Nigeria.
- AMCON and legacy banking issues:
  - Staff welcomes authorities’ directive for AMCON to redeem by end-2013 all its debt held by deposit money banks (DMBs) and not to purchase additional assets from banks.
  - All AMCON bonds held by DMBs are to be redeemed by October 2014. All AMCON bonds held by the CBN will then be bought back by AMCON using the Sinking Fund to which DMBs contribute 0.5 percent of their assets in the next ten years.
  - Authorities noted AMCON is closing for all practical purposes: no longer purchasing NPLs and has a financing plan for ten years; they preferred a longer winding-down period than the proposed sunset of end-2017 and maintaining an inactive “shell.”

### Improving competitiveness, productivity, and SME finance
- Structural reform goals:
  - Implement planned reforms to achieve the 2020 vision and the Transformation Agenda: promote inclusive growth via economic diversification, improve power supply, and enhance the agriculture-manufacturing value chain.
- Power sector reforms:
  - Physical handover to private tenders of 10 DisCos and 4 legacy GenCos to new owners on November 1, 2013.
  - Access Power initiative and MOUs expected to enhance power infrastructure and access.
  - Staff stressed need for timely and adequate public investments to increase and improve transmission capacity (transmission not being privatized).
  - Authorities decided to allocate half of the Nigeria Independent Power Producers’ privatization proceeds (US$1.3 billion) to fund critical transmission projects.
  - Staff stressed need to strengthen provision of lifeline tariffs for low-income households.
- Agriculture reforms:
  - Support for the Growth Enhancement Support (GES) scheme and measures fostering private-sector-led marketing of seeds and fertilizers and domestic fertilizer manufacturing.
  - Establishment of free zones helping accelerate reforms and rice production potential.
  - Staff caution: time-bound support measures useful at nascent stage but fiscal costs should be contained; focus should remain on addressing structural bottlenecks, reducing costs of doing business, and improving governance.
  - High tariffs on selected agricultural products (for example, rice, wheat) should be temporary with a clear exit strategy (Appendix 7).
- SMEs and access to finance:
  - Lending to SMEs is a mere 5 percent of total lending of commercial banks; banks finance only 3 percent of SME working capital and 2 percent of their fixed assets (2011 survey for SME Finance Study (World Bank)).
  - Staff recommends:
    - Regular performance reviews of credit and guarantee schemes and funding such schemes from fiscal sources.
    - Expansion of financial education.
    - Accelerating reforms to improve credit reporting systems and ensure enforcement of lenders’ rights over collateral.
  - Authorities’ views:
    - Committed to reforms in power and agriculture and improving SMEs’ access to financial services.
    - Federal government developed a broad social safety program and a lifeline tariff for those consuming below 50 Kwh/month, with each DisCo’s lifeline tariffs reflecting specific costs, location, and consumer profile.
    - Argued tariff changes aimed at protecting rice and wheat value chains and overall policy objective to reduce poverty and create jobs; agreed measures should be time bound but did not foresee sunset clauses.
    - Financial schemes aimed to ameliorate high lending rates.

### Staff appraisal and key policy recommendations
- Macroeconomic assessment:
  - Macroeconomic performance broadly positive, but inclusive growth indicators remain low.
  - Non-oil sector records solid growth; inflation declined; comfortable reserve position maintained despite UMP tapering uncertainties.
  - A shortfall in oil revenues resulted in a drawdown of the ECA, a key fiscal buffer.
  - Continued weaknesses: labor markets, access to electricity, cost of doing business, SMEs’ access to finance.
- Risks to 2014 outlook:
  - Key risks: (i) uncertainty about the pace of global recovery; (ii) unwinding of UMP; (iii) persistently lower oil prices; (iv) persistent oil production losses; (v) continuation of insurgency in the North; and (vi) low political consensus for key reforms.
  - Policy focus to manage risks: boost external and rebuild fiscal buffers, avoid spending pressures from the political cycle, improve oil-revenue management, undertake structural reforms to boost growth and job creation, and strengthen governance frameworks.
- Fiscal and PFM recommendations:
  - 2014 budget consistent with medium-term fiscal consolidation objectives.
  - Adoption of a conservative oil benchmark price and oil production level, freezing allocations for salaries, and focusing on completing existing capital projects.
  - Extend TSA and information systems in key federal institutions to enable expenditure efficiencies and strengthen service delivery.
  - Migrate from the ECA to the SWF, incorporate a rule-based budget oil price, and support greater transparency in fuel subsidy management; enhance non-oil revenue mobilization.
  - Programs to fight poverty and alleviate inequalities are welcome; implement strong monitoring and evaluation frameworks.
- Oil sector governance:
  - Strengthen transparency and governance; additional steps needed including passing a sound PIB with enhanced provisions and stringent enforcement clauses and implementing regular auditing and monitoring of oil revenue management processes.
  - AML/CFT measures and a multicountry partner strategy could contribute.
- Monetary and exchange rate policy:
  - Maintaining a tight monetary policy stance is appropriate given strong growth and risks of fiscal slippage and capital outflows.
  - Recent reserve requirement adjustments to manage liquidity create costs to financial-sector development; staff encouraged greater reliance on open market operations to guide short-term interest rates.
  - Stability of the naira supported confidence and helped bring down inflation; if persistent pressures emerge, greater flexibility in the exchange rate may be needed.
- Financial sector recommendations:
  - Implement key recommendations of the 2012 FSAP Update to further strengthen financial stability.
  - Closer monitoring of interbank transactions, including with discount houses, and foreign currency positions of banks is desirable.
  - Directive for AMCON to phase out activities is a welcome step to exit the legacy of the 2009 banking crisis.
  - Commended CBN’s collaboration on cross-border supervisory arrangements and encouraged enhanced onsite inspections of Nigerian banks operating abroad.

*Source: IMF staff report excerpt.*

### 48.      Implementing wide-ranging structural reforms should improve competitiveness and

### 48.      Implementing wide-ranging structural reforms should improve competitiveness and

### Structural reforms, competitiveness, and productivity
- Consistent with the Transformation Agenda, key priority areas are to increase the delivery of power, broaden the agricultural base, and increase access to finance for SMEs.
- Timely and adequate public investment is needed to increase and improve transmission capacity and support power generation.
- Recently introduced high tariffs on selected agricultural products create distortions and should be temporary, with sectoral growth underpinned by improvements in competitiveness rather than by protectionist measures.
- Specialized credit and guarantee schemes can encourage financial access but regular reviews should be undertaken to detect problems early and improve effectiveness.

### Macroeconomic statistics and data priorities
- Nigeria’s macroeconomic statistics are broadly adequate for surveillance.
- The authorities’ focus on ensuring the accuracy and credibility of the rebasing of GDP is appropriate.
- The release of the new national accounts, expected in early 2014, as well as planned census of business, increased use of biometrics, and a household living conditions survey will strengthen the basis for informed policy making and private-sector investment decisions.
- Continued improvements to data collection and dissemination in the balance of payments and state and local fiscal accounts remain a high priority.

*Source: IMF staff report excerpt.*

### 50.      It is proposed that the next Article IV consultation be held on the standard 12-month

### _cr14103 - 50.      It is proposed that the next Article IV consultation be held on the standard 12-month

### Macroeconomic outlook and key indicators
- Real GDP (at 1990 basic prices): 6.6 (2013 Act.), 6.4 (2014), 7.3 (2015), 7.0 (2016), 6.8 (2017), 6.9 (2018), 6.6 (projection year labeling in Table 2).
- Oil and Gas GDP: -0.2 (2013 Act.), -1.8 (2014), 6.8 (2015), 3.4 (2016), 2.2 (2017), 2.3 (2018), 1.6 (projection year labeling).
- Non-oil GDP: 7.8 (2013 Act.), 7.7 (2014), 7.4 (2015), 7.5 (2016), 7.5 (2017), 7.5 (2018), 7.2 (projection year labeling).
- Production of crude oil (million barrels per day): 2.339 (2013 Act.), 2.392 (2014), 2.300 (2015), 2.388 (2016), 2.463 (2017), 2.505 (2018), 2.561, 2.594 (series as provided).
- Nominal GDP at market prices (trillions of naira): 41.1 (2013 Act.), 44.8 (2014), 49.7 (2015), 54.8 (2016), 60.4 (2017), 67.2 (2018), 74.8 (final).
- Nominal GDP per capita (US$): 1,589 (2013 Act.), 1,702 (2014), 1,813 (2015), 1,899 (2016), 1,993 (2017), 2,106 (2018), 2,228 (final).
- Consumer price index (annual average): 12.2 (2013 Act.), 8.5 (2014), 7.3 (2015), 7.0 (2016), 7.0 (2017), 7.0 (2018), 7.0 (final).
- Gross international reserves (US$ billions): 44.2 (2013 Act.), 43.6 (2014), 44.5 (2015), 44.3 (2016), 45.1 (2017), 46.5 (2018), 46.6 (final).
- ECA/SWF (US$ billions): 11.0 (2013 Act.), 3.0 (2014), 6.3 (2015), 11.3 (2016), 13.6 (2017), 16.4 (2018), 18.3 (final).
- Current account balance (percent of GDP, Table 2 note): 7.8 (2013 Act.), 3.1 (2014), 3.7 (2015), 2.8 (2016), 2.2 (2017), 2.2 (2018), 1.1 (final); note staff caution that the current account surplus is likely overestimated due to large errors and omissions.
- Overall consolidated government balance (percent of GDP): -6.9 (2010), 0.5 (2011), -0.4 (2012), -4.7 (2013), -2.9 (2014), -1.9 (2015), -2.4 (2016) (from Table 4b/4c series).

### Fiscal position, composition, and projections
- Total consolidated government revenue (billions of naira): 6,883 (2010), 11,285 (2011), 10,393 (2012), 8,938 (2013), 10,469 (2014), 12,189 (2015), 12,401 (2016).
- Oil revenue (billions of naira): 4,809 (2010), 8,834 (2011), 7,581 (2012), 5,794 (2013), 6,854 (2014), 8,042 (2015), 7,656 (2016).
- Non-oil revenue (billions of naira): 2,074 (2010), 2,451 (2011), 2,812 (2012), 3,144 (2013), 3,615 (2014), 4,147 (2015), 4,745 (2016).
- Federal government overall balance (billions of naira): -1,799 (2010), -1,232 (2011), -1,390 (2012), -1,443 (2013), -1,053 (2014), -892 (2015), -804 (2016).
- FGN Total Debt (memorandum, billions of naira): 5,323 (2010), 6,493 (2011), 7,560 (2012), 8,543 (2013), 9,918 (2014), 11,102 (2015), 12,207 (2016).
- Budget oil price assumptions: 60 (2010), 75 (2011), 72 (2012), 79 (2013–2016) as noted in Table 4a/4b/4c.

### External sector and balance of payments
- Current account balance (US$ billions, Table 3): 13.4 (2010), 8.8 (2011), 20.4 (2012), 9.1 (2013), 11.6 (2014), 9.4 (2015), 8.0 (2016).
- Trade balance (US$ billions): 30.6 (2010), 31.1 (2011), 42.5 (2012), 36.7 (2013), 33.3 (2014), 30.1 (2015), 26.6 (2016).
- Exports (US$ billions): 77.4 (2010), 93.3 (2011), 96.0 (2012), 93.8 (2013), 93.8 (2014), 93.4 (2015), 92.1 (2016).
- Imports (US$ billions): -46.8 (2010), -62.2 (2011), -53.6 (2012), -57.2 (2013), -60.5 (2014), -63.4 (2015), -65.6 (2016).
- Errors and omissions (US$ billions): -15.5 (2010), -3.3 (2011), -8.0 (2012), -8.0 (2013), -8.0 (2014), -8.0 (2015), -8.0 (2016).
- Net international reserves (increase -) series and gross official reserves, end-of-period (US$ billions): 32.3 (2010), 32.6 (2011), 44.2 (2012), 43.6 (2013), 44.5 (2014), 44.3 (2015), 45.1 (2016) (Table 3 / Table 5b memoranda).

### Monetary and financial sector developments
- Broad money (percent change; end of period): 16.4 (2013 Act.), -5.2 (2014), 14.3 (2015), 15.6 (2016), 14.5 (2017), 14.5 (2018), 14.2 (final entries in Table 2).
- Credit to the rest of the economy (percent change): 6.1 (2013 Act.), 7.8 (2014), 11.1 (2015), 12.8 (2016), 11.4 (2017), 11.3 (2018), 12.4 (final).
- Reserve money (billions of naira, Table 5a): 2,784 (Dec 2011), 2,528 (Mar 2012), 2,512 (Jun 2012), 3,117 (Sep 2012), 3,704 (Dec 2012), 3,911 (Mar 2013), 3,236 (Jun 2013), 4,650 (Sep 2013), 5,559 (Dec 2013), 5,686 (Mar 2014), 6,158 (Jun 2014), 7,049 (Sep 2014).
- Financial soundness indicators highlights (Table 6): NPLs/Total Loans: 10.8 (Jun-11), 5.3 (Dec-11), 4.3 (Jun-12), 3.5 (Dec-12), 3.7 (Jun-13); Regulatory capital/RWA: 4.3 (Jun-11), 17.9 (Dec-11), 17.7 (Jun-12), 18.3 (Dec-12), 18.9 (Jun-13).

### Oil sector dependencies and vulnerabilities
- Price of Nigerian oil (US dollar per barrel, Table 2): 110.0 (2010), 109.0 (2011), 104.0 (2012), 98.5 (2013), 93.7 (2014), 90.3 (2015), 88.0 (2016) (series provided).
- Value of ECA/SWF and relation to fiscal balances: ECA/SWF (US$ billions) series listed above; charts and scenario analysis show ECA balance is sensitive to oil price and production shocks.
- Oil sector risk scenarios modeled by staff:
  - Oil price shock: oil prices assumed lower than WEO projections by about 20 percent in the medium term (Figure 6). Scenario outcomes show declines in Real GDP growth, deterioration in Consumer Price Index path, worsening Fiscal Government Balance (percent of GDP), depletion of Excess Crude Account (Billions of U.S. dollars), lower Current Account Balance (Percent of GDP), and a fall in International Reserves (Millions of U.S. dollars).
  - Fiscal expansion scenario: budget oil price set at $82 per barrel in 2013-18 (compared to $79) with ad hoc withdrawals from the ECA assumed to continue financing non-growth-enhancing spending; scenario shows larger fiscal deficits, reduced ECA balances, pressures on the current account and international reserves (Figure 7).
  - Vulnerabilities in the oil sector scenario: assumed oil production loss is 20 percent below the baseline during 2014-2018; scenario indicates lower Real GDP growth, marked deterioration in Fiscal Government Balance (Percent of GDP), sharp declines in Excess Crude Account, Current Account Balance (In Percent of GDP), International Reserves (Millions of U.S. dollars), and implications for inflation (Figure 8).

### Risk Assessment Matrix (RAM): risks and recommended policy responses
- Oil price shock
  - Likelihood: MEDIUM
  - Impact: MEDIUM
  - Key concerns: Nigeria’s heavy reliance on oil exports and revenue; drawdown on the Excess Crude Account (ECA) could be severe.
  - Recommended policy response:
    - Rebuild the ECA balance by implementing regular effective reconciliation processes, while containing recurrent expenditure and prioritizing spending in favor of high-return infrastructure projects.
    - Boost non-oil revenues.
- Continued oil theft and production losses
  - Likelihood: LOW to MEDIUM
  - Impact: MEDIUM
  - Key concerns: Prolonged oil theft and production losses weaken the economy; scenario analysis shows rapid deterioration in the current account balance and gross international reserves if losses continue.
  - Recommended policy response:
    - Improve oil sector oversight by strengthening the regulatory framework (e.g., passing a sound Petroleum Industry Bill) and security arrangements and engaging in a multicountry partner strategy.
    - Boost non-oil exports by diversifying the economy and improving competitiveness and productivity.
- Weaker fiscal policy stance
  - Likelihood: MEDIUM
  - Impact: MEDIUM
  - Key concerns: Fiscal stance has weakened ahead of previous elections; looser fiscal policy could reduce pro-growth spending, delay structural reforms, lead to inflation and crowding out private sector.
  - Recommended policy response:
    - Continue enhancing fiscal control (e.g., formula-based budget oil price; full transition to Sovereign Wealth Fund; Fiscal Responsibility Laws for state governments).
    - Better manage banking sector liquidity and public finance by expanding the coverage of Treasury Single Account (TSA).
- Substantial deterioration of security in the North of Nigeria
  - Likelihood: LOW
  - Impact: MEDIUM
  - Key concerns: Violence by Boko Haram has adversely affected agriculture and commerce; intensification would markedly impact economic activity, non-oil growth, and investor confidence.
  - Recommended policy response:
    - Ensure service delivery in key areas (e.g., education and health).
    - Strengthen social safety nets by continuing SURE-P (Subsidy Reinvestment and Empowerment Program) efforts.
    - Continue reforms in the agriculture sector.
- Protracted economic and financial volatility (e.g., prospective exit from unconventional monetary policy)
  - Likelihood: HIGH
  - Impact: MEDIUM
  - Key concerns: With a relatively open capital account, volatility could affect macroeconomic and financial stability.
  - Recommended policy response:
    - Enhance prudential supervision.
    - If persistent pressures emerge in the foreign exchange market, allow the exchange rate to adjust.

### Policy implications and priorities highlighted in the report
- Rebuild and protect ECA/SWF buffers and use formula-based budget oil prices to reduce fiscal volatility.
- Prioritize containment of recurrent expenditure and channel resources toward high-return infrastructure and growth-enhancing projects.
- Strengthen tax administration and boost non-oil revenue mobilization.
- Strengthen oil-sector governance and security to address production losses and oil theft; pursue legislative reforms such as a sound Petroleum Industry Bill.
- Continue reforms to broaden and deepen the financial sector, enhance prudential supervision, and manage liquidity to avoid crowding out credit to the private sector.
- Expand public financial management tools such as the Treasury Single Account (TSA) and transition fully to a Sovereign Wealth Fund framework.

*Source: Nigeria — IMF staff report and associated tables, figures, and Risk Assessment Matrix as provided in the supplied content.*

### Box 1. Nigeria: Authorities’ Response to Past IMF Policy Recommendations

### Box 1. Nigeria: Authorities’ Response to Past IMF Policy Recommendations

### Fiscal policy
- Authorities have pursued fiscal consolidation and expect to rebuild fiscal buffers and to promote fiscal stability in the medium term.
- Improved administration of the petroleum subsidy has been a key contributor to strengthening the fiscal position.
- Subsidy administration has become more transparent, making it easier for oil marketers to follow the subsidy payment process.
- The SURE Program has helped to scale up investment in priority sectors.
- Identified needs:
  - Further improved project management and evaluation.
  - Greater availability of information to the public to help obtain needed consensus on the reform subsidy agenda.

### Public Financial Management (PFM)
- IMF-World Bank-supported reforms in PFM are advancing.
- The number of public sector entities covered by the Treasury Single Account (TSA) has doubled from [95] in 2012.
- Modules developed in the context of the Government Integrated Financial Management Information System (GIFMIS) have contributed to improving the formulation of the 2014 budget.
- Initiatives to mobilize non-oil tax revenues (e.g., use of outside consultants) and improve tax administration are expected to contribute to reducing fiscal risks.

### Monetary and financial policy; supervision and regulation
- Following the 2009 financial crisis, authorities and staff broadly agreed on the appropriate monetary policy stance.
- Monetary policy has been kept tight given the risks of potential reversal of capital inflows and possible fiscal slippage.
- Tight policy contributed to bringing and maintaining inflation to single digit levels for the last 11 months.
- Progress on FSAP recommendations includes:
  - Enhancing consolidated and cross-border bank supervision.
  - Building capacity for effective implementation of the International Financial Reporting Standard (IFRS).
  - Adopting a macroprudential framework.
- The 2012 FSAP recommended setting a formal sunset provision on AMCON operations by 2017 to minimize potential fiscal and moral hazard risks; this recommendation has not been adopted, but efforts have been made to phase out AMCON’s activities.

### Anti-money-laundering and combating the financing of terrorism (AML/CFT)
- Both the action plan agreed with the Financial Action Task Force (FATF) and the removal of Nigeria from the FATF’s International Cooperation Review Group (ICRG) list on October 18, 2013, are noted as positive developments.

### Structural reforms: power and agriculture
- Power sector:
  - The transfer of Power Holding Company of Nigeria (PHCN) assets in November to distribution and generation companies (DisCos and GenCos) was a significant milestone in privatization.
  - Remaining priority: ensure adequate and timely investment in the transmission subsector as well as produce and transmit electricity at relatively low cost to reap full benefits of expanded generation capacity.
- Agriculture sector:
  - Agriculture production has increased significantly.
  - Reforms are helping to enhance distribution systems for seeds and fertilizers, implement a biometric system of registration for farmers, and promote exports and attract investment.
  - Remaining needs:
    - Address low access to credit and other financial services by small and medium-sized enterprises (SMEs).
    - Pass a sound anti-money-laundering and combating the financing of terrorism (PIB).

*Source: IMF staff summary of the authorities’ response to past IMF policy recommendations in Nigeria.*

### Appendix I. Changing Trends in Oil Markets?

### Appendix I. Changing Trends in Oil Markets?

### Shift in global supply and U.S. production
- Since 2010, worldwide oil supply has grown at an unprecedented rate, outpacing consumption.
- World total oil supply is projected to reach about 106 mbd by 2018, while demand would rise to 96 mbd.
- The shift in production is mainly supported by Iraq, the United States, Canada, and Brazil, with the United States the surprising factor in this changing picture.
- North America’s oil and gas output is forecast to grow by 3.9 mbd, accounting for about half of the increase in world oil output by 2018.
- Oil production in the United States is set to overtake that in Saudi Arabia and Russia by the second half of this decade.

### Shale/tight oil and gas effects on crude quality and product markets
- Sustained high oil prices unleashed an unparalleled investment cycle since 2003 and improved the return on investment for unconventional production technologies now broadly used to exploit U.S. shale and tight oil fields.
- The shale/tight oil and gas boom has caused an unexpected quality shift in the global crude mix toward more light and sweet crude, including large volumes of field condensate.
- Refining and trading sectors, previously predicated mostly on heavier and sourer grades, have started to adjust to the new crude mix.
- Increased domestic consumption of U.S. oil production, in part owing to current U.S. law restricting most crude exports, has significantly reduced U.S. imports.
- The surge in U.S. shale gas production and subsequent lower gas prices have encouraged increased gas consumption.

### Impact on African and other exporters; U.S. import patterns
- Lower U.S. imports have mainly affected African oil-producing countries supplying light and sweet crude that competes with U.S. tight/shale oil.
- U.S. oil imports fell to 8.5 mbd in 2012, the lowest level since 1997.
- Since July 2010, U.S. imports from Nigeria have decreased by about half.
- Angolan imports are down by the same magnitude (to less than 200 kbd, compared with an average of 513 kbd in 2008).
- Imports from Saudi Arabia, Canada, Iraq, Mexico, and Venezuela rose to 72 percent of U.S. net crude imports, the highest in 15 years.

### Price outlook and volatility
- Oil futures prices suggest rising worldwide oil production could significantly affect oil prices.
- Oil prices are expected to remain volatile in 2013–2018, amid heightened supply, demand uncertainty, and geopolitical factors.
- Abstracting from geopolitical factors, shifting oil supply, changing demand, and trade patterns suggest potential downward pressure on global oil prices in coming years.

### Opportunities and challenges from rising oil output
- Opportunities:
  - Incremental North American supply played a critical role in offsetting record supply disruptions in 2012.
  - Increased supply would help offset declining oil reserve growth in other parts of the world.
- Challenges to increasing shale/tight output:
  - (i) the massive infrastructure and logistical needs required by the development of these oil fields;
  - (ii) the uncertainties concerning the U.S. legislative framework, in particular the restrictions of crude exports to other parts of the world;
  - (iii) the prospective environmental challenges to unconventional technologies; and
  - (iv) the geopolitical factors, in particular decisions of OPEC countries that could affect the shale oil revolution process.

*Source: _cr14103 - Appendix I. Changing Trends in Oil Markets?*

### 3.      The sustainable NOPD estimated under the WEO assumptions is about 21.5 percent of

### _cr14103 - 3.      The sustainable NOPD estimated under the WEO assumptions is about 21.5 percent of

### Sustainable Non-Oil Primary Deficit (NOPD) — WEO baseline
- Sustainable NOPD estimated under the WEO assumptions is about 21.5 percent of non-oil GDP in 2013, below the 23 percent of 2013 non-oil GDP estimated in the 2013 Article IV.
- The sustainable NOPD declines over time as oil and gas wealth is smoothed in real terms while non-oil GDP is assumed to grow in real terms:
  - 16–17 percent of non-oil GDP by 2016.
  - 13–14 percent of non-oil GDP by 2018.
- Staff baseline projection for the planned fiscal consolidation:
  - NOPD falls from 23.5 percent of non-oil GDP in 2013 to 15.4 percent of non-oil GDP in 2018.

### Sustainable NOPD — Alternative AEO scenario
- Under the alternative scenario using AEO assumptions (higher oil and gas prices in real terms over the next three decades), the sustainable NOPD path is higher:
  - 25.0 percent of non-oil GDP in 2013.
  - 22.1 percent of non-oil GDP in 2016.
  - 18.5 percent of non-oil GDP in 2018.

### Interpretation of sustainability benchmarks and caveats
- Design considerations for benchmarks:
  - The PIH is based implicitly on a constant distribution criterion: maintain purchasing power of oil wealth distributed every year, with government spending a constant amount in real terms.
  - This implies a declining annuity, with the share of non-oil GDP falling as non-oil GDP grows.
- Analytical treatment and implications:
  - Analysis treats all government spending as consumption, implying the benchmark could be conservative because it excludes higher non-oil GDP growth from spending on infrastructure and human capital.
- Uncertainty and need for updates:
  - Substantial uncertainty over oil and gas wealth estimates due to unknowns: innovations in technology, future oil and gas prices, extent of reserves, production costs, extraction rates, and interest rates.
  - Necessitates periodic updates to the sustainability benchmark.

### REER, current account, and exchange rate assessment
- Exchange rate regime and recent movements:
  - Regime: managed float with CBN intervention.
  - In 2013 the naira nominal exchange rate with the U.S. dollar fluctuated between 154.7 and 156.1.
  - The REER continues to appreciate and is slightly overvalued.
- CGER-type assessments of overvaluation:
  - Equilibrium REER approach: overvaluation of 7.7 percent.
  - Macroeconomic balance approach: overvaluation of 8.3 percent.
  - External sustainability approach: overvaluation of 4.6 percent.
- Current account norm and projection:
  - Current account norm for Nigeria estimated at 3.4 percent of GDP.
  - Projected current account balance of 1.4 percent of GDP in 2018.
  - Given estimated elasticity of the current account balance, the exchange rate is estimated to be overvalued by 8.3 percent.
- Cautions in interpretation:
  - Determining appropriate target level for net foreign assets is not straightforward for an oil producer seeking to preserve oil wealth versus addressing infrastructure needs.
  - Data quality issues: large errors and omissions in the balance of payments warrant caution.
  - Assessment sensitive to projections and elasticities.

### International reserves and adequacy
- Levels and recent changes:
  - International reserves were US$43.8 billion (6.1 months of prospective imports) in 2012.
  - Reserves at end-2013 were US$43.6 billion, corresponding to 5.7 months of prospective imports.
- Assessment of optimal reserves (conditional on projected fiscal consolidation and reforms):
  - Optimal level of reserves varies from 3.9 months to 8.9 months of next year’s imports, depending on unit cost of holding reserves.
  - Under baseline assumptions, estimated optimal levels (months of next year's imports) by unit cost of holding reserves, percent:
    - Unit cost 2.0: 8.9
    - Unit cost 3.0: 7.3
    - Unit cost 4.0: 5.9
    - Unit cost 5.0: 4.7
    - Unit cost 6.0: 3.9
  - Worst case scenario optimal levels (months of next year's imports) by unit cost:
    - Unit cost 2.0: 8.9
    - Unit cost 3.0: 8.1
    - Unit cost 4.0: 6.6
    - Unit cost 5.0: 5.4
    - Unit cost 6.0: 4.5
- Staff conclusion:
  - Projected reserves in the Staff Report for 2013 (5.7 months of prospective imports) would be appropriate for Nigeria, provided the fiscal consolidation takes place as planned.
- Caveats:
  - Uncertainty in policy and global dynamics may intensify capital flows and commodity price volatility.
  - Size of errors and omissions in the balance of payments indicates data gaps affecting robustness.

### Appendix V baseline assumptions (selected)
- External shock variables:
  - External demand growth, percent: 1 1.5
  - Terms of trade growth, percent: 1 1.1
  - Change in FDI to GDP, percent: 1 -4.5
  - Change in aid to GDP, percent: 0
- Fundamental variables:
  - Government balance, percent of GDP: 2 -2.0
  - CPIA: 3 4.3
  - Flexible exchange rate regime dummy: No
- Notes:
  - 1 Bottom 10th percentile of the distribution in 2003–12.
  - 2 Average in 2008–12.
  - 3 As of 2012. Estimated by the World Bank.

### Appendix VI — Job creation tracking: key findings
- Labor market outcomes:
  - Unemployment doubled from 12.3 percent in 2006 to 24 percent in 2011.
  - NBS estimated 56 percent of youth are unemployed.
- Quarterly Job Creation survey:
  - Covers 12 sectors and all 36 states plus FCT.
  - Samples 5,000 establishments and public institutions (MDAs).
  - Private jobs classified as formal (>10 persons) and informal (<10 persons).
- Job creation patterns (Q4 2012 and Q1 2013):
  - High-growth sectors (agriculture, wholesale and trade, services) generated the least jobs; low-growth sectors (education) created more than 50 percent of new jobs.
  - Youth (15–35 years) occupied 64 percent of jobs created in Q4 2012 and 31 percent in Q1 2013.
  - Highest youth employment: education, followed by social work, then financial intermediation.
  - Skill mismatches persist: 49,968 unoccupied job positions at end-2013.
- Informal sector role:
  - Informal sector accounted for more than 50 percent of jobs generated in both reporting quarters.
  - In Q4 2012, 208,920 jobs were generated; in Q1 2013 the informal sector accounted for 232,327 of the total jobs generated.

### Appendix VII — Trade policy and competitiveness: agriculture
- Key message:
  - Policies to improve competitiveness should focus on domestic measures rather than border transactions, on reducing market failures rather than on sectors, and base success/failure on productivity and international benchmarking.
  - High tariffs recently introduced on selected agricultural products should be temporary.
- Export diversification:
  - Two meanings: product diversification and process diversification (moving up the value chain).
- Trade policy principles and risks:
  - Risks from trade policy:
    - Uninformed policy: difficulty identifying successful products.
    - Poorly designed policy: not accounting for general equilibrium effects (e.g., high rice tariffs raising input costs and harming other agricultural exports).
    - Self-perpetuating policy: rent creation leading to persistence irrespective of results.
  - Design principles (non-exhaustive):
    - Target market failures more than sectors (example: Peru’s asparagus case).
    - Second-best measures (such as tariffs) should be temporary and part of broader programs that include competitiveness measures.
    - Use clear criteria for success/failure based on productivity and/or international benchmarking.
    - Implement automatic rules to discontinue unsuccessful programs to avoid rent-seeking.
- Agricultural export trends:
  - Agricultural exports experienced strong growth in recent years, dominated by cocoa beans with other products gaining share.
  - Emerging economies are becoming important export destinations in addition to traditional European partners.

*Source: IMF staff estimates and text from the provided content unit.*

### 8.      Notwithstanding the rise in exports, Nigeria is a net importer of agricultural goods. Staple

### _cr14103 - 8.      Notwithstanding the rise in exports, Nigeria is a net importer of agricultural goods. Staple

### Agricultural trade balance and commodity details
- Nigeria is a net importer of agricultural goods despite a rise in exports.
- Staple foods such as rice and wheat are leading import commodities.
- Graph captions (data source and classification):
  - Source: UN Comtrade. Note: calculations based on HS1988/1992 product cassification.
  - Nigeria: Agricultural Exports, Selected Partners, 2006 -11 (Million U.S. dollars) — partners listed in figure: India; Singapore; Netherlands; France; Japan; Antigua and Barbuda; Belgium; Turkey; Vietnam; Barbados; World; EU27.
  - Nigeria: Agricultural Imports, Selected Products, 2000-11 (Million U.S. dollars) — products listed in figure: Semi-milled or wholly milled rice; Cocoa beans, whole or broken, raw o; Spelt, common wheat and meslin; Total agricultural imports.

### Trade barriers, recent policy measures, and policy advice
- Findings on trade barriers:
  - IMF staff calculations based on UN Comtrade data show that (i) non-tariff measures (NTMs), such as prohibitions and standards, are a much higher barrier than tariffs for both Nigeria’s imports and exports of agricultural commodities; (ii) import barriers in agriculture are substantially higher for Nigeria than for other developing economies (such as sub-Saharan countries) or large agricultural exporters (such as Brazil); and (iii) food products face the highest import restrictions.
- Recent protectionist measure:
  - As part of an effort to boost production of rice, Nigeria has imposed a 100 percent tariff on brown, semimilled, and wholly milled rice in February 2013.
- Policy recommendation:
  - Authorities should use domestic tools that boost agricultural productivity rather than protectionist measures.
  - Example cited: Brazil mostly supports the agricultural sector through domestic measures that directly address market distortions, in particular preferential credit lines and price support mechanisms that aim at reducing uncertainty in agricultural production.
  - The logic of these policies is similar to Nigeria’s Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL).

### Debt sustainability summary and sensitivity
- Overall assessment:
  - Although Nigeria’s debt has increased relative to the last DSA (May 2013), Nigeria remains at a low risk of debt distress under current macroeconomic assumptions.
  - For both the baseline scenario and the standardized stress tests, Nigeria’s debt outlook remains robust.
  - For the customized stress test, which simulates a persistent oil price shock, all indicators deteriorate when compared to the baseline results, but remain within all of the country-specific thresholds relevant for Nigeria.
  - Stress scenarios indicate that, without significant or timely compensating policy measures, a prolonged negative oil price shock or a fiscal revenue shortfall could undermine the recent progress in achieving macroeconomic and debt sustainability.
  - Findings are highly sensitive to the actual implementation of the fiscal consolidation assumed in the analysis.

- Data deficiencies and caveats:
  - Errors and omissions in the balance of payments are large (possibly reflecting an underestimation of current account debit transactions) and lead to large observed residuals in the DSA presentation.
  - The methodology for estimating imports was changed in 2010, resulting in a break in the balance of payments series between 2009 and 2010.
  - The DSA does not incorporate debt of the state and local governments and of public enterprises.
  - Specific data note: For instance, in 2012 errors and omissions were 10 percent of total imports.
  - Additional note: The authorities recently made information available on domestic debt of state and local governments (estimated at about 1.7 percent of GDP in 2011 in commercial bank loans and State bonds and 1.5 percent of GDP in arrears and other liabilities). Sub-national borrowing is currently limited and tightly regulated. However, the exposure of the multiplicity of off-budget funds is unknown.

### External debt stock (end-September 2013)
- At end-September 2013, external debt of the federal government is US$8.3 billion (2.9 percent of GDP), comprised:
  - Multilateral: 5,887 (Millions of U.S. dollars)
    - World Bank Group
      - IDA: 5,102
      - IFAD: 92
    - African Development Bank Group
      - ADB: 11
      - ADF: 562
    - EDF: 103
    - IDB: 15
    - Others: 3
  - Bilateral: 850 (Millions of U.S. dollars)
  - Commercial: 1,527 (Millions of U.S. dollars)
    - Note: This includes the issuance of a Eurobond of US$1 billion in 2013
  - Total: 8,264 (Millions of U.S. dollars)

### Macroeconomic assumptions used in the baseline scenario for 2013–33
- Average GDP growth of 6.8 percent in 2013–33 (slightly below the average of 7 percent for 2012–2032).
- Nigerian oil price assumptions:
  - US$104.5 a barrel in 2013, moderating to US$86.7 a barrel by 2018, and then remaining constant in real terms thereafter.
  - The DSA is based on the WEO’s latest projections for Brent crude prices. Nigerian oil price is projected by using the relation for the previous period between the Nigerian oil prices and Brent oil prices.
- Fiscal consolidation and balances:
  - Non-oil primary deficit (NOPD) would decline from 27.4 percent of non-oil GDP in 2012 to about 15.7 percent of non-oil GDP in 2018. This takes into account the consolidation plans embedded in the 2014–2016 Medium Term Expenditure Framework, including policies to control personnel expenses and contain the growth of capital expenditure.
  - It is assumed that the oil-price-based fiscal rule continues to be applied, with a budget oil price assumed to be on average about 20 percent below the projected oil price.
  - On that basis, the Excess Crude Account accumulates over time, reaching about 6 percent of GDP by 2018.
  - After 2018, it is assumed that the government budget remains balanced, i.e., well within the deficit limit enshrined in the Fiscal Responsibility Law (FRL). This implies the primary deficit of 3.3 percent of GDP in 2018 will have to turn to a surplus of 0.3 percent of GDP in 2033.
- External sector and financing:
  - Following the strong total export growth in 2010–11, exports are projected to stagnate 2012–19 and recover thereafter.
  - Imports are expected to increase strongly in 2013–18, reflecting strong economic growth.
  - Consequently, the current account surplus declines to about 1.4 percent of GDP by 2018, followed by a small deficit after 2019.
  - Growth in non-oil exports is expected to partially offset the declining oil exports in the medium term.
- Borrowing and contingent liabilities:
  - To finance much needed infrastructure investment, new borrowing of US$1.5 billion is contracted during the medium term and $500 million thereafter. The grant element of these loans is assumed at 1.7 percent.
  - N1 trillion of contingent liabilities (bonds) from the Asset Management Company of Nigeria (AMCON) materialize as ultimate fiscal cost for the federal government in 2023 (equivalent to

*Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA), February 6, 2014.*

### 0.7 percent of GDP).

### _cr14103 - 0.7 percent of GDP).

### External sustainability — baseline
- Nominal gross external debt burden projected to moderately increase in the next three years but decline gradually after.
- External debt-to-GDP ratio: 2.5 percent in 2012 → 2.8 in 2013 → 2.0 in 2018; projected to decline to 0.3 percent by 2033.
- All debt and debt service indicators remain well below LIC-DSF country-specific thresholds throughout the projection period.
- Historical average of the noninterest current account surplus is 9.6 percent; projected average for 2013-18 is about 3 percent. Treating the difference as “residual borrowing” becomes explosive over time.
- Identified details from Table 1 (selected):
  - External debt (nominal) series (2010–2018, 2023, 2033): 2.3, 2.4, 2.5, 2.8, 3.1, 3.4, 3.5, 3.6, 3.6, 2.2, 0.5
  - Change in external debt (2010–2018): -0.1, 0.1, 0.1, 0.3, 0.4, 0.2, 0.2, 0.1, 0.0
  - Non-interest current account deficit (2010–2033 series including averages): -5.9, -3.7, -7.9, -9.6, 7.9, -3.2, -3.8, -2.9, -2.3, -2.3, -1.2, 1.3, 3.1, 1.6
  - PV of external debt (selected years): 3.0, 3.3, 3.6, 3.7, 3.9, 3.9, 3.9, 2.5, 0.6
  - PV of debt in percent of exports (selected): 7.9, 9.8, 11.4, 12.9, 14.5, 15.8, 17.1, 13.9, 3.4
  - Debt service-to-exports ratio (in percent) (selected): -0.2, -0.1, 0.0, 0.4, 0.5, 0.8, 0.9, 0.9, 1.1, 1.9, 0.7
  - Total gross financing need (Billions of U.S. dollars) (selected): -18.9, -17.1, -26.2, -15.2, -18.0, -15.7, -14.4, -14.8, -11.1, 0.3, 44.1

### External sustainability — frameworks and thresholds
- LIC-DSF country-specific thresholds for Nigeria (CPIA rating 3.5, medium performer):
  - PV of external debt-to-GDP: 40 percent
  - PV of external debt-to-exports: 150 percent
  - External debt service-to-exports: 20 percent
- Under the baseline, all indicators remain well below these thresholds throughout the projection period.
- The Sinking Fund description and assumptions (related to AMCON):
  - Sinking Fund estimated worth at end-2023: N6.4 trillion.
  - Annual contributions: 0.5 percent of total assets by DMBs (about N23 trillion at end-2013) assumed to grow at 20 percent.
  - CBN annual contribution: N50 billion assumed to accrue 10 percent return.
  - Uses: fill AMCON gap of about N3.4 trillion (assets ~N2.3 trillion; bond liabilities ~N5.7 trillion as of September 2013); pay net interest expenses on bonds estimated about N4.0 trillion over 10 years.
  - Assumption: all assets sold at face value or higher to cover other operating costs.

### External sustainability — alternative scenarios and stress tests
- Standardized stress tests (Table 2 and Figure 1) findings:
  - Under all scenarios: (i) PV of debt not likely to exceed 10 percent of GDP throughout projection period; (ii) PV of debt-to-exports ratio far below 150 percent threshold.
- Country-specific oil price shock scenario:
  - Oil price shock calibrated at 20 percent lower than baseline during 2014–18.
  - All indicators worsen from baseline but remain within country-specific thresholds.
  - If oil price were to go below 30 percent of WEO projections (about 1 standard deviation), indicators worsen considerably and PV of debt-to-exports ratio can exceed threshold for several years.
- Sensitivity tables (selected scenario outcomes):
  - PV of debt-to-GDP ratio under oil price shock (A3) for 2013–2033 (selected): 3, 10, 15, 20, 24, 28, 22, 7
  - Bound tests include shocks such as one-time 30 percent nominal depreciation and permanently lower GDP growth.

### Fiscal sustainability — baseline
- Federal government gross debt outstanding: estimated 18.4 percent of GDP at end-2012; projected to decline to about 3.4 percent of GDP by 2033.
- Consolidated government debt-to-GDP ratio: decline slightly to about 18.2 percent in 2018; gradual decline to single digits by 2031 under baseline.
- Baseline implies continued expenditure restraint (control personnel expenses, contain growth of capital expenditure).
- Sensitivity: findings highly sensitive to implementation of fiscal consolidation and recovery in oil revenue assumed in analysis.
- Note on volatility: if real GDP growth volatility in 2014–18 replicates 2004–2008 period, PV of debt-to-exports ratio would breach indicative policy threshold at least once (in 2018).

### Fiscal sustainability — indicators and mechanics
- Public sector debt (selected series, percent of GDP): 15.5 (2010), 17.3 (2011), 18.4 (2012), 19.0 (2013), 19.9 (2014), 20.2 (2015), 20.2 (2016), 20.4 (2017), 20.8 (2018), 13.0 (2023), 3.7 (2033).
- PV of public sector debt (selected): 18.9, 19.5, 20.4, 20.6, 20.5, 20.8, 21.1, 13.3, 3.9
- Gross financing need (selected): 9.7, 3.1, 4.5, 9.5, 7.8, 7.0, 7.5, 8.2, 8.8, 3.7, 1.2
- Primary deficit that stabilizes debt-to-GDP ratio (selected): 5.4, -4.0, -2.8, 2.3, 0.3, -0.1, 0.7, 1.3, 1.8, 0.3, 0.2
- Key macro/fiscal assumptions (selected):
  - Real GDP growth (in percent) series: 8.0, 7.4, 6.6, 7.4, 1.8, 6.4, 7.3, 7.0, 6.8, 6.9, 6.6, 6.8, 6.6, 7.0, 6.8
  - Government revenues (excluding grants, percent of GDP) (selected): 20.0, 29.9, 25.3, 20.0, 21.1, 22.3, 20.5, 19.2, 18.3, 17.0, 18.3, 17.4

### Fiscal sustainability — alternative scenarios and stress tests
- Standardized stress tests underscore need for fiscal policy adjustment to the economic environment.
- Scenario outcomes (Table 4, selected):
  - If primary balance unchanged from 2013: debt in 2033 may increase from 4 percent in baseline to 32 percent.
  - Permanently lower GDP growth scenario: gross public debt-to-GDP ratio in 2033 would increase from 4 percent in baseline to 15 percent.
  - Persistent revenue shock would result in debt reaching about 14 percent of GDP by 2033.
- Staff note: if fiscal policy assumptions in baseline (including gradual improvements in primary deficit) do not materialize, debt outlook will be negatively affected and risks to debt sustainability may appear.

### Authorities’ views
- Authorities concurred that external debt risk was low.
- They agreed timely policy responses would be necessary in the event of a prolonged adverse oil price or economic growth shock.
- Authorities’ view: the sinking fund will be sufficient to cover the negative net worth by the end of 2023.

### Statistical and data issues (surveillance adequacy)
- General: Macroeconomic data broadly adequate for surveillance but serious deficiencies remain—particularly inadequate information on subnational public finances and large errors and omissions in the balance of payments.
- National accounts: Issues from high non-response rates, inaccuracy, and reliance on CPI to construct constant price GDP; GDP rebasing exercise (base year = 2010) and supply and use table expected to improve measurement.
- Prices: CPI available timely; re-referenced to November 2009=100.
- Government finance statistics: Fiscal data incomplete; subnational governments comprise almost one-half of total government expenditure and data coverage is inadequate.
- Monetary and financial statistics: Significant improvements; need clearer measure of commercial banks’ foreign assets and liabilities including off-balance-sheet exposures; definition of ODCs should be extended.
- Balance of payments: Improvements noted but large errors and omissions remain; need better validation of bank-reported transactions and coverage of free trade zone enterprises.
- External debt: Public external debt data are of good quality and timely; DMO collaborating with CBN to extend database coverage to private sector liabilities and foreign investment in domestically-issued debt securities.
- Nigeria participates in GDDS since 2003; metadata need updating. No Data ROSC.

*Sources: Country authorities; and staff estimates and projections as presented in the document.*

### 5.6 months of next year’s imports, despite uncertainties about the timing of the tapering of

### _cr14103 - 5.6 months of next year’s imports, despite uncertainties about the timing of the tapering of

### Overview
- The non-oil primary deficit of the consolidated government is projected to narrow from expenditure restraint, but a shortfall in oil revenues resulted in a drawdown of the Excess Crude Account (ECA), a key fiscal buffer.
- Despite significant job creation, unemployment and poverty are high and social indicators lag those of peers.
- Continued weaknesses in labor markets, access to electricity, cost of doing business, and small and medium enterprises’ access to finance have prevented a transition to a more robust and inclusive growth path.
- Economic growth is expected to improve further in 2014, driven by agriculture, trade, and services.
- Inflation should continue to decline, supported by higher rice and wheat production, tight monetary policy, and budget execution that maintains medium-term consolidation objectives.
- The current account is expected to improve, but large errors and omissions suggest the current account surplus is overestimated by a significant (but unknown) amount.

### Macroeconomic outlook and risks
- Growth and inflation:
  - Real GDP (at 1990 factor cost): 2010 Act. 8.0; 2011 Act. 7.4; 2012 Act. 6.6; 2013 Proj. 6.4; 2014 Proj. 7.3.
  - Oil and Gas GDP: 2010 5.2; 2011 -0.6; 2012 -0.2; 2013 -1.8; 2014 6.8.
  - Non-oil GDP: 2010 8.5; 2011 8.9; 2012 7.8; 2013 7.7; 2014 7.4.
  - Consumer price index (end of period): 2010 11.7; 2011 10.3; 2012 12.0; 2013 7.9; 2014 7.0.
- External sector:
  - Production of crude oil (million barrels per day): 2010 2.46; 2011 2.37; 2012 2.34; 2013 2.30; 2014 2.39.
  - Price of Nigerian oil (US$ per barrel): 2010 79.0; 2011 109.0; 2012 110.0; 2013 109.0; 2014 104.0.
  - Gross international reserves (US$ billions): 2010 32.3; 2011 32.6; 2012 44.2; 2013 43.6; 2014 44.5.
  - Reserves in months of next year’s imports: 2010 4.5; 2011 5.0; 2012 6.0; 2013 5.7; 2014 5.5.
- Key risks to be managed:
  - (i) uncertainty about the pace of global recovery;
  - (ii) unwinding of UMP;
  - (iii) persistently lower oil prices;
  - (iv) persistent oil production losses;
  - (v) continuation of insurgency in the North;
  - (vi) slow implementation of reforms.

### Fiscal policy, oil revenues, and buffers
- Fiscal performance and targets:
  - Total revenues and grants (percent of GDP): 2010 20.0; 2011 29.9; 2012 25.3; 2013 20.0; 2014 21.1.
  - Of which: oil and gas revenue (percent of GDP): 2010 14.0; 2011 23.4; 2012 18.5; 2013 12.9; 2014 13.8.
  - Total expenditure and net lending (percent of GDP): 2010 26.9; 2011 29.4; 2012 25.4; 2013 24.6; 2014 24.0.
  - Overall balance (percent of GDP): 2010 -6.9; 2011 0.5; 2012 -0.4; 2013 -4.7; 2014 -2.9.
  - Non-oil primary balance (percent of non-oil GDP): 2010 -34.3; 2011 -36.0; 2012 -27.5; 2013 -24.0; 2014 -22.0.
  - Excess Crude Account / SWF (billions of US$): 2010 2.7; 2011 4.6; 2012 11.0; 2013 3.0; 2014 6.3.
- Executive Board and Directors’ advice:
  - Rebuild fiscal buffers and strengthen the fiscal framework.
  - Boost non-oil revenue by broadening the tax base, improving tax administration, and curtailing exemptions.
  - Further reduce oil subsidies and adopt a rule based reference oil price in fiscal projections.
  - Improve oil revenue management, including completing transition from the Excess Crude Account to the Sovereign Wealth Fund.
  - Fully implement the Treasury Single Account and integrated information management systems.
  - Maintain fiscal discipline in the run up to the elections.

### Monetary policy and financial sector stability
- Monetary stance and liquidity management:
  - Directors considered the current tight monetary policy stance appropriate given risks of capital flow reversals.
  - Encouraged greater reliance on open market operations to guide short-term interest rates and better manage liquidity.
  - Noted that greater exchange rate flexibility could be an important buffer against external shocks.
- Financial system:
  - System is well capitalized with low nonperforming loans.
  - Recommended continued improvements in supervisory framework, especially for cross-border exposures.
  - Encouraged full implementation of remaining FSAP recommendations and winding down Asset Management Corporation of Nigeria (AMCON) operations.
  - AMCON directed to desist from further purchase of assets from banks and expected to redeem all its debt held by deposit money banks by October 2014.
  - A Sinking Fund was established by AMCON and Deposit Money banks (DMBs) intended for liquidation of potential loss to be incurred by AMCON.
- Financial inclusion measures:
  - National Financial Inclusion Strategy initiatives include extension of Mobile Payment System and Cash-less Policies, Credit Enhancement Schemes, Micro, Small and Medium Enterprises Development Fund, Nigerian Incentive-Based Risk Sharing System for Agricultural Lending, Entrepreneurship Development Centers, Restructuring and Refinancing Facilities for SMEs, and SME Credit Guarantee Scheme.

### Structural reforms, competitiveness, and social policy
- Structural reform priorities:
  - Strengthen governance and transparency in the oil sector; pass a sound Petroleum Industry Bill with enhanced oversight and transparency provisions.
  - Improve education and health, power supply, and broaden agricultural production.
  - Enhance business environment, improve productivity, and boost financial access to small and medium sized enterprises.
  - Implement steady rollout of a wide-range of structural reforms to improve competitiveness, productivity, and social cohesion.
- Agriculture and jobs:
  - Growth Enhancement Scheme reached an estimated 4.2 million farmers with subsidized inputs in 2013.
  - $100 million Fund for Agricultural Finance in Nigeria to serve as agriculture-focused private equity fund.
  - Target to attract over 750,000 young Nigerians into agribusiness through Youth Employment in Agriculture initiative.
  - In 2013 over 250,000 farmers producing 1.1 million metric tons of dry season rice were engaged.
- Power and infrastructure:
  - Privatization of 4 power generation companies and 10 power distribution companies completed in 2013; bidders for remaining companies announced with initial bid amounts paid.
  - Within the year $1.5 billion in financing mobilized from multilateral sources to invest in transmission.
  - Over 120 billion naira in financing strengthened Nigerian Bulk Electricity Trading Plc.
  - Commencement of construction of a new 700MW Hydro-Power project.
  - Plans in 2014 to complete privatizations, expedite gas pipeline infrastructure, invest in hydro-electric power, and accelerate road, rail, communication, and aviation projects (including construction of five new airport terminals and 13 perishable air cargo terminals).
- Industry and enterprise development:
  - Nigerian Industrial Revolution Plan (NIRP) and Nigeria Enterprise Development Program (NEDP) launched.
  - Target to increase contribution of the manufacturing sector to GDP from 4 percent to more than 10percent over a five-year period.
  - New wholesale development finance institution to be established by end-2014 for medium-to long-term financing.
- Social safety nets and security:
  - Piloted programs: maternal and child health under Saving One Million Lives, routine immunization, conditional cash transfer, and community-driven development programs.
  - Federal Initiative for the North East (FINE): a 5 billion naira intervention program for rehabilitation of schools and health clinics and assistance to farmers in the North East.

### Policy recommendations and implementation priorities
- Rebuild external and fiscal buffers while avoiding spending pressures from the political cycle.
- Strengthen transparency and governance in the oil sector; pass the Petroleum Industry Bill.
- Enhance financial stability and broaden access to finance, especially for SMEs and agriculture.
- Continue tight monetary policy and use open market operations to manage liquidity; allow greater exchange rate flexibility as an external shock buffer.
- Strengthen tax administration, broaden the tax base, curtail exemptions, and further reduce oil subsidies.
- Fully implement Treasury Single Account and integrated information management systems.
- Implement structural reforms in education, health, power, agriculture, and business environment to boost competitiveness, productivity, and inclusive job creation.
- Address oil theft and production losses, including anti-money laundering and combating financing of terrorism (AML/CFT) measures and international collaboration.

### Key statistics and indicators (selected)
- Nominal GDP (2012, billion U.S. dollars): 262.6
- Quota (million SDR): 1,753.2
- GNI per capita, Atlas method (2012, US$): 2,450
- Population (2012, million): 168.8
- Poverty headcount ratio (adult equivalent, 2009-10): 46.0
- GINI index (2010): 48.8
- Life expectancy at birth (2011, years): 52
- Public debt to GDP: less than 20 percent
- Gross external reserve approximately US 41.54 billion as at February 17, 2014 – equivalent to about 5.7 months of imports.
- Total balance in Sovereign Wealth Fund after recent addition: $1.55 billion; total buffer including ECA: $3.6 billion.

*Source: IMF staff report and Executive Board assessment as presented in the provided content unit.*

### Conclusion

### Conclusion

### Progress and foundation for inclusive growth
- Over the last three years, my Nigerian authorities have made progress in laying the right foundation for enduring inclusive growth.
- The progress is expected to take a while to translate into significant reduction in unemployment, inequality and poverty.

### Growth performance and international confidence
- The strong growth performance has increased the confidence of the international community in the economy.
- Evidence cited:
  - one billion-dollar Eurobond issue, which was four times oversubscribed.
  - The reaffirmation of the economy’s BB- sovereign credit rating by rating agencies.

### Foreign direct investment and GDP rebasing
- Nigeria has become a prime destination of foreign direct investment in Africa.
- Market size will be significantly enhanced with the completion of the GDP rebasing exercise—done in collaboration with the IMF, the World Bank, and the African Development Bank—creating many opportunities.

### Structural reform commitment and outlook
- Authorities express unswerving commitment to the implementation of structural reforms.
- Expectation: with continued reform implementation, the identified opportunities will be translated into reality.

### Relationship with the Fund
- Authorities remain grateful to the Fund for the encouragement received through numerous technical assistance and policy advice over the years.

*Source: Conclusion (from _cr14103 - Conclusion).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14103.pdf_