Press Release: IMF Executive Board Approves a Two-Year Policy Support Instrument for Nigeria
IMF News, October 17, 2005
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- Published: October 17, 2005
PSI approval and purpose
- The Executive Board approved a two-year Policy Support Instrument (PSI) for Nigeria under the IMF's newly created PSI framework on October 17, 2005.
- The PSI is based on the National Economic Empowerment and Development Strategy (NEEDS), Nigeria's Poverty Reduction Strategy, and focuses on rapid and sustainable non-oil growth and poverty reduction.
- The PSI is intended to:
- support the nation's economic reform efforts;
- assist Nigeria to develop a well-articulated and sound policy framework, including prudent macroeconomic policies and strengthened institutions;
- ensure a governance structure conducive to private sector activity.
- Approval of the PSI signifies IMF endorsement of the policies outlined in the program.
PSI framework characteristics
- PSIs are designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies.
- PSIs are voluntary and demand driven.
- PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process and articulated in a Poverty Reduction Strategy Paper (PRSP).
- Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program.
Director-level assessment and key policy messages (Ms. Anne O. Krueger)
- Nigeria has made "commendable progress" over the past 18 months in implementing its economic reform program aimed at accelerating economic growth, reducing poverty, and meeting the Millennium Development Goals.
- The authorities requested a PSI to support a comprehensive reform program based on NEEDS.
- The authorities' program:
- is designed to sustain and strengthen macroeconomic performance and encourage economic growth and diversification with front-loaded structural reforms;
- emphasizes pro-growth and export-oriented reforms together with prudent fiscal, exchange rate, and monetary management to boost external competitiveness over the medium term;
- is formulated with quantitative and structural assessment criteria reflecting policies meeting the IMF's standard of upper credit tranche conditionality.
- Key challenges and actions:
- Maintain an appropriate stance and mix of fiscal and monetary policies to reverse the upsurge in inflation associated with expansionary policies in early 2005.
- The Central Bank of Nigeria (CBN) has taken measures to reduce money growth, including increased sales of foreign exchange, more aggressive open market operations, and a further increase in cash reserve requirements.
- Prospective adoption of a 2006 budget that reduces the primary non-oil deficit well below the projected outturn for 2005 would further improve the policy mix.
- The government aims to strengthen expenditures on poverty-related programs by allocating an extra US$1 billion to well-defined programs related to the Millennium Development Goals.
- Implementation of the agreement in principle reached with Paris Club creditor countries should improve investor confidence and free up resources for poverty reduction; negotiations on a comprehensive debt treatment are expected in the near future.
- Continued provision of technical assistance and support of the international community is essential for bolstering implementation capacity and program success.
Recent economic developments (Annex summary)
- Over the past 18 months, macroeconomic policies were broadly consistent with achieving macroeconomic stability and reducing vulnerability to oil shocks.
- Since early 2004, all three tiers of government adhered to a conservative oil price-based fiscal rule, resulting in large overall budget surpluses and a significant build-up in international reserves.
- GDP growth has been robust, benefiting from improved macroeconomic environment and policy initiatives to spur agricultural production.
- First half of 2005 developments:
- Continued rise in gross international reserves.
- Sharp increase in broad money; the Central Bank initially failed to sterilize the liquidity build-up but tightened policy starting in August.
- Expansionary macroeconomic policies and increased food prices pushed 12-month consumer price inflation to 26 percent in July.
- Fiscal policy broadly contained spending below budget appropriations, but the increase in spending remained large and the non-oil primary deficit was projected to widen by 5 percent of non-oil GDP.
- In August 2005, domestic fuel prices were increased by about 25 percent to reduce implicit subsidies.
Program summary and targets
- The program under the PSI meets the Fund's standards for upper credit tranche conditionality.
- Context: positive medium-term macroeconomic outlook characterized by continued high oil prices, rising oil production and robust non-oil growth.
- Main pillars and targets:
- Tightening of macroeconomic policy and improvement of the fiscal-monetary policy mix to achieve single digit inflation from 2006.
- Medium-term fiscal program aims at gradual reduction of the consolidated non-oil primary balance from 41 percent of non-oil GDP in 2005 to 35 percent in 2008.
- Target a strong accumulation of international reserves to reach US$26 billion at end-2005.
- Tight reserve money growth target of 4 percent in 2005.
- Formulation of the 2006 budget to strengthen expenditures on poverty-related programs, with an extra allocation of US$1 billion related to the Millennium Development Goals (this allocation represents expected saving in debt service from proposed Paris Club debt restructuring).
- Structural reform program includes measures to strengthen budgetary procedures, advance civil service reforms, restructure the banking system, unify foreign exchange markets, rationalize the external tariff system, and improve governance and transparency.
- Recent decision to allow oil marketers to increase gasoline prices by about 25 percent to reduce allocation distortions and implicit subsidies.
Key statistics (Table 1: Nigeria: Selected Economic and Financial Indicators, 2003-06)
- National income and prices (Annual percentage changes, unless otherwise specified)
- Real GDP (at 1990 factor cost): 2003: 10.9; 2004: 6.1; 2005 Est.: 4.0; 2006 Proj.: 5.0
- Real GDP per capita: 2003: 7.9; 2004: 3.3; 2005 Est.: 1.4; 2006 Proj.: 2.5
- GDP deflator (period average): 2003: 20.8; 2004: 19.9; 2005 Est.: 26.6; 2006 Proj.: 12.1
- Consumer price index (end of period): 2003: 23.8; 2004: 10.1; 2005 Est.: 18.5; 2006 Proj.: 8.5
- External sector (Annual percentage changes)
- Exports, f.o.b.: 2003: 54.2; 2004: 36.9; 2005 Est.: 36.1; 2006 Proj.: 14.8
- Imports, f.o.b.: 2003: 26.1; 2004: 11.3; 2005 Est.: 38.0; 2006 Proj.: 9.9
- Terms of trade: 2003: 20.5; 2004: 35.2; 2005 Est.: 11.0
- Real effective exchange rate (end of period; - indicates depreciation): 2003: 0.9; 2004: 4.9; 2005: ...
- Consolidated government operations 1/ (Annual percentage changes)
- Total revenue and grants: 2003: 47.5; 2004: 33.1; 2005 Est.: 33.2
- Total expenditure and net lending: 2003: 26.2; 2004: 17.3; 2005 Est.: 22.3; 2006 Proj.: 10.0
- Current expenditure 2/: 2003: 25.3; 2004: 16.3; 2005 Est.: 20.7; 2006 Proj.: 9.7
- Capital expenditure and net lending 2/: 2003: 28.8; 2004: 20.2; 2005 Est.: 37.7; 2006 Proj.: 9.8
- Money and credit (Annual percentage changes)
- Net foreign assets 3/: 2003: 5.5; 2004: 62.3; 2005 Est.: 39.3; 2006 Proj.: 95.1
- Net domestic assets 3/: 2003: 19.0; 2004: -49.9; 2005 Est.: -26.2; 2006 Proj.: -82.8
- Net domestic credit 3/: 2003: 29.7; 2004: -23.1; 2005 Est.: -13.8; 2006 Proj.: -80.8
- Broad money: 2003: 24.1; 2004: 14.0; 2005 Est.: 15.0
- Investment and saving (In percent of GDP; unless otherwise specified)
- Investment: 2003: 23.9; 2004: 22.4; 2005 Est.: 21.6
- Public fixed investment: 2003: 9.1; 2004: 9.6; 2005 Est.: 8.9
- Private fixed investment: 2003: 14.2; 2004: 13.2; 2005 Est.: 13.5
- Gross national savings: 2003: 21.1; 2004: 27.0; 2005 Est.: 31.4; 2006 Proj.: 36.7
- Public: 2003: 20.9; 2004: 28.6
- Private: 2003: 8.1
- Total revenues and grants (In percent of GDP)
- 2003: 37.1; 2004: 43.1; 2005 Est.: 43.5; 2006 Proj.: 49.3
- Total expenditure and net lending (commitment basis) (In percent of GDP)
- 2003: 38.4; 2004: 35.4; 2005 Est.: 33.6; 2006 Proj.: 31.3
- Overall balance (commitment basis) (In percent of GDP)
- 2003: -1.3; 2004: 7.7; 2005 Est.: 17.9
- Current account balance (In percent of GDP)
- 2003: -2.7; 2004: 4.6; 2005 Est.: 14.3
- External debt outstanding (in billions of U.S. dollars)
- 2003: 32.9; 2004: 35.9; 2005 Est.: 30.4; 2006 Proj.: 4.8
- Overall balance of payments (In billions of U.S. dollars, unless otherwise specified)
- 2003: -1.6; 2004: 9.4; 2005 Est.: 15.9
- Gross international reserves (end of period)
- 2003: 13.4; 2004: 21.4; 2005 Est.: 26.4; 2006 Proj.: 48.3
- (equivalent months of goods and services): 2003: 3.4; 2004: 5.8; 2005 Est.: 8.4; 2006 Proj.: 13.7
- Nominal GDP at market prices (in billions of naira)
- 2003: 7,533; 2004: 9,575; 2005 Est.: 12,604; 2006 Proj.: 14,839
Source: International Monetary Fund press release dated October 17, 2005.