An International Monetary Fund mission led by Gene Leon visited Abuja and Lagos December 1−15 to hold discussions for the 2014 Article IV consultation. Discussions focused on policies to addressing near-term vulnerabilities and reforms over the medium-term to address the authorities’ strategic objectives of macroeconomic stability, sustained inclusive growth, and a reduction in poverty and inequality.

At the conclusion of the mission, Mr. Leon issued the following statement:

“We have held very useful and frank discussions with the authorities. Nigeria, like other oil-exporting countries, is facing a sharp fall in the price of oil (a primary source of foreign exchange and fiscal revenue) and increased risk aversion by international investors, who remain uncertain about the future of oil prices. 

“The authorities fully recognize the implications of this exogenous shock. They have already taken bold measures to counteract lower oil receipts, pressure on the naira, and a fall in reserves, and expressed their intent to pursue macroeconomic stability, based on assessments of credible scenarios that reflect downside risks. The fiscal authorities have tabled a tighter budget for 2015, revising the 2015−17 Medium Term Expenditure Framework (MTEF) to better reflect the latest developments in oil prices and proposing measures to increase non-oil revenue. In addition, the Monetary Policy Committee adjusted the exchange rate by -8 percent (from N155/$ to N168/$), widened the currency band, and increased the monetary policy rate by 100 basis points and the cash reserve requirement on private sector deposits from 15 percent to 20 percent. Fund staff has supported these measures, noting that the authorities should remain ready, given the fluid global situation, to manage downside risks if they materialize. In addition, there are Nigeria-specific risks related to continuing security-related issues and uncertainty ahead of general elections.

 “Nigeria’s economy has continued to grow strongly in 2014. Real Gross Domestic Product (GDP) grew by 6.1 percent in the third quarter of 2014 (compared to third quarter 2013), supported by robust performances in the non-oil economy (agriculture, trade, and services). Inflation continued to decline for the third month in a row, registering 7.9 percent for end-November 2014, from lower food inflation. Despite lower oil production in 2014 (compared to budget), the overall fiscal balance is expected to be broadly on target (1 percent deficit) and the non-oil primary deficit to improve, but the current account surplus is projected to decline to about 2.4 percent of GDP and reserves to fall to about $35 bn at end−2014 (5.6 months of imports of goods and services). 

“Growth is expected to decline in 2015 to about 5 percent. The magnitude of the adverse oil price shock (projected at about 25 percent for 2015) will sharply reduce fiscal revenues and limit fiscal spending. However, the overall impact on non-oil sector GDP will be relatively muted, because of limited direct channels from the oil sector. Further, the non-oil sector is expected to remain the main driver of growth over the medium term. Similarly, the depreciation of the exchange rate is expected to increase inflation, reflecting pass-through effects of higher domestic prices for imports, but the effect is likely to be contained, in part owing to lower food prices from increased local production of staple food crops.

“Nigeria remains vulnerable to oil price volatility and global financial developments. The measures already taken by the authorities demonstrate their commitment to macroeconomic stability. However, fiscal and external buffers are low and there is less policy space for maneuvering, compared to the onset of the 2008-09 financial crisis – the Excess Crude Account (ECA) in 2008 was $21 bn compared to $3bn now, while gross international reserves was $52 bn. Further, the exigencies of public financial management apply equally to all tiers of government: although the focus has been on the response of the federal government, lower oil receipts, low internal generated revenues, and a constrained ability to reduce recurrent expenditure could have a significant impact on delivery of social services by state and local governments, suggest the need for robust risk management frameworks across all tiers of government.

“Rebuilding buffers, especially the ECA, is a necessity for addressing future shocks. Capital outflows have continued and, with lower oil receipts, have led to sustained pressure on the naira. The authorities have reaffirmed their willingness to implement appropriate measures to manage risks. Despite the tightly managed official exchange rate, the interbank foreign exchange market and bureau de change rates have been trading at significant premia over the official Dutch auction rate, producing market distortions and contributing to inflation.

“The longer-term challenge, however, is to successfully put the economy on a path to lower oil-dependency and a diversified and competitive investment-driven non-oil sector. In that regard, staff is supportive of the authorities’ ongoing efforts to promote targeted and core infrastructure (in power, integrated transport network, aviation); reduce business environment costs and encourage high value-chain sectors (agriculture); promote employment of youth and female populations, and advance human capital development (health and education).

“Given the developments in the oil markets, the authorities have embarked on initiatives to diversify revenue sources, address the cost of governance (an opportunity cost to capital and social investment), improve efficiency of public sector service delivery, galvanize public financial management reforms, and improve effective capacity at the state and local tiers of government. Also, they are mobilizing non-oil revenue by improving tax administration (achieving almost double the target for 2014), and intend to undertake tax reform and lower leakages (through a rationalization of waivers and exemptions). It is important that these continue. Despite the outlook, Nigeria could surmount its challenges, especially if a national spirit of burden sharing and rebuilding together is actively embraced.

“During our visit, the team met with Finance Minister and Coordinating Minister of the Economy Ngozi Okonjo-Iweala, Central Bank of Nigeria Governor Godwin Emefiele, Minister of Agriculture Akinwunmi Adesina, Chief Economic Advisor to the President Nwanze Okidegbe, senior government officials, and representatives of the private sector. The team would like to thank the authorities for the high quality and openness of the discussions and for their hospitality.”