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IMF Concludes 2001 Artcile
IV with Nigeria The State of
the Nigerian Economy, By IMF |
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| By Ayo Teriba
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BACK |
On August 6, 2001,
the International Monetary Fund (IMF) published the full
details of its Staff Report on consultations held with Nigerian
officials during the IMF Staff visit to Lagos and Abuja
from March 8-20 , 2001 and Nigerian official visit to the
IMF in April. The Staff Report was completed on June 14.
IMF issued a Staff Statement on June 29, updating information
provided in the Staff Report. Finally, the IMF issued a
Public Information Notice (PIN), which summerizes the view
expressed by the Executive Board of the IMF during its June
29 discussion of the staff report. Below are excerpts from
the Staff Report along with the full texts of the Staff
Statement and Views of the Executive Board.
Executive Summary
Serious macroeconomic imbalances have emerged in Nigeria
over the last year. Inflation has accelerated to double-digit
levels, and instability bas prevailed in the foreign cxchange
market. Although there has also been a rebound in economic
activity, this is likely to prove temporary in the wake
of the imbalances. Against the backdrop of pressures to
deliver a "democracy dividend," spending surged, absorbing
the large oil windfall gains. In 2000, large wage overrun
led to much higher levels of government spending than anticipated
. The 2001 budget envisages sharply higher spending, which
also raises concerns about the quality of spending. Monetary
tightening has come too late and been too gradual to forestall
inflationary pressures. Moreover, the Central Bank of Nigeria
(CBN) has reverted to a system of selling foreign exchange
at a predeterrnined price, and the differential between
the CBN's rate and the parallel market rate has widened
substantially. Structural reforms and measures to improve
governance were both delayed.
Tensions between the government and the National Assembly,
ethnic and religious conflicts, and the absence of requisite
technical capacity in the civil service have all hampercd
progress. Moreover, the 1999 constitution, which gives state
and local governments full and automatic rights to their
share of oil revenues, and their insistence on spending
them, have made prudent management of oil windfall gains
diflicult. Nevertheless, a series of useful, if modest,
achievements has been made over the last two years. The
government has decided to restrain spending to preserve
macroeconornic stability. Monetary policy has been tightened,
with signs of calm retuming to the foreign cxchange market.
The privatization process has gained momentum and several
actions have been taken to lay the groundwork for improving
transparency and accountability in the use of public funds.
These achievements offer a modest basis to build on as market-based
reforms and the restoration of macroeconomic stability are
pursued. Above all, it is critical that for 2001 the federal
government adhere to its intention to restrain spending.
The quality of spending also needs to be ensured through
strict compliance with due process. Further tightening of
monetary policy may be needed to bring inflation down to
single digits and substantially narrow the differential
between the CBN and parallel market rates.
Maintaining the momentum of privatization will be essential
to laying the foundation for a private sector-driven improvement
of medium-term growth prospects. Thc government's anticorruption
measures will have to be particularly strong to tackle deep-rooted
problems and make a dent in firmly entrenched pcrceptions
in the private sector. Moreover, the capacity to implement
economic reforms is inadequatc, particularly in relation
to the budget process. In this context, donors need to enhance
and coordinate their assistance.
Even with a determined pursuit of economic reforms, Nigeria
will need concessional assistance from the international
comrnunity. Steadfast implementation of these reforms should
help Nigeria garner the support of the international community
in seeking to reduce its debt burden. If the authorities
implement the actions necessary to reinvigorate their economic
programme, the staff would recommend that the Board complete
the first review under the current Stand-By Arrancement
and extend the arrangement by six months. The authorities
intend to seek a successor three-year arrangement. The broad
support of state and local governments, National Assembly,
and civil society will be important for the success of the
economic reform and poverty reduction strategy.
INTRODUCTION
The last Article IV consultation was concluded on December
8, 1999. At that time, Directors noted that an exceptional
window of opportunity existed for Nigeria to undertake ambitious
and wide-ranging reforms to lay the basis for a renewal
of confidence and sustained economic development. They considered
that a tightening of the fiscal stance was needed, and cautioned
that the delegation of fiscal responsibilities to lower
levels of government should be consistent with their institutional
capacity. They viewed the decisive implementation of the
privatization programme as a key element of the reform agenda
and emphasized the importance of transparency, good governance,
a strong judiciary, and institution building for sustained
economic recovery.
Since then, the Executive Board met on Nigeria, formally
or informally, on a number of occasions, including on August
4, 2000 when a 12-month precautionary Stand-By Arrangement
in the amount of SDR 788.94 million (45 percent of quota)
was approved in support of a programme for July 2000 - June
2001. The first review under the Arrangement was to have
been completed by end-December 2000, but it has been delayed
in view of deviations from programme targets. In the informal
discussion of February 7, Directors expressed their disappointment
with Nigeria's performance under the Stand-By Arrangement.
They endorsed the staff's plan to bring the first review,
together with the Article IV consultation, to the Executive
Board for its consideration in May, following the completion
of actions to bring the programme back on track and an agreement
on the economic programme for January-June 2000. In the
event, the Nigerian authorities were unable to complete
some of the key prior actions. Notwithstanding this disappointing
performance, the Nigerian authorities strongly wish to complete
the current Stand-By Arrangement-albeit with a delay-and,
then, enter into a successor, three-year arrangement. The
latter would help provide continuity in economic policy
implementation into the next administration (which will
take office after the next general elections scheduled for
February 2003), and assist the authorities in tackling widespread
poverty. Under the circumstances, the staff would recommend
that the Executive Board consider, in early August 2001,
the authorities' request for completion of the first review
and an extension of the current arrangement by six months
to February 4, 2002, if (a) certain measures are taken by
the end of June as reported in this paper; and (b) a satisfactory
understanding is reached on the economic programme for the
second half of the year.
Summaries of Nigeria's relations with the Fund and with
the World Bank Group are presented in Appendices I and II,
respectively. A discussion of statistical issues is contained
in Appendix III, while selected social and demographic indicators
are provided in Appendix IV. The performance under the Stand-By
Arrangement is summarized in Appendix V. Medium-term growth
prospects are described in Appendix VI, while a debt sustainability
analysis is found in Appendix Vll. Appendix VIII reviews
Fund technical assistance since 1999 and the Technical Cooperation
Plan (TCAP). A tentative work programme is presented in
Appendix. Selected economic and financial indicators are
provided in Table 1.
Background
The present administration took office in May 1999, following
20 years of military rule, mismanagement, and the destruction
of civil institutions. It pledged to fight corruption; ease
the infrastructure bottlenecks, particularly for power and
petrol; improve education, health, and other basic public
services; accelerate privatization; and reestablish government
institutions that serve the public. Its aims were to promote
private investment, revive the economy, and reduce unemployment,
while restoring macroeconomic stability. The new administration
declared its intention to work closely with the international
community to help deliver a "democracy dividend" to the
Nigerian public.
Several factors have, however, hampered progress. First,
for much of 2000, the government was involved in a bitter
political battle with the National Assembly-in essence,
to delineate the boundaries of their respective authorities
under the new democracy. At stake, among other issues, was
the responsibility of the executive vis-a-vis the legislature
in the formulation, implementation, and monitoring of the
federal government budget. Second, strong ethnic and religious
tensions surfaced with the cessation of military rule which
have claimed many lives and, at times, threatened national
unity. While such tensions appear to have eased, the undercurrent
of these conflicts continues to constrain economic policy
decisions. Third, under democracy, labour unions have emergcd
as an effective force in challenging certain of the govemment's
policy measures. Massive protests, organized by the labour
unions, forced the governrnent to roll back its decision
to remove the petroleum subsidy and deregulate the downstream
petroleum sectors. Fourth, the absence of the requisite
technical capacity in the civil service, coupled with opposition
from parts of the government, meant that reform measures
could not be pushed through as swiftly as wished.
In addition, the new constitution, which gives state and
local governments full and automatic right to their shares
of the oil revenues, has severely constrained the management
of oil windfall gains. The 2000 oil windfall, defined as
oil revenue in excess of US$20 per barrel (so-called excess
proceeds), amounted to US$4 billion, or 10 percent of GDP.
About one-half of this accrued to subfederal governments,
which was distributed equally in the last quarter of 2000
and the first quarter of 200 l . Reflecting in part the
latter, spending by state and local governments is expected
to increase in 2001 by about 4 percent of GDP.
Moreover, the sharp contrast between the democracy dividend
promised by the democratic government and the lack of discernible
unprovements in living standards- symbolized by the continued
power outages and gasoline shortages-fueled pressures on
the federal government to revert to the old-and failed-paradigm
of employment and income creation through big public spending.
Thus, the federal government more than doubled public service
wages in May 2000 (which the authorities felt necessary
to compensate for the substantial erosion of real wages
and to reduce petty corruption). After a prolonged dispute,
the federal government agreed in July to support the 2000
budget, which envisaged a sharp increase in consolidated
govemment spending to 43 percent of GDP, nearly all of which
was eventually spent. The federal government then proposed,
and the National Assembly approved, the 2001 budget that
provided for a further increase of the consolidated government
spending to 53 percent of GDP.
With inflation negative in early 2000, the Central Bank
of Nigeria (CBN) pursued a policy of low interest rates
to help reflate the economy. The minimum rediscount rate
was reduced in three steps from 18 percent in December 1999
to 14 percent in December 2000, and the cash reserve requirement
was reduced in two steps from 12 percent to 10 percent during
the same period. Moreover, the CBN transferred in December
to the federal govemment the proceeds of the earlier sale
of N100 billion worth of treasury bills (3 8 percent of
end- 1999 reserve money), which fully offset the sterilization
it had undertaken earlier in the year. To ensure a reserve
build-up of US$4 billion-the amount of excess oil proceeds
in 2000-the CBN did not sterilize the liquidity injection
from the fiscal operations with increased sales of foreign
exchange. Thus, reserve money expanded by 40 percent in
2000 with much of the growth having occurred in December.
As inflation picked up, the interest rate turned negative
in real terms. The CBN began to shift its monetary policy
stance in early 2001, but reserve money continued to expand
at a rapid pace.
The large government spending, together with the buoyant
oil sector, appears to have given a temporary boost to the
economy (real GDP grew by an estimated 3.8 percent in 2000,
but macroeconomic stability has come under serious threat.
Inflation, as measured by the 12-month increase in the consumer
price index, rose from 0.2 percent in December 1999 to 18
percent in March 2001. Moreover, excessive fiscal spending
spilled into the foreign exchange market. With the CBN reverting
to the pre-reform system of selling foreign exchange in
the interbank foreign exchange market (IFEM) at a predetermined
rate, the interbank market split into the IFEM and the open
inter-bank market- where banks trade among themselves at
freely negotiated exchange rates (the NIFEX.) The parallel
rate depreciated by 30 percent between December 1999 and
May 2001, and the differential with the IFEM rate widened
to 20 percent. A foreign exchange market crisis emerged
in April 2001, when the CBN made a small adjustment of the
IFEM rate before it had effectively mopped up the excess
liquidity. Very large amounts of foreign exchange were sold
to deal with the crisis, and foreign reserves have increased
only modestly during the first five months of 2001 despite
the continued high oil price.
These macroeconomic developments and policies were substantively
at variance with the programme supported by the Stand-By
Arrangement. Inflation exceeded the programme target by
a substantial margin. The federal govemment borrowed substantially
compared with the programme target of zero borrowing, and
used a larger portion of the excess oil proceeds than envisaged
under the programme which together resulted in spending
greatly exceeding the programme target. Also, the CBN's
liquidity absorption operations were more limited than targeted.
While the end-2000 target for net international reserves
was met, the CBN's foreign exchange management included
some administrative measures, which gave rise to a multiple
currency practice. ln addition, structural reforms fell
behind schedule.
Why did the programme go off track even within a few months
after approval? The legal, institutional, and political
constraints were much stronger than the authorities had
expected. One of the fundarnental premises of the programme
was to contain the wage bill within the budgeted outlay.
However, large wage overruns occurred because the government,
under strong pressure from the civil service establishment,
rolled back in October 2000 its earlier decision to pay
wages in accordance with the estimates of the Accountant
General of the Federation (AGF) rather than those requested
by the line ministries. Second, political pressures to "implement
the approved budget"-in particular to alleviate the severe
power outages-intensified as oil prices continued to rise
and the next general elections approached. Third, the programme
assumed that, in line with past practice, no excess oil
proceeds would be distributed beyond the levels approved
in the budget. The state and local governments successfully
claimed-against the opposition of the federal government-that
the federation could not withhold their shares of all oil
procccds as the constitution stipulated that these proceeds
accrued to them directly.
MEDIUM-TERM ECONOMIC PROSPECTS
The Nigerian authorities have stressed that it is their
highest priority to reduce poverty as rapidly as possible,
sufficient at least to meet the United Nation's target of
halving absolute poverty by 2015. Given the projected growth
of the population (nearly 3 percent per year), attaining
this objective would require overall economic growth of
at least 6-7 percent per annum. The authorities have emphasized
that it is feasible to achieve such growth rates, pointing
to the country's abundant natural resources, in particular
natural gas (whose proven reserves are larger in value than
those of crude oil) and agriculture. Moreover, Nigeria's
labour force is large and skilled, and its relatively large
domestic market makes it an attractive location for foreign
and local investors.
While the authorities' growth targets were laudable, the
staff advised caution in raising expectations. It would
likely be difficult to elicit in such a short period the
private sector response that would be needed to achieve
growth as high as 6 percent to 7 percent. Even the attainment
of a modest growth rate-of, say, 4 percent to 4.5 percent
in the medium term-would require prudent fiscal policy,
the steadfast implementation of structural reforms, governance-improving
measures, and the rebuilding of public institutions so as
to create an attractive environment for private investment.
These actions would need to be supplemented with generous
levels of concessional external financing under the staff's
projections based on a medium-term oil price of US$20 per
barrel.
Prudent fiscal policy-one that safeguards macroeconomic
stability and preserves competitiveness while also cushioning
the economy against a future downturn in oil prices-will
be central to facilitate private sector investment. This
would require the federal government in 2001 to save excess
oil proceeds and keep spending below budgeted levels. For
2002, it would require a sharp reduction in spending by
state and local governments as the oil price is projected
to fall to US$22.5 per barrel from high levels in 2001,
which may be difficult to sustain politically. Beyond 2002,
it would require all levels of government to contribute
to macroeconomic stability. It would, therefore, be imperative
for Nigeria to create a workable intergovernmental structure
for smoothening revenue flows that ensures sound macroeconomic
management at all levels of government.
In view of the depth of the challenges that the Nigerian
authorities must address, it may be only realistic to assume
that improvements would be gradual, and that it might take
some time before Nigeria is put on a growth trajectory of
6-7 percent. The staff therefore projects, as a central
scenario, that non-oil growth could increase from 2.8 percent
in 1999-2000 to about 5 percent by 2004, sufficient for
real GDP growth to increase from 2.4 percent to 4.5 percent
over the same period. Macroeconomic stability could be maintained,
while bringing end-period inflation down to 9 percent in
2001 and 5 percent over the medium term. Gross international
reserves could rise and remain close to US$10.3 billion
(6 months of imports) over the medium term.
Even with such a fiscal adjustment, Nigeria's external payments
situation will likely remain difficult. From a projected
deficit of 2 percent of GDP in 2001, the current account
deficit is expected to widen to average about 7 percent
of GDP in the outer years. The capital account is projected
to register small but rising surpluses over the medium term,
reflecting disbursements from IDA and other agencies as
well as a gradual rise in private capital inflows. Nevertheless,
a financing gap averaging US$1.5-US$2 billion per year is
envisaged through 2005. These estimates take account of
the Paris Club rescheduling agreement of December 13, 2000.
REPORT ON THE DISCUSSIONS
Against this background, the discussions focused on measures
to safeguard macroeconomic stability and the quality of
public spending, as well as those that would lay the foundations
for sustainable economic growth and poverty reduction. Specifically,
the discussions focused on (a) fiscal policy and issues
relating to the management of oil windfall gains; (b) the
challenges posed by fiscal federalism; (c) monetary policy
in the wake of expansionary fiscal policy; (d) measures
to promote good governance, privatization, trade liberalization,
and regional integration, as well as policies to improve
the investment climate; and (e) capacity building and priority
technical assistance needs. Progress in developing a poverty
reduction strategy and views on debt sustainability were
also discussed. During these discussions, the staff reached
understandings on the prior actions that would be necessary
for the staff to recommend completion of the first review
under the Stand-By Arrangement.
Fiscal Policies
Nigeria experienced a positive terms of trade shock in 2000
and 2001, with oil prices rising from US$17 per barrel in
1999 to US$28 per barrel in 2000, and a projected US$25.5
per barrel in 2001. The income gains from the terms of trade
improvement accrue almost exclusively to the government
in the form of additional revenue. In addition, about US$
1billion, or 2.5 percent of GDP of foreign exchange receipts
(from nonresidents) is expected from the privatization programme
and sales of oil field exploration rights.
What would be an optimal policy response to these terms
of trade gains? The staff argued that such a policy would
be for the government to spend only part of the windfall
and save tbe rest, thus enabling Nigeria to safeguard fiscal
sustainability against a likely fall in the oil price. The
staff projections showed that if vigorous efforts to reduce
the wage bill, contain federal capital expenditures, and
enhance domestic taxation (including removal of petroleum
subsidy) were pursued, a sizable primary balance could be
achieved and, hence, fiscal sustainability assured. However,
there were substantial downside risks of the oil price falling
below the current projection of about (US$20 per barrel.
If, for example, the oil price fell to US$ 15 per barrel
in 2002 and 2003, government revenue would be lower by about
10 percent of GDP annually. As it would be difficult to
reduce government expenditures substantially from the levels
currently assumed, the primary deficit could decline to
4-5 percent of GDP and foreign exchange reserves to below
US$2 billion, equivalent to about one month of imports.
Recognizing this risk, the authorities initially intended
to base the 2000 budget on the oil price of US$20 per barrel,
and save oil revenues in excess of this level. The staff
was in agreement with this approach, and proposed a fiscal
policy rule to save oil proceeds in excess of US$20 per
barrel. This rule would provide for savings of "windfall
gains" of US$ 4 billion or 10 percent of GDP in 2000, and
US$3.7 billion or 9.6 percent of GDP in 2001.
Several other considerations supported the staff's fiscal
rule. First, in view of the time that would be required
to improve the quality of expenditure and enhance governance,
there would be little assurance that higher-than-proposed
levels of spending would contribute effectively to poverty
reduction and non-oil growth. Second, the economy had limited
capacity to absorb sharply higher levels of government spending,
given the severe bottlenecks in infrastructure. Third, unduly
large spending financed from oil revenues would lead to
an appreciation of the real exchange rate and undermine
prospects for the non-oil sector ("Dutch disease" effects).
While agreeing in principle that it svould be desirable
to save the oil windfalls, the authorities considered that,
in the current circumstances, the states rule was too stringent
to adhere to in practice. Specifically, given the current
extreme poverty and the devastation of basic infrastructure,
using the windfall to allow higher current spending would
be justified even if it meant foregoing spending in the
future. In their view, the key therefore was the quality
of spending-including cost- effectiveness, poverty focus,
and transparent implementation-which they were committed
to achieving through strict observance of due process. To
this end, the government had adopted a set of "due process
tests" (in line with World Bank recommendations), and introduced
a system of checks and balances so that no capital expenditures
would
Monetary and Exchange Rate Policy
As a result of the substantial terms of trade gains and
the deviation from the expenditure restraint proposed by
the staff, fiscal operations have given rise to a large
liquidity injection in 2000 and 2001. This injection was
equivalent to l 03 percent of the opening reserve money
stock in 2000. The resulting surge in inflationary pressures
and consequent appreciation of the interbank exchange rate
(13 percent in real terms) could weaken prospects for medium-term
growth based on a revival of the non-oil economy.
In the wake of such an expansionary fiscal policy, how should
monetary policy respond in 2001? The first priority should
be to reduce the rate of inflation to single digits as soon
as possible. This would require substantial and rapid absorption
of liquidity. In the staff's view, a preferred method for
liquidity absorption would be central bank sales of government
securities, and limiting sales of foreign exchange to ensure
an adequate build-up of reserves. However, in view of the
enormous size of liquidity that would need to be absorbed,
large foreign exchange sales by the CBN would have to be
accepted in order to limit reserve money growth consistent
with the aim of reducing inflation substantially. It had
to be recognized, however, that tight monetary policy was
a second-best response in the face of expansionary fiscal
policy, and could not be expected to mitigate the impact
of the latter on the real exchange rate, except in the short
run.
The Nigerian representatives explained that the CBN had
come to a view, late last year, that, as economic activity
had begun to pick up in response to the fiscal stimulus
and signs of rising inflationary pressures had become clearer,
the balance between facilitating non-oil activity and forestalling
macroeconomic instability had shifted toward the latter.
The CBN thus changed its policy direction in December, but
judged that monetary tightening would have to be gradual
in order to minimize the political opposition and pressure
on the banking system. Accordingly, over the subsequent
five-month period, (a) the minimum rediscount rate (MRR)
was raised in three steps, by 2.5 percentage points to 16.5
percent (treasury bill interest rates were raised correspondingly
to 17 percent); (b) the interest rate on 360-day CBN certificates
was raised to 21.5 percent; (c) the cash reserve requirement
was raised in two steps by 2.5 percentage points to 12.5
percent; and (d) the ]iquid asset ratio was increased from
35 percent to 40 percent.
TheNigerian representatives noted that, by late April, these
measures, togetber with the restraint on Federal Government
spending, had brought about a considerable tightening of
monetary conditions, with interest rates in the interbank
market rising from 17-20 percent throughout most of 2000
to 30-40 percent in April 2001. There were nascent signs
that this tightening was strengthening the currency as the
parallel market rate appreciated from over N140 per U.S.
dollar in early April 2001 to about N 135 per U.S. dollar
in mid-May. Correspondingly, the differential between the
parallel and the IFEM rates narrowed from 23 percent to
about l9 percent.
While acknowledging that these measures were significant,
the staff stressed that a threat of major macroeconomic
instability remained. The liquidity injection from fiscal
operations would continue to be large during the remainder
of the year, stoking further inflationary pressures. Further,
inflationary expectations had been aggravated by the extremcly
large government spending provided for in the 2001 budget
and the attendant anticipation of a future depreciation
(based, in part, on the unsustainably large differential
between the official and parallel exchange rates).
The staff regards it as important that lasting stability
in the foreign exchange market be restored quickly, and
that reforms toward developing a fully market determined
exchange system be expeditiously resumed. After the successful
introduction of the interbank market in the third quarter
of l999, where the CBN and commercial banks traded foreign
exchange on the basis of two-way quotes, the CBN prohibited
in 2000 the transfer between banks of foreign exchange purchased
from tbe CBN. This action, together with administrative
measures which limited access to the IFEM, led to the segmentation
of the interbank market with two distinct exchange rates,
and gave rise to a multiple currency practice subject to
Article VIII. Transferability was re-introduced in mid-December
2000, but was barred again in early-February 2001. The staff
recommended that (a) the IFEM and the open inter-bank market
be merged, thus eliminating the multiple currency practice;
and (b) the differential between the IFEM and the parallel
market rates be narrowed to less than 10 percent, all by
the end of May 2001. The staff was also in the process of
determining whether exchange restrictions had been introduccd.
The staff thus recommended that, as part of the prior actions
for completing the first review, the CBN adopt a monetary
programme for 2001 that aims at bringing about lasting stability
in the foreign exchange market and restoring price stability.
Specifically, the CBN would (a) sell a large amount of treasury
bills and CBN certificates in May and June that would reduce
net domestic assets of the CBN by N22 billion for the year
as a whole; (b) limit its sales of foreign exchange, sufficient
to achieve at least a small increase in intemational reserves
in 2001; and (c) limit the increase in reserve money to
8.3 percent, consistent with the target of reducing inflation
to less than 10 percent by the end of 2001.
The Nigerian representatives agreed with the staff's recommendations
on the monetary programme but cautioned that it would not
be easy to achieve these objectives. First, the exchange
rate differential reflected to a large extent a premium
that purchasers of foreign exchange were willing to pay
to falsify import documents so that they could evade customs
duties, or to make transfers that were otherwise restricted
(e.g., capital flight) or illicit (e.g., money laundering.)
The recent widening of the differential also reflected stricter
controls on "round-tripping" (i.e., purchases of foreign
exchange for resale in the parallel market) and tighter
enforcement of capital controls. Thus, while the differential
should narrow, the exact magnitude of the differential may
be beyond the control of the CBN. Second, an increase in
international reserves in 2001 would be possible only if
federal government spending could be limited as currently
envisaged. Third, once currency went into circulation, it
tended not to flow back into the banking system, making
it difficult to control reserve money. Most Nigerians did
not either save or settle transactions through the banks.
Furthermore, in view of the poor quality of money and banking
statistics, movements of reserve money ought to be interpreted
with care. The staff further recommended that the vulnerability
and soundness of the financial system be carefully assessed
to ensure that weaknesses in the banking system did not
unduly constrain the conduct of monetary policy. The last
Article IV staff report described progress that had been
made during the second half of the l 990s in addressing
financial distress in commercial and merchant banks (SM199/276,
Appendix Vl). There were indications that the health of
the banking system had improved further during 2000. Banks
reported strong earnings with profits before tax having
increased by 36 percent to N63.3 billion (1.5 percent of
GDP). In addition, and notwithstanding another year of strong
growth of credit to the private sector, the ratio of non-performing
loans to total loans had fallen by 4 percentage points to
a stil1 high 21.5 percent. Nonetheless, problems remained.
According to the World Bank study of May 2000, many banks
were taking imprudently high foreign exchange risk, 14 banks
(out of a total of 51) were classified as distressed, and
7 additional banks appeared to remain at risk. Moreover,
while the frequency of on-site inspection of commercial
and merchant banks had been gradually increased, not much
progress had been made in addressing the inadequacy of supervision
of the nonbank financial sector. There was still a need
for enhancing the overall supervisory capacity, including
through training and an increase in the number of bank supervisors.
A Financial Sector Stability Assessment is to be conducted
during 2001.
Good Governance
On governance issues, the staff representatives indicated
that, notwithstanding a number of actions that had been
taken to reduce corruption, including the dismissal or prosecution
of some senior of ficials, there appeared to be a sense
of disappointment among the Nigerian public and in the internaffonal
community that corrupt practices continued to be widespread
throughout public institutions in Nigeria. In part, this
may be a reflection of the high hopes held by the public
that corruption would be reduced substantlally and rapidly
under the democratic government. The preliminary interim
reports of the value-for-money audit of government expenditures
in 2000 showed frequent neglect of the established procedures
governing the use of public resources. The delays in (a)
the start-up of the Anti-Corruption Commission; (b) the
submission to the National Assembly of the statutory audit
of the 1999 government accounts; (c) the adoption of strengthened
procurcment procedures; and (d) the completion of the value-for-money
audits and other programme measures were also sources of
concern.
In response, the Nigerian representatives stressed that
the government had now implemented most actions that had
been programmed for completion by end-December 2000, and
suggested that, if the public's perceptions were negative,
as reported by the staff, it might be because they were
not fully informed of the measures the government bad taken.
The oft-cited Transparency International's corruption index,
which ranks Nigeria at the bottom, was bascd on a survey
taken before the present administration took of fice. The
Anti-Corruption Commission had received initial funding
to commence operations and was now investigating about one
dozen major cases. The government had not hesitated at all
in dismissing and prosecuting high of ficials whenever a
clear case of abuse had been presented (there have been
11 such cases since this administration took office). Moreover,
the Attorney General had made it clear that the government
would follow up on the results of the value-for-money audits
and the civil service audit, and would prosccute where there
was evidence of wrongdoing.
The staff urged the authorities to redouble their efforts
to improve transparency and accountability in the use of
public resources. The authorities indicated that thc government
would ensure that budget implementation did not give rise
to abuses of contracting and other procedures to the detriment
of the quality and effectiveness of spending. The establishment
of additional checks to ensure full compliance with due
processes was central to these efforts. To this end, the
government would publish the newly established due process
tests, and the role of the Budget Monitoring and Price Intelligence
(BMPI) unit in the presidency in this regard. It would also
continue with the value-for-money audits; the results of
the audit of projects undertaken in the first quarter of
2001 were expected to be published by end- June 2001. New
procurement procedures, which are in line with World Bank
recommendations, will come into effect in June 2001.
The Nigerian representatives also indicated that they placed
a high priority on ensuring that anti- money laundering
legislation met international standards. The government
was reviewing the 1995 Anti-Money Laundering Act to ascertain
whether it conformed to international standards. The government
would then adopt the Forty Recommendations on Anti-Money
Laundering developed by the Organization for Economic Cooperation
and Development (OECD)'s Financial Action Task Force.
Privatization and Deregulation
The Nigerian representatives reiterated that privatization
remained the centerpiece of their structural reforms and
noted that, although progress had been slower than initially
hoped for, there was now a momentum to move forward rapidly.
Phase I of the privatization programme, which involved the
sale of the government's shareholdings in a dozen commercially
viable enterprises, such as banks and petroleum marketing,
cement, and insurance companies, had now been largely completed.
Important progress had also been made toward the privatization
of the telecommunications sector, a key item in phase II.
Three GSM licenscs were successfully auctioned in February
2001, for a license fee of US$285 million each (i.e., for
a total of US$855 million). Expressions of interest from
strategic investors in the Nigeria Telecommunications Company
(NITEL) had been sought; it was expected that a majority
shareholding in NITEL would be sold by the end of 2001.
In preparation for this sale, it was now expected that the
regulatory framework and law in the telecommunications sector
would be approved by the cabinet and submitted to the National
Assembly by end-June. Moreover, the government had reached
agreement on a Privatization Support Credit with the World
Bank that would enable the Bank to intensify its support
for privatization in this and other sectors.
The Nigerian representatives also informed the staff that
they had made major strides in gaining public support for
the deregulation of the downstream petroleum sector and
the associated removal of the petroleurn subsidy. Following
the almost complete rolling back of the 50 percent hike
of retail prices of petroleum prices in luly 2000, the government
constituted a committee, consisting of all major stakeholders,
to advise on whether and how to proceed with deregulation
of this sector. In January 2001, the committee had supported
the government's policy (with representatives of the labour
unions dissenting) and recommended that the petroleum subsidy
be removed in two stages over a nine-month period, beginning
the third quarter of 2001. The government was firmly committed
to implementing these recommendations and is seeking the
consent of the labour unions through a further consultative
process. A bill to establish an independent regulatory agency
in the downstream petroleum sector, which would consolidate
and develop existing laws, would be submitted by end-200
l to the National Assembly. Privatization of the first refinery
is now envisaged in 2002.
The Nigerian public enterprise sector accounts for an estimated
50 percent of total GDP, 57 percent of investment, and two-thirds
of forrnal sector employment. Underscoring the importance
of privatization in Nigeria's econornic reforms-to remove
structural bottlenecks to growth and improve allocation
of budgetary resources-the staff representatives wondered
whether a shift in strategy might not be needed to prevent
further delays in reforming other key sectors. First, in
the critical power sector, the government's approach had
been to strengthen the Nigeria Electric Power Agency (NEPA)
with a wholesale change in its top management, while continuing
to entrust NEPA with the rehabilitation and upgrading of
the existing generation facilities, transmission systems,
and power distribution (pending the unbundling of the company
expected in early 2002 and subsequent privatization); concurrently,
generation capacity had been augmented through arrangements
with private power suppliers. This approach apparently had
little success as severe disruptions of power supplies have
continued unabated. Second, the 2001 budget envisaged an
injection of large amounts of public funds into a number
of unviable, large public enterprises in the aluminum, fertilizer,
steel, and other sectors, on the premise that additional
investments for rehabilitation and/or completion of the
projects would facilitate privatization. The World Bank
had consistently maintained that such investments would
be unwise, as the facilities were better sold "as is." Third,
the 2001 budget also provided for the construction of grain
silos and a national food security programme. According
to the World Bank, such government intervention in agriculture
would be inappropriate, given that it had failed in the
past, both in Nigeria and elsewhere in Africa.
The Nigerian representatives were not in full agreement
with these views of the Bank and Fund staff. However, they
agreed not to put in public money, pending the completion
of an ongoing technical audit of the Ajaokuta Steel complex,
Delta Steel, and three inland rolling mills, which will
look at options for privatization in the sector.
Trade Liberalization & RegionaL Integration
The discussions of trade policy took place against the background
of the approaching expiry of the 1995-2001 customs and excise
tariff, which had been amended with the adoption of the
annual budgets. These amendments introduced a modest degree
of trade liberalization, by reducing the average tariff,
the dispersion and number of rates, and lowering some tariffs
on consumer goods while increasing those on raw materials.
Nigeria still has a complex structure of trade taxes, with
at least seven taxes and with the customs duty varying from
0 percent to 100 percent.
The staff expressed disappointment that the full review
of the tarriff structure contemplated for end- 2000 had
not been completed. In the staff's view, Nigeria should
give high priority to simplifying the structure of trade
taxes by folding all trade taxes into one tax-the customs
duty. Nigeria should aim to move gradually toward a structure
of rates for the basic duty akin to that in the West African
Economic and Monetary Union (WAEMU)-a zero rate could be
applied to essential goods, raw materials, and capital goods,
and a rate of 10 percent or 15 percent to all other goods.
Such a structure would reduce the administrative burden
and scope for rent seeking and provide some protection to
domestic industry, while mitigating the anti-export bias
by ensuring that exporters had access to inputs at world
prices. At the same time, Nigeria should strive to eliminate
remaining nontarriff barriers.
The authorities indicated that their intention was to move
in the direction of a more liberalized and simplified tariff
regime. However, decisions would be made only after the
completion of the comprehensive review of the structure
of trade tariffs and the level of effective protection which
is now expected by September 2001, in time for a major revision
of the current tariff code in the 2002 budget.
The staff also welcomed the decisions taken at the Economic
Community of West African States (ECOWAS) Heads of State
summit in December 2000 to establish an ECOWAS free trade
zone and to harmonize ECOWAS and WAEMU programmes in the
areas of common tariffs, convergence of macroeconomic policies,
and implementaffon of sectoral policies. In particular,
the staff called on the authorities to emulate the steps
taken by the WAEMU countries to establish a common external
tariff and to remove existing intratrade barriers within
the community. It was essential to proceed with nonpreferential
liberalization of the external tariff to minimize trade
diversion that might stem from regional integration. The
authorities noted that the agreement reached with Ghana
in December 1999 to implement the programme of free movement
of persons, goods, and services under a fasttrack approach
was making progress, including the removal on April 1, 2000
of duties on bilateral trade between Nigeria and Ghana.
The staff also noted the decision taken by six non-WAEMU
countries in April 2000 (the "Accra declaration") to create
a second monetary zone in West Africa by 2003, with the
ultimate objective of combining it with the WAEMU to establish
a single, unified currency system in the region in 2004.
While welcoming the long-run objective of closer integration,
the staff cautioned that the quest for monetary union should
not distract attention from resolving Nigeria's current
problems, and the timing and modalities for achieving monetary
union had to be carefully assessed. In particular, the staff
stressed that appropriate macroeconomic discipline and structural
policies would be prerequisites for successful monetary
integration. While recognizing these concerns, the authorities
indicated their resolve to proceed with plans for monetary
union.
Debt Sustainability & Poverty Reduction Strategies
The staff presented the key findings of the debt sustainability
analysis (DSA), taking into account the Paris Club agreement
of December 2000. It noted that, before the full use of
traditional Paris Club mechanisms, that is, a stock-of-debt
operation with a 67 percent net present value (NPV) reduction
on pre-cutoff-date and commercial debt, Nigeria's debt ratios
could be brought close to or below the HIPC thresholds after
three years of concessional flow rescheduling. However,
notwithstanding this expected positive trend, actual debt-service
payments were projected to increase significantly after
the three-year flow rescheduling, averaging 17-20 percent
of exports, which was higher than the corresponding ratios
for the HIPC countries before they obtained relief. Thus,
further debt relief may be necessary if this hike was to
be prevented. Assuming strong macroeconomic policy performance,
Nigeria would need continuing access to concessional resources
even to achieve a modest growth target of 4 percent to 4.5
percent over the medium term.
The authorities expressed the concern that a succession
of concessional flow reschedulings would not address Nigeria's
large debt overhang, which was estimated at US$ 31 .9 billion
at end-2000, or the equivalent of 80 percent of GDP. In
particular, they pointed out that with a debt-to- export
ratio projected at or above 150 percent (on an NPV basis)
well into the decade, a sizable share of Nigeria's resources
that could otherwise be invested in the economy or devoted
to vital social services, such as health and education,
would continue to be diverted. At a recent debt conference,
the authorities, while disavowing the need for outright
debt cancellation, forcefully argued that only a debt stock
reduction operation on Naples terms would be satisfactory
from their perspective. The mission encouraged the authorities
to pursue discussions with creditors, noting that a solid
track record of programme implementation and timely debt-service
payments would enhance the prospects for eliciting creditors'
support for any debt relief.
The authorities stressed that poverty reduction was important
and noted that the increase in poverty since 1980 stemmed
from the ineffective use of available resources, as well
as the poor performance of the economy. The federal government
had therefore restructured and streamlined its poverty alleviation
agencies to avoid wasteful duplication and to improve their
performance. The National Poverty Eradication Council, chaired
by the President and with the membership of core ministries,
is at the apex of this new structure, overseeing the implementation
of the National Poverty Eradication Programme (NAPEP). The
latter covers four schemes: the Youth Empowerment (YES),
Rural Infrastructural Development (RIDS), Social Welfare
Services (SOWESS), and Natural Resources Development and
Conservation (NRDCS) schemes. A National Poverty Eradication
Policy and a Blueprint for Poverty Eradication had been
adopted, and a Poverty Reduction Plan prepared. During 2000,
the Poverty Alleviation Programme (PAP) also provided jobs
to about 250,000 people.
While welcoming efforts to improve coordination, the staff
expressed concern that this approach had so far not been
developed as part of a wider strategy for poverty reduction
and was focused on the execution of speciflc projects. As
such, the approach appeared to have been derived in a "top-down"
manner. The staff therefore welcomed the govemment's intention
to develop a interim poverty reduction strategy paper (I-PRSP),
with broad-based participation, to consolidate the efforts
so far undertaken. The authorities indicated that, following
consultations with donors, including in the Consultative
Group, the l-PRSP was expected be completed by the end of
2001.
Statistics and Capacity Building
The staff stressed that the reliability and timeliness of
economic statistics needed to be improved to support the
monitoring of macroeconomic developments and policy formulation.
The capacity of Nigeria's statistical agencies to compile
such statistics had been seriously impaired by inadequate
funding, poor management, and a lack of coordination among
statistical agencies with resulting deficiencies in all
areas of macroeconomic statistics.
The authorities shared these concerns. They also agreed
that technical assistance could play a vital role in improving
statistics and implementation capacity and expressed some
concern that the pace of delivery of technical assistance
had, in some areas, been slower than planned. They recognized
that the increased receptiveness of key government agencies
would help to expedite the delivery of such assistance.
In this vein, the authorities agreed on steps to take to
ensure the effective and timely use of available technical
assistance, including the United Nations Development Prograrn
(UNDP) IIMF technical assistance programme. This programme,
with financial and technical support from the UNDP, Japan,
the U.K. Department for International Development (DFID),
and the IMF, is designed to strengthen the capacity of key
institutions to formulate and implement appropriate macroeconomic
policies in the fiscal and monetary areas, and to manage
public finances more effectively and efficiently. Considerable
assistance has been provided, including the placement of
short-term advisors and technical assistance missions in
the area of fiscal federalism and foreign exchange management,
and numerous seminars and workshops. While the staff considered
that the implementation of this ambitious and wideranging
programme had not met initial expectations-owing in part
to concerns about public perceptions of "Fund monitoring"
of Nigeria's economic management-recent experience had been
more encouraging.
To accelerate the use of these technical assistance resources,
the government has designated the Director of Multilateral
Institutions of the Federal Ministry of Finance as National
Director of the UNDP/IMF programme, and, established, in
consultation with staff of the Fund, the World Bank, UNDP,
and other agencies, the following priorities for technical
assistance for 2001. (a) establishing a Budget Office in
the Federal Ministry of Finance headed by a Permanent Secretary
responsible for overseeing all aspects of budget preparation
and implementation; (b) establishing a Budget Monitoring
and Price Intelligence Unit in the Of fice of the President
to ensure that costs of major budget items are accurate
and contracts are awarded only after due processes have
been followed; (c) strengthening the management system and
automation of the AGF's office as the first stage of the
development of a government financial information system
(GFMIS); and (d) strengthening the capacity of the CBN,
the Federal Office of Statistics, and the Ministry of Finance
to compile and disseminate accurate and timely economic
statistics, with priority given to improving national accounts,
monetary, and balance of payments, and government financial
statistics.
STAFF APPRAISAL
Serious macroeconomic imbalances have become evident in
Nigeria over the last year. Against the backdrop of pressures
to deliver a democracy dividend, the government has now
spent the windfall gains from higher oil prices in 2000.
Unsurprisingly, the very sharp increase in government spending
brought double-digit inflation and instability in the foreign
exchange market. A rebound in economic activity fueled by
higher spending is thus likely to prove temporary. Moreover,
for most Nigerians, especially the poor, the erosion of
living standards from higher inflation far outweighs any
gains from increased public spending. The risks of a further
acceleration of inflation and continuing instability in
the exchange market remain.
The staff regrets this loss of macroeconomic stability,
for it was foreseen and avoidable. The programme for 2000,
supported by the Stand-By Arrangement, was based on the
premise that the budget approved by the National Assembly
was incompatible with macroeconomic stability and fiscal
sustainability. However, the desired underspending of the
budget did not materialize because of a wage overrun of
over 3 percent of GDP-largely reflecting irregular payments.
The 2001 budget, which contains many ill-prepared projects
and does not target poverty reduction effectively, entails
additional spending incompatible with macroeconomic stability
and saving for a future downturn in oil prices. The government
insisted that it could, if necessary, "put a brake" on spending
to preserve economic stability. However, the key lesson
of the current episode is that sound economic management
requires carefully anticipating impending problems rather
than reacting to them.
The staff recognizes that excessive government spending
has put an undue burden on the Central Bank of Nigeria (CBN),
but its policy responses were nevertheless disappointing.
The shift toward monetary tightening came too late and,
given this delay, was too gradual. The resulting large expansion
in monetary aggregates has accommodated, if not fueled,
inflation. Under pressure of the unsustainably large demand
for foreign exchange, the central bank reverted to selling
foreign exchange at a predetermined price. As a result,
the official (IFEM) rate was held unchanged (except for
two adjustments) and, in real terms, appreciated sharply.
Moreover, the interbank market split into two, giving rise
to a multiple currency practice, and the differential between
the IFEM and parallel exchange rates widened to nearly 20
percent.
The staff understands that the authorities were driven by
a desire to deliver positive results quickly. At the same
time, the depth of the problems inherited from the military
governments decaying infrastructure and public services,
and the demoralized government institutions-was greater
than the government and the staff had anticipated. The delicate
ethnic and regional balances, the political tensions associated
with the transition to democracy, and the weak civil service
ravaged under many years of military rule all made it difficult
for the government to accomplish many of the goals that
it had set. Even with prudent macroeconomic management,
it will take several years of steadfast implementation of
structural reforms, improved governance, and the alleviation
of bottlenecks in infrastructure before the full confidence
of private investors can be reearned. Such investor confidence
will be critical to decisively raise investment and attract
savings, thereby helping achieve-and sustain-the required
rates of economic growth. It was simply unrealistic to have
expected to lowear poverty significantly, improve power
and other essential public services substantially, and put
the country on a higher growth path-all in such a short
period.
Nevertheless, the staff is of the view that a series of
useful achievements over the last two years offers a modest
basis on which to build. On the political front, ethnic
and religious tensions have eased somewhat, as have frictions
between the executive and the National Assembly. Based on
its own internal review of the capital budget, the government
has decided to restrain spending to preserve macroeconomic
stability. Monetary policy has recently been tightened,
with signs of calm returning to the foreign exchange market.
The privatization process has gained momentum with the successful
sale of the GSM licenses and the imminent sale of the national
telecommunications company. In addition, the commencement
of operations of the Anti-Corruption Commission, the successful
launch of value-for- money audits, and the adoption of strict
due process tests have laid the groundwork for substantively
improving transparency and accountability in the use of
public funds.
The staff thus urges the government to rededicate itself
to the pursuit of marketbased reforms, while accepting that
an attempt at a quick fix through big public spending would
only hurt prospects for sustained economic growth and poverty
reduction over the medium and long term. To achieve sustained
growth and poverty reduction, the government should attach
the highest priority to avoiding the Nigerian bane of an
oil price-related cycle of boom-and-bust.
The staff thus considers it most critical that the federal
government adhere to its intention to restrain spending
consistent with saving fully its share of windfall oil revenues
and not borrowing from domestic sources. While the spending
level now envisaged is still higher than desired, it may
be unrealistic to expect any further cuts. In this regard,
it is most important to ensure the quality of government
expenditures, by complying strictly with due process and
rejecting capital projects with an insufficient poverty
focus. A public commitment to restrained spending would
also help dampen inflationary expectations. The staff also
calls on the authorities to rid the wage bill of ghost workers
and other irregular payments, and launch comprehensive civil
service reforrns, so that "living wages" could be paid to
all employees without jeopardizing the sustainability of
the federal budget.
State and local governments have an essential role to play
in ensuring the Nigerian economy can maintain macroeconomic
stability and effectively deliver essential public services
in a cost-effective, transparent, and accountable manner.
Since the state and local governments have been given full
and automatic access to more than half of oil revenues,
the implementation of prudent fiscal policies requires collaboration
among all tiers of government. A pact among the federal
and state governments that would acknowledge the common
goal of economic stability and the shared responsibilities
to achieve it would be very beneficial. The staff is of
the view that, ideally, the availability of financial resources
to state and local governments should be insulated from
oil price fluctuations, and commensurate with the tasks
that they are assigned to perform and their capacity to
effectively spend such resources. The staff recognizes that
issues of fiscal federalism are complex and involve sensitive
constitutional considerations, but it urges the authorities
to reconsider carefully the implications of the current
arrangement for macroeconomic management, the delivery of
basic public services, and the reduction of poverty.
In the meantime, the likely spending of oil windfall gains
by the state and local governments should be taken into
account in setting macroeconomic policy. Interest rates
have risen to over 30 percent (against the current inflation
rate of l 8 percent), but reserve money continues to expand
at a rapid pace and a large premium persists in the parallel
exchange market. The CBN believes that even higher interest
rates would seriously strain the banking system. The staff
believes, however, that a more effective approach to achieve
lasting stability in the foreign exchange market and the
banking system is to accept further increases in short-term
interest rates for a brief period, and to narrow the differential
between the interbank and parallel exchange rate quickly
and substantially-if necessary, with a step adjustment of
the interbank rate.
Even with the determined pursuit of economic reforms as
outlined above, the staff is of the view that Nigeria will
need concessional assistance from the international community
over the medium term if it is to attain the objectives of
higher growth and poverty reduction. The staff's analysis
shows that, given the projected decline in the price of
oil, and even with a more effective utilization of Nigeria's
considerable resources, substantial financing gaps of up
to US$ I.5-US$2 billion will remain over the medium term.
Nigeria's oil resources are large, but, in per capita terms,
its overall income, as well as its income derived from oil,
is smaller than many countries that currently receive considerable
international assistance. The successful implementation
of the current Fund-supported programme and the adoption
of policies that could be supported under a successor arrangement
should help Nigeria garner the support of the international
community in seeking to reduce the burden of its existing
debt to a sustainable level.
The Nigerian authorities have undertaken to take decisive
steps to move forward in their economic reforms, prior to
requesting completion of the first review under the current
Stand-By Arrangement. If these actions are fully implemented,
the staff would recommend that the Board complete the review
and extend the arrangement by six months. This could be
followed by a successor three-year arrangement. In this
context, the staff urges the authorities to develop expeditiously
a medium-terrn poverty reduction strategy-that includes
macroeconomic and structural reforrns-with the active participation
of stakeholders. Support of the state and local governments,
the national assembly, and the civil society will be important
for the success of such a strategy.
The depth of Nigeria's economic problems, the useful if
modest start made by the authorities in reversing decades
of economic mismanagement, and the constructive role that
can be played by the Fund and the international community
in helping Nigeria steer through difficult times argue in
favor of continuing Fund engagement. The staff would, however,
underscore the enormous challenges that lie ahead and call
upon Nigerians and the international community to recognize
that the process of transforming the economy will be long
and needs to be sustained by determined efforts.
It is proposed that the next Article IV consultation discussions
with Nigeria be held on the standard 1 2-month cycle.
The 2001 Article IV Consultation
On June 29, 2001, the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation
with Nigeria. Under Article IV of the IMF's Articles of
Agreement, the IMF holds bilatera1 discussions with members,
usually every year. A staff team visits the country, collects
economic and financial information, and discusses with officials
the country's economic developrnents and policies. On I
return to headquarters, the staff prepares a report, which
forms the basis for discussion by the / Executive Board.
At the conclusion of the discussion, the Managing Director,
as Chairman of the Board, summarizes the views of Executive
Directors, and this summary is transmitted to the country's
authorities. This PIN summarizes the views of the Executive
Board as expressed during the June 29, 2001 Executive Board
discussion based on the staff report.
Background
Nigeria experienced a rebound in economic activity in 2000,
spurred by increased public spending of the windfall gains
stemming from higher oil prices and by a buoyant oil sector.
Real GDP is estimated to have grown by 3.8 percent in 2000.
Notwithstanding a sharp pick-up in activity in the non-oil
sector, overall growth is projected to slow to 3.0 percent
in 2001 owing in part to a reduction in Nigeria's OPEC oil
production quota by more than 9 percent during the first
juarter of 2001. At the same time, increased public spending
has stoked inflationary pressures. Inflation, measured by
the 12-month increase in the consumer price index, rose
to 18 percent in March 2001 from 0.2 percent in December
1999.
The inflationary impact of the expansionary fiscal policy
led the official exchange rate of the Naira to appreciate
in real effective terms by close to 13 percent in 2000.
However, at the same time the premium in the parallel exchange
market rose significantly. Aided by the increase in the
price of oil by about 71 percent, the current account moved
to a surplus of 5 percent of GDP in 2000 from a deficit
of abouf 10 percent of GDP in 1999. As a result, gross intemational
reserves increased to US$9.4 billion from US$5.4 billion
over the same period.
Fiscal policy, and management of the windfall gains from
the substantial oil price increases in particular, is playing
a key role in economic developments in 2000 and 2001. These
gains- defined as oil revenue in excess of US$20 per barrel
(so-called excess proceeds")- amounted to US$4 billion (10
percent of GDP) in 2000 and are projected at US$3.7 billion
(9.6 percent of GDP) in 2001. On account of the constitution
adopted in 1999, that gives state and local governments
full and automatic right to their shares of oil revenues,
almost one half of the excess proceeds which accrued in
2000 was distributed to sub-federal governments in the second
half of 2000, and the remainder in the first quarter of
2001.
Against the backdrop of the windfall gains, the 2000 budget
envisaged a sharp increase in consolidated government spending
to over 43 percent in 2000 from 38 percent of GDP in 1999.
The sub-federal levels increased their expenditures by about
6.6 percentage points of GDP, while Federal government expenditures
declined by about 1.3 percentage points. This outcome reflected
a combination of the elimination of extra-budgetary outlays
(3 percent of GDP in 1999) and a sharp increase in personnel
costs of 2.4 percent of GDP, following a substantial increase
in public service wages in May 2000. Actual spending levels
in 2000 were about 6.5 percentage points of GDP greater
than they would have been had the government saved all of
the windfall gains.
The budget for 2001 envisages a further increase in consolidated
government spending, which should rise to about 53 percent
of GDP. Federal govemment capital expenditure accounts for
about 40 percent of this increase and spending by sub-federal
levels for the rest. In response to concerns that the size
of the budget might threaten macroeconomic stability and
also compromise the quality of spending, the authorities
have decided to limit federal expenditure, thereby bringing
projected consolidated govemment expenditure in 2001 to
about 50 percent of GDP. Compliance with due process requirements,
which is considered necessary to safeguard the quality of
spending, is likely to result in lower levels of capital
expenditure than budgeted. Had the government saved all
the excess proceeds in 2001 and not distributed the carryover
of excess proceeds from 2000, consolidated government spending
would have been about 10 percentage points of GDP lower
than currently envisaged.
Monetary policy has not offset the liquidity injected by
the fiscal stance. On the contrary, the minimum rediscount
rate (MRR) was reduced in three steps to 14 percent in December
2000 from 18 percent in December 1999 and the cash reserve
requirement was reduced in two steps to 10 percent from
12 percent during the same period. This, in conjunction
with the unsterilized increase in foreign reserves by US$
4 billion-the amount of excess oil proceeds in 2000-resulted
in reserve money growth of 40 percent.
Since early 2001, the CBN has tightened monetary policy
stance. The MRR was raised in three steps by 2.5 percentage
points to 16.5 percent (accompanied by increases in interest
rates on treasury bills and CBN certificates), the cash
reserve requirement was raised by 2.5 percentage points
to 21.5 percent, and the liquid asset ratio increased to
40 percent from 35 percent. As a result of these measures,
market interest rates rose to between 30 and 40 percent
in late April and May from about 17-20 percent in early
2001.
In response to the pressures in the exchange market stemming
from expansionary fiscal policy, the CBN reverted to the
pre-refom (i.e. pre October 1999) system of selling foreign
exchange in the Inter-bank Foreign Exchange Market (IFEM)
at a fixed rate, except for step adjustments in mid- December
2000 and early-April 2001 that devalued the Naira by 10
percent. Consequently, the differential widened between
the IFEM rate and the open interbank market-where banks
trade among themselves at freely negotiated exchange rates-
and with the parallel rate, and at the time of intensified
pressures in April 2001 had reached 15 percent and 20 percent,
respectively. In the parallel market, the Naira lost about
30 percent of its value between December 199 and May 2001.
As very large amounts of foreign exchange were sold to deal
with these pressures, foreign reserves have increased only
modestly during the first five months of 2001, notwithstanding
continued high foreign exchange inflows from oil.
On structural reforms, the government successfully sold
four Global System for Mobile Communications (GSM) liconses
and has brought to the point of sale NlTEL/M-Tel and several
other public enterprises. However, progress on implementing
the appropriate regulatory frameworks for telecommunications
and power has been slower than originally envisaged. The
Anti-Corruption Commission was inaugurated in September
and investigations are now under way on some 20 cases. The
Auditor General's report on the 1999 accounts was submitted
to the National Assembly in February 2001 while the federal
civil service audit was completed in December 2000.
Macroeconomic developments and policies in 2000 and early
2001 were at variance with the programme in support of which
the Stand-By Arrangement had been approved. In particuiar,
inflation and federal government spending exceeded the programme
targets by a substantial margin and the CBN's liquidity
absorption operations were more limited than expected. While
the end-2000 target on net international reserves was met,
the CBN's foreign exchange management included some administrative
measures that gave rise to a multiple cunrency practice.
In addition, structural reforms fell behind schedule. As
a result, the first review under the Stand-By Arrangement
could not be completed.
Executive Board Assessment
Executive Directors observed that major macroeconomic imbalances
had emerged as a result of the sharp increase in government
spending-particularly that of state and local governments-and
expressed concern at the risks of a further acceleration
of inflation and continuing instability in the exchange
market. They regretted that the programme implementation
had been inadequate during the second half of 2000 and that
the Stand-by Arrangement review would not be completed on
time, and attached great importance to getting the programme
back on track as soon as possible. Directors understood
the desire of the democratic government to deliver positive
results quickly, but cautioned that for most Nigerians,
especially the poor, the erosion of living standards from
higher inflation could outweigh any gains from increased
public spending. Directors stressed the urgent need for
strong action by the government to restore macroeconomic
stability by containing govemment spending, and to ensure
its quality through implementation of the due process tests.
Directors recognized that the problems that the present
government inherited from previous military governments
were far greater than anticipated, and made it difficult
to achieve rapid progress in economic reforms. They also
agreed that effective policy making, especially under a
democracy, required institution and consensus building which
would take time and involve a process of learning by doing.
Directors saw a role for donors and Nigeria's development
partners to provide technical assistance in these areas.
Directors stressed that prudent fiscal policy would be critical
to assure macroeconomic stability and the sustainability
of the fiscal position over the medium term. Most important
in this regard was to save the excess oil proceeds. Directors
regretted that the objective of saving these excess oil
proceeds in 2000 was not realized, and welcomed the intention
of the federal government not to spend its share of excess
oil proceeds in 2001. They also expressed concern at the
failure of the federal government to control the wage bill
in 2000, which was largely responsible for the major overruns
in spending, and they welcomed the recent progress in reducing
the wage bill. They recommended that the authorities work
closely with the staff in formulating the 2002 budget, and
endorsed the staff's efforts to maintain a dialogue with
the National Assembly and officials at the national and
sub-national level.
Directors underlined the risks to the economic outlook from
rising oil prices. They stressed that it is imperative that
state and local govemments, in addition to the federal govemment,
contribute to the re- establishment of macroeconomic stability.
They endorsed strongly the federal govemment's intention
to reach an understanding with the sub-federal levels to
save their share of excess oil proceeds and restrain spending,
and to institute due process tests to ensure the quality
of public spending. Efforts to strengthen legislation on
the accountability of sub-federal levels would also be very
helpful. Directors underlined the importance of providing
for adequate spending on the priority areas of health and
education.
Directors stressed the urgent need to fight inflation through
monetary restraint. While recognizing that expansionary
fiscal policy had burdened monetary policy, they considered
that the shift toward monetary tightening had come too late
and was too gradual, so that the resulting large expansion
in monetary aggregates had accommodated the upsurge in inflation.
They welcomed the recent tightening, but noted with concern
that interest rates in the interbank market are now barely
positive in real terms. Most Directors thus considered it
necessary to maintain tighter monetary conditions for some
time, to help re-establish macroeconomic stability while
at the same time instituting appropriate measures to safeguard
the stability of the banking system.
On exchange rate policy, Directors expressed concem at some
recent measures-reverting to selling foreign exchange at
a price set by the CBN, eliminating transferability between
the official and open interbank markets, and limiting the
freedom of banks in setting the price of foreign exchange
in the open interbank market-that would impede the development
of a market-based exchange system. They underscored the
need for exchange rates to reflect market forces, and urged
the CBN to reverse these measures, and to move quickly to
unify the exchange markets.
Directors strongly recommended that the authorities build
on the recent progress on structural reforms. The privatization
process had received an impetus with the successful sale
of the GSM licenses. They encouraged the authorities to
accelerate the preparation of the regulatory frameworks
in key infrastructure sectors and welcomed the Privatization
Support Credit that had recently been approved by the World
Bank. They supported the consultative process initiated
by the govemment aimed at deregulating the petroleum sector.
Directors were encouraged by the increasingly effective
implementation of the due process tests that had contributed
to restraint on capital expenditures. They hoped that this,
in conjunction with the near-completion tof the value-for-money
and civil service audits and the commencement of operations
of the Anti-Corruption Commission, would contribute to improved
transparency and accountability in the use of public funds.
While encouraged by the government's commitment to fight
corruption, Directors observed that, given the deep-rooted
problems and firmly entrenched perceptions in this area,
the govemment's anti- corruption measures will need to be
particularly strong. They urged appropriate follow-up action
on the cases being pursued by the Anti-Corruption Commission.
Fostering transparency would assist in improving govemance,
and Directors encouraged the commission to report regularly
on its activities. They noted that the Financial Action
Task Force had recently added Nigeria to its list of non-cooperative
countries in fighting money laundering, and called on the
authorities to improve their anti-money laundering efforts,
especially in the context of an FSAP. Directors recommended
the speedy publication of the value-for-money and civil
service audits and attached great importance to the Attorney
General's undertaking to follow up on the results of these
audits and to initiate actions where there was evidence
of wrongdoing.
Directors underscored the critical importance of capacity
building for the successful implementation of the government's
economic reforms. They stressed that proper formulation,
implemental on, and monitoring of economic reforms will
require urgent capacity-building efforts for budget formulation
and monitoring, as well as substantial improvement of the
quality of all key economic statistics in Nigeria. They
encouraged the authorities to make greater use of technical
assistance, and donors to enhance and coordinate such assistance.
Directors noted the staff's intention to recommend the complete
on of the first review and an extension of the current Stand-By
Arrangement, provided that certain prior acts are met and
a satisfactory programme for the second half of 2001 is
presented. They thought that successful completion of the
current arrangement and adoption of policies that could
be supported by the Fund under a successor arrangement,
would enhance the prospects for further assistance by the
intemational community to reduce the burden of Nigeria's
existing debt to a sustainable level. Directors considered
it likely that, over the medium term, Nigeria will need
concessional assistance from the intemational community
in order to underpin its own efforts to attain the objectives
of higher growth and poverty reduction. It will be equally
important to attract private capital. To this end, some
Directors noted that maintaining good relations with external
creditors, including continued timely payments, is crucial.
In conclusion, Directors commended the government's efforts
to lay the foundations for sound policy making, and were
encouraged by the easing of ethnic and religious tensions
as well as those between the National Assembly and the executive.
However, the depth and complexity of Nigeria's economic
problems means that the process of transforming the economy
will take time, and Directors therefore cautioned against
unrealistic expectations. The serious current macroeconomic
imbalances make it urgent for the authorities to intensify
their efforts to restore macroeconomic stability in the
near future and to implement market-based reforms that lay
the foundations for growth and poverty reduction in the
medium term. Directors called on Nigeria to show continued
commitment to pursuit of a strong economic programme that
could be supported by the Fund.
Nigeria: Debt Sustainability
Analysis, By IMF
Last recent weeks saw several
major developments on the debt front for Nigeria, beginning
with the release of the International Monetary Fund 2001
Article IV agreement with the country. The next day an IMF
staff paper suggested that the country's debt ramped from
an innocent US$960 million in 1970 to a staggering US$32.5
billion in 2000 or a dizzying 2,899 per cent jump in 30
years. And when it began to look like the country had surrendered
its battle for debt relief, following the lamentation of
Ambassador Jubril Aminu in Washington that the technically-minded
IMF and World Bank would not waive, President Olusegun Obasanjo
made a surprising new call for debt cancellation. In the
excepts from Article IV below, IMF Board assesses Nigeria's
career in debt. - Editors
In August 2000, the
Nigerian government established a Debt Management Office
(DMO) to verify individual loan accounts with creditors'
statements and improve the efficiency of debt management.
The DMO is in the process of examining for correctness
and for comparison | with creditor statements all outstanding
loans to officials and non-officials creditors as part
of | the debt recording and management project with technical
assistance from Crown Agents. Reconciliation has already
been completed with a number of Paris Club creditors.
Full reconciliation is expected for mid-200 1.
This note presents an assessment of Nigeria's external
debt situation at the end of 2000 and evaluates its sustainability
over the medium-term through an examination of standard
debt indicators within the context of a 10-year macroeconomic
and balance of payments framework.
The scenarios presented in this analysis are subject to
a number of critical assumptions-starting with the oil
price projections over the medium-term-and, as a consequence,
are essentially illustrative by nature. Also, the preliminary
debt service projections and resulting net present value
(NPV) calculations are based on debt information provided
by creditors, pending the completion of the reconciliation
of Nigeria's loan portfolio with creditors' statements.
Debt Composition
Nigeria's external medium-and long-term debt was tentatively
estimated at US$3 1.9 billion (equivalent to 78 percent
of GDP) at the end of 2000, and consisted of obligations
to Paris Club creditors (US$24.4 billion), multilateral
creditors (USS3.8 billion), and commercial creditors (US$3.6
billion).
(This reflects Paris Club debt reported by creditors.
The authorities's (DMO) data showed a bilateral debt of
about US$1. I billion lower than that reported by Paris
Club creditors and did not include the capitalised moratorium
interest at end-2000, which staff estimated at about US$600
million. Pending the full completion of the reconciliation
exercise with creditors, the debt figures used in this
analysis are thus preliminary.)
A small amount of debt (US$140 million) was also estimated
to be owed to non-Paris Club bilateral creditors. The
largest bilateral creditor is the UK (with about 27 percent
of total Paris Club debt), followed by France, Japan and
Germany (at about 15-17 percent), and Italy, the Netherlands,
and the US (at less than 10 percent). Among the multilateral
institutions, the World Bank (IBRD and 1DA) and the African
Development Bank (ADB and ADF) were the largest creditors,
with debt stocks of US$2.6 billion and US$1.1 billion,
respectively. Nigeria has no outstanding credit or loans
to the Fund. (The authorities intends to treat the 12-month
Stand-By Arrangement (August 4, 2000 August 3, 2001) in
the amount of SDR 789 million as precautionary.)
The debt to commercial creditors was composed of US$2
billion of par ("Brady") bonds and US$1.6 billion of central
bank promissory notes arising from past restructurings.
Most of this debt reflected the prolific external borrowing
that took place during the late 1970s and 1980s, first
in the boom period of exceptionally high oil prices early
in the decade and then to offset and postpone the effects
of the collapse in oil prices that followed. (According
to the authorities' draft Report of the Evaluation of
Projects Financed with International Capital Market Loans
and Credits (November 2000), a good number of projects
had failed either because (i) they never took off after
their covering loans had been drawn and were misappropriated;
or (ii) once completed, they had to close down due to
a number factors, including bad management, fraudulent
practices, or instability in government economic management
policies.)
It also reflects the accumulation of large amounts of
late interest on arrears and penalties. For the most part,
these obligations were not contracted on concessional
terms and thus the grant element of Nigeria's debt is
very small. At a discount rate of 6.8 percent, and taking
into account the Paris Club rescheduling of December 13,
2000 (see below), the NPV of Nigeria's public and publicly
guaranteed debt was estimated at US$31 billion (76 percent
of GDP) at end-2000. The NPV of debt-to-export ratio (three-year
average of exports of goods and nonfactor services) and
the debt-to-government-revenue ratio (consolidated government)
reached, respectively, 207 percent and 166 percent in
2000.
Following a number of commercial debt restructurings,
debt conversions, and debt buy-backs at discount in the
late 1980s and early 1990s, Nigeria has generally remained
current in the servicing of its commercial obligations.
(The promissory notes that were issued in the mid-1980s
to refinance overdue trade credits were restructured in
1988 under different options of conversion and buy-back.
The bonds were restructured in 1992 through a buy-back
of about 60 percent of the stock at a discount of 60 percent,
the restructuring of the outstanding principal arrears
to Brady Bon | |