Information about Sub-Saharan Africa África subsahariana
Journal Issue


International Monetary Fund
Published Date:
November 2009
  • ShareShare
Information about Sub-Saharan Africa África subsahariana
Show Summary Details

I. Managing The Global Crisis From A Position of Strength

Nigeria entered the crisis from a position of strength because of reforms initiated earlier this decade. The crisis has nonetheless had a significant impact on the economy. Lower oil prices have put pressure on the fiscal and external accounts. The banking system has been pressured by deteriorating asset quality.

A. The Payoff From Earlier Reforms

1. Reforms earlier this decade have left the economy better prepared to deal with the crisis. Central to this success is the oil-price-based fiscal rule.1 This rule broke the link between public spending and oil prices and created an oil-savings cushion of $18 billion (15 percent of non-oil GDP) as well as foreign reserves that peaked in September 2008 at $62 billion (16 months of imports). Similarly, the bank consolidation in 2005–2006, provided the banking sector with a capital buffer against potential losses during an economic downturn.

2. Increased confidence in economic prospects was reflected in improved growth and lower inflation. Non-oil growth averaged over 9 percent from 2004 through 2008, as agriculture, telecommunications, construction, and financial services expanded. Although inflation accelerated in 2008 in response to rising global food and fuel prices and the loosening of monetary conditions, it remains below rates prevailing earlier in the decade.

3. Real incomes have risen significantly, suggesting that poverty is likely to have fallen. Official estimates of poverty are based on the Nigerian Living Standard Survey (NLSS), which was last conducted in 2004, making it difficult to assess the impact of recent developments. The results of the 2009 NLSS will not be available until 2010. World Bank analysis of the General Household Surveys suggests that real incomes in the formal and informal sectors increased significantly between 1999 and 2006.

4. This positive economic performance underscores the break from past episodes of the oil price cycle. In previous episodes, fiscal policy was highly pro-cyclical because of both mounting oil revenues and debt financing. Periods of high oil prices increased access to debt and pushed up indebtedness. When oil prices turned down the economy went through periods of severe contraction (Figure 1).

Figure 1.Economic Developments during Current and Past Oil Cycles

Sources: Nigerian authorities and IMF staff estimates.

B. Growth Slows and Fiscal and External Balances Move to Deficit

5. The pace of economic activity has slowed in 2009 (Figure 2). A decline in real public sector demand of about 2 percent is restricting activity. Moreover, credit to the private sector has been broadly flat in the first half of 2009. However, with a good harvest in prospect, agricultural production, which grew by over 6 percent in 2008, may again do well. Non-oil sector growth is expected to fall from 9 percent in 2008 to 4.5 percent in 2009. Oil and gas production is constrained by security issues in the Niger Delta and more recently, by OPEC production quotas. Production has averaged about 2 million barrels a day in recent months—20 percent below its 2005 peak and well below estimated capacity of 2.8 million barrels a day.

Figure 2.Real and External Sector Developments

Sources: Nigerian authorities and IMF staff estimates.

6. Inflation is falling albeit after a slow response to declining global food and fuel price inflation. The acceleration in consumer price inflation in 2008 was broad-based. A combination of rising global food and fuel prices, transport bottlenecks caused by local fuel shortages, and the easy monetary conditions prevailing for much of the past year offset the impact of a good harvest. Inflation has moderated from a peak of 15.1 percent in December 2008 to 11.0 percent in August 2009.

7. The balance of payments has weakened because of lower oil revenues and capital outflows.2 Net private capital flows turned negative in 2008: the withdrawal of foreign equity investors from the Nigerian market was exacerbated by domestic capital flight as Nigerian banks substantially increased their foreign currency positions. Oil exports, which account for over 90 percent of exports, declined by about half in the first half of 2009. International reserves fell from a peak of $62 billion in September 2008 to $43 billion in July 2009.

8. The naira depreciated in nominal terms but is little changed from pre-crisis levels in real terms. Before the crisis, the naira appreciated sharply, reflecting high oil prices and a close link to the strong dollar. With the onset of the crisis, the naira depreciated against the dollar by 25 percent from December 2008 to January 2009 before the authorities introduced temporary measures that fixed the rate at the prevailing dollar exchange rate (Box 1). A sizeable spread between the parallel market and official rates emerged, peaking at about 25 percent in early May 2009 before falling to 7 percent by July after temporary exchange restrictions were eased.3 Through the crisis period, the naira depreciated by 21 percent in real effective terms. Nonetheless, the real effective rate of the naira in June 2009 is only 3 percent below year-ago levels. Staff analysis, while subject to considerable uncertainty, suggests that the real exchange rate is consistent with external stability as of mid-2009 (Appendix I).

Box 1.Main Measures in Response to the Crisis

Crisis Measures (Sep. 2008–Mar. 2009)Current Policy (August 2009)
Domestic money and credit markets
  • Policy lending rates reduced in two stages from 10¼ to 8 percent
  • Cash reserve requirement reduced from 4 to 1 percent
  • Liquidity ratio reduced from 40 to 25 percent
  • Discount window facility expanded: lending extended from overnight to up to 360 days; range of eligible collateral increased
  • Regulatory forbearance on loans for share purchases
  • Ceilings on deposit and lending rates introduced
  • Financial sector surveillance increased, resident bank examiners introduced
  • Special examinations of bank balance sheets. Banks required to bring off-balance sheet capital market exposure on to their balance sheets and fully provision for non-performing assets.
  • Expanded discount window closed
  • Ceilings on deposits and lending rates eliminated
  • Interbank transactions guaranteed until March 2010
  • On-lending of proceeds from repo transactions permitted
  • Monetary policy rate redefined as the mid-point between the central bank lending rate of 8 percent and a deposit rate of 4 percent
Foreign exchange market
  • Retail Dutch Auction System (RDAS) replaces wholesale version (WDAS).
  • Oil companies and government agencies required to sell foreign exchange to the central bank rather than interbank markets
  • Bank net foreign exchange open position limits reduced in stages from 20 to 1 percent
  • Banks required to transact foreign exchange within +/-1 percent of the official (RDAS) rate
  • Official rate managed within a band of +/- 3 percent around central rate of 145.5
  • WDAS resumed
  • Requirements to sell foreign exchange to the central bank eliminated.
  • Bank net open limits increased to 5 percent
  • Banks free to determine rate at which they transact foreign exchange.
  • Central bank established quarterly program of foreign exchange sales
Fiscal policy
  • Budget oil price assumption reduced to $45 from $62 a barrel
  • Plans for $500 million Eurobond issue shelved
  • Financing from multilateral institutions sought/secured.

9. Driven by falling oil revenues, the fiscal accounts moved from surplus to deficit (Figure 3). The overall balance of the consolidated government is projected to swing from a surplus of 3.7 percent of GDP in 2008 to a deficit of 9 percent of GDP in 2009. This turnaround is entirely due to the drop in oil revenue: the non-oil deficit is expected to narrow by almost 4 percentage points to 27 percent of non-oil GDP. A modest increase in spending by the federal government is more than offset by significant spending compression at state and local government levels where access to borrowing is limited.4

Figure 3.Fiscal Developments

Sources: Nigerian authorities and IMF staff estimates.

10. The growth rate of monetary and credit aggregates has slowed sharply triggered by the economic slowdown and central bank intervention in some banks. The crisis-induced growth slowdown, falls in equity market indices, a depreciated naira, lower oil prices, and a period of very rapid credit growth raised questions about bank asset quality. Signs of stress in the banking system became evident in the interbank market where activity diminished as the crisis developed. Following special examinations, the central bank intervened in some banks by replacing management and injecting funds. It was learned that governance in some banks had been weak and legal actions are pending. These developments have contributed to a tightening of lending (see section II C).

11. The crisis has affected Nigeria somewhat less than many other oil producers (Figure 4). The decline in revenues has been less than in some other countries, and the compression in real public expenditure has been more modest. Non-oil growth, though falling, is set to hold up better than in many other countries. However, Nigeria has seen a greater reduction in international reserves than many other oil producers because it sought to contain the decline in the nominal value of the naira.

Figure 4.Impact of the Global Financial Crisis: Nigeria and Other Oil Producers

Sources: IMF staff estimates, based on definitions and projections in the April 2009 World Economic Outlook.

C. Moderate Growth Outlook and Evenly Balanced Risks

12. Growth is expected to remain slower than in recent years. Reduced financing (both foreign and domestic), constraints on public spending, and uncertainty about global and domestic prospects, will weigh on consumption and investment until well into 2010. Non-oil growth is projected to slow from 9 percent in 2008 to 4.5 percent in 2009, and to pick up gradually thereafter as confidence in the banking system is restored and oil prices recover. The current account surplus, after falling by 13 percentage points of GDP in 2009, should strengthen as oil prices recover and production picks up.

Nigeria: Economic Outlook(Percent, unless otherwise stated)
Real GDP growth6.
Non-oil GDP growth9.
Oil production (millions barrels a day)
Consumer price inflation, end of period6.615.19.18.5
Overall fiscal balance (percent of GDP)-1.13.7-9.0-0.1
Non-oil primary fiscal balance (percent of non-oil GDP)-30.3-30.8-27.0-27.0
Current account balance (percent of GDP)18.820.46.913.8
Gross international reserves (US$ billions)51.353.041.644.1
Oil price (US$ a barrel)
Sources: Nigerian authorities and IMF staff
Sources: Nigerian authorities and IMF staff

13. The medium term growth outlook depends on the success of efforts to realize the potential of oil and gas reserves and to address the infrastructure gap. Apart from security related issues holding oil and gas below potential, the policy framework for the oil and gas sector will be critical (see Section II E). The rapid non-oil growth of recent years was sustained by increases in agricultural acreage and the take off in sectors such as telecommunications. Ongoing reliance on these sources of growth is not likely to be sustainable. The baseline growth rate is assumed to be about 6½ percent over the medium term consistent with preparatory work for the national plan that projects a growth rate of 6.9 percent in 2010–14.

14. Risks to the immediate outlook are substantial and evenly balanced. Uncertainty about the depth and duration of the global recession, and the associated outlook for oil prices, implies a range of possible outcomes on either side of the baseline projection. Wide ranging market expectations of oil prices have profound implications for the possible outcome for Nigeria (Figure 5). The baseline could also change depending on how quickly domestic issues, concerning hydrocarbon production and the banking sector, are resolved

  • The top left panel shows market expectations of oil prices in the form of an implied probability distribution derived from options prices.
  • The associated risks to the fiscal and external accounts are then illustrated. Public spending, imports, and the exchange rate are held constant at their baseline levels, so that the full impact of adjustment falls on foreign reserves and the excess crude account.

Figure 5.Risks to the Outlook

Sources: Bloomberg and IMF staff calculations

II. Setting the Policy Course Following the Global Financial Crisis

With signs that macroeconomic and financial conditions may be starting to stabilize, discussions focused on the importance of articulating a macroeconomic and financial policy framework that could support a return to strong economic growth and steer the economy through an unusually uncertain period.

A. Fiscal Policy—Options in a Low Growth Environment

Lower than trend growth argues for an accommodative fiscal policy. The scope for such a policy depends critically on financing and administrative capacity.

15. The design of the fiscal policy regime is based on a medium-term framework using the oil-price-based fiscal rule. The purpose of the regime, developed in 2004, was to insulate public spending from short-term oil sector developments and ensure that spending is consistent with inflation goals. Recent experience suggests that a non-oil primary deficit—the best available measure of how fiscal policy affects the domestic economy—of around 25 percent of non-oil GDP for the consolidated government is the appropriate medium-term fiscal anchor.

16. An accommodative fiscal stance relative to the medium term benchmark could mitigate the impact on growth of the global crisis. With growth expected to be well below potential in 2009 and 2010, tempering the speed with which the non-oil primary balance is brought back toward the medium-term benchmark would help support economic activity without generating inflationary concerns.5

17. Financing constraints have limited the scope for fiscal support of activity in 2009. Apart from the decline in oil revenues of 20 percent of non-oil GDP, ambitious targets for non-oil revenues are unlikely to materialize and a planned sovereign bond issue of $500 million (0.5 percent of non-oil GDP) has been shelved because of market conditions. These shortfalls will be only partially offset by increased domestic borrowing, oil savings, the use of unspent account balances, and support from multilateral development banks. The consolidated government non-oil primary deficit is therefore expected to fall from 31 percent of non-oil GDP in 2008 to about 27 percent in 2009.

Nigeria: Consolidated Government Finances(Percent of non-oil GDP, unless otherwise stated)
of which: oil and gas revenue34.843.021.132.7
Federal government15.417.316.815.6
State and local government17.023.216.817.1
Extrabudgetary and power sector projects7.75.89.610.8
Non-oil primary balance-30.3-30.8-27.0-27.0
Overall balance (percent of GDP)-1.13.7-9.0-0.1
Memorandum items:
Real primary spending (percent change)16.44.3-2.13.2
Excess crude acount balance (US$ billions)14.218.313.620.6
Sources: Nigerian authorities and IMF staff
Sources: Nigerian authorities and IMF staff

18. Financing constraints on the budget should ease in 2010. Projected oil prices and production levels should ease financing constraints subject to the level of the budget oil price in the 2010 budget. It will be important, however, to use some of this additional financing to scale back domestic borrowing from this year’s peaks. Lower domestic borrowing is needed to allow room for a recovery in private sector borrowing as activity picks up.

19. Implementation capacity will limit the pace at which spending can be scaled up. A consolidated non-oil primary deficit for 2010 similar to the anticipated outturn for this year, would allow for a real increase in primary spending of about 3 percent. While there is still a case for a more accommodative stance from a cyclical perspective, it would be difficult to scale up spending substantially beyond these levels without compromising the quality of spending projects, including at the state and local governments where administrative capacity is limited (Box 2).

20. The authorities emphasized that their priority has been to support economic activity through better budget execution and public financial management. Federal capital spending has fallen well short of budgeted levels in recent years, The authorities indicated that the early start to the 2010 budget preparations, improved integration of medium-term sector strategies into the budget process, and increased familiarity with new procurement procedures should pave the way for better selection and execution of capital projects.

Box 2:Public Financial Management Reforms in State and Local Governments1/

State and local governments account for almost half of public spending. Better public financial management at the subnational level is essential to achieve spending priorities.

The World Bank has conducted public expenditure reviews and public expenditure and financial accountability assessments in 7 out of 36 states. These have highlighted a number of challenges, including:

  • Limited budget credibility, reflected in large gaps between approved budgets and outturns.
  • Limited and opaque budget reporting, with significant extra-budgetary operations.
  • Poor alignment of resource allocation with state development priorities.
  • Ineffective budget execution, on account of poor revenue forecasts and monitoring, and weak cash management.
  • Deficiencies in accounting, recording, and reporting systems. Account reconciliations are not timely and in-year budget reporting is either irregular or not done. A major problem is the poor quality and timeliness of annual financial statements.
  • Relatively good external audit systems, but significant flaws in the scrutiny and follow-up of audit recommendations.

Since late 2005, the World Bank’s State Governance Capacity Building Project has provided support to three states to help them improve the management of their financial and human resources. It has provided assistance with accounting and financial reporting, external audit, budget preparation, improving the regulatory framework for public financial management (fiscal responsibility and procurement legislation and reforms), modernization of tax administration, personnel and payroll management and capacity building.

The main achievements have been: (i) strengthened tax administration to improve internally generated revenue; (ii) more timely and transparent reporting; and (iii) reforms and audits of personnel and payroll that have reduced fraud. Remaining priorities include implementation of integrated financial management systems and promotion of improved budget preparation. The Bank is planning to provide support to another 4 states in the second phase of the project.

1/Prepared by World Bank staff.

B. Setting Monetary Policy in the Face of Conflicting Goals

Anchoring inflation expectations in line with the single-digit target calls for articulation and consistent implementation of the monetary and exchange rate regime. Competing concerns about inflation, exchange rates, international reserves, and financial stability have challenged monetary policy and operations.

21. Inflation performance was much improved until the second half of 2008. Nigeria has a history of high inflation; inflation averaged about 15 percent in the first half of the decade and about 30 percent in the 1990s. In 2006-2007, more effective management of the monetary aggregates and reform-related increases in money demand kept inflation to its single-digit target.

22. The acceleration in inflation in 2008 was broad-based. While supply related food price developments played a role in the rise in inflation and its more recent retreat, disaggregated price indices suggest that inflation was a broader phenomenon than supply related factors. A trimmed-mean measure of core inflation accelerated in 2008, averaging 15 percent in the second half of the year (Figure 6).

Figure 6.Inflation and Monetary Developments

Sources: Nigerian authorities and IMF staff estimates.

23. The rapid growth of the monetary aggregates likely helped push up inflation in 2008. When oil prices were surging in 2008, monetary policy was geared to preventing appreciation of the naira against the US dollar by restraining foreign exchange sales. Because the resulting accumulation of reserves was not sterilized fully, monetary aggregates accelerated, with broad money and private credit increasing by about 60 percent by the end of 2008.

24. Triggered by the crisis, a reversal of monetary expansion is bringing inflation back to its single-digit target. Broad money growth (quarter-on-quarter) abruptly turned negative in the second quarter of 2009. The central bank sought to limit pressure on the naira from lower oil prices and became a net seller of foreign exchange. Banks have reined in their lending. The slowdown in activity and tight credit conditions should dampen inflationary pressures considerably and offset the impact of naira depreciation on prices.

25. Monetary operations were challenged by financial stability considerations and fiscal developments resulting in high and volatile interest rates. As in other countries, after the crisis began, concerns about banks’ balance sheet risks led to a breakdown in the interbank market. This contributed to higher interest rates in the interbank market and competition for liquidity in the retail market that pushed up deposit and lending interest rates. Moreover, the mechanism for disbursing government oil revenues leads to large and variable injections of liquidity that contribute to the volatility of interest rates.

26. Effective communication of the framework and its implementation will be critical for anchoring market expectations. A clear published statement of the monetary policy framework would help market participants to understand the basis for policy decisions. Similar communication of foreign exchange market policy and publication of central bank foreign exchange activity would also be desirable.

27. Monetary policy should focus on price stability with a well-defined nominal anchor. Staff argued that policy should be based on the relationship between monetary aggregates and inflation, leaving the exchange rate to respond flexibly to sustained external shocks. This would be superior to relating interest rates directly to the inflation goal at this stage of Nigeria’s financial market development. Policy interest rates do not yet fully influence credit market conditions and tend to play a correspondingly small role in influencing economic activity. Over time, however, the central bank should move to inflation-targeting and set interest rates based on expected inflation.

28. The implementation of the monetary regime faces some challenging issues in Nigeria. In view of the changes in the economy, especially the rapid growth of the financial sector, policymakers need to pay close attention to factors that affect the demand for money for a given rate of inflation. Given the importance of food in domestic consumption, it would also be important to understand clearly the role of supply shocks, such as weather-related disruptions of food production.

29. The foreign exchange regime needs to permit flexibility in the naira rate to avoid undermining monetary policy. The pivotal role of the central bank, which is often the only provider of foreign exchange to the market (particularly since the onset of the crisis), complicates its policy task. The central bank needs to permit the exchange rate to be guided by fundamentals without being trapped on one side of the market as the sole seller (or buyer) of foreign exchange. Effective central bank intervention in the foreign exchange market may be necessary to ensure that market players see a two-way risk to taking foreign exchange positions.

30. The authorities intend to publish their monetary policy framework. They agree on the use of the monetary aggregates as the operating target for monetary policy (Box 3). They noted, however, that other considerations are important. For instance, they see an important role for monetary policy in promoting economic development by ensuring that interest rates are as low as possible consistent with their inflation target. Moreover, they are concerned about large swings in the exchange rate, noting that the economy is import dependent, including for basic items that affect the poor. They also observed that, in the absence of a non-oil export sector, there is intense political opposition to a weaker naira.

31. Retail interest rates that are relatively high compared to interbank and policy rates underscore the importance of addressing structural issues in the banking system. Market participants indicated that these impediments include the high cost base for banks, weaknesses in commercial bankruptcy law, and the absence of effective credit bureaus. The absence of a well-functioning corporate bond market leaves banks with a near monopoly in financing businesses. Corporate bond issuance would be promoted by significantly reducing regulatory costs in terms of both fees and administrative costs.

Box 3:The Monetary Policy Regime

The central bank uses a monetary targeting regime. Under this regime, it uses policy instruments to influence its targets, the reserve and broad money aggregates; the ultimate goal of its interventions is to keep inflation in single digits. This goal is consistent with supporting growth and minimizing the harmful consequences of inflation, particularly for low-income groups.

A central component of policy is the interest rate corridor around the monetary policy rate (MPR). The central bank intervenes in the money market through the interest rate corridor, where the rate on a standing lending facility constitutes the ceiling and the rate on the standing deposit facility is the floor. The MPR is the midpoint between these rates. By adjusting this corridor, the central bank seeks to influence interest rates in the interbank market and thus the willingness of banks to hold naira.

Open market operations and reserve requirements are also used to help manage liquidity. Each week the central bank auctions treasury bills and, less frequently, federal government bonds. A repurchase (repo) market complements open market operations. The central bank also modifies bank reserve requirements to influence liquidity.

In conducting monetary policy, the central bank is also cognizant of other considerations. To keep interest rates as low as possible to support economic activity, the central bank promotes reforms in the banking and other sectors. Likewise, while recognizing that the exchange rate will move according to changes in the global and domestic economy, the central bank stands ready to dampen abrupt moves in the exchange rate.

C. Financial Stability—Supporting Growth While Managing Risks

Domestic factors and the global crisis have triggered significant problems in the banking system. The financial stability framework needs to be strengthened.

32. The banking system has expanded rapidly in recent years. In advance of the 2005–06 consolidation the banking system was chronically weak; of the 89 banks, marginal or unsound banks accounted for about 20 percent of system assets and the system’s non-performing loan ratio hovered around 20 percent. Consolidation transformed the system resulting in the current 24 banks with a substantial increase in capital. Many banks raised significant further capital following consolidation. Financial intermediation increased significantly. Bank branches grew from 2,900 in 2005 to almost 5,500 in mid-2009. Banks participated in a wider range of activities, including financing of infrastructure and the oil sector, which previously had been out of reach.

33. The pace of expansion posed challenges for supervisors. While the level of private credit in Nigeria at 21 percent of non-oil GDP was low before consolidation, its rapid growth since then to 50 percent of non-oil GDP by the end of 2008 argued for careful monitoring. Banks were under pressure to deploy and secure a return on their expanded capital. The central bank recognized the need for strengthened supervision and developed a plan for consolidated and risk-based supervision. But progress in implementation was slow.

34. The global crisis magnified the challenges facing the banking system. The immediate impact of global financial turbulence on the banking system was contained. While offshore funding of the domestic banking system was growing before the crisis, its scale was manageable and the central bank was able to accommodate commercial bank foreign exchange demand in the depth of the global crisis. Commercial banks did not have exposure to complex domestic or foreign financial instruments and foreign bank ownership was low. However, the large swing in oil prices, the resulting depreciation of the naira, and confidence effects in domestic capital markets, contributed to growing pressure on the banking system.

35. Concerns about bank balance sheets intensified as the crisis progressed. Market speculation about the quality of some bank balance sheets was evident in the breakdown of the naira interbank market as well as market perceptions, later verified, that some banks were using the central bank discount window as an ongoing source of funding. Some banks were involved heavily in margin lending for equity market investments. The equity market subsequently crashed by 70 percent reflecting both domestic and global market developments. In addition, some banks had high exposure to the importers of fuel products. The importers had high foreign currency obligations owing to the high fuel prices of earlier in 2008 and were then hit when oil prices plus the naira fell sharply thereby cutting their naira earnings.

36. Special examinations of bank balance sheets by the central bank and deposit insurance corporation were launched. The examinations sought to verify asset quality and examined related party transactions. Independent accounting firms reviewed the examinations. Some banks had sizable off balance sheet instruments that concealed non-performing loans and while, in other cases, non-performing loans were rolled over or otherwise reclassified as performing. The examinations identified serious breaches of regulations and laws, including cases of connected lending. The central bank has required banks to bring on to their balance sheets exposures related to the capital market and to provision fully for any exposures that are deemed non-performing.

37. On the basis of the first round of examinations, which covered 10 banks, the central bank intervened in five banks in August 2009. Management of the banks was replaced and funds were injected into the banks. Capital adequacy and liquidity ratios in the intervened banks, which account for about one third of bank sector assets, fell short of regulatory requirements. About 40 percent of their loans were non-performing. The central bank provided N420 billion (about $2.8 billion), equivalent to about 2½ percent of non-oil GDP, of liquidity support in the form of loans. The support was defined by determining the amount needed to notionally raise the capital adequacy of the banks to the regulatory requirement often percent plus a margin.6

38. The central bank plans to seek new capital for the intervened banks. The central bank has made a public commitment to protect depositors and creditors. The immediate goals are to stabilize the banks, seek full recapitalization through loan recovery and new investors, to strengthen the corporate governance practices in the banks, and to enable the central bank to remove itself from both the management and balance sheets of the banks.

39. Looking ahead, there is a pressing need to develop a financial stability framework to provide a solid foundation for the banking system. The recent experience has highlighted that there are legal and procedural questions in the current resolution arrangements. For example, it is not clear whether the central bank is permitted, under the central bank act, to take equity in a financial institution even as a transitory step in bank resolution. For the government to take the equity position would require an appropriation bill approved by the National Assembly. Such an appropriation cannot be secured in a timely manner. While the Central Bank and Nigeria Deposit Insurance Corporation legislation provides the legal framework for resolving banks, the questioning by some bank executives (and other interested parties) of the legal basis for these actions gives rise to the possibility of lengthy court involvement that could undermine the timely resolution of banks by the regulator.

40. Some elements of the financial stability framework are being introduced. The four main areas comprising the framework are:

  • Macro prudential factors. Macroeconomic developments, including asset prices, need to guide supervisory and regulatory policy. The central bank intends to establish a macro prudential function in its supervision department.
  • Prudential rules. The credibility of banks’ balance sheets will be enhanced by the new requirement that banks move to a common reporting period by the end of 2009 and adopt IFRS accounting standards from the beginning of 2010. Decisions will also be needed on defining the scope of bank activities such as the pace with which derivative products can be developed given regulatory and supervisory capacity.
  • Supervisory framework. The central bank’s framework for risk-based and consolidated supervision needs to be implemented because a large number of banks have non-bank financial subsidiaries and cross-border activities. The number of foreign branches of Nigerian banks has expanded rapidly to 70 from only 4 in 2004. Enhanced monitoring of banks’ risk management practices, lending standards, and funding situation is warranted.
  • Resolution framework. Allowing institutions to enter and leave the banking system based on the consequences of business decisions establishes strong incentives for banks to assess risks prudently. To enable this to occur without creating systemic distress, a framework must be established. The framework would make a clear statement of the conditions under which a troubled bank will be resolved by outlining principles, policies, and procedures for handling both a systemic crisis and the failure of an individual financial institution.

D. Promoting Economic Growth and Diversification—Vision 2020

A significant diversification of the economy away from oil and gas is the theme of Nigeria’s Vision 2020 plan currently being prepared. Macroeconomic policy must create an enabling environment for private sector-led growth in the non-oil sector.

41. By 2020, Nigeria wants to become one of the world’s top 20 economies. Vision 2020, now being prepared, sets out the authorities plan to achieve this goal by building a globally competitive economy that is much less reliant on the oil and gas sector to generate employment and reduce poverty.

42. Establishing a macroeconomic policy framework that supports growth and economic diversification will be essential. This calls for enhancing competitiveness through structural reforms and investment in critical infrastructure as well as ensuring that the exchange rate does not become overvalued.7 In this regard, resource producers that have successfully managed swings in commodity prices have done so by adopting strongly counter-cyclical fiscal policies. Nigeria’s economic history demonstrates how letting swings in commodity prices drive fiscal policy can play havoc with development goals.

43. Fiscal policy needs to neutralize the macroeconomic impact of swings in oil prices. The oil-price-based fiscal rule has been instrumental in avoiding the boom bust pattern of earlier cycles. Diversification has begun to take place: non-oil GDP growth has been higher than in the oil sector and new growth drivers, such as telecommunications and financial services, have emerged. These reforms need to be sustained and extended through consistent implementation of the oil-price based fiscal rule. Extraordinary distributions from the Excess Crude Account in response to political pressures to spend oil revenue windfalls have meant that fiscal policy has still been pro-cyclical during the current oil cycle.8

44. Private sector-led growth calls for a reduction in the size of the public sector. Despite recent increases in public capital expenditure, there is still a large infrastructure gap, and the costs of meeting the Millennium Development Goals will also be significant. Both of these factors will place demands on public resources in the next few years. Over time, however, the size of the public sector should gradually be scaled back to make room for private sector led-growth.

45. To achieve these goals, the difficult issue of institutionalizing practices concerning the management of oil wealth and revenue flows must be tackled. Some countries have used special fiscal institutions such as fiscal rules, commodity funds, or fiscal responsibility legislation to help deliver this outcome (Box 4). Beyond the current use of the Excess Crude Account and the Fiscal Responsibility Act, the authorities have considered setting up a national Sovereign Wealth Fund.9

Box 4.Experience with Fiscal Rules in Selected Commodity Producing Countries

Some countries have found rule-based frameworks helpful in keeping spending growth moderate and smooth during commodity price booms:

  • Chile’s fiscal policy has been based on maintaining a structural central government balance target over the economic and copper price cycles. A feature is the use of independent experts to compute the extent to which output lies above or below potential, and to compute the extent to which the price of copper lies above or below its long-run level.
  • Botswana’s framework incorporates goals for the overall balance and a “golden rule” whereby non-mineral revenue should at least cover non-investment recurrent spending.
  • Norway seeks to limit the central government structural non-oil deficit to no more than the expected long-run real rate of return on the accumulated financial assets in its oil fund. The guidelines allow deviations for countercyclical fiscal policy and are seen as a tool to help set a long-term benchmark for fiscal policy.
  • Timor-Leste has relatively flexible guidelines. Fiscal policy is based on the non-oil deficit consistent with the estimated permanent income from oil wealth, but deviations are allowed so long as the government provides a rationale and information on the impact on oil wealth in future years.

Critical to success have been good institutions, transparency, and a high degree of political commitment to fiscal discipline. Lacking these factors, several countries have tried and failed despite efforts to make the rules as rigid as possible.

46. Meeting spending priorities while allowing for medium-term fiscal consolidation calls for efforts on a number of fronts:

  • Prioritizing spending. The authorities have taken an important first step by proposing to eliminate subsidies on the remaining two subsidized fuel products; this will generate savings of about 2–4 percent of non-oil GDP.
  • Strengthening non-oil tax performance. A draft National Tax Policy proposes reforms in a range of areas. Caution is warranted in considering proposals for extensive tax incentives, in terms of both the implications for achieving development goals and designing such incentives cost-effectively.
  • Identifying areas for private sector initiatives. Two areas identified are Public Private Partnerships (PPPs) and corporatization of public sector involvement in upstream oil sector development, which would reduce the call on the budget for investment in the oil sector. Both areas require establishing a regulatory and legal framework including to manage the associated fiscal risks.
  • Boosting the quality of spending. The increased focus on performance indicators with a view to the adoption of program-based budgeting is a major initiative. It will also be important to build on steps already taken to improve budget planning by, for example, increasing the effectiveness of the medium-term sector strategies in evaluating projects.

E. Charting a Course for the Oil and Gas Sector

While the Vision 2020 plans to diversify the economy are important, the oil and gas sector will remain a critical determinant of macroeconomic performance and the primary source of exports and government revenue for the foreseeable future. Draft legislation proposes a major overhaul of the sector.

47. The authorities are considering a wholesale reform of the petroleum industry. The draft Petroleum Industry Bill would replace 16 existing laws and a myriad of administrative instruments into a single omnibus law establishing a new legal and regulatory framework for the industry. Among the objectives it seeks to achieve are:

  • Promotion of good governance and transparency, by publishing all procedures, contracts, and payments. Prospecting licenses and mining leases would be subject to competitive bidding. The Bill would also be consistent with the Nigerian Extractive Industries Transparency (NEITI) Act.10
  • Separation of the government’s commercial and regulatory roles, including the establishment of a viable and self-financing national oil company. The Bill envisages a new national oil company to form incorporated joint ventures with international oil companies that can finance new projects directly from cash flow and borrowing.
  • Establishing a fiscal framework involving increased emphasis on royalties. Royalty rates would be adjusted depending on production volumes and prices and would vary by geographical location (onshore, shallow offshore, deep offshore, and inland basins) to account for differences in costs and risk.

48. The review of the oil and gas regime is an opportunity to enhance arrangements, but care needs to be taken to ensure that the industry remains attractive to investors. The tax regime needs to both maximize returns to government and promote investment in the sector; this requires detailed quantitative analysis and careful design of transitional arrangements. For gas especially, it will be important to identify and address price, payment, regulatory and other impediments that have held back the development of a vibrant downstream gas industry, despite a generous tax regime for upstream production.

49. Current tax arrangements vary according to the type of contract; there may be scope to increase the return to government in some cases. A preliminary assessment of current fiscal terms, based on comparisons of the estimated average effective tax rate with those of other oil producing countries, suggests that the average effective tax rate for onshore joint venture (JV) arrangements is high by international standards (Figure 7), although the terms for production sharing contracts (PSCs), which were agreed to in 1993 to encourage investors to explore offshore, are more generous.11

Figure 7.Average Effective Tax Rates in Selected Oil Producing Countries

1/ The terms for PSCs vary. The PSC shown refers to the deep water PSC of 1993.

Sources: Nigerian authorities and IMF staff estimates.

50. Policy and administrative considerations will affect the choice of a future fiscal regime. Among them are the responsiveness of government to oil prices and the costs of production. Reliance on revenue-based instruments is attractive because they are easier to administer and so reduce scope for tax avoidance. However, they have the serious drawback that they are not responsive to the cost structure of different oil and gas projects and so run the risk of discouraging investment.

III. Staff Appraisal

51. Though growth has slowed from the impressive rates of recent years, reforms initiated earlier this decade have done much to soften the impact of the global financial crisis on Nigeria. The substantial cushion of oil savings and foreign reserves built up when oil prices were surging, together with bank consolidation and recapitalization, have enabled policy makers to manage the crisis fallout from a position of strength. However, the outlook remains challenging and highly dependent on developments in oil prices; growth is likely to remain weaker than trend.

52. The growth outlook calls for a supportive fiscal stance, but financing and administrative capacity constraints limit the scope for this support. The authorities’ emphasis on improved budget execution and enhanced public financial management is welcome. Faced with a precipitous decline in oil revenues, the availability of oil savings and room to increase borrowing averted the need for an equally deep fiscal contraction. Nonetheless, financing constraints and lack of implementation capacity have limited the scope for fiscal stimulus. The uncertain outlook for oil revenues also warrants the prudent approach followed by the authorities.

53. A clearly articulated monetary policy framework would help anchor inflation expectations. A robust framework would help guide policy through competing concerns about inflation, external developments, and financial stability, which have been a challenge for monetary policy and operations in recent years. The authorities’ intention to publish their monetary policy framework is welcome. Consistent implementation of the framework, based on the relationship between monetary aggregates and inflation, and its effective communication will be critical in anchoring market expectations. Over time, the authorities should pursue their goal of adopting an inflation-targeting framework.

54. The increased flexibility of the exchange rate in recent months is positive. It will support the implementation of monetary policy focused on price stability, while allowing the naira to find its equilibrium level. A more consistent regime will help to reduce uncertainty and build policy credibility following the recent frequent changes of foreign exchange regulations. In the staff’s view, the level of the naira is consistent with external stability.

55. The authorities are taking welcome measures to resolve problems in bank balance sheets. The banking system has been transformed in recent years, but sustaining that success calls for decisive action to address weaknesses in some banks. While the system as a whole has significant capital, individual banks that pursued high-risk strategies during the recent period of rapid credit growth are demonstrably vulnerable. The next step is to take the necessary actions to normalize the banking system consistent with financial stability considerations.

56. A robust financial stability framework will be important for the sustained development of the financial sector. Improvements are already in train, including steps to improve the credibility of information on bank balance sheets and to establish a macro prudential unit within the central bank. Preparatory steps have also been taken to develop a framework for risk-based and consolidated supervision: this framework now needs to be implemented. Beyond this, the rapid expansion of Nigerian banks across borders calls for stronger cross-border supervisory arrangements. A clear framework for dealing with bank failures also needs to be spelled out.

57. Macroeconomic policies are decisive in supporting private sector-led growth, diversifying the economy, and further reducing poverty. Building on past progress in managing swings in commodity prices, fiscal policy will need to be more consistently counter-cyclical—ad hoc or discretionary distributions of oil savings have generally operated in the opposite direction. This underscores the importance of tackling the difficult issue of institutionalizing practices concerning the management of oil wealth and revenue flows.

58. The proposed overhaul of the framework for the oil and gas sector is an opportunity to improve arrangements in a sector that will remain critical from a macroeconomic perspective. The authorities’ goals of improving governance, enhancing transparency, and creating an efficient fiscal regime that remains attractive to investors, are fully appropriate. Achieving them will require further detailed quantitative analysis and careful design of transitional arrangements.

59. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.Nigeria: Selected Economic and Financial Indicators, 2006–14
National income and prices (annual percentage change, unless otherwise specified)
Real GDP (at 1990 factor cost)
Oil and Gas GDP-4.5-4.5-6.2-
Non-oil GDP9.
Production of crude oil (million barrels per day)2.362.
Nominal GDP at market prices (trillions of naira)18.720.924.625.230.935.641.247.654.9
Nominal non-oil GDP at factor cost (trillions of naira)11.613.115.217.820.423.326.730.835.6
Nominal GDP per capita (US$)1,0391,1531,4011,0891,1911,2441,3061,3751,445
GDP deflator19.54.311.0-0.316.
Non-oil GDP deflator18.83.56.312.
Consumer price index (annual average)8.25.411.612.
Consumer price index (end of period)8.56.615.
Consolidated government operations (consists of federal, state, and local governments; percent of GDP)
Total revenues and grants33.928.432.829.228.628.829.129.229.1
Of which: oil and gas revenue29.121.926.615.021.621.822.122.122.1
Total expenditure and net lending26.929.529.231.228.728.127.527.326.8
Overall balance7.0-1.13.7-9.0-
Non-oil primary balance (percent of non-oil GDP)-29.5-30.3-30.8-27.0-27.0-26.6-25.9-25.7-25.1
Excess crude account (US$ billions)
Money and credit (change in percent of broad money at the beginning of the period)
Broad money53.444.257.819.324.8
Net foreign assets72.516.426.6-6.28.6
Net domestic assets-15.727.831.125.516.2
Credit to consolidated government-38.3-3.5-
Credit to the rest of the economy22.654.850.211.415.2
Treasury bill rate (percent; end of period)
External sector (annual percentage change, unless otherwise specified)
Current account balance (percent of GDP)26.518.820.46.913.814.314.814.714.5
Exports, f.o.b.16.915.926.3-39.329.
Oil and gas export volume-2.64.2-7.5-
Imports, f.o.b.-7.034.521.2-13.2-
Terms of trade9.00.317.0-22.715.
Price of Nigerian oil (US$ per barrel)64.371.197.061.576.579.581.083.084.8
Nominal effective exchange rate (end of period)97.999.8100.6
Real effective exchange rate (end of period)104.5109.5123.8
External debt outstanding (US$ billions)
Gross international reserves (US$ billions) 241.851.353.041.644.150.059.471.184.6
(equivalent months of imports of goods and services)11.712.113.810.810.711.412.714.315.9
Sources: Nigerian authorities and IMF staff estimates and projections.

Including the naira-denominated component.

Includes $2.6 billion in 2009 on account of the SDR allocation

Sources: Nigerian authorities and IMF staff estimates and projections.

Including the naira-denominated component.

Includes $2.6 billion in 2009 on account of the SDR allocation

Table 2a.Nigeria: Federal Government, 2006-10(billions of naira)
Total revenue2,4252,2963,0051,7873,121
Oil revenue2,1671,7522,5151,1662,357
Non-oil revenue258544490621764
Total expenditure1,6692,3432,6252,9923,187
Recurrent expenditure1,1741,5691,9582,1742,337
Other service wide votes000333255
Capital expenditure495774667818850
Overall balance756-47380-1,204-66
Debt buyback-5760000
Central bank-1,204-1,809-35347-508
Commercial banks273847-282704600
Other (including privatization and recovered funds)301201070
Statistical discrepancy-773-1,0403400
Sources: Nigerian authorities and IMF staff estimates and projections.

Includes earmarked spending for National Judicial Council, Universal Basic Education, and Niger Delta Development Corporation.

Sources: Nigerian authorities and IMF staff estimates and projections.

Includes earmarked spending for National Judicial Council, Universal Basic Education, and Niger Delta Development Corporation.

Table 2b.Nigeria: Consolidated Government, 2006-10(billions of naira)
Total revenue6,3365,9268,0635,5988,831
Oil revenue5,4454,5646,5353,7616,666
Non-oil revenue8911,3621,5291,8372,165
Import and excise duties178241281300355
Companies’ income tax245327417524610
Value-added tax227302405499581
Other (education tax and customs levies)6092129141161
Federal government independent revenue33243115175242
SLG independent revenue148158182199215
Total expenditure5,0336,1497,1597,8598,870
Federal government1,6692,3432,6252,9923,187
Extrabudgetary funds1212367265345437
State and local government2,3622,5823,5293,0043,485
Shared infrastructure spending1942050245624
Explicit fuel subsidy4491191460
Overall balance1,303-223904-2,262-40
Debt buyback-7670000
Central bank-1,204-1,809-35857-580
Commercial banks267812-4791,136600
Other (including privatization and recovered funds)301201070
Statistical discrepancy-377-1,21139300
Memorandum items:
Implicit fuel subsidy232239377275
Total real spending (% growth)17.316.44.3-2.13.2
FG real primary spending (% growth)328.836.8-0.21.8-4.3
SLG real primary spending (% growth)314.63.722.7-24.06.6
Gross domestic debt (% of GDP)11.812.811.615.014.7
Sources: Nigerian authorities and IMF staff estimates and projections.

Includes spending of customs levies and education tax; transfers to FIRS and NCS; spending from the ecology, stabilization, development of natural resources accounts; and FCT spending.

Includes cash calls and foreign-financed capital expenditure.

Excludes contribution to shared spending

Sources: Nigerian authorities and IMF staff estimates and projections.

Includes spending of customs levies and education tax; transfers to FIRS and NCS; spending from the ecology, stabilization, development of natural resources accounts; and FCT spending.

Includes cash calls and foreign-financed capital expenditure.

Excludes contribution to shared spending

Table 2c.Nigeria: Consolidated and Federal Government, 2006-10(Percent of non-oil GDP, unless otherwise stated)
Consolidated Government
Total revenue54.745.253.131.443.3
Oil and gas revenue47.034.843.021.132.7
Non-oil revenue7.710.410.110.310.6
Total consolidated expenditure43.546.947.144.043.5
Federal government14.417.817.316.815.6
State and local government20.419.723.216.817.1
Shared infrastructure spending1.
Explicit fuel subsidy0.
Overall balance11.3-1.75.9-12.7-0.2
Overall balance (percent of GDP)7.0-1.13.7-9.0-0.1
Non-oil primary balance-29.5-30.3-30.8-27.0-27.0
ECA balance eop (billions of Naira)1,6941,6642,4301,6752,879
Federal Government
Total revenue20.917.519.810.015.3
Oil and gas revenue18.713.316.56.511.6
Non-oil revenue2.
Total expenditure14.417.817.316.815.6
Recurrent expenditure10.112.012.912.211.5
Other service wide votes0.
Capital expenditure4.
Overall balance (percent of GDP)4.0-0.21.5-4.8-0.2
Non-oil primary balance-10.6-12.1-12.4-11.7-10.1
Sources: Nigerian authorities and IMF staff estimates and projections.
Sources: Nigerian authorities and IMF staff estimates and projections.
Table 3a.Nigeria: Central Bank of Nigeria (CBN) Analytical Balance Sheet, 2006–10
Net foreign assets15,3125,9836,8136,8757,0536,9486,1335,7776,6597,597
Net domestic assets-4,401-4,788-5,613-5,357-5,806-5,399-4,749-4,486-4,805-5,292
Net domestic credit-2,451-3,107-3,912-3,774-4,493-4,135-3,582-3,266-3,150-3,731
Net claims on consolidated government-2,491-3,487-4,038-3,837-4,547-4,139-3,760-3,414-3,298-3,879
Excess crude account-1,708-268-373-400-672-884-622-29469-1,091
Net claims on federal government-690-3,103-3,526-3,291-3,723-3,095-2,985-2,974-3,236-2,611
Statutory funds-92-116-138-146-153-160-153-146-132-176
Other net claims4038012662543177148148148
Other items net-1,950-1,681-1,701-1,583-1,312-1,264-1,167-1,220-1,655-1,562
Reserve money9111,1951,2001,5181,2471,5491,3841,2911,8532,305
Currency in circulation7799618929189761,1551,0381,007
Banks reserves with the CBN132234308599271394346285
Memorandum items:
Reserve money y/y growth rate19.531.242.672.128.929.615.3-14.919.624.4
Sources: Nigerian authorities and IMF staff estimates and projections.

CBN presents long-term liabilities in other items net.

Sources: Nigerian authorities and IMF staff estimates and projections.

CBN presents long-term liabilities in other items net.

Table 3b.Nigeria: Monetary Survey, 2006–10
(Billions of naira)
Net foreign assets6,0176,6797,5557,7447,9868,2287,2786,7787,6608,598
Central Bank of Nigeria (net)5,3125,9836,8136,8757,0536,9486,1335,7776,6597,597
Commercial and merchant banks (net)7046967438709341,2801,1441,0011,0011,001
Net domestic assets-1,989-8704432049749391,7202,2993,2755,043
Net domestic credit1,0193,2753,8984,6154,8055,3455,7196,6128,0249,698
Net claims on consolidated government-1,551-1,694-1,964-2,041-2,574-2,564-2,296-1,693-1,010-992
Excess crude account-1,708-268-373-400-672-884-622-29469-1,091
Net claims on federal government169-1,397-1,554-1,595-1,845-1,670-1,733-1,505-1,415-192
States and local governments81881029996150211252467467
Statutory funds-92-116-138-146-153-160-153-146-132-176
Claims on private sector2,5314,7405,7266,5517,2167,6577,7097,9778,70510,362
Other net claims39229136105162253306329329329
Other items (net)-3,008-4,145-3,456-4,411-3,831-4,406-3,999-4,313-4,749-4,655
Broad money4,0285,8107,9987,9488,9609,1678,9989,07710,93513,641
(y/y growth rate)53.444.266.755.458.057.812.514.219.324.8
Memorandum items:(contribution to broad money growth, unless otherwise stated)
Net foreign assets72.516.432.131.523.526.6-3.5-12.2-6.28.6
Net domestic assets-15.727.834.623.834.531.116.026.425.516.2
Net domestic credit-14.856.049.543.548.335.622.825.129.215.3
Net credit to the consolidated government-38.3-3.5-10.3-18.9-8.7-15.0-4.24.417.00.2
Claims on private sector22.654.857.761.554.850.224.817.911.415.2
Other items (net)-0.9-28.2-14.9-19.6-13.9-4.5-6.81.2-3.70.9
Velocity (non-oil GDP/broad money)2.882.261.661.631.50
Gross international reserves (billions of US$)41.851.359.857.159.353.048.242.541.644.1
Sources: Nigerian authorities and IMF staff estimates and projections.
Sources: Nigerian authorities and IMF staff estimates and projections.
Table 4.Nigeria: Financial Soundness Indicators, 2006-09

(In percent, unless otherwise indicated)

Capital Adequacy
Regulatory capital to risk weighted assets22.621.021.921.5
Regulatory Tier I capital to risk-weighted assets21.820.221.521.2
Capital (net worth) to assets14.716.318.018.4
Asset quality and composition
Nonperforming loans to total gross loans8.
Nonperforming loans net of loan-loss provision to capital21.322.716.85.5
Sectoral distribution of loans to total loans
Trade and Services22.015.316.622.4
Energy and Minerals10.110.711.411.1
Construction and Property6.
Earnings and profitability
Return on assets1.
Return on equity10.413.122.010.0
Interest margin to gross income39.640.839.439.8
Noninterest expenses to gross income52.746.043.145.5
Personnel expenses to noninterest expenses42.744.242.144.3
Trading and fee income to total income33.330.012.913.1
Liquid asset to total assets32.532.128.120.4
Liquid assets to total deposits63.762.654.238.4
Liquid assets to short term liabilities......36.8
Customer deposit to total (non-interbank) loans73.785.8117.4116.3
Foreign currency denominated liabilities to total liabilities12.
Source: Nigerian authorities

Reflects bank data available prior to the special audits of bank balance sheets by the central bank

Source: Nigerian authorities

Reflects bank data available prior to the special audits of bank balance sheets by the central bank

Table 5.Nigeria: Balance of Payments, 2006–10(Billions of U.S. dollars, unless otherwise specified)
Current account balance38.631.242.311.525.7
Trade balance34.836.
Services (net)-6.7-11.1-12.3-12.2-12.4
Income (net)-6.7-11.9-12.0-13.4-14.0
Of which: Interest due on public debt-0.2-0.6-0.7-0.1-0.1
Transfers (net)
Capital and Financial account balance-3.12.7-
Capital Account (net)
Financial Account (net)-13.82.7-
Direct Investement (net)
Portfolio Investment (net)1.30.8-6.7-3.00.3
Other Investment (net)-20.0-3.7-
Errors and omissions-21.4-24.8-27.3-27.3-27.3
Overall balance14.09.01.7-14.02.5
Net international reserves (increase -) 2-14.0-9.0-1.711.3-2.5
Memorandum items:
Gross official reserves, end-of-period 241.851.353.041.644.1
In months of next year’s GS imports11.712.113.810.810.7
Current account (percent of GDP)26.518.820.46.913.8
GS exports (percent of GDP)
GS imports (percent of GDP)21.725.924.727.925.0
External debt
External debt (percent of GDP)
External debt (percent of GS exports)
External debt3,
External debt service due (percent of GS exports)
GDP (at market prices)145.4165.9207.1165.4185.8
Sources: Nigerian authorities and IMF staff estimates and projections.

Includes capital transfers.

Includes $2.6 billion in 2009 on account of the SDR allocation

Nominal public sector short- and long-term debt, end of period.

Percent of general government fiscal revenues.

Sources: Nigerian authorities and IMF staff estimates and projections.

Includes capital transfers.

Includes $2.6 billion in 2009 on account of the SDR allocation

Nominal public sector short- and long-term debt, end of period.

Percent of general government fiscal revenues.

Table 6.Nigeria: Millennium Development Goals—Status at a Glance



1. Eradicate extreme poverty and hunger
Percentage of population living in relative poverty436654 200421Slow
Percentage of population living below minimum level of dietary energy consumption13135Good
Percentage of underweight children (under 5)36312518Slow
2. Achieve universal education
Net enrolment ratio in primary education689590100Good
Proportion of pupils starting grade one who reach grade five679774100Good
Grade six completion rate587768100Good
Literacy rate of 15–24-year-olds716481100Good
3. Promote gender equality and empower women
Ratio of girls to boys in primary education (girls per 100 boys)767894100Good
Ratio of girls to boys in secondary education (girls per 100 boys)758198100Good
Ratio of girls to boys in tertiary education (girls per 100 boys)4666100Good
Share of women in wage employment in the non-agriculture sector (percent)6679100Lack of data
Proportion of seats held by women in national parliament (percent)13830Slow
4. Reduce child mortality
Infant mortality rate (per 1,000 live births)918111030Worsening
Under-five mortality rate (per 1,000 live births)19118420164Worsening
Percentage of 1-year-olds fully immunized against measles463360100Good
5. Improve maternal health
Maternal mortality rate (per 100,000 live births)704 1999800 2003100Worsening
Proportion of births attended by skilled health personnel4542 199936 2003100Worsening/
data problem
6. Combat HIV/AIDS, malaria, and other diseases
HIV prevalence among pregnant women aged 15–245199942005Slow
Percentage of young people aged 15–24 reporting the use of condoms during sexual intercourse with a non-regular sexual partner100Slow / Lack of data
Number of children (millions) orphaned by HIV/AIDS1.97 2005Lack of data
Prevalence and death rates associated with malariaLack of data
Prevalence and death rates associated with tuberculosisLack of data
7. Ensure environmental stability
Proportion of land area covered by forests151320Worsening
Proportion of gas flared6853340Slow
Proportion of total population with access to safe drinking water545449100Worsening
Proportion of people with access to secure tenure3861100Improving
Carbon dioxide emissions (per capita)479925002005Improving
Proportion of total population with access to basic sanitation394343100Worsening
Residential housing construction index (ACI) (Proxy)5331 2005Worsening
8. Develop a global partnership for development
Per capita official development assistance to Nigeria ($)3.01.4781.67Improving
Debt service as a percentage of exports of goods and services91.2Good
Private sector Investment ($ million)50758100Improving
Telephone-density (per 1000 people)0.450.7327.41Good
Personal computers (per 1000 people)6.386.74Lack of data
Internet access (percent)
Source: Nigerian authorities, Millennium Development Goals Information Kit 2008.
Source: Nigerian authorities, Millennium Development Goals Information Kit 2008.
APPENDIX - Assessment of the Exchange Rate Level for Nigeria

Assessment of Nigeria’s exchange rate is based on the IMF’s CGER methodology, adapted for Nigeria’s circumstances, using data as of mid-2009. One method suggests that the naira was overvalued by about 7 percent reflecting projected current account surpluses that are below the norm. Two methodsrelating the value of the naira to its fundamental determinants, and comparing the projected current account surplus with the level needed to stabilize net foreign assetssuggest that the naira was undervalued by 13 percent and 7 percent. This assessment is broadly consistent with external stability.

MacroeconomicEquilibrium realExternal
balance2exchange ratesustainability2
CA norm7.44.0
CA projection5.85.8
CA gap-1.61.8
RER gap1-7+137

Depreciation (+ = appreciation) needed to close gap between norm and projection.

Current Account projection for 2013 includes 75% of errors and omissions.

Depreciation (+ = appreciation) needed to close gap between norm and projection.

Current Account projection for 2013 includes 75% of errors and omissions.

1. Macroeconomic balance. Using coefficients relating current account balances to macroeconomic fundamentals, estimated from a sample of 13 oil- and gas-exporting countries (see IMF Country Report 2008/104), yields a current account norm for Nigeria of 7.4 percent of GDP. Nigeria’s current account projections need to be adjusted to account for very large errors and omissions in the balance of payments. Assuming that three-quarters of errors and omissions reflect current account transactions, Nigeria’s projected current account surplus is 5.8 percent of GDP in 2013, a little below the current account norm, suggesting that the exchange rate may be overvalued by 7 percent. This result should be treated with caution, however, given uncertainties about the estimated current account norm. Nigeria is less developed than most of the oil and gas exporters included in the sample used to construct the current account norm, so a lower norm may be appropriate for Nigeria given its pressing investment needs. This would be consistent with a smaller estimate of overvaluation or, possibly, undervaluation.

2. Equilibrium real effective exchange rate (REER). Estimation of a reduced-form relationship between the REER and certain macroeconomic fundamentals (relative productivity, oil price, and trade openness) suggests that the REER was about 13 percent below its estimated equilibrium level by mid-2009 (Figure AI.1).

Figure AI.1.Nigeria: Estimated Equilibrium and Real Exchange Rates, 2000-2009

Sources: Nigerian authorities and IMF staff estimates.

3. External sustainability. Based on the medium-term projections for real growth and inflation, an external current account balance of 4 percent of GDP would stabilize net foreign assets at current levels over the medium term. This is somewhat lower than staff’s projected medium-term current account balance of 5.8 percent of GDP which, adjusting for errors and omissions, suggests that the naira was undervalued by 7 percent. However, determining the appropriate target level for net foreign assets in Nigeria is not straightforward. As an oil producer seeking to preserve oil wealth for future generation, Nigeria should be seeking to accumulate financial assets via a higher current account surplus; as a low-income country with substantial investment needs, however, there is also a case for using its oil savings.

1The oil-price-based fiscal rule, introduced in 2004, is a political agreement between all tiers of government that provides for an allocation of oil revenues based on a budget oil price and volume of production. Oil revenues in excess of the budget price and production are transferred into an “excess crude account” at the central bank in the names of the various governments. As originally designed, the excess crude account is drawn upon only if actual oil receipts fall short of budgeted amounts.
2This report uses a balance of payments data series that differs from that used in previous staff reports. The Statistical Issues Appendix details these changes.
3Nigeria is not an Article VIII member. As reported at the time of the last Article IV consultation, multiple prices are a technical characteristic of the central bank’s Dutch auction system and give rise to a multiple currency practice (MCP). Staff does not recommend approval of this MCP.
4The debt sustainability analysis concludes that Nigeria’s debt outlook remains robust. Since the last Article IV, the authorities have extended until 2010 a memorandum of understanding with the Chinese Government for a $500m infrastructure loan that, if taken forward, would be on concessional terms. In the event that such a loan is contracted, it would not modify the assessment of debt sustainability.
5Staff analysis suggests that this trajectory is consistent with preserving oil wealth for future generations, even without taking into account the potentially high returns from infrastructure spending and other investments.
6The injection of liquidity could not formally be recorded as tier 2 capital in all cases. Tier 2 capital cannot exceed tier 1 capital. Hence, if the intervened bank had tier 1 capital of less than one half of the regulatory requirement (the case in two of the intervened banks) they remain below the regulatory capital requirement.
7There is general agreement that an overvalued real exchange rate has a detrimental impact on economic growth (see, for example, Spence, 2008, The Growth Report: Strategies for Sustained Growth and Inclusive (Washington: World Bank)).
8A 2007 memorandum of understanding between the tiers of government sought to formalize extraordinary allocations (i.e., beyond those to cover shortfalls in budget oil revenue) through the establishment of the 80-20 rule: 80 percent of oil savings accrued in a particular year would be available for additional spending the following year. This understanding, if implemented, runs counter to the objectives set by Vision 2020.
9The Fiscal Responsibility Act prescribes procedures for formulating, executing, and publishing the annual budget and medium-term expenditure framework, and sets out the role of the budget oil price. It also contains a rule limiting the overall budget deficit to 3 percent of GDP, with only a very restrictive escape clause.
10The first set of NEITI audits for 1999-2004 were published in 2006 and a second audit report for 2005 was published in 2009. Audits for 2006-08 are being commissioned.
11The average effective tax rate is the ratio of government revenues to the before-tax net cash flow from the project, both expressed in real net present value terms, calculated over the estimated life of a representative oil field.

Other Resources Citing This Publication