Transcript of a Conference Call on Nigeria 2007 Article IV Consultation

February 15, 2008

Washington, D.C., February 15, 2008

MS. MBOTO FOUDA: Good day, everybody. I am Lucie Mboto Fouda and I work in the External Relations Department of the IMF. I am happy to welcome all of you to this conference call on the 2007 Article IV Consultation Report for Nigeria which as you know was discussed by the IMF's Executive Board on Wednesday, February 13, 2008. The staff report, the public information notice, and all other supporting documents were posted on the IMF's online media briefing center yesterday for your convenience. I hope you had a chance to cast a look over.

Joining me on this call is David Nellor. David is a Senior Adviser in our African Department and he leads the IMF's work on Nigeria. He will give some opening remarks, and then we will be happy to take your questions. Just let me remind you of a few ground rules. This conference call along with all supporting documents are all embargoed until 9:30 a.m. Washington time, 1330 GMT. David, you have the floor for your opening remarks.

MR. NELLOR: Thank you, Lucie. Good morning or good afternoon, depending where you are. Let me start by summarizing a few of the points which were raised in the IMF's Executive Board discussion on Wednesday when the Article IV discussion took place. First, looking at the current economic situation, this is really the strongest economic performance that Nigeria has seen in its recent economic history. Growth is high, inflation is in single digits, and the external and fiscal positions are strong. The recapitalized banking sector and the newly active financial markets are supporting strong private activity. These gains of course reflect implementation of Nigeria's homegrown reform program that the Fund supported through its policy support instrument that ended late last year. Of course, the global environment with high oil prices along with favorable agricultural conditions also supported this upturn.

Looking forward to the prospects for 2008, we think that an anticipated increase in oil production will be positive for growth. However, of course, development in the Niger Delta remains an important consideration for prospects in the oil sector. In the non-oil sector, particularly services and agriculture, there has been strong growth and-subject to weather conditions for agriculture-we see strong growth again. In fact, we think growth of about 9 percent is once again feasible for the non-oil sector. The strong Naira, has helped put single-digit inflation targets within reach. In this area again, weather conditions that impact food prices are probably the main risks to the inflation outlook.

Against this strong performance, I think Nigeria is at a critical juncture. It faces the challenge of how to sustain and build on the gains that have been made to date. One way to see this is to think about it as challenges brought about by success. Let me talk about three areas very briefly. These are covered in the report which you may have looked at as provided on the website.

The first issue is: what is the best policy for managing oil revenues and oil savings? The success of budget policy over the last years in terms of bringing about higher growth and lower inflation has of course also resulted in high oil savings. This is really the first time for Nigeria to have this - if you like - blessing, but it also creates challenges because Nigeria has great needs and there is pressure to spend these savings. Everybody, including the IMF, agrees with the goals. A strong public infrastructure is needed, particularly in the power sector, to support private-sector activity. And of course there is a tremendous need to reduce poverty. The issue is: what is the best budget policy in the use of oil savings to deliver these goals?

I do not need to go into the history of Nigeria, but Nigerians know well that the answer to this question is not simply to spend more. Over the last decades, hundreds of billions of dollars have accrued from the oil sector but there is not a lot to show in terms of lower poverty levels. In the earlier episodes of oil booms, the spending of oil receipts resulted in booming growth, but this was always followed by low or even negative growth, and in some cases an accumulation of debt. In other words, Nigeria went through a harmful pattern of boom and bust that locked the country into a very low-growth path.

Looking to 2008 we need to think carefully about what is the best policy stance to avoid a recurrence of those earlier experiences. Basically, we would argue - in terms of budget behavior - that spending by all tiers of government, federal, state, and local, should not be determined by whether oil prices happen to be high or low. Spending needs to be in line with the economy's needs and the economy's ability to absorb those resources. If this principle is not followed, the alternative is again economic instability that results in further suffering of the poor and the private sector becoming uncompetitive. In sum, the oil-price-based fiscal rule has been successful in containing spending levels to be consistent with macro-stability and this was the key factor to the turnaround in Nigeria's economic performance. We need a comparable policy anchor in the future to avoid placing the gains made at risk.

The second issue of the three I'm going to mention concerns the financial sector. Again this is a challenge brought about by success. The banking consolidation and recapitalization, the broader reform program, the dramatic reduction in external debt, along with high oil prices, is leading Nigeria along the path of emerging markets elsewhere in the world. This has given a new lease on life to Nigeria's financial sector. This is good news because it can support growth in the private sector but, again, it must be managed well to get the best results.

Nigeria accounts for about a third of sub-Saharan GDP if one takes out South Africa and for that reason alone it attracts great interest from global financial markets, and the country is integrating rapidly into these markets. If one looks at government securities, there has been a fivefold increase in trading since 2005 and the stock market capitalization of course has also gone up by about four times since 2005. And we see that bank lending has grown rapidly in the last 12 months with lending across a range of sectors. At the same time, going along with these positive developments, the challenges of managing monetary policy and of preserving financial stability will only intensify. In particular we think the central bank will need to redouble its efforts to keep pace with the dramatic changes in the sector and ensure strong bank supervision which is commensurate with the increasing complexity in the banking sector.

The third issue, just to mention briefly, is to recognize the critical role of the private sector for growth. Private-sector activity must ultimately be the driver of growth, employment creation, and poverty reduction. Here, while it is not a focus of the Fund's responsibility, we note a number of priorities. We already see that the private sector in Nigeria can be very vibrant, just look at the communications sector, suggesting that once a regulatory framework is put in place, it is possible for rapid growth of private activity.

There are other examples of successful reform. The concessioning of Nigeria's ports is one illustrated by what happened to container dwelling times on the ports. Since concessioning, they have gone from 30 days on average to just 3 or 4 days today. So reforms have really helped the private sector.

But these successes have also underscored the need to address bottlenecks in the business environment. The government for example now is bringing additional focus in the customs area to further facilitate trade. But of course the main issue which is on everybody's agenda is that of infrastructure. In this context we see that the federal government's medium-term fiscal strategy provides an adequate spending envelope to make meaningful progress in addressing the infrastructure gap. If we look at what has happened to government spending over the last few years we see that within the prudent budget envelope, spending on capital or investment has gone up by about 300 percent. So we see that strengthening the quality of spending is a key factor as much as any additional spending. The government needs to again look at the role of the private sector, it needs to prioritize outlays, and to give value for money from the spending by strengthening public financial management.

To sum up: while looking at the overall context, the authorities' macroeconomic policy priorities are centered on meeting the challenges brought about by the successes of their reform program. The authorities recognize well that managing oil savings and revenues consistent with macroeconomic stability and in line with the constitution is essential. The prudent management of the oil savings and revenues is really the key that can open up sustained growth and poverty reduction in the Nigeria economy. Thank you, Lucie.

QUESTIONER: The questions that I have, if you don't mind, are quite a few, are regarding the issue of oil savings. As you know, the presidency said today that Nigeria's plan to release $4 billion in oil savings to federal and state governments is unconstitutional. There are worries I guess from the presidency about the fact that that could stir inflation. What is your view of this, and do you think that it could have an inflationary impact to such an extent that the payments should actually be made in the local currency?

MR. NELLOR: I don't want to comment on the legal aspects, but let me pick up on more of the economic substance of the issue. I want to break it down a little bit first, and then come to your question. There are two issues here. One relates to the flow of oil revenues and the second relates to the stock of savings resulting from past oil revenue flows. The federal government budget presented to the National Assembly, which is still under discussion by the Assembly, continues to include the budgeted oil price. Revenues above that oil price would go into the excess crude account as has been the case over the last few years and that is in line with the federal government's medium-term fiscal strategy, so, that is a continuation of policy.

The second aspect is the oil savings and I think this is what you're referring to. What should happen to those oil savings? Should they be spent, should they continue to be saved and so forth. I think there are two dimensions to this question. One is that spending can be used to the extent that it does not jeopardize macro-stability. What does that mean? I think we see that there is some scope to spend those receipts, if they do not increase the fiscal deficit significantly out of line with what has been seen over the last few years when macro-stability has been maintained. So we see some scope to spend from those oil savings. The macroeconomic impact will depend on a few factors. If spending is on major infrastructure projects which entail high imports, then the effect on macro-stability is not a problem because the funds are going offshore. For example, spending on power generation equipment involves, in some cases, imports equal to 80 percent of the outlays and so there would not be macroeconomic concerns. Secondly, if the funds are allocated, as has been done in recent times, in foreign currency. In this case, when these monies are used domestically, they do not add to domestic liquidity, because the foreign exchange is sold on the interbank market for naira already in circulation.

In all of these cases nonetheless one needs to look at what it means for private-sector activity. If the exchange rate were to be pushed up significantly, that may squeeze private activity somewhat. So I think one needs to look at all of these factors in considering the macroeconomic aspects of this issue.

The second dimension is really the "value for money"-issue, ensuring that these projects are based on sound cost-benefit analyses and that the execution of the projects are based on sound practices in terms of tendering procedures. In this area, Nigeria has made a lot of progress through the due-process procedures which have been established over the last few years, but there is still scope to strengthen this further.

So overall, I think there is some scope to spend from the savings, but it has to be managed carefully, to avoid pushing the deficit to a level which would really trigger inflation and require action by the central bank to tighten policy that would squeeze the private sector.

QUESTIONER: When there was some discussion about how to sort out the dispute over the excess crude savings, they decided that over the following years they will save 20 percent of excess crude revenues and release the other 80 percent to the three tiers of government. The question is do you think that 20 percent is enough to continue the fiscal prudence and does it really constitute a savings policy given that these are excess revenues?

MR. NELLOR: On this issue I am not sure that the 20/80 is a final decision at this point, but whatever the precise numbers are, the general principle is that you should not let public spending go up and down with oil prices, you should de-link or separate the spending path from oil prices. To the extent that you allocate depending on whether oil prices happen to be high or low, that separation is not taking place and so we would favor a method of allocation that de-links spending from saving to avoid the boom and bust that I talked about.

QUESTIONER: Overall, do you think that Nigeria is sticking to its reform principles or do you think those are being eroded? There has been some worry since the new government has come in, not any within Nigeria but outside, that these reform principles could slowly be eroded. What are your comments?

MR. NELLOR: I think we would see the principles of reform remaining. The challenge at the moment is, as I said, a new one for Nigeria; how to face the question of oil savings. In the past the savings weren't there. So what's needed, and what the present national discussion is about, is establishing the fiscal institutions or regime that will manage these savings. When the excess crude account was first established or started to build, the concept was stabilization. In other words, if oil prices happen to fall in the future, there would be a fund to protect and so there was a stabilization element. It's only in the last couple of years when it was realized that oil prices remained high and the balance kept rising that the question of oil savings and how to manage those oil savings has arisen. So I think the government understands well the principles. The objectives have not changed under the new government. They face a new challenge of how to establish the fiscal institutions and practices to ensure that those objectives are met.

QUESTIONER: My question is: how many years do you reckon the government needs to invest in infrastructure to bring it up to a level where it can support the general economy? Secondly, what is the point of having a huge reserve as we have now and the lives of the people have not been impacted positively?

MR. NELLOR: I think both of these issues relate in some sense to the quality of spending and getting value for money. As I indicated in my remarks earlier, Nigeria has received hundreds of billions of dollars from the oil sector over the last several decades, and those funds have been spent, but there is not a lot to show for it in terms of lower poverty levels. So one needs to look carefully about how quickly one can spend while ensuring that you get value for money.

On the infrastructure topic, investment in the power sector, for example, is inevitably quite long-term so this can take a matter of years in terms of providing additional generation, distribution, and transmission and so forth. I think we are talking about a matter of years, but the underlying concept is clear. We have supported the government in terms of spending more. We have agreed with them when the fiscal deficit has widened because of the points you make, the need for infrastructure. The concept is that if infrastructure is provided, this will "crowd in" private investment and allow the government then to be less active in this area, but we're talking about a matter of years.

The second part of your question, what is the point of reserves when poverty levels are so high? Again, this relates to the questions that we have discussed already. At one level, if spending is too high, then the economy will once again be destabilized either through inflation or low private economic activity and this will hurt the poor. So you cannot spend beyond levels which will destabilize the macroeconomy.

The second aspect is the quality of spending. If there are good projects which are effective in terms of poverty reduction, clearly they should be pursued, but it is not clear over time what strategy will be required. In the last few years since Nigeria received debt relief, additional funds have been allocated to poverty reduction to achieve the MDGs [Millenium Development Goals] and there have been a number of successful projects. But the experience there is that it has been difficult to spend all of the funds which are made available on quality projects, so again strong public financial management is important.

This relates both to the earlier questions and to your question. To understand the issue better, it might be useful for you to look at the staff paper which was published on the IMF website in October. It's entitled "Nigeria: Fourth Review Under the Policy Support Instrument." If you look at that report, on page 6 there is a series of charts which compare the current period of high oil prices with the earlier periods of high oil prices or earlier oil booms. That demonstrates how -- by maintaining prudent fiscal policy and having savings -- the outcome is better in terms of higher growth and lower inflation, whereas in the earlier periods, what Nigeria saw when it spent all of the savings was that growth fell, inflation went up, and in fact debt was accumulated in those earlier periods. So if you look at those charts, they illustrate the consequences of not saving prudently in times of high oil prices.

QUESTIONER: I wanted to come back to an issue for a second, the global economy. Do you think that Nigeria at all is going to be affected by the global slowdown? I see your projection for 9 percent growth slowing next year to 8.3. Where do you see any impact for Nigeria from the global slowdown?

MR. NELLOR: This is an interesting question. Our best judgment at this time is that there are a few channels of influence but these are not likely to slow growth in the near-term due to global developments. Let me mention a couple of points here. One is that the non-oil tradable sector, is quite small in Nigeria and doesn't have a big impact on growth. So if there were a global slowdown leading to reduced demand for exports, that would not have a major impact on Nigeria where the non-oil sector is largely driven by domestic factors, agriculture particularly being important.

The second possible channel of influence would be through the financial sector. I mentioned earlier the dramatic change in the banking and financial sector in the last 12 months. We see that in that area so far recent international financial developments have not slowed foreign interest in the market. We see that international investors continue to be interested in the stock market, they continue to be interested in the government securities market. Potentially if, for reasons which we don't see yet, that interest were to slow, then I guess you could see some upward pressure on domestic interest rates and some repercussions through effects of a weaker stock market. But at this point we have not seen any signs of this. You can think of a couple of reasons why that might be the case. One is that for many international investors, exposure to markets like Nigeria is quite small and so it has not been a focus of investment managers' attention. But second, a number of investors point to the fact that these markets are uncorrelated with mature markets, and hence offer some sort of diversification attraction as well. Overall on balance we are maintaining our growth outlook for Nigeria, but these types of issues I mention are the ones which we would continue to watch.

I mentioned in my remarks on agriculture that there are some risks on the weather side. There was some pick-up in food prices in the last couple of months which is one area that would need to be watched.

QUESTIONER: I was going to come back to the food price issue. I was just at the African Union summit and there were a lot of complaints about that. Have you seen any effects from that?

MR. NELLOR: In the consumer price index series we saw some impact in November from the Northern states which is weather related, impact on food prices, and we saw some in more urban areas like Lagos and so on in December on food prices, but it has not been a systematic effect yet. I think it's something which deserves watching, though we don't see as big an effect as has been noted in some other countries in the region.

QUESTIONER: Just coming back to the issue of releasing the savings in dollars or in the local currency, you didn't really give a position on which one you thought was the best policy. Is there any one that you prefer that would think would be the best for Nigeria?

MR. NELLOR: I think one has to consider the political-economy aspects of what is the best way to manage this. Let me just start from a technical perspective. In the past, when allocations were made, the regular monthly allocations in domestic currency, that injected that liquidity into the economy. The central bank was then faced with the choice of how to withdraw that liquidity to avoid inflationary consequences. It would do that either by selling government paper, treasury paper and so on, or through sales of foreign exchange. You can then look at the consequences. The first measure impacts interest rates and the second measure impacts the exchange rates. When it is allocated in foreign exchange it is putting all the burden on the exchange rate. Over time I think that's probably the best way to go because you can't sterilize through selling paper on an ongoing basis-over a long period of time. That's not sustainable. So there is a need to let the real exchange rate adjust and if you don't let the nominal rate adjust, the adjustment will tend to come through inflation.

So on balance, I think that it could be done various ways, but the allocation through foreign exchange is probably helpful in terms of the inflation outlook for Nigeria, but then you do need to watch how much pressure is placed on the exchange rate because it does impact private-sector activity of course.

MS. MBOTO FOUDA: Thanks, Joyce. I would like you to just double-check one last time. If there are no further questions then I will ask David to wrap up on this conference call.

MR. NELLOR: Let me just reiterate: I think that overall we see prospects for Nigeria's economy as very strong as long as these issues associated with managing both the oil revenues and the stock of oil savings is managed well. I think one of the overarching themes of the Article IV discussion was that Nigeria faces now new challenges brought about by the success of its past reform efforts. We think the authorities have the objectives clearly in mind and that they understand the issues associated with management of the oil revenue and savings and that they now need to look to develop their long-standing institutions which will bring about those objectives. And from the Fund's perspective we stand ready to assist the authorities in these efforts in our ongoing consultations with them.

MS. MBOTO FOUDA: Thank you, David. I would like to thank all of our participants for being with us today. I would like to just remind you once more that this conference call and the documents are embargoed until 9:30 a.m. Washington time.
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