IMF Survey: Nigeria Needs Sustained Reforms to Build on Success

IMF News, February 15, 2008

Source details

Canonical URL: IMF Survey: Nigeria Needs Sustained Reforms to Build on Success

Nigeria's current economic situation is described as "the strongest in its recent economic history."
Growth is high, inflation is in single digits, and external and fiscal positions are strong.
The IMF supported Nigeria's homegrown reform program through a two-year Policy Support Instrument that was concluded successfully late last year.
Prospects for growth in 2008 are positive, with:
- a rebound in oil production anticipated, though developments in the Niger Delta need to be watched;
- non-oil sector growth driven by services and agriculture, with non-oil sector growth "on course to reach about 9 percent this year" as long as weather conditions continue to support agriculture.
Single-digit inflation targets are within reach, helped by a strong naira; an increase in food prices driven by unfavorable weather conditions is the main risk to inflation.

Key challenge: designing the best budget policy and use of oil savings to deliver infrastructure improvements and poverty reduction without triggering instability.
Historical pattern referenced: hundreds of billions of dollars have accrued from the oil sector in recent decades but spending previously led to short-term booms followed by low or negative growth and massive accumulation of debt—resulting in a harmful pattern of boom and bust.
Policy guidance and findings:
- In 2008, a carefully balanced policy stance is essential.
- Spending by all tiers of government should not be determined by whether oil prices are high or low.
- Governments must spend in line with the economy's needs and its ability to absorb resources to avoid economic instability and loss of private-sector competitiveness.
- The oil-price-based fiscal rule has been central to containing spending to levels consistent with macroeconomic stability; without a comparable policy anchor in the future, gains are at risk.

Nigeria is integrating rapidly into global financial markets and is attracting strong interest:
- Accounting for about one third of sub-Saharan Africa GDP excluding South Africa.
- A fivefold increase in government securities trading since 2005.
- A fourfold increase in stock market capitalization since 2005.
The recapitalized banking sector and newly active financial markets are supporting private activity; bank lending has increased across a range of sectors.
Challenges and recommendations:
- The challenge for monetary policy and preserving financial stability will intensify.
- The central bank needs to redouble efforts to keep pace with dramatic changes in the sector.
- Supervisory capacity must be commensurate with growth and activities in the banking sector.

The private sector must be the driver of growth, employment creation, and poverty reduction.
Reforms such as liberalizing the communications sector and privatization have yielded benefits, but significant constraints remain, primarily infrastructure gaps.
Infrastructure constraints highlighted:
- Limited power generation and weak distribution.
- Severe lack of transportation, which raises the cost of business.
- By some estimates, the cost of power to the private sector is six or seven times the price paid by international competitors.
Policy priorities:
- The government's medium term fiscal strategy provides an adequate spending envelope to make meaningful progress on infrastructure, but attention must be paid to the quality of spending and ensuring project completion.
- Identifying the right roles for the public and private sectors, prioritizing outlays, and strengthening public financial management are priorities.

The success of the reform program to date shows that macroeconomic policy priorities have focused on the right bottlenecks and opportunities.
Macroeconomic stability is essential to translate higher growth into widespread increases in living standards.
Prudent management of oil savings and revenues is key to unleashing Nigeria's potential and reducing poverty.

IMF Survey: Nigeria Needs Sustained Reforms to Build on Success — February 15, 2008.