NIGERIA DEVELOPMENT UPDATE  |  DECEMBER 2023 Turning the corner: From reforms & renewed hope, to results Nigeria Development Update December 2023 Turning the corner: From reforms and renewed hope, to results NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Illustrations: Design by Freepik. ii TURNING THE CORNER: From reforms and renewed hope to results Acknowledgements The Nigeria Development Update (NDU) is a World Bank report series produced twice a year that assesses recent economic and social developments and prospects in Nigeria, and places these in a longer-term and global context. The NDU also provides an in-depth examination of selected policy issues and medium-term development challenges in Nigeria. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Nigeria’s evolving economy. The report was prepared by a World Bank team led by Nyda Mukhtar (Economist) and Matheus Bueno (Economist). The team included: Alex Sienaert, Samer Matta, Aleksandar Stojanov, Joseph Ogebe, Lilian Okpeku, Gloria Joseph- Raji, Mariano Cortes, Hadija Kamayo, Utz Johann Pape, Arthur Alik-Lagrange, Dominik Peschel, Bob Rijkers, Mohammed Isa Shuaibu, Guido Porto, and Guillermo Falcone. The team is grateful for valuable discussions with the Ministry of Finance and Economic Coordination and the Ministry of Budget and National Planning. The team would like to thank Miguel Angel Saldarriaga and Smriti Seth for their comments, as well as the International Monetary Fund’s Mission Chief, Axel Schimmelpfennig, for their continual dialogue and collaboration. The team is grateful to Chinelo Akunyili, Pinar Baydar, Peter Milne, and Robert W. Reinecke for their support with the finalization of the report. External and media relations are managed by Mansir Nasir, Maryam Laushi and Chuka Agu. The report was prepared under the overall supervision of Shubham Chaudhuri (Country Director for Nigeria), Abebe Adugna (Regional Director for Equitable Growth, Finance, and Institutions), and Sandeep Mahajan (Practice Manager for Macroeconomics, Trade, and Investment). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. For questions about this report please email nmukhtar@worldbank.org and mbueno@worldbank.org. For information about the World Bank and its activities in Nigeria, please visit: www.worldbank.org/ng iii NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Abbreviations and Acronyms BOF Budget Office of the Federation mbpd Million barrels per day CBN Central Bank of Nigeria CIT Corporate Income Tax COMTRADE Commodity Trade Statistics Database DMO Debt Management Office EMDEs Emerging Markets and Developing Economies FDI Foreign Direct Investment FGN Federal Government FPI Foreign Portfolio Investment FX Foreign Exchange GDP Gross Domestic Product MPR Monetary Policy Rate N Nigerian Naira NAFEX Nigeria Autonomous FX Fixing NAFEM Nigeria Foreign Exchange Market NBS National Bureau of Statistics NDU Nigeria Development Update NLSS Nigerian Living Standard Survey OAGF Office of the Accountant General of the Federation OMO Open Market Operation PMS Premium Motor Spirit US United States VAT Value Added Tax yoy Year-on-year iv TURNING THE CORNER: From reforms and renewed hope to results Table of Contents Acknowledgements iii Abbreviations and Acronyms iv Table of Contents v List of Figures vi List of Tables vii List of Boxes vii Overview viii PART 1: Recent economic developments and the outlook for Nigeria 1 Real sector: Reform momentum offers renewed hope for growth 2 Prices and monetary policy: Inflation has continued to hit record highs and monetary policy needs significant tightening 4 External sector: Vulnerabilities remain elevated in the external sector due to the weakness of oil and non-oil flows 8 Financial sector: Private sector credit remains resilient but pockets of vulnerabilities emerge 10 Fiscal: Reforms provided significant fiscal relief, but pressures remain high 13 Economic Outlook 20 References 30 PART 2: Taking a closer look 31 Lifting FX Restrictions on Imports and Tackling Import Bans 32 The Unintended Consequences of Imports Restrictions 32 Lifting Import Restrictions: A Pathway to Improved Welfare 36 The Way Forward 39 References 41 Nigeria: Key Economic Indicators 42 Endnotes 45 v NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 List of Figures Figure 0.1a-f. A snapshot of Nigeria's economic situation xii Figure 1.1. Past economic policy missteps and external shocks have contributed to lower growth and higher poverty… 3 Figure 1.2. …with consistent contraction of the oil sector, counterbalanced by services growth 4 Figure 1.3. Nigeria’s inflation spiked to almost two-decade high… 4 Figure 1.4. …with energy and food price increases being the main driver of recent headline inflation 5 Figure 1.5. T-bills and OMO rates have begun moving closer to the MPR. 5 Figure 1.6. The CAB is projected to strengthen in 2023… 8 Figure 1.7. …driven by higher oil export inflows and remittances 8 Figure 1.8. FDI and FPI flows into Nigeria remain low relative to the size of the economy… 9 Figure 1.9. …and are well below those of peer countries 9 Figure 1.10. Nigeria’s FX reserves have declined despite higher oil price 9 Figure 1.11. The CBN reduced its FX interventions in early 2023 10 Figure 1.12. The parallel market-NAFEX premium increased between 2022 and mid-2023 10 Figure 1.13. CBN MPR and selected banking rates (2020–September 2023) 12 Figure 1.14. Commercial and merchant bank exposure to the Government and the CBN (2020–June 2022) 12 Figure 1.15. Despite reforms, the fiscal deficit in 2023 is expected to remain high… 13 Figure 1.16. …as expenditure pressures continue 13 Figure 1.17. Large (and growing) deductions, primarily for non-oil excess account, have reduced net Federation revenues in 2023 14 Figure 1.18. Corporate taxes were the biggest contributor to revenue growth in 2H2023…. 14 Figure 1.19.…as net oil revenues were lower than what they had been expected to be following the removal of the subsidy 15 Figure 1.20. Room for fiscal consolidation from the expenditure side is limited, as interest payments and personnel costs occupy a larger share of Federal revenues 15 Figure 1.21. Federation transfers to states are projected to increase by 25 percent on average in 2023 16 Figure 1.22. The total fiscal deficit is projected to be higher than budgeted in 2023… 16 Figure 1.23.…resulting in a significant financing gap 16 Figure 1.24. Global financial conditions have tightened 20 Figure 1.25. Public and publicly guaranteed debt 24 Figure 1.26. The important reforms initiated, if sustained, improve Nigeria’s economic outlook 26 Figure 2.1. Price of both domestic and imported rice increased post FX import restrictions and border closure 35 Figure 2.2. FX restrictions led to an increase in trade evasion by 18.1 percent 35 Figure 2.3. FX restrictions led to substantial evasion gaps in some sectors 35 Figure 2.4. Without tariff evasion, Nigeria’s revenue would have been significantly higher 36 Figure 2.5. The impact of removing FX restrictions and imports bans would vary by state depending on what households consume and produce 36 Figure 2.6. Lifting import restrictions will not affect negatively economic diversification and export competitiveness gains 37 Figure 2.7. Despite the FX restrictions Nigeria still had a large unrealized export potential in 2021 37 vi TURNING THE CORNER: From reforms and renewed hope to results Figure 2.8. Imports of restricted FX products would have been US$3.7 billion higher had they not been restricted 37 Figure 2.9. Nigeria’s unrealized export in 2021 in presence of FX restrictions (US$) 38 Figure 2.10. Winners and losers at the sectorial level from removing FX restrictions in 2021 (US$ million) 39 List of Tables Table 0.1 Macro-fiscal outlook (with vs without reforms) xi Table 0.2 Measures to restore macroeconomic stability xiii Table 1.1. Global and regional indicators, 2019–2023 21 Table 1.2. Macro-fiscal outlook (with vs without reforms) 25 Table 1.3. Macro policy options to continue to support Nigeria’s achieve macroeconomic stability 28 Table 2.1. Comparison of FX restrictions on imports and import bans 33 Table 2.2. Policy options to support Nigeria’s trade policy 40 List of Boxes Box 1.1. Publication of financial statements of the Central Bank of Nigeria 6 Box 1.2. The Proposed Medium-Term Fiscal Framework 2024–26 17 Box 1.3. The costs of using Ways and Means financing 18 vii NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Overview Continuing on the difficult reform path is Nigeria was previously spending every three months on necessary to improve Nigeria’s growth the subsidy. Previously, the unsustainable spending on prospects and reduce poverty the subsidy was fueling economic imbalances (especially, fiscal deficit monetization and rising inflation) that Important reform decisions have been taken were worsening poverty outcomes and pushing Nigeria for Nigeria to avoid a fiscal cliff, and temporary toward a full-blown crisis. compensation is being provided to help the poorest and most vulnerable households The Government is making progress on implementing the announced reforms In May and June 2023, the incoming administration undertook two critical policy decisions, which have On FX policy, progress has been made on resulted in price and exchange rate adjustments in implementing the policy for a unified, transparent, the second half of the year. While the reforms were and flexible exchange rate. On October 12, the essential for Nigeria to avoid a fiscal cliff and enable Central Bank of Nigeria (CBN) reaffirmed that it was faster growth, they have brought difficult economic committed to achieving a flexible exchange rate based adjustments. When the previous edition of the Nigeria on freely priced transactions between willing buyers Development Update (NDU) was published at the end and willing sellers in the official market (renamed the of June, major policy changes had just been announced Nigeria Foreign Exchange Market, NAFEM). Also on by the new government, including ending the gasoline October 12, the CBN lifted the ban on the use of FX (premium motor spirit, PMS) subsidy, and shifting to to import 43 product categories. The end of the ban— a unified, market-reflective foreign exchange (FX) rate. which was first imposed in 2015—is an important step Since May, retail gasoline prices have increased by an to removing policy-induced segmentation in the FX average of 163 percent and the Nigerian naira (N) has market distortions, while having the pro-poor effect of depreciated against the US dollar by 41 percent in the reducing the prices of basic goods (see Part 2 for a closer official market and by 30 percent in the parallel market. look). Finally, the CBN has begun to clear the backlog of The sharply higher price of gasoline and other imported overdue forward obligations that had accumulated under goods has contributed to inflation, which increased from the previous foreign exchange management approach. already elevated levels to 27.3 percent year-on-year (yoy) in October. Monetary policy has begun to tighten. On October 27, the CBN lifted the cap on banks’ use of its Standing Targeted cash transfers are helping to cushion the Deposit Facility (SDF) (currently at the Monetary Policy adjustment to higher gasoline prices. Recognizing the Rate [MPR] minus 300 basis points [bp]), which was need to help especially poor and vulnerable households previously set at N2 billion per bank. This strengthens to cope with the shock of one-off price adjustments, on monetary policy transmission by allowing the bottom October 17 the Government announced that it would of the MPR corridor to anchor short-term market roll out cash transfers of N25,000 (about US$32) rates, since it provides banks with a remunerated option per month to 15 million recipients and their families to place excess liquidity. On October 30, the CBN (directly benefiting over 67 million Nigerians) for three conducted large open market operations (OMOs), months. The total costs of these transfers to provide relief mopping up N400 billion in liquidity at relatively high to Nigeria’s most poor and vulnerable are similar to what clearing yields, including 17.5 percent for one-year viii TURNING THE CORNER: From reforms and renewed hope to results T-bills. Market interest rates have also risen sharply. For mostly categorized as “exchange rate gains”, suggesting example, the one-year interbank T-bill fixing surged to that they are due to Nigerian naira depreciation. Except 19 percent on November 13, up from about 10 percent for the exchange rate-related increases, however, there is before the OMOs. a lack of transparency regarding oil revenues, especially the financial gains of the Nigeria National Petroleum On fiscal policy, budget planning for the next several Corporation (NNPC) from the subsidy removal, the years is consistent with sustaining the fiscal savings subsidy arrears that are still being deducted, and the from the subsidy reform and mobilizing more impact of this on Federation revenues. It is also unclear revenues. The Federal Executive Council approved the why retail petrol prices have not changed much since medium-term expenditure framework (MTEF) and August, despite fluctuations in the exchange rate and Fiscal Strategy Paper on October 16, which anticipate global oil prices. a rise in non-oil revenues in the medium term due to several tax policy measures, and plan no financing Inflation remains at record high levels for Nigeria. for gasoline subsidies for 2024–2026. In addition, a Most recently, inflation rose to reach 27.3 percent (yoy) supplemental budget for 2023 was signed into law on in October 2023, partly driven by the one-off price November 8, increasing spending1 and raising the debt impacts of the removal of the gasoline subsidy. The issuance ceiling by N2.2 trillion (about US$2.8 billion, impact of this inflation is especially hard on the poor and or 0.9 percent of GDP). This included N400 billion for vulnerable. The Government has initiated targeted cash the cash transfers. transfers to mitigate some of the impact on the most vulnerable households. In addition, a holistic approach However, the reforms are yet to be to reducing inflation, including through tighter fiscal completed to fully realize the economic and monetary policies, is also needed. benefits The near-term priority is to enhance the The FX market has remained volatile and is still in a reform effort with a closely coordinated period of continuing adjustment to the new policy mix of fiscal, monetary, and FX policies approach. Following the announcement to merge all to reduce inflation and achieve the official FX windows and reaffirmation of the willing- macroeconomic stabilization buyer-willing-seller (WBWS) mechanism at the official FX rate, there have been significant fluctuations in the On the fiscal front, it will be crucial to sustain the exchange rate, in both the official and parallel markets. savings from the PMS subsidy reform. The high cost While the parallel market premium fell significantly in of the gasoline subsidy was weakening Nigeria’s fiscal July 2023 following the announcement to merge FX position, in turn leading to a rapid increase in deficit windows, it re-emerged in August 2023 and, in October, monetization through CBN Ways and Means financing, even briefly rose to pre-June levels. The premium and fueling inflation. It is important that the subsidy is changes significantly on a daily basis, as the official not reinstated, and that continued progress is made to exchange rate has fluctuated up to 26 percent in one day ensure market-reflecting pricing. Removing the PMS and the parallel market rate has also been volatile. subsidy creates an opportunity to open up the gasoline market, enabling other market players apart from Revenue gains from the FX reform are visible, but NNPC to import gasoline. This would yield benefits to more clarity is needed on oil revenues, including the consumers from market competition, and more revenues fiscal benefits from the PMS subsidy reform. Nominal to the Federation account, ultimately flowing to all tiers oil revenue gains have been evident since June. These are of government. However, to fully reap this benefit, there ix NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 is a need to allow PMS prices to adjust periodically in intention to end quasi-fiscal activities, and refocus on line with market fundamentals (i.e., in line with the targeting lower and stable inflation and, moving into exchange rate and international prices, similar to the 2024, the effective implementation of the new approach pricing of diesel). To gain more clarity on how gasoline is will be key. being priced in the context of the Government’s decision to remove the PMS subsidy, there is a need to enhance On exchange rate policy, additional measures can the transparency of NNPC, and to regularly publish be taken to increase market stability. The CBN has information that explains prices at the pump. reaffirmed its commitment to the WBWS mechanism, yet liquidity in the official (NAFEM) market has The Government needs to also continue implementing remained thin. Further monetary policy tightening revenue-led fiscal consolidation. In the absence of is expected to help underpin the value of the naira. such consolidation, debt levels will escalate, along with However, there is also a need to increase FX supply debt servicing costs. To prevent such a situation, it is in the market. Facilitating FX flows, especially from important that revenue mobilization efforts continue. all exports, through the NAFEM can help provide For oil revenues, this includes continued efforts to additional volumes in the official window that can help increase oil production, reducing distortions in PMS provide stability. In addition, clarity on the CBN’s net pricing, and ensuring that oil revenues flow appropriately reserve position, and on the CBN’s continued progress to the Federation, which will require more transparency in clearing the FX backlog, would also strengthen market and accountability regarding NNPC revenues. For non- confidence. oil revenues, this includes reforming the value-added tax (VAT) regime, implementing green excise taxes and Communicating and implementing a other socially and environmentally beneficial taxes, coordinated economic policy mix is and making improvements in tax administration. In essential addition, prudence needs to be exercised in expenditure decisions, with a clear focus on prioritizing expenditure Building on the bold reforms already made, there efficiency. is a need to develop and announce coordinated fiscal and monetary policy actions for the short to On the monetary front, the policy stance has begun medium term. A well-articulated policy direction and to tighten, but significantly stronger action is still strategy can help build market confidence and allow the needed to curb inflation. The new management at economy to stabilize more quickly. The policy direction the CBN has implemented some tightening measures, can articulate the short-term objectives that would help including narrowing the asymmetric corridor in the coordinate all the key economic actors and accelerate SDF, removing the cap on banks’ SDF deposits, and implementation. This policy plan would require increasing the volume and rates of OMOs. While buy-in and articulation from the highest level of the these are welcome measures, further tightening is likely Government, and a consensus among the key economic required to effectively control inflation. The MPR actors. The credibility of the plan would need alignment remains negative in real terms (-1.0 as of October 2023 among the policy actions in terms of policy objectives in the baseline inflation projection), broad money (e.g., both monetary and fiscal policy actions focusing supply (M2) growth is still elevated (34.6 percent yoy on tightening), and consistent implementation. in September 2023), and monetary policy transmission is still hindered by the CBN’s development finance Beyond macroeconomic stabilization schemes and ongoing financing of fiscal deficits through imperatives, extending the reform momentum Ways and Means. The CBN has signaled clearly its can address structural constraints, and x TURNING THE CORNER: From reforms and renewed hope to results Table O. 1. Macro-fiscal outlook (with vs without reforms) Post-reforms No-reforms 2022 2023 2024 2025 2026 2023 2024 2025 2026 Key economic indicators Act. Proj Proj Proj Proj Proj Proj Proj Proj Real GDP growth (annual percentage change) 3.3 2.9 3.3 3.7 4.1 2.9 2.9 3.0 3.1 CPI inflation (yearly average) 18.8 24.5 21.7 19.6 17.1 21.0 21.5 23.0 24.0 Current account balance (percent of GDP) 0.2 0.2 0.1 -0.0 -0.0 -0.7 -1.0 -0.6 -0.7 Fiscal and debt indicators (percent of GDP, unless stated otherwise) Revenues 6.7 7.6 8.8 9.5 10.2 5.7 6.0 5.9 5.1 Expenditures 11.7 12.7 12.9 13.2 13.4 12.1 12.1 11.8 11.2 Primary fiscal balance -1.6 -1.7 -1.0 -0.5 0.1 -2.2 -2.0 -2.0 -2.5 Overall fiscal balance -5.0 -5.1 -4.1 -3.7 -3.2 -6.4 -6.1 -6.0 -6.2 Public debt 40.0 42.0 41.2 38.3 35.9 43.0 41.8 40.0 38.2 Debt service (percentage of revenues) 101.5 66 61 51 41 172 176 182 236 Sources: OAGF, DMO, CBN, NBS and World Bank staff calculations propel Nigeria onto a high and inclusive transport infrastructure, as well as on human capital. growth path Structural constraints to growth can be alleviated by strengthening public services and investments, reducing The economic outlook for Nigeria in the short insecurity, improving the business environment, and to medium term hinges on the continuation and increasing openness to trade. Together, such reforms effectiveness of its macroeconomic stabilization would boost investment and productivity across sectors, agenda. Successful implementation of the initiated unlocking the stronger growth that Nigeria’s economys reforms will be the first step toward improving Nigeria’s demonstrably capable of, and allowing economic growth prospects2. With implementation of these first development to regain its fast pace. macroeconomic stabilization reforms, the economy is expected to grow at an average annual rate of 3.5 percent during 2023–2026, or 0.5 of a percentage point higher than in a scenario in which the reforms had not been implemented. Services, especially banking and ICT, together with industry will benefit from a more stable and predictable macroeconomic environment, and easier access to FX and imported inputs. Moreover, the reform of the gasoline subsidy should help NNPC settle its arrears and start paying fully for the Federation’s share of costs in joint venture operations, thereby allowing oil production to gradually increase over time. Meanwhile, the agriculture sector is expected to recover from the disruption caused by the devastating floods in mid-2022. Moving decisively onto a higher long-term growth and poverty reduction path requires not only a stable macroeconomic environment but also concerted structural reforms. In the medium term, the economy will begin to benefit from increasing fiscal space for development spending, including on power and xi NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure O.1. A snapshot of Nigeria’s economic situation A. In Q2 and Q3 2023, output growth continues to be subdued B. …as services have yet to fully recover from the demonetization policy in Q1 and oil production continues to contract Percent (yoy) Percent, percentage points 15 7.0 10 6.0 5.0 5 4.0 0 3.0 2.0 -5 1.0 -10 - -15 -1.0 -2.0 -20 -3.0 -25 -4.0 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 Q3 2020 Q1 2021 Q3 2021 Q1 2022 Q3 2022 Q1 2023 Q3 2023 23 15 16 17 18 19 20 21 22 14 20 20 20 20 20 20 20 20 20 - 20 3 10 Q 20 1- Q Agriculture Oil Industry Non-oil Industry GDP growth (seasonally adjusted annualized rate) GDP growth Services Net Indirect Taxes GDP growth Sources: NBS and World Bank estimates.situation Sources: NBS and World Bank estimates. C. Headline inflation continued to rise, notably through food and fuel D. … partly driven by continued excess domestic liquidity, removal prices…. of gasoline subsidy, and naira depreciation Percent (yoy) Index - Jan 2022=100 Naira per liter 31.0 180 730 29.0 170 630 160 27.0 150 530 25.0 140 430 23.0 130 21.0 120 330 19.0 110 230 17.0 100 130 15.0 90 80 30 Feb-23 Mar-23 May-23 Oct-22 Nov-22 Dec-22 Apr-23 Jan-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Feb-22 Mar-22 Feb-23 Mar-23 Apr-22 Apr-23 May-22 Jul-22 Oct-22 Nov-22 Dec-22 May-23 Jun-23 Jul-23 Oct-23 Nov-21 Dec-21 Jan-22 Jun-22 Jan-23 Aug-22 Sep-22 Aug-23 Sep-23 Broad money Parallel rate Petrol Prices (rhs) Headline Energy Food Core (excl. food & energy) Sources: NBS Sources: CBN, NBS and Bureau de Change Operators E. Fiscal pressures remain high… F. …and Nigeria’s sovereign credit risk premium in the global capital market has begun to improve. “ Percent of federal revenues Basis points 140 132 1400 120 120 1200 98 100 93 1000 87 80 800 57 60 600 60 400 40 200 23-Aug-22 23-Aug-20 23-Aug-21 23-Dec-21 23-Dec-22 23-Aug-23 23-Dec-19 23-Dec-20 23-Feb-21 23-Feb-22 23-Feb-23 23-Feb-20 23-Apr-23 23-Oct-23 23-Apr-20 23-Oct-20 23-Apr-21 23-Oct-21 23-Apr-22 23-Oct-22 23-Jun-22 23-Jun-23 23-Jun-20 23-Jun-21 20 0 2018 2019 2020 2021 2022 2023f 2024f Emerging Market Bond Index - Global Emerging Market Bond Index - Nigeria Interest payments Sources: OAGF and DMO Source: JPMorgan. Note: The series presented are EMBI spreads. xii TURNING THE CORNER: From reforms and renewed hope to results Table O.2.: Measures to restore macroeconomic stability Policy Status Specific Measures Restoring Macroeconomic Stability Remove the gasoline subsidy The removal of the subsidy was announced on May 29 and pump prices and establish a were adjusted on June 1. This results in expected fiscal savings of around market-based N2 trillion in 2023, or 0.9 percent of GDP. Between 2023 and 2025, the mechanism for expected gains are over N11 trillion, against a scenario in which the gasoline pricing subsidy had continued. Reaffirm the commitment to not subsidize gasoline and ensure retail gasoline prices are consistent with this. Regularly publish information that explains prices at the pump. Publish detailed financial statements and revenue flows of NNPC to safeguard the fiscal savings from the subsidy reform and ensure that oil revenues flow to the Federation. Increase non-oil revenues Since 2019, the Government introduced non-oil revenue reforms and tax administration improvements, through the Strategic Revenue Growth Initiative (SRGI). This has helped boost non-oil revenues, reversing the previously declining trend, and preventing an even more severe fiscal squeeze. Key reforms included increasing the VAT rate from 5.0 to 7.5 percent, increasing gas flare fees, rationalizing tax expenditures, and operationalizing the electronic money transfer levy. The oversight of government-owned enterprises (GOEs) has also been strengthened, by ensuring a 50 percent cap on the cost-to-income ratio of these parastatals. In the short run, the Government can further increase non-oil revenues by: (i) gradually increasing the VAT rate, while allowing for input tax credit on capital and services; (ii) removing VAT exemptions on petroleum products; (iii) improving tax administration to ensure the collection of the newly introduced excises on telecommunication, single-use plastics, and high- polluting vehicles; (iv) implementing an advisory visit program to improve voluntary compliance; (v) adopting a data-driven approach to tax audit; (iv) leveraging technology to reduce tax avoidance; (vii) linking residential property with profit income tax (PIT) returns; (viii) introducing a simple turnover tax on SMEs at the state level, instead of the various nuisance fees and levies; and (ix) adopting modern valuation methods to properties. xiii NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Policy Status Specific Measures Restoring Macroeconomic Stability Reduce excess The CBN has begun tightening monetary policy restarting OMOs, and domestic liquidity removing the cap on the Standing Deposit Facility. Additional measures to and money supply reduce naira liquidity, and tolerance for higher market interest rates, may growth to control be required. inflation Further tighten monetary policy. Build on strong stated commitments by finalizing and communicating the plan to swiftly phase out monetization of the fiscal deficit and current CBN development finance interventions. Reduce trade On October 12, CBN announced the removal of FX restrictions for the restrictions that importation of 43 items. This is expected to help reduce prices on staples increase prices and such as rice and help to bring poverty rates down, spur competition by poverty removing exchange rate access distortions, and raise revenues. Start lowering import tariffs and non-tariff barriers on food and pharmaceuticals to lower prices and reduce poverty. Past import restrictions have not achieved their intended objectives of fostering domestic production, and have increased domestic prices, curtailing competitiveness and household consumption. Adopt a de facto floating exchange On June 14, the CBN unified the multiple official FX windows into a single rate and fully official market to be operated under a de facto willing-buyer-willing-seller channel FX inflows mechanism. to NAFEM Ensure full FX liberalization by continuing to build market confidence around free pricing and evaluating, and implementing policy measures to channel FX supply into the NAFEM. Publish full information on net reserves to build market confidence. Expand social protection to protect the poor and most vulnerable Establish a social compact with the Nigeria has developed a social registry system and rolled out time- Nigerian people bound, shock responsive, targeted cash transfers of N25,000 to 15 million recipients and their families (directly benefiting over 60 million Nigerians) for a period of 3 months. Implement a wider compact with Nigerian citizens to partly channel increasing revenues to continuous redistribution mechanisms—such as targeted cash transfers—and to expanded and better provision of public services. Publicize and publish details of this compact to enable public monitoring of its implementation. xiv PART 1: Recent economic developments and the outlook for Nigeria NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Real sector: Reform momentum offers of trade protectionism, and external shocks such as the renewed hope for growth COVID-19 pandemic weakened economic fundamentals and pushed Nigeria into a fragile economic position. Despite having the largest economy and population While growth rebounded to 3.6 percent in 2021, after a in Africa, Nigeria offers only limited opportunities to contraction of 1.8 percent in 2020 during the pandemic, most of its citizens. A Nigerian born in 2020 is expected the recovery lost momentum, with growth slowing to 3.3 to be a future worker who will be only 36 percent as percent in 2022 and further to 3.1 percent (yoy) by Q3 productive as he/she could have been if they had had 2023, partly due to a disruptive currency demonetization full access to education and health—the seventh-lowest policy in Q1 2023 and weak oil production. Services Human Capital Index (HCI) in the world. Weak continue to be the main positive contributor to growth job creation and entrepreneurial prospects stifle the (Figure 1.2). absorption of the 3.5 million Nigerians entering the labor force every year, and many workers choose to emigrate in • Agriculture. Agricultural output, which had remained search of better opportunities. An estimated 79.4 million resilient even during the pandemic, contracted for the Nigerians lived below the international poverty line in first time in seven years, by 0.9 percent in Q1 2023, 2018 (the latest survey data)—one of the world’s largest but rebounded to grow by 1.5 percent in Q2 2023 poor populations. In most areas, state capacity is low, and 1.3 percent in Q3 2023. On average, agricultural service delivery is limited, and insecurity and violence are output grew by 0.7 percent (yoy) in the first nine widespread. Wide infrastructure gaps constrain access to months of 2023, the lowest level of growth since electricity and hinder the domestic economic integration 2011. The slowdown in agricultural output was driven that would allow the country to leverage its large market by a significant contraction in livestock and fishing size. Emerging problems, such as the increased severity production. The cash shortage experienced in Q1 2023, and frequency of extreme weather events, especially in lingering effects of the 2022 floods, and high costs of the northern parts of the country, add to these long- imported inputs such as fertilizers contributed to the standing development challenges. slowdown in the agriculture sector. Various official development finance interventions since 2015 have not Economic growth offers the main path for sustained been effective in restoring agricultural production to its and inclusive development in Nigeria, but recent 2010–14 average growth rate of around 4.5 percent. performance has been weak (Figure 1.1). Between 2000 and 2014, Nigeria’s economy experienced broad- • Non-oil industry. In the first nine months of 2023, based and sustained growth of over 7 percent annually, output in the non-oil industry sector grew modestly by on average, benefiting from favorable global conditions, 2.3 percent (yoy). In the manufacturing sector, output and macroeconomic and first-stage structural reforms. growth remained sluggish, as the sector continues to The poverty rate at the international poverty line face structural challenges, including transport and decreased from 48 percent in 2003 to 32 percent in power infrastructure gaps. Stronger expanding industries 2015 World Bank 2023b), implying a 4.4 million include food and beverage, cement, wood and wood decline in the number of poor people. In the period products, chemical and pharmaceutical products, and 2015–2022, however, economic policy missteps and non-metallic products. Construction grew by 3.5 percent external shocks contributed to a slump in growth rates yoy in the first nine months of 2023. to an average of 1.4 percent (-1.1 percent in per capita terms). The poverty rate increased by 4 percentage • Oil: The historically low level of crude oil production points in the period. Monetary and exchange rate since 2020 has prevented Nigeria from fully reaping policy distortions, increasing fiscal deficits, high levels the benefit of higher global oil prices. Oil production 2 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results has shown a modest improvement, growing by 4.6 ICT, one of the resilient sectors during the pandemic, percent (yoy) in the first nine months of 2023, but grew by 8.5 percent yoy in the first nine months of 2023, remains well below the pre-pandemic average monthly boosted by both voice and internet subscribers. Financial production level (1.7 mbpd), Nigeria’s Organization of services output rose by 25.3 percent in H1 2023, as the Petroleum Exporting Countries’ (OPEC) quota of the cash crunch experienced during Q1 substantially 1.7 mbpd, and the Federal Government estimate for the expanded e-payment transactions. The trade sector’s 2023 Budget of 1.69 mbpd. growth remains tepid, however, at 1.8 percent yoy in the first nine months of 2023, below its average of 6.6 • Services. The services sector grew by 4.3 percent yoy percent between 2010 and 2014, partly due to the cash in the first nine months of 2023, driven by growth in squeeze in Q1. Transportation and storage contracted by financial services and information and communications 30.7 percent in the first nine months of 2023, largely technology (ICT), which counterbalanced a contraction due to the impact of the gasoline subsidy removal, which in the transport industry. The sector continues to be the led to an almost threefold increase in gasoline prices. main driver of growth in Nigeria, reflecting continuing structural transformation from agriculture to services. Figure 1.1. . Past economic policy missteps and external shocks have contributed to lower growth GDP per capita growth and real GDP growth GDP per capita growth, real GDP growth and poverty rate Percent 30 25 20 15 10 5 0 -5 -10 -15 -20 2024f 2026f 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 GDP per capita growth Real GDP growth Source: NBS Recognizing the need to change course, the new relative prices, partly liberalized the exchange rate to administration has undertaken several bold reforms better reflect market conditions, and lifted the restriction to restore the economic fundamentals for inclusive on purchasing FX in the official market to import growth since May 2023. The Government of Nigeria 936 product lines. The CBN has also re-commenced eliminated an increasingly costly, opaque, and regressive conducting open market operations (OMOs) and lifted gasoline subsidy that amounted to 2.2 percent of GDP the cap for commercial banks to deposit funds at the in 2022, unified multiple FX windows that distorted Central Bank of Nigeria (CBN). The mopping-up of PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 3 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.2. .... with consistent contraction of the oil sector, counterbalanced by services growth Prices and monetary policy: Inflation Contributions to real GDP growth has continued to hit record highs and Percent, percentage points monetary policy needs significant 7.0 6.0 tightening 5.0 4.0 Nigeria’s inflation has increased in 2023 and reached 3.0 2.0 an almost two-decade high. Inflation has historically 1.0 been high and persistent in Nigeria—in 13 out of - the past 15 years, inflation was higher than 9 percent, -1.0 -2.0 the ceiling of the CBN’s target range—reflecting the -3.0 combination of loose fiscal and monetary policies, structural supply constraints, and external shocks (Figure 23 15 16 17 18 19 20 21 22 14 20 20 20 20 20 20 20 20 20 - 20 3 10 Q 1.3). Most recently, inflation rose to reach 27.3 percent 20 1- Q Agriculture Services Oil Industry Net Indirect Taxes Non-oil Industry GDP growth (yoy) in October 2023, partly driven by the removal of Sources: NBS and World Bank estimates the gasoline subsidy and the significant exchange rate depreciation. Food inflation remained chronically high excess domestic liquidity and changes toward more at 31.5 percent yoy in October (6.3 percentage points orthodox, rates-based monetary policy have led to a rise [pp] higher than in June), as the prices of key staples rose in domestic market interest rates. Recognizing the short- by at least one-quarter in October. Energy inflation also term adjustment costs of these reforms—in particular, remained elevated at 23.1 percent (2.1 pp higher than in the gasoline subsidy removal—the Government has also June), driven by record-high prices of gasoline and diesel rolled out temporary, targeted cash transfers of N25,000 (Figure 1.4). Core inflation (excluding food and energy) per month, directly benefiting over 60 million people for also increased, reaching 22.6 percent in October (2.5 three months. pp higher than in June), led by rising prices of medical services, travel, furniture, and maintenance and repairs The recent reforms are expected to undo the increases of transport equipment. in poverty seen in recent years from 2024 onward, Figure 1.3. Nigeria’s inflation spiked to almost albeit only marginally and slowly. Sluggish growth and two-decade high… rising inflation have increased poverty from 40 percent Inflation, broad money growth and exchange rate in 2018 to 46 percent in 2023, pushing an additional 24 million people below the national poverty line3. The number of poor rose from 79 million in 2018 to 104 million in 2023, with urban poor—more exposed to inflation—increasing from 13 to 20 million, while the number of poor people in rural areas increased from 67 to 84 million. In the medium term, the reforms will reverse this trend through higher growth and lower inflation, but to a limited extent, with poverty rates decreasing from 46 percent in 2024 to 44 percent in 2026. Source: NBS 4 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Figure 1.4. …with energy and food price increases Figure 1.5. T-bills and OMO rates have begun being the main driver of recent headline inflation moving closer to the MPR Inflation rate Interest rates Percent (yoy) 31.0 29.0 27.0 25.0 23.0 21.0 19.0 17.0 15.0 Mar-23 May-23 Feb-23 Apr-23 Jul-23 Aug-23 Sep-23 Oct-22 Nov-22 Dec-22 Oct-23 Jan-23 Jun-23 Headline Energy Food Core (excl. food & energy) Source: NBS Source: NBS The CBN has started tightening monetary Nonetheless, a significantly tighter monetary policy policy. and stronger policy transmission are needed to rein in inflation. The MPR remains negative in real terms with The CBN has increased the Monetary Policy Rate respect to both the past year’s inflation and the expected (MPR) since May 2022 by a cumulative 725 basis inflation in the next year, while real interest rates have points, to 18.75 percent, and increased the cash risen significantly in advanced economies. Money supply reserve ratio by 500 basis points, to 32.5 percent grew by 34.6 percent yoy to reach 27.5 percent of in September 2022. The CBN also narrowed the GDP in September 2023, the highest in over a decade. asymmetric corridor from +100/-700 to +100/-300 basis Monetary policy transmission is still hindered by the points around the MPR in the Standing Deposit Facility CBN’s development finance schemes and central-bank (SDF)—where banks can deposit funds overnight financing of fiscal deficits through Ways and Means. with the CBN to earn interest and borrow funds from While the new CBN management and the Government the CBN—and removed its N2 billion cap per bank. have committed to eliminating development finance The new administration has also restarted OMOs— programs, this has yet to be implemented. Similarly, interrupted since January 2023—in October 2023, with significant Ways and Means financing has continued in a N325 billion operation (almost three times higher than 2023 and is projected to reach 1.4 percent of projected the average intervention since 2010) at 17.5 percent 2023 GDP, in breach of the limits imposed by the CBN yield for the one-year T-bill, closer to the MPR than in Act 2007. Central-bank financing of fiscal deficits not the recent past. Recent data have also shown that T-bill only directly contributes to rising inflation but also yields have reached over 21 percent (Figure 1.5). In a undermines its institutional credibility and de facto move toward greater transparency, the CBN published independence to pursue its inflation control mandate. its financial statements for the years 2017–2022, which Relatedly, coordination and communication of monetary were previously outside the public domain. (Box 1.1). and fiscal policies could help anchor expectations and increase foreseeability for market agents. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 5 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Box 1.1. Publication of financial statements of the Central Bank of Nigeria After a gap of five years, in August 2023, the CBN published its financial statements, for the years 2017– 2022. The publication of financial statements was important in putting CBN back on track with meeting basic financial transparency standards. The financial statements show that the CBN recorded a small profit throughout the period. Large income inflows were recorded from the interest payments from the Ways and Means financing extended to the Federal Government. The statements also highlight the increase over time in the deposits of financial institutions at the CBN, which may have helped mitigate the inflationary pressure of the high volume of credit to the Federal Government, to the detriment of the availability of credit for the private sector. Large credit losses were also reported, likely due to the CBN undertaking several development finance schemes. Other large costs included those due to foreign exchange revaluations, rebate expenses, and large administrative and personnel expenses. As such, the remittance of profits to the Federal Government remained low, although significantly varying year-on-year. The statements also showed that the composition of gross reserves of the CBN has changed over time. Time deposits decreased, as have current accounts with foreign banks, while the share of domiciliary accounts in gross reserves fell to negligible levels between 2021 and 2022. The statements also showed that the CBN has significant short-term liabilities, include foreign exchange denominated liabilities. They indicate that in 2022 the net reserves of the CBN were significantly lower than the gross reserves that are reported more publicly on the website. Figure B1.1.1. Net income of the CBN remains Figure B1.1.2. …which is partially financed large as interest income soars due to high from the deposits of the financial institutions volumes of Ways and Means lending… held at the CBN Naira Billions Naira billion Percent 2500 25,000 25 2000 1500 20,000 20 1000 15,000 15 500 0 10,000 10 -500 -1000 5,000 5 -1500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Net credit loss expense Other operating income Net fair value (loss)/ gains on financial instruments Fees and commission income Credit to FGN (mostly Ways and Means) Net Interest income Financial institutions deposits Net operating income CPI inflation (year average)-rhs Sources: CBN financial statements and World Bank estimates. 6 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Box 1.1 cont. Figure B1.1.3. However, large costs means that Figure B1.1.4. …and remittance of the profit to the CBN remains in only a small profit… the FGN remains low Naira billions Naira Billions Percent 1400 200 450 180 400 1200 160 350 140 1000 300 120 250 800 100 200 80 600 60 150 40 100 400 20 50 0 0 200 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 Surplus to FGN - from cash flow 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Net operating income Net operating expenses Surplus payable to FGN - from liabilities as percent of Net operating profit operating profits (t-1) -rhs Sources: CBN financial statements and World Bank estimates. Sources: CBN financial statements and World Bank estimates. Figure B1.1.5. Composition of gross reserves at the CBN have changed significantly over the past few years, with higher reliance on current accounts in foreign banks US$' billion 54 49 44 39 34 29 24 19 14 9 4 -1 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Current accounts with foreign banks Time deposits and money employed Domiciliary accounts Sundry currencies and travellers' cheques Short term deposits Debt securities FVTPL Debt securities - Amortised cost International Monetary Fund Derivatives SDRs Gold bullion Expected credit loss Sources: CBN financial statements and World Bank estimates. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 7 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 External sector: Vulnerabilities remain removal of the gasoline subsidy and the large-scale elevated in the external sector due to the depreciation of the naira in June 2023, imports, weakness of oil and non-oil flows including gasoline imports, are projected to fall. However, exports are also expected to contract, even The current account balance is expected to remain though oil production is projected to increase, as oil slightly positive for 2023, while the trade balance prices are projected to be 20 percent lower, on average, is projected to decline. While the goods balance is than 2022 levels. Higher imports of services, especially expected to remain positive, the deficit on the services in the transportation and travel sectors, are expected to side is expected to increase. In H1 2023, the current reduce the trade balance. In H1 2023, the trade balance account balance (CAB) increased to a surplus of 1.1 stood at a deficit of 1.7 percent of GDP, as opposed to a percent of GDP, compared with an H12022 current deficit of 1.6 percent of GDP in H12022. account surplus of just 0.3 percent GDP. With the Figure 1.6. The CAB is projected to strengthen in Figure 1.7. …driven by higher oil export inflows 2023… and remittances Current account balance (2019–2024f) Contributions to the current account balance (2019–2024f) Percent of GDP Percent of GDP 0.5 10 0.0 5 -0.5 -1.0 0 -1.5 -5 -2.0 -2.5 -10 -3.0 -15 -3.5 2019 2020 2021 2022 2023f 2024f -4.0 2019 2020 2021 2022 2023f 2024f Net exports Net Income Net Transfers CAB Sources: CBN and World Bank estimates. Sources: CBN and World Bank estimates. The financial account is projected to remain in a small reforms are estimated to help the country post larger surplus in 2023, despite posting negative balances at gains on FDI and FPI by year-end. the half-year mark. Net foreign direct investment (FDI) is projected to reach 0.4 percent of GDP in 2023, against Favorable oil prices and the CAB surplus have not 0.1 percent of GDP in 2022, and foreign portfolio buoyed reserves. The generally high oil prices since investment (FPI) is projected to improve to 1.5 percent 2021 would normally be associated with rising gross of GDP in 2023, against 1.0 percent of GDP in 2022. reserve levels, but this has not been the case, and is part However, at the half-year mark, both FDI and FPI were of the reason behind the high errors and omissions figure weaker than in the previous year. In H12023, FDI was reported in the balance-of-payments (BOP) accounts.4 at -0.1 percent of GDP compared with 0.6 percent in The low reserves appear to be primarily due to a H12022, while FPI was at 0.2 percent of GDP, against continued lack of oil-related flows to the CBN. Lower oil 0.7 percent of GDP in H12022. However, the two major production—below the Organization of the Petroleum Exporting Countries’ (OPEC) quota—is likely a factor, 8 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Figure 1.8. FDI and FPI flows into Nigeria remain Figure 1.9. …and are well below those of peer low relative to the size of the economy… countries Capital flows (FDI only) to Nigeria and comparator countries Net FPI and FDI flows into Nigeria (2019–2024f) (2019–2023f) Percent of GDP Percent of GDP 2.5 4.0 3.5 2.0 3.0 1.5 2.5 1.0 2.0 0.5 1.5 1.0 0.0 0.5 (0.5) 0.0 (1.0) -0.5 2019 2020 2021 2022 2023f 2024f 2019 2020 2021 2022 2023f Net FDI Net FPI SSA Oil producing EMDEs Nigeria Sources: CBN and World Bank estimates. Sources: CBN and World Bank estimates. Figure 1.10. Nigeria’s FX reserves have declined despite higher oil priceNet FPI and FDI flows into Nigeria (2019–2024f) Gross FX reserves and oil prices US$ billion US$/bbl Reserves accumulation in a context of 70 increasing oil prices and less rigid FX 160.0 Additional management SDR 60 allocation 140.0 COVID Oil price shock and oil 120.0 50 I&E window created price shocks 100.0 40 80.0 30 Declining 60.0 reserves in 20 a context of Interventions to keep the naira and increasing high oil 40.0 fuel imports and petrol subsidy prices 10 20.0 Sources: CBN and World Bank estimates. 0 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Gross reserves Gross reserves (excl. additional SDR in 2021) Oil Price (Bonny Light)-rhs but the removal of the gasoline subsidy (and direct debits information on net reserves is unavailable, making it by NNPC for it) and the discontinuation of the Direct problematic to gain a full sense of the CBN’s ability to Sale Direct Purchase arrangement (crude oil for gasoline meet its liabilities. swaps) in the latter half of 2023 should have increased gross reserves post-June 2023. However, this has not been the case and gross reserves remain at around the US$33 billion level, despite the reforms. In addition, PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 9 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.11. The CBN reduced its FX interventions in 2023 range. The parallel rate depreciated by 45.4 percent Sources of FX inflows to the investors and exporters FX market between June and October (monthly averages), while the US$ Billion official rate has not adjusted proportionately (monthly 35.0 averages depreciating by 27.3 percent in the same period). The latest figures show a premium of about 30.0 40 percent, on average, as the naira remains at around 25.0 N800/US$1 in the official market. Without stabilization 20.0 of the official FX market at market-reflective rates, the 15.0 risks to expected net FDI and net FPI remain high. 10.0 5.0 Financial sector: Private sector credit remains resilient but pockets 0.0 2019 2020 2021 2022 Jan-Nov of vulnerabilities emerge 2023 FDIs FPIs Foreign:Other corporates Domestic:CBN Nigeria’s financial sector has grown markedly in Dom estic:Exporters Domestic:Individuals Domestic:Other corporates size in the past year, mainly driven by the surge Sources: FMDQ in the banking sector. The assets held by financial Figure 1.12. The parallel market-NAFEX premium increased between 2022 and mid-2023 intermediaries and institutional investors stood at NAFEX closing rate and parallel market rate (Jan 2022–May 2023) the equivalent of 58.9 percent of GDP in June-2023, Naira/US$ 10.5 percentage points higher than in June-2022. FX premium 1200 = 36% Banks—commercial, merchant, non-interest, primary 1100 mortgage, and microfinance—held the largest share, 1000 at 80.0 percent, followed by the pension fund sector at 900 13.2 percent, and development finance institutions, at 800 2.8 percent. The insurance sector has a small holding 700 of assets reflective of the very low market penetration FX premium 600 = 62% (premiums were equivalent to just 0.4 percent of GDP FX premium 500 =37% in 2022), although they could grow over time as health 400 insurance starts to develop.5 The sovereign wealth 300 fund held assets equivalent to just 0.5 percent of GDP Mar-23 Feb-22 Mar-22 Feb-23 Apr-22 Apr-23 May-22 Jul-22 Oct-22 Nov-22 Dec-22 May-23 Jun-23 Jul-23 Oct-23 Nov-23 Jan-22 Jun-22 Jan-23 Aug-22 Sep-22 Aug-23 Sep-23 in 2022. The build-up of assets has been impacted in the past few years by the diversion of crude revenue IEFX rate Parallel rate resources toward fuel subsidy payments; assets under Sources: FMDQ, AbokiFX. management (AUM) in the sovereign wealth fund are TThe FX market has been volatile. The lack of clear expected to grow in the coming years on the back of communication by the CBN on the strategy to clear the earmark in the Petroleum Sector Act benefiting the the FX backlog has fueled speculation around low net Nigerian Sovereign Investment Authority.6 reserves (JPMorgan 2023), which in turn has caused volatility in both the official and parallel markets. The Institutional investors exhibit a very strong preference volume of FX trades in the official window remains for sovereign risk holdings and short-term fixed- consistently low, and the exchange rate premium income instruments, but have very limited exposure between the official window and the parallel market has to infrastructure financing. Pension funds hold 76 re-emerged and is fluctuating between a 10 to 40 percent percent of their total assets in government securities 10 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results and in money market mutual funds invested in T-bills. in manufacturing, and oil and gas) from 35.1 percent Prudential regulations allow pension funds to take a year earlier, while that going to agriculture fell by 1.2 significant exposure to infrastructure bonds—up to 15 percentage points over the same period. Bank retail percent of AUM. However, these assets are less than 1 portfolios remain relatively small, at just about 1 percent percent of the portfolio, in part reflecting the dearth of of private sector credit (end-2022). While the CBN’s offerings. In the mutual funds sector, money market monetary policy rate (MPR) has risen by 725 basis points funds held 44 percent of the AUM by the sector, and US since end-April 2022, the average prime lending rate rose dollar funds another 29 percent. Public equities market by only one-third of that rise through September 2023, capitalization stood at the equivalent of 16.4 percent of while the maximum lending rate fell marginally over GDP in June 2023, and has continued to surge strongly that period. By contrast, deposit rates have risen by a since then. However, participation of foreign investors significant share of the rise in the MPR across maturities, in public equities continued to decline in the first nine with the largest rise on savings deposits. Banks have been months of 2023, accounting for less than 10 percent cautious about passing on the rise in MPR and in their of trading, down from 16 percent a year earlier. This funding costs to borrowers, as their repayment capacity downward trend of FPI in general, including exits from is under pressure from the continued rise in inflation, OMOs,7 started after 2019, and has intensified more the currency depreciation, and sluggish growth of the recently, reducing market liquidity and impacting price economy. There is a risk that stressed loans exposures will discovery. The recent removal of Nigeria from the MSCI turn non-performing if interest rates on those facilities Frontier Market Index to a standalone market status on are raised further. account of persistent difficulties in the FX market, could further diminish foreign investor participation. The erosion of bank capital buffers continued through H1 2023 and pockets of vulnerability have Over the past few months, there has been a surge in emerged in a challenging operating environment. growth of banking sector credit to the economy, while The banking system capital adequacy ratio (CAR) fell to lending rates have risen, but by only a fraction of the 11.2 percent in June 2023, 3.3 percentage points lower rise in the CBN policy rates. The growth rate (yoy) in than a year earlier, and 4.3 percentage points lower than nominal credit to the private sector accelerated from an in 2021.8 The decline has accelerated in the past year, in average 22.6 percent in Q2 2023 to 39.9 percent in Q3 part reflecting the impact of the currency devaluation, 2023, largely reflecting the valuation impact of the naira which was only partially offset by net revaluation gains depreciation on US dollar-denominated loans in June as banks’ US dollar-denominated assets are bigger than and the subsequent floating of the currency. As a result, US dollar-denominated liabilities.9 Smaller banks have notwithstanding the acceleration in annual inflation thinner capital buffers above minimum requirements in Q3 2023, growth in real credit to the private sector than systemic ones. This makes them more vulnerable turned positive and started to accelerate, breaking 10 to the possible worsening in overall loan quality that, consecutive months of contraction. A similar pattern in the past, has followed significant depreciations of is shown in money supply growth, both narrow and the currency (with a 12- to 24-month lag)—stress that broad. The relative importance of the CBN in the is further heightened by high inflation. While through provision of credit to the private sector through a wide June 32023, the non-performing loans (NPLs) ratio has range of development finance interventions has declined continued to improve and fell to 4.1 percent, 0.8 of a further to 7.0 percent, from 10 percent in 2021. At the percentage point lower than one year earlier, stress test sectoral level, the share of private sector credit going to results for credit risk as of end-2022 reported in the industry rose to 39.5 percent in June 2023 (particularly CBN’s Financial Stability Report are suggestive of latent PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 11 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.13. CBN MPR and selected banking rates weaknesses to a substantial deterioration in loan quality. (2020–September 2023) Among other reasons, this is because the banking Interest rates system capital buffer has further eroded since last year. Percent The system remains liquid, with a liquidity ratio of 35.0 48.4 percent in June 2023, and profitable with a return 30.0 on equity of 17.2 percent in 2022. Banks’ combined 25.0 exposure to the sovereign remains elevated at 2.0 times 20.0 capital, with an additional 1.6 times capital in CBN 15.0 securities, as of June 2023. 10.0 5.0 In May 2023, the CBN took decisive supervisory 0.0 action on numerous financial institutions with long- Feb-21 Feb-22 Feb-23 Jun-21 Jun-22 Jun-23 Dec-20 Apr-21 Aug-21 Oct-21 Dec-21 Apr-22 Aug-22 Oct-22 Dec-22 Apr-23 Aug-23 standing breaches of regulatory requirements. In addition to commercial banks, the CBN also oversees MPR Savings rate microfinance banks, primary mortgage banks, and 3-months Deposit rate 12-months Deposit rate finance companies, among other financial intermediaries. Prime lending rate Maxium lending rate In May 2023, the CBN removed the licenses of 179, Source: CBN. four, and three of those institutions, respectively. The Note: Others include private mortgage banking and microfinance banks Nigeria Deposit Insurance Corporation (NDIC) has Figure 1.14. Commercial and merchant bank proceeded promptly with the payment of guaranteed exposure to the Government and the CBN (2020– deposits, which is a critical attribute in well-functioning June 2022) deposit insurance agencies to help maintain the public’s Bank exposure to government confidence in the system. Percent 40 35 30 25 20 15 10 5 0 Feb-22 Feb-23 Feb-21 Apr-22 Aug-22 Apr-23 Apr-21 Aug-21 Oct-21 Dec-21 Oct-22 Jun-22 Dec-22 Jun-23 Dec-20 Jun-21 Exposure to government Exposure to CBN Source: CBN 12 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Fiscal: Reforms provided significant fiscal the H1, limiting the ability of the Federal Government relief, but pressures remain high to implement significant fiscal consolidation from the expenditure side in H2 2023. Additional expenditure Nigeria’s fiscal situation improved in the second half pressures are expected in 2023 from the announced of 2023 on the back of the reforms undertaken in June policy measure of the N35,000 wage award for all 2023, but challenges continue. With the devaluation of federal civil servants from September 1 onward for six the naira, net Federation revenues grew in nominal terms months. As such, despite higher revenue performance in yoy, but remained stagnant in terms of GDP per capita. H2-2023, the fiscal deficit for 2023 for the Federation However, the revenue impact of the removal of the fuel is estimated to be 0.1 of a percentage point higher than subsidy is yet to fully materialize. Expenditure pressures 2022 levels, at 5.1 percent of GDP. continued to mount, as interest payments soared. Capital expenditures were also high, especially during Figure 1.15. Despite reforms, the fiscal deficit in Figure 1.16. …as expenditure pressures continue 2023 is expected to remain high… Federal revenue and expenditure Jan–Aug (as percent of full-year GDP) Fiscal deficit (as percent of GDP) Percent of GDP Percent of GDP 6.0 14 5.0 12 4.0 10 3.6 6.5 5.1 4.6 5.0 3.2 4.1 5.1 3.0 8 3.8 6 2.0 4 1.0 2 0.0 2019 2020 2021 2022 2023 0 Capital Expenditure Interest 2015 2016 2017 2018 2019 2020 2021 2022 2023 Personnel costs Other costs Deficit Revenue Expenditure Total federal expenditure Total federal revenue Sources: OAGF, BOF, and World Bank estimates Sources: OAGF, BOF, and World Bank estimates Between January and August 2023, net Federation channeled back into the Federation account to meet the revenues remained stagnant at 2.5 percent of full-year growing expenses. GDP, as deductions from the net Federation account increased in July and August. However, net Federation Non-oil Federation revenues saw considerable gains revenues in the July–August period registered a smaller on the back of exchange rate reform in the second nominal growth (15.9 percent) than in the January–June half of the year. Corporate tax revenues posted an period (22.8 percent). This is primarily due to large-scale increase of 0.1 of a percentage point of full-year GDP deductions for non-oil excess account in July and August, (a 34.2-percent increase in nominal terms) in January– at N589 billion and N600 billion, respectively. Without August yoy, with the entire increase coming in the these deductions, net Federation revenues would have July–August period, making it the largest contributor increased by 0.3 of a percentage point of GDP (30.5 to Federation revenue growth in the period. While percent yoy in nominal terms) between January and July–August is the filing period, which could explain August, with all of the increase coming in the July– the increase in corporate taxes, the collections in these August period. It is unclear why these deductions were months are significantly higher than the previous year’s made, or against which methodology and formulae, and collection in the July–August period, indicating some it is not known whether some of these deductions were windfall gains for companies on the back of naira PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 13 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 devaluation. Similarly, VAT collections for January– Figure 1.17. Large (and growing) deductions, August increased yoy by 0.1 of a percentage point primarily for non-oil excess account, have reduced net Federation revenues in 2023 of full-year GDP (28.6 percent in nominal terms, Percent of GDP with July–August posting gains of 46.9 percent yoy in 3.5 nominal terms). Customs revenues declined by 0.1 of 3.0 a percentage point of full-year GDP in the January– 2.5 August period (a nominal increase of only 3.8 percent yoy), but it reversed the negative nominal growth 2.0 (-0.1 percent yoy) in the January–June period, to post 1.5 nominal growth of 14.4 percent yoy in the July–August 1.0 period. While the devaluation of the naira is expected to 0.5 raise the value of imports and therefore increase customs 0.0 duties on them, the impact of the devaluation on the -0.5 price of imports is also expected to weigh on demand. As -1.0 such, the net effect of the devaluation on customs duties Jan-Jun Jul-Aug Total Jan-Jun Jul-Aug Total is not expected to be large. 2022 2023 CIT Customs VAT Net Oil Deductions Total Source: OAGF, NBS, and World Bank estimates As per the Office of the Accountant General of the Federation (OAGF) fiscal accounts reports, gains in Figure 1.18. Corporate taxes were the biggest contributor to revenue growth in H2 2023…. net oil revenues of the Federation were lower than Percent what they should have been, given the removal of the costly gasoline subsidy. The gasoline subsidy cost the 80.0 Federation about N380 billion a month and it had been 60.0 expected that, after the decision to remove the subsidy, the Federation account would have seen large increases 40.0 in net oil revenues. However, most of the gains in the 20.0 oil revenues in H2 2023, as reported by OAGF, can be 0.0 attributed to exchange rate gains. Without exchange rate gains, net oil revenue between January and August -20.0 would have declined by 0.2 of a percentage point of -40.0 full-year GDP yoy, all materializing in the July–August period 10. In August, additional revenue from 40 percent -60.0 Jan-Jun Jul-Aug Total profit of Production Sharing Contracts (PSCs) and the CIT Customs VAT Net Oil Deductions interim yearly dividend were reflected in the accounts. Source: OAGF, and World Bank estimates However, these were not as high as what the gains from removing the gasoline subsidy should have been. Given Expenditure pressures have continued to mount that petrol pump prices have not changed in line with during 2023. Federal expenditure (which accounted for market fundamentals (notably exchange rate movements 60 percent of the total Federation expenditure in 2022) and global oil prices), there is a risk that the implicit saw 0.7 of a percentage point of full-year GDP yoy fuel subsidy has reemerged, potentially keeping net oil increase in the January–August period (a 36.6-percent revenues lower than expected. nominal increase yoy). This was driven by rising interest costs that increased by 0.3 of a percentage point of full- year GDP yoy (a 36.4-percent nominal increase yoy, 14 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results in June 2023. However, with the wage reward being announced for the end of the year as a palliative for federal employees due to the removal of the fuel subsidy, Figure 1.19.…as net oil revenues were lower than what they had been expected to be following the a further contraction on the expenditure side for the removal of the subsidy remainder of the year seems unlikely. Naira Billion Federation transfers to states are expected to stay 700 relatively constant in real terms in 2023. In 2022, 600 for an average state, Federation transfers (states + local) 500 increased by N18 billion, or 13.8 percent, from 2021 levels—below the rate of inflation. While oil-producing 400 states on average saw an increase in 2022 of N54 billion, 300 non-oil-producing states only received an additional 200 N4 billion, on average. In 2023, with higher revenues, 100 especially from exchange rate gains in the oil sector, and from CIT, an average state is expected to see about N187 0 Jan Feb Mar Apr May Jun Jul Aug billion of Federation transfers vis-à-vis N150 billion in 2022 Net oil revenues 2022 Exchange rate gain 2022 (a 25-percent increase). Oil-producing states are 2023 Net oil revenues 2023 Exchange rate gain projected to receive N52 billion more in Federation transfers than 2022 levels (a 21.7-percent increase), comprising 99 percent of total Federal revenues), and while non-oil-producing states are estimated to gain an high capital expenditures (which increased by 0.4 of a additional N31 billion in 2023 in Federation transfer percentage point of full year GDP yoy). Personnel costs revenues. also increased considerably for the Federal Government Figure 1.20. Room for fiscal consolidation by 0.2 of a percentage point of GDP yoy (a 33-percent from the expenditure side is limited, as interest increase in nominal terms) during January–August. payments and personnel costs occupy a larger share of Federal revenues However, efforts at fiscal consolidation can be seen Percent of federal revenues in the second half of the year, as total expenditure 300.0 contracted during the July–August period by 0.2 of a percentage point of full-year GDP yoy, as opposed to 0.8 250.0 of a percentage point of GDP yoy growth posted in the 53.7 200.0 42.2 January–June period. 28.3 29.6 150.0 Interest expenses are estimated to slow down in the 71.8 66.3 second half of the year, as the securitization of the 100.0 Ways and Means financing lowers costs. In July– August 2023, interest costs increased yoy but remained 50.0 89.3 99.1 constant in percentage-of-GDP terms yoy, as opposed 0.0 to 0.3 of a percentage point of GDP increase yoy in the 2022 Jan-Aug 2023 Jan-Aug first half of the year. Interest on external debt declined in Interest Personnel Other recurrent Capex July–August 2023 by 18.4 percent yoy in nominal terms, Source: OAGF, NBS, and World Bank estimates despite devaluation of the naira, while it was 3.5 percent lower in nominal terms yoy in the January–June period. A large part of the slowdown in interest payments is attributable to the securitization of the N22.7 trillion of Ways and Means11, which was approved by Parliament PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 15 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.21. Federation transfers to states are projected to increase by 25 percent on average in 2023 Naira billions 600 500 400 300 187 200 100 150 0 TARABA OGUN PLATEAU BAUCHI KANO EBONYI EKITI ONDO KOGI SOKOTO BENUE NASSARAWA KADUNA KWARA ADAMAWA GOMBE ANAMBRA RIVERS DELTA LAGOS AKWA IBOM CROSS RIVER NIGER ENUGU OSUN BORNO KEBBI IMO EDO OYO JIGAWA KATSINA YOBE ZAMFARA ABIA BAYELSA Source: OAGF, and World Bank estimates With reformsNorth North East Central in higher resulting North West revenues, Nigeria’s Figure South EasttotalSouth 1.22. The fiscalSouth South West deficit is projected to debt sustainability has improved. The debt stock is be higher than budgeted in 2023… Federation Transfers 2022 Federation transfers 2023 Average 2022 Average 2023 estimated to reach 42.2 percent of GDP in 2023, as 15000 foreign currency debt increases by 2 percentage points 10127 10000 of GDP (to reach 11.3 percent of GDP) due to the Budgeted revenues revaluation effects of the naira depreciation, while 5000 expenditures domestic debt (despite higher issuances and continued Budgeted Est. in-year Estimate addl. 0 revenue revenues from Total est. fiscal Ways and Means financing) increases by only 0.1 of a shortfalls reforms Additional in- year -5000 expenditure percentage point of GDP (to reach 30.9 percent of deficit GDP). With higher nominal revenues in 2023 and -10000 -19138 2654 securitization of Ways and Means, debt servicing as a -15000 -3971 -2212 -12540 share of GDP is expected to decline from 101.5 percent Source: OAGF, NBS, and World Bank estimates in 2022 to 66 percent of Federation revenues. Figure 1.23.…resulting in a significant financing gap A higher-than-budgeted Federal fiscal deficit is Naira billions 14000 expected to result in continued reliance on costly Financing gap ~ ₦3.2 and distortionary Ways and Means financing. While 12000 trillion market domestic debt issuances are estimated to be 10000 much higher than 2022 levels (budgeted at N7 trillion 8000 in 2023, as opposed to N3.3 trillion in 2022), reliance 6000 on Ways and Means financing is expected to continue, 4000 which is a costly and distortionary source of finance. 2000 While Ways and Means financing is lower than the 0 Budget Est. Actual 1.7-percent-of-GDP level in 2022, it is still estimated to Domestic Securities External Borrowing be 1.4 percent of GDP at the end of 2023. Other financing FGN Fiscal Deficit Source: OAGF, and World Bank estimates 16 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Box 1.2. The Proposed Medium-Term Fiscal Framework 2024–26 The 2024–2026 Medium-Term Fiscal Framework (MTFF), along with the Fiscal Strategy Paper, was approved by the Federal Executive Council (FEC) on October 16, 2023. The MTFF and the Fiscal Strategy Paper present the Government’s economic framework and projections, the Federation revenues and the Federal budgeted expenditures over the next three years, as well as aggregate financing options for the Federal fiscal deficit. A summary of the MTFF is presented below, noting that details may change as the MTFF and budget are approved by Parliament (including exchange rate assumptions). In Nigeria, revenue projections have tended to be over-optimistic (partly due to over-optimistic oil-production projections), and the outturns tend to fall short of budget targets, resulting in higher-than-budgeted Federal fiscal deficits. Table 1.2.1. Summary information from the proposed MTEF 2024–2026 2023 approved 2024 2025 2026 budget Crude oil price (US$ per barrel) 75 78 73.8 69.9 Crude oil production (mbpd) 1.7 1.8 1.8 1.8 Exchange rate (N/US$) 435.6 750 665.6 669.8 Inflation (%, annual average) 17.2 21.4 20.3 18.6 Real GDP growth (%) 3.8 3.8 4.2 4.8 Net Federation Accounts Allocation Committee 11.9 26.6 25.9 27.1 (FAAC) revenues (N trillion) Federal Government revenues (N trillion) 8.6 15.5 14.3 14.8 Federal Government expenditure (N trillion) 20.2 24.8 24.6 26.4 Federal fiscal deficit (N trillion) -11.6 -9.3 -10.3 -11.6 Federal deficit financing (N trillion) 11.6 9.3 10.3 11.6 Domestic borrowing (N trillion) 7.9 6 6.4 8.9 External borrowing (N trillion) 1.8 1.8 2.1 1.1 Multilateral and bilateral loans (N trillion) 1.8 1.1 1.7 1.4 Privatization (N trillion) 0.2 0.3 0 0 Other (N trillion) 0 0.1 0.1 0.1 Source: BOF, and World Bank estimates PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 17 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Box 1.3. The costs of using Ways and Means financing Monetization of the Federal fiscal deficit is a violation of the CBN Act 2007. As per the CBN Act 2007, the recourse to Ways and Means financing is meant to be a temporary solution to smooth out any short-term revenue management issues for the Federal Government (FGN). However, the Act also states that the FGN cannot, at any time, obtain an advance from the CBN of more than 5 percent of the previous year’s revenue, and that an advance must be repaid at the end of the financial year. Failure to repay an advance would result in no further advances to the FGN. However, since 2013, the FGN has been accumulating a stock of Ways and Means financing at an increasing rate, breaching the limits set in the Act. By end-2022, the stock of Ways and Means financing stood at N23.5 trillion, or 11.6 percent of GDP. Ways and Means financing carries significant costs and causes distortions in the economy. The interest cost of Ways and Means (at the Monetary Policy Rate [MPR] + 3 percent) tends to be much higher than any of the other domestic financing instruments used by the FGN. For example, with the MPR increasing to 18.75 percent in July 2023, the interest rate on Ways and Means financing stands at 21.75 percent, significantly higher than even long-term FGN bonds issued by the Government (15.7 percent for 30-year bonds issued in November). Ways and Means is also mostly financed by the CBN through seigniorage, which increases money supply and is, therefore, highly inflationary. The CBN has also partially financed Ways and Means through the balances of commercial banks, which maintain balances at the CBN to comply with Cash Reserve Ratio (CRR) requirements; the minimum CRR stands at 32.5 percent. Even though financing through CRR mitigates the inflationary impact of Ways and Means, it comes at the cost of private sector credit, diverting this to the public sector. Reliance on Ways and Means financing continues to date, despite high costs, primarily due to existing budgeting practices. Federal budgets are prepared based on overly optimistic revenue projections that are often not realized during the year, causing in-year financing gaps to emerge as actual fiscal deficits exceed budgeted fiscal deficits. Meeting this unbudgeted financing gap through official domestic financing channels would require preparing a supplementary budget that has to be approved by Parliament, which can be a difficult and time-consuming process. Consequently, the FGN resorts to using Ways and Means financing—a quicker source of financing and one that is not officially accounted for as part of the FGN’s debt stock. 18 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Box 1.3 cont. Figure B1.3.1. Up until May 2023 (pre-approval Figure B1.3.2. Fiscal deficit outturns have of the securitization), FGN had accumulated been larger than budgeted, contributing to an additional N3 trillion of Ways and Means increasing the stock of Ways and Means financing, much higher than the statutory limit Naira Billion Percent Naira Billion 0 7000 14 6000 12 -2000 5000 10 -4000 4000 8 3000 6 -6000 2000 4 -8000 1000 2 0 0 -10000 2015 2016 2017 2018 2019 2020 2021 2022 Up until May -12000 2023 2016 2017 2018 2019 2020 2021 2022 Ways and Means financing (in percent of GDP) - rhs Base Change in Ways and Means financing Budgeted federal fiscal balance Statutory limit (5% of previous year's revenue) Actual federal fiscal balance Sources: CBN and World Bank staff estimates. Sources: BOF, OAGF, and World Bank staff estimates. Securitization of the stock of Ways and Means helped mitigate some of the fiscal costs, but it is not a long-term solution. In mid-June 2023, Parliament approved the securitization of N22.7 trillion of the stock of Ways and Means (stock up until October 2022) to a 40-year tenor instrument at 9 percent interest rate, which is now considered part of the official debt stock of the FGN. This securitization helps reduce the cost of servicing the accumulated stock of Ways and Means financing, but reduces the profitability of the CBN, and does not address the ongoing “flow” of deficit monetization. As of May 2023, the stock of Ways and Means financing was over N26 trillion, or 11.1 percent of full-year projected GDP. The securitization was approved in May 2023 and the total outstanding stock of Ways and Means by end-June was revised to N4.3 trillion, or 1.8 percent of GDP. Both the monetary and fiscal authorities need to work together to reduce, and eventually eliminate, the use of Ways and Means financing. On the monetary side, it is important for the CBN to prioritize returning to adherence with the CBN Act. On the fiscal side, boosting revenues can reduce the size of fiscal deficits, which would reduce the overall recourse to Ways and Means as the actual revenues may be closer to the optimistic budget revenue targets. Better budgeting practices, including more realistic revenue and expenditure planning, can reduce the need to use Ways and Means. In addition, better cash management practices, including more stringent application of Treasury Single Account (TSA) principles, can eliminate the need for accumulating Ways and Means in response to in-year cash management challenges. Full transparency and disclosure of information on Ways and Means, both to the public and Parliament, is also vital to rebuild institutional credibility and confidence, which implies including it as part of Nigeria’s official debt stock and all debt analytics. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 19 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Economic Outlook The global economy: Continuation of a weighing on investor confidence, adversely affecting policy-induced slowdown capital flows and investment. However, if the recovery in China should disappoint, global commodity prices could Global growth is expected to weaken this year, as decline and thereby undermine recoveries in commodity tighter monetary policy owing to persistent inflation exporters, especially metal exporters. In EMDEs, tighter weighs on economic activity (World Bank 2023a). financial conditions, rising debt service costs, weak Despite a recent deceleration in global inflation amid growth, and high levels of debt could increase the risk easing commodity prices, inflation has remained sticky of debt distress, while further constraining fiscal space. in many countries. The extent of monetary policy Food prices are expected to remain above pre-pandemic tightening has been unprecedented, leading to a sharp levels. As a result, further disruptions to the supply of increase in borrowing costs, tighter credit conditions, farming inputs (especially energy and fertilizers), extreme and a slowdown in interest-rate-sensitive sectors, such weather conditions, and an escalation of violence and as commercial real estate. While stronger than expected conflict could push more people into extreme poverty earlier this year, global growth is still expected to have and food insecurity. weakened in 2023, reflecting the lagged impact of interest rate hikes (Figure 1.24A). Global economic Commodity prices have retreated from their highs growth is projected to decline to just 2.1 percent this year in 2022. Commodity prices are expected to drop 24 and to 2.9 percent in emerging markets and developing percent in 2023 and fall a further 4 percent in 2024 economies (EMDEs) excluding China. Slowing external (Figure 1.24B), assuming that the latest conflict in the demand, tighter global financial conditions, and weaker Middle East remains contained, with minimal effects growth spillovers from the recovery in China have on commodity markets (World Bank Group 2023). In weighed on recoveries in EMDEs. An acceleration of such a scenario, weak global growth amid tight financial growth in China is expected to be primarily driven by a conditions continues to drive commodity prices lower in recovery in services, thus providing only limited positive 2024. Energy prices are projected to decline by nearly 29 spillovers to global demand, trade, and commodity percent in 2023 and ease further by 4.5 percent in 2024, prices. Meanwhile, tighter financing conditions, slower while food and metal prices are forecast to decline by growth, and high debt levels exacerbated unfavorable 8.8 and 12 percent in 2023, and by 1.5 and 5.1 percent debt dynamics across many EMDEs, increasing the risk in 2024, respectively. While increased supply of major of debt distress. commodities will dampen prices, subdued global goods trade and weakness in China’s highly leveraged property Risks to the global outlook remain tilted to the sector will weigh on energy and industrial metals into downside. Global growth could weaken more than 2024. With the latest conflict in the Middle East, anticipated if persistent inflation results in additional geopolitical risks have risen sharply, for the commodity monetary policy tightening. Increasing interest rates, market outlook in particular. Severe weather events, along with slowing growth, may trigger an increase in primarily driven by El Niño, and weaker-than-expected NPLs, leading to a further tightening of credit conditions global growth are additional risks to the commodity in some countries. Current global geopolitical tensions outlook. and policy uncertainty could worsen—especially in the case where the conflict in the Middle East escalates— 20 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Figure 1.24. Global financial conditions have tightened A. Global policy rates B. Commodity price indices Percent Index, 100 = 2019 12 300 10 250 8 6 200 4 150 2 0 100 1/1/2021 4/1/2021 7/1/2021 1/1/2022 4/1/2022 7/1/2022 1/1/2023 4/1/2023 7/1/2023 10/1/2021 10/1/2022 10/1/2023 50 2019 2020 2021 2022 2023f 2024f EMDEs AEs Energy Food Fertilizers Base metals Sources: Haver; World Bank. Note: AEs =Advanced economies; EMDEs = Emerging Markets and Developing Economies. A. Unweighted average of nominal policy rates. Panel includes 16 AEs and at least 70 EMDEs. Last observation is October 2023. B. f indicates forecast. Table 1.1. Global and regional indicators, 2019–2023 2023f 2020 2021 2022 June 2023 January 2023 (current pro- (previous jection) projection) Real GDP growth – Global economy (%) -3.1 6 3.1 2.1 1.7 Real GDP growth – Advanced Economies (%) -4.3 5.4 2.6 0.7 0.5 Real GDP growth – Emerging and Developing Econo- -1.5 6.9 3.7 4.1 3.4 mies (%) Real GDP growth – Emerging and Developing Econo- -3.9 5.9 4.1 2.9 2.7 mies excluding China (%) a3 Crude oil, Brent (US$ per barrel) 42.3 70.4 99.8 84 88 Sources: World Bank. 2023a. Global Economic Prospects (June 2023). World Bank: Washington, DC; World Bank Group. 2023. Commodity Markets Outlook (October 2023). World Bank: Washington, DC. Note: a For the crude oil price, the current reference date is October 2023 (as in the Commodity Markets Outlook). PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 21 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Nigeria’s outlook and policy priorities: transparent, market-reflective, and flexible exchange Maintaining reform momentum will allow rate, underpinned by monetary policy tightening, is also Nigeria to chart a new course likely to be more stable, thereby easing the pressures on inflation. Additional transparency on the net reserves Recent reforms, if continued and enhanced, are position of the CBN and clearer communication on expected to unwind critical macroeconomic the clearance of the backlog can also boost confidence imbalances and distortions that have held back in market and help stabilize the naira, which will help Nigeria’s growth in the recent past. Reforms are keep inflation moderated. In the baseline scenario, lower expected to contribute to a progressive recovery of GDP inflationary pressures from reduced deficit monetization growth between 2023 and 2026, at an annual average of would be best supported by a significantly tighter 3.5 percent in the period. Services—especially banking monetary policy, the projected decline in global non- and ICT—and non-oil industry will benefit from a more oil commodity prices, and the higher foreign supply stable and predictable macroeconomic environment, of goods and services, as strengthened policies and and easier access to FX and imported inputs. Along macroeconomic stability foster the increased trade and with continuing increased global oil prices, the removal investment needed to address supply-side constraints. of the gasoline subsidy should help oil production to gradually recover and reverse the sector’s decline. In turn, The reform of the gasoline subsidy, the unification the agriculture sector is expected to progressively recover of the exchange rate, and non-oil revenue-related from impacts of the severe floods in 2022. In the medium reforms are expected to result in larger fiscal inflows. term, the economy will also benefit from increased fiscal It is estimated that revenues will rebound from 6.7 space for development spending, including on power and percent of GDP in 2022 to 7.6 percent in 2023, and transport infrastructure, and on human capital. Moving increase further to average 9.5 percent of GDP in 2024– decisively onto a high long-term growth path will require 2026. Three main factors contribute to this increase in not only macroeconomic stabilization but also structural revenues: reforms to reduce insecurity, improve the business environment, and increase openness to trade. Together, • First, the resources that were previously used to these reforms will significantly boost investment and finance the gasoline subsidy will now flow back to productivity across all sectors. the Treasury, adding about 1.4 percent of GDP as additional annual revenue gains. Inflation will gradually decline in 2024 and beyond, if monetary policy tightening is accelerated (Figure • Second, the reform of the FX rate will boost foreign- 1.26). The reform of the gasoline subsidy increased related revenues (oil and customs) as US dollar- some prices, mainly of gasoline purchases for vehicles denominated Federation revenues were previously and generators, as well as transport-related costs. exchanged at an overvalued exchange rate. This Consequently, headline inflation is expected to rise is estimated to bring about 0.9 percent of GDP in from an average of 18.8 percent in 2022 to 24 percent additional gains compared with a scenario in which the in 2023. However, the reform of the subsidy will reform was not implemented. become disinflationary starting in H12024 due to fiscal consolidation. This will help to reduce financing from • Third, planned non-oil revenue-generating measures the CBN, consequently lowering money supply growth are expected to yield an additional 1 percent of GDP and dissipating the impact of the initial large gasoline by 2026. price increases. Similarly, while the depreciation of the naira contributes to short-run inflation, over time a more 22 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results As a result of the revenue gains, the fiscal deficit debt stock is not high by international standards. will decrease, despite an increase in spending. However, due to low revenue mobilization and high Expenditures are set to rise from 11.7 percent of GDP in debt costs, debt servicing had been rising rapidly before 2022 to 13.5 percent in 2026. This increase is due to the the reforms, on a trajectory to reach more than 200 Government's rollout of compensating measures in 2024 percent of revenues by 2026. Following the reforms, to protect Nigerian households from the initial impacts Nigeria’s significantly improved fiscal path will keep of the subsidy reform. This is reflected in an increase debt levels below 40 percent of GDP over the medium of 0.7 of a percentage point of GDP in the wage bill. term, and debt servicing will start trending downward Concurrently, there will be a boost in capital spending, from about 101.5 percent of total revenues in 2022 to particularly in 2025 and 2026, as the Government 43 percent in 2026. The improving debt trajectory is directs investments toward enhancing physical and primarily due to the improved fiscal outlook resulting human capital. In addition, interest payments on from higher projected revenues through the reforms, debt will rise because of the anticipated tightening of and the securitization of over 95 percent of the stock of monetary policy. Overall, the revenue gain will outweigh Ways and Means financing into a long-tenor instrument the spending increase, resulting in the primary balance with a significantly lower interest rate.12 With only 23 moving into a small surplus by 2026 and the fiscal deficit percent of the total PPG debt stock in foreign currency shrinking from 5.1 percent of GDP in 2022 to about (mostly on concessional terms), the public debt stock 3.2 percent in 2026. and servicing are estimated to remain sustainable in the face of exchange rate and other macroeconomic shocks The improved fiscal position will contribute to (Figure 1.25). maintaining the sustainability of public debt. With the Public and Publicly Guaranteed (PPG) debt stock at 40 percent of GDP at the end of 2022, Nigeria’s PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 23 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.25. Public and publicly guaranteed debt Nigeria Public DSA - Stress Tests Macro-Fiscal Stress Tests Baseline Primary Balance Shock Real Interest Rate Shock Real GDP Growth Shock Real Exchange Rate Shock Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 60 700 9 600 8 50 7 500 40 6 400 5 30 300 4 20 3 200 2 10 100 1 0 0 0 2023 2024 2025 2026 2027 2028 2023 2024 2025 2026 2027 2028 2023 2024 2025 2026 2027 2028 Additional Stress Test Baseline Combined Macro-Fiscal Shock Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 60 700 10 9 50 600 8 500 7 40 400 6 30 5 300 4 20 3 200 2 10 100 1 0 0 0 2023 2024 2025 2026 2027 2028 2023 2024 2025 2026 2027 2028 2023 2024 2025 2026 2027 2028 Source: World Bank estimates using data from DMO and the MAC DSA template. Risks to the economic outlook are tilted to the ramp up non-oil revenues through tax policy and tax downside, as the baseline scenario hinges on administration, combined with a continued decline in reforms being sustained, despite the headwinds oil production, would lead to a rapid deterioration in the from adjustment pains and any adverse shocks. fiscal situation, with debt servicing pressures escalating Domestically, policy reversals or the failure to implement over the medium term. Under this “no-reform” scenario coherent and supportive policy measures are the biggest (Table 1.2), Nigeria's macroeconomic stability would risks to restoring macroeconomic stability in Nigeria. If worsen significantly, the growth outlook would remain savings from the PMS subsidy are not realized, revenues weak, and economic instability would intensify. could drop as much as 2 percentage points of GDP in Externally, continued tight monetary policy in the the coming years. Similarly, not allowing the exchange key economies, global growth deceleration, worsening rate to be determined by market forces and failing to political instability in the region, or intensification of tighten monetary policy could add to exchange rate the conflicts in the Middle East and Ukraine, could volatility, maintain inflationary pressures, erode investor undermine economic activity in Nigeria. Similar to all confidence, reignite arbitrage opportunities, and further countries, Nigeria also faces rising climate change-related increase inflation. A weaker reform impetus to quickly risks, such as a repeat of the damaging 2022 floods. 24 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Table 1.2. Macro-fiscal outlook (with vs without reforms) Post-reforms No-reforms 2022 2023 2024 2025 2026 2023 2024 2025 2026 Key economic indicators Act. Proj Proj Proj Proj Proj Proj Proj Proj Real GDP growth (annual percentage change) 3.3 2.9 3.3 3.7 4.1 2.9 2.9 3.0 3.1 CPI inflation (yearly average) 18.8 24.5 21.7 19.6 17.1 21.0 21.5 23.0 24.0 Current account balance (percent of GDP) 0.2 0.2 0.1 -0.0 -0.0 -0.7 -1.0 -0.6 -0.7 Fiscal and debt indicators (Percent of GDP, unless stated otherwise) Revenues 6.7 7.6 8.8 9.5 10.2 5.7 6.0 5.9 5.1 Expenditures 11.7 12.7 12.9 13.2 13.4 12.1 12.1 11.8 11.2 Primary fiscal balance -1.6 -1.7 -1.0 -0.5 0.1 -2.2 -2.0 -2.0 -2.5 Overall fiscal balance -5.0 -5.1 -4.1 -3.7 -3.2 -6.4 -6.1 -6.0 -6.2 Public debt 40.0 42.0 41.2 38.3 35.9 43.0 41.8 40.0 38.2 Debt service (percentage of revenues) 101.5 66 61 51 41 172 176 182 236 Sources: OAGF, DMO, CBN, NBS and World Bank staff calculations. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 25 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 1.26. The important reforms initiated, if sustained, improve Nigeria’s economic outlook Macroeconomic indicators and projections, 2019–2024 Percent Inflation Real GDP growth 5.0 3.7 30.0 3.6 3.3 3.3 4.0 2.9 24.5 3.0 2.2 25.0 21.7 2.0 2.9 2.9 3.0 18.8 23.0 1.0 20.0 17.0 21.5 0.0 21.0 19.6 -1.0 -1.8 15.0 13.2 11.4 -2.0 -3.0 10.0 2019 2020 2021 2022 2023 2024 2025 2019 2020 2021 2022 2023 2024 2025 Initial reform No reforms Initial reform No reforms Current Account Balance Percent of GDP 1.0 Percent Revenue 0.2 0.2 0.1 0.0 9.5 10.0 0.0 -0.7 8.8 9.0 -1.0 7.4 7.6 -0.7 -0.6 8.0 6.9 -1.0 6.5 6.7 -2.0 7.0 -2.9 6.0 -3.0 -3.7 5.0 6.0 5.8 5.7 -4.0 4.0 2019 2020 2021 2022 2023 2024 2025 2019 2020 2021 2022 2023 2024 2025 Initial reform No reforms Initial reform No reforms Percent of GDP Fiscal Deficit Public Debt Service Percent of revenue 7.0 6.4 225.0 6.1 6.0 182 6.0 6.6 172 176 175.0 5.0 125.0 102 5.1 5.0 5.1 80.0 80.0 4.0 4.6 75.0 60.0 101 4.1 3.7 66 61 3.0 25.0 2019 2020 2021 2022 2023 2024 2025 2019 2020 2021 2022 2023 2024 2025 Initial reform No reforms Initial reform No reforms Source: World Bank. Staying the course: To fully realize stability remains an important priority, to reduce the the economic gains, Nigeria needs to vulnerability of the economy to crisis and help return to continue with reforms the growth focused reforms (World Bank 2022), needed to sustainably reduce poverty and boosting job creation. Nigeria took several critical decisions and reforms There are three key outstanding reform areas in this earlier this year to avoid a fiscal cliff and regain regard: macroeconomic stability, but there is a need to fully implement and broaden them to switch onto a a. Safeguarding the benefits to the Federation of higher growth path. Fully establishing macroeconomic the PMS subsidy reform: To ensure that revenue gains 26 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results from the removal of subsidy are fully transferred to the across sectors, allowing economic development to regain Federation account, and to guarantee that the subsidy its fast pace. remains effectively removed and petrol prices adjust in line with market principles. b. Increasing non-oil revenues. To reduce Nigeria’s vulnerability to volatile oil prices, rebuild fiscal space, and sustainably increase spending to meet its enormous development needs, it is vital to increase non-oil revenues. This can be achieved by building on recent progress that has begun to broaden the non-oil tax base efficiently and equitably, and rationalizing tax expenditures. c. Reducing inflation and rebuilding confidence through a consistent overall mix of monetary, FX and fiscal policies to restore conditions for private investment and growth, and ultimately benefit Nigerians. As the economy adjusts to the new policy mix, cushioning the impacts on the poor and most vulnerable is also essential. The Government has recently rolled out cash transfers to 15 million households to help them cope with the inflationary impact of the removal of the gasoline subsidy. This can be a critical first step in building a social compact of the citizens with the state, and gain buy-in from the public for continuing with the reforms and undertaking future reforms. Moving decisively onto a higher long-term growth and poverty reduction path requires not only a stable macroeconomic environment but also concerted structural reforms (World Bank 2022). In the medium term, the economy will begin to benefit from increasing fiscal space for development spending, including on power and transport infrastructure, as well as on human capital. Reducing structural constraints to growth require not only strengthening public services and investments but also reducing insecurity, improving the business environment, and increasing openness to trade. Together, these reforms will boost investment and productivity PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 27 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Table 1.3. Macro policy options to continue to support Nigeria’s achieve macroeconomic stability Policy Status Specific Measures Restoring Macroeconomic Stability Remove the The removal of the subsidy was announced on May 29 and pump prices were adjusted gasoline subsidy on June 1. This results in expected fiscal savings of around N2 trillion in 2023, or 0.9 and establish a percent of GDP. Between 2023 and 2025, the expected gains are over N11 trillion, market-based against a scenario in which the subsidy had continued. mechanism for gasoline pricing Reaffirm the commitment to not subsidize gasoline and ensure retail gasoline prices are consistent with this. Regularly publish information that explains prices at the pump. Publish detailed financial statements and revenue flows of NNPC to safeguard the fiscal savings from the subsidy reform and ensure that oil revenues flow to the Federation. Increase non-oil revenues Since 2019, the Government introduced non-oil revenue reforms and tax administration improvements, through the Strategic Revenue Growth Initiative (SRGI). This has helped boost non-oil revenues, reversing the previously declining trend, and preventing an even more severe fiscal squeeze. Key reforms included increasing the VAT rate from 5.0 to 7.5 percent, increasing gas flare fees, rationalizing tax expenditures, and operationalizing the electronic money transfer levy. The oversight of government- owned enterprises (GOEs) has also been strengthened, by ensuring a 50 percent cap on the cost-to-income ratio of these parastatals. In the short-run, the Government can further increase non-oil revenues by (i) gradually increasing the VAT rate, while allowing for input tax credit on capital and services, (ii) removing VAT exemptions on petroleum products, (iii) remove the suspension imposed on the excises on telecommunication, single use plastics, and high-polluting vehicles, (iv) increase excise rates on sin goods (tobacco and alcohol), implementing an advisory visit program to improve voluntary compliance, (v) adopting a data-driven approach to tax audit, (iv) leveraging technology to reduce tax avoidance, (vii) linking residential property with Profit Income Tax (PIT) returns, (viii) introducing a simple turnover tax on SMEs at the state level instead of the various nuisance fees and levies, (ix) adopting modern valuation methods to properties Reduce excess The CBN has begun tightening monetary policy restarting OMOs, and removing the domestic liquidity cap on the Standing Deposit Facility. Additional measures to reduce naira liquidity, and and money supply tolerance for higher market interest rates, may be required. growth to control inflation Further tighten monetary policy. Build on strong stated commitments by finalizing and communicating the plan to swiftly phase out monetization of the fiscal deficit and current CBN development finance interventions. 28 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA TURNING THE CORNER: From reforms and renewed hope to results Policy Status Specific Measures Restoring Macroeconomic Stability Reduce trade On October 12, CBN announced the removal of FX restrictions for the importation restrictions that of 43 items. This is expected to help reduce prices on staples such as rice and help increase prices to bring poverty rates down, spur competition by removing exchange rate access and poverty distortions, and raise revenues. Start lowering import tariffs and non-tariff barriers on food and pharmaceuticals to lower prices and reduce poverty. Past import restrictions have not achieved their intended objectives of fostering domestic production, and have increased domestic prices, curtailing competitiveness and household consumption. Adopt a de facto floating exchange On June 14, the CBN unified the multiple official FX windows into a single official rate and fully market to be operated under a de facto willing-buyer-willing-seller mechanism. channel FX inflows to NAFEM Ensure full FX liberalization by continuing to build market confidence around free pricing and evaluating, and implementing policy measures to channel FX supply into the NAFEM. Publish full information on net reserves to build market confidence. Expand social protection to protect the poor and most vulnerable Establish a social Nigeria has developed a social registry system and rolled out time-bound, shock compact with the responsive, targeted cash transfers of N25,000 to 15 million recipients and their families Nigerian people (directly benefiting over 60 million Nigerians) for a period of 3 months. Implement a wider compact with Nigerian citizens to partly channel increasing revenues to continuous redistribution mechanisms—such as targeted cash transfers—and to expanded and better provision of public services. Publicize and publish details of this compact to enable public monitoring of its implementation. Note: Green indicates completion, yellow denotes partially completed reforms, and red highlights reforms that have not yet begun. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 29 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 References JPMorgan. 2023. Emerging Markets Research. Nigeria: Reform Pause Rather than Reform Fatigue. August 17, 2023. World Bank. 2022. Country Economic Memorandum: Charting a New Course – Synthesis Report. Washington, DC: World Bank. https://documents.worldbank.org/en/publication/documents-reports World Bank. 2023a. Global Economic Prospects, June 2023. World Bank, Washington, DC. https://openknowledge. worldbank.org/handle/10986/39846 World Bank. 2023b. “Poverty and Inequality Platform” (version 2017 PPPs: 20230919_2017) (Nigeria). World Bank Group. www.pip.worldbank.org. Accessed 11/13/2023. World Bank Group. 2023. Commodity Markets Outlook: Lower Prices, Little Relief. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/39633 30 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA PART 2: Taking a closer look NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Lifting FX Restrictions on Imports bans have been established through various pieces of and Tackling Import Bans government legislation since the mid-1970s. Summary: This section examines the effects of foreign The two lists overlapped on certain products, creating exchange (FX) restrictions and import bans in Nigeria. governance loopholes, uncertainty for the private The analysis reveals several unintended consequences. sector, and higher prices. There was an overlap of seven Notably, these restrictions not only pushed economic product categories between the two lists (Table 2.1). The agents toward the parallel FX market, widening the gap overlap and lack of clarity on these measures led to the between the official and parallel exchange rates, but they restrictions affecting product categories beyond those also raised the prices of both imported and domestic included in the restrictions. goods. The most significant impact was on households, which saw their purchasing power decrease with higher The FX access restrictions and import bans heightened prices. In addition, they undermined the competitiveness trade barriers and created costly economic distortions. of local firms reliant on imports for their inputs and the While the FX restrictions did not explicitly prohibit competition pressures in the domestic market. These importing the 43 categories of goods on the restriction negative outcomes outweighed any potential industrial list, they created a significant hurdle. Since importers policy payoffs, calling into question their net social and were unable to obtain FX through official channels to economic values. The section concludes by proposing cover the cost of their imports, they turned to the more complementary policies that would support Nigeria's expensive parallel markets and resorted to smuggling macroeconomic stabilization and structural reforms to the imported products into the country. Moreover, increase competitiveness and economic diversification. private sector firms often raised concerns over how these restrictions affected exchange rate management, The Unintended Consequences of Imports inflation, and firms’ productivity15. Partly because of Restrictions these restrictions, Nigeria ranked 97 out of 153 countries in 2023 on the Competitive Industrial Performance The FX restrictions on importing 43 product Index, 44 places below South Africa (ranked 53)16. categories have now been lifted, but import bans on specific items remain in place. Nigeria maintained two distinct lists of trade restrictions. The first, FX restrictions imposed on importers in 2015, were lifted on October 12, 2023. Initiated by the CBN, the restrictions purportedly aimed to conserve FX reserves and bolster domestic industry and job creation. They affected 43 product categories13, encompassing over 936 product lines according to the Harmonized Standard (HS) customs classification. The Nigeria Customs Service (NCS) enforces the second, still active, list of trade restrictions. As the statutory authority tasked with implementing trade policies, the NCS operates within the framework of the Government's fiscal policy measures, as directed by the Ministries of Trade and Finance, to enforce a comprehensive ban on the importation of 23 product categories14. These import 32 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Table 2.1. Comparison of FX restrictions on imports and import bans FX restrictions on imports Import Bans Items in both lists Rice Live or dead birds including frozen poultry Vegetable oils Cement Pork and beef Chicken and poultry Margarine Bird eggs (excl. hatching eggs for breeding and research) Eggs Refined vegetable oil (excl. linseed, castor oil, olive oil, and Palm Kernel/Palm oil products/Vegetable oils Tomato hydrogenated vegetable fats. Meat and Processed Meat Products Cane or beet sugar, chemically pure sucrose in any form Tomato paste Vegetables fresh and processed Cocoa butter, power and cakes Soaps Meat, processed meat Poultry: chicken, egg, turkey Spaghetti/noodles (pork, beef) Private airplanes/Jets Tomatoes, whole, in pieces, tomato paste or concentrate Indian Incense Fruit juice in retail packs Tinned fish in sauce (Geisha/Sardines) Tomato ketchup and sauces Waters, incl. mineral or with added sugar but excl. energy, health Cold Rolled Steel Sheets drinks and beer Galvanized Steel Sheets Bagged cement Roofing Sheets Dichlorodifluoromethanezzzz Wheelbarrows Medicaments (various) Head pans Waste pharmaceuticals Mineral and chemical fertilizer (nitrogen, phosphorus, potassium Metal Boxes and Containers and variants) Enamelware Soaps and detergents in retail packs Steel Drums Mosquito repellent coils Rethreaded and used pneumatic tires but excluding used truck Steel pipes tires for rethreading of size 11 x 20. Paper products (cartons, boxes, and cases); toilet paper, cleans- Wire rods (deformed or not) ing or facial tissue (excl. baby diapers and incontinence pads; and exercise books Iron rods and reinforcing bars Carpets and rugs of all types All types of footwears, bags and suitcases (excl. safety shoes Wire mesh in oil industries, sports shoes, canvass shoes, and all knocked down) Steel nails Hollows glass bottles of a capacity > 150 ml (0.15 liters) Security and razor wire Used compressors, air conditioners, and fridges and freezers Wood particle boards and panels Used motor vehicles > 12 years from the year of manufacture Wood fiber boards and panels Ball point pen and parts including refills (excluding tips) Wooden doors Furniture PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 33 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Toothpicks Glass and Glassware Kitchen Utensils Tableware Tiles – vitrified and ceramic Textiles Woven fabrics Clothes Plastic or rubber products and cellophane wrappers Soap and cosmetics Tomatoes and Tomato paste Euro bond, foreign currency bond Overall, import restrictions had four major adverse 3. Trade evasion: FX restrictions on imports had effects on the Nigerian economy: also directly resulted in an 18.1 percent increase in trade evasion (Figure 2.2). This evasion rate in Nigeria is triple 1. FX market segmentation: Despite the import that of low-income countries. The unrecorded trade restrictions faced by traders and businesses, whether in flows, which were not reflected in Nigeria's balance- the form of FX restrictions or import bans, substantial of-payments (BOP) statistics, were evidenced by a quantities of restricted products were continuously comparison between exports to and imports from Nigeria imported to Nigeria. Anecdotal evidence suggests as recorded by trading partners. While reported imports that these entities used to resort to the parallel market in Nigeria dropped by over two-thirds between 2015 and to secure FX for their import bill, increasing demand 2019, exports to Nigeria from trade partners only halved pressures in the parallel market and contributing to FX in the same period. These recording gaps, especially market segmentation. pronounced in sectors such as textiles (exceeding 100 percent), art (94 percent), and hides and skins (78 2. Higher prices: Figure 2.1 shows, for percent), suggest that imports under FX restrictions had instance, that the price of domestic and imported rice consistently been evaded, including in product categories moves concurrently and increased substantially post that were not part of the FX restrictions lists (Figure 2.3). implementation of import restrictions. Eliminating both FX restrictions on imports and import bans would 4. Lower fiscal revenues from tariffs: The revenue lead to an estimated 4.7 percent decrease in prices impact of import restrictions amounted to about US$1.4 of the goods affected. Moreover, import restrictions billion, or about US$275 million annually, between can affect the production costs and market power of 2015 and 2019 (Figure 2.4). all domestic and foreign firms operating in Nigeria. Through domestic supply chains and competition for 5. Overall revenue losses: This estimate accounts resources and market shares, industries other than the for the revenue that would have been collected if imports ones targeted by the protectionist policies are affected, had been formally recorded at the borders, and assuming amplifying the adverse, unintended consequences of this no evasion due to import restrictions, which did not form of industrial policy. materialize following the introduction of the import 34 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Figure 2.2. FX restrictions led to an increase in restrictions. 1718The overall revenue loss is significantly trade evasion by 18.1 percent higher when including evasion due to high tariffs. 0.5 Assuming that there was no trade evasion due to high Restrictions imposed tariffs and import restrictions between 2010 and 2019, Nigeria would have collected additional annual revenue Impact relative to 2014 of US$1.8 billion.19 This is a conservative estimate and 0.0 is equivalent to 0.4 percent of GDP and 6.6 percent of overall tax revenue in 2020. Based on these estimates, overall tariff revenues would have been 45 percent higher -0.5 each year in the absence of evasion. The sectors with the highest revenue losses are plastics, metals, stones and textiles. Figure 2.1. Price of both domestic and imported -1.0 rice increased post FX import restrictions and 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 border closure Time Imports Mirror Imports Evasion Naira/kg Source: World Bank staff calculations using COMTRADENBS price 1,000 Border closure data 900 800 Figure 2.3. FX restrictions led to substantial 700 evasion gaps in some sectors 600 25-27 Mineral pro ducts 86-89 - vehicles 500 6-14 vegetable products 1-5 live animals 400 84-85 machinery 15 Animal or vegetable fat 300 72-83 metals 68-70 stone 200 28-38 Chemicals 16-24 Beverages 100 39-40 Plastics 47-49 pulp - 93 - arms Jan-16 May-16 Jan-17 May-17 Jan-18 May-18 Jan-19 May-19 Jan-20 May-20 Jan-21 May-21 Jan-22 May-22 Jan-23 May-23 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 44-46 wood 90-92 optical equipment 94-96 furniture 71 precious metal 64-67 - footwear 41-43 hides and skins Rice local sold loose Rice,imported high quality sold loose 97 - art 50-63 textiles Source: NBS (for price data). -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 Source: World Bank staff calculations using COMTRADENBS price Note: Figure shows price movements for the goods labeled “Rice data local sold loose” and “Rice, imported high quality sold loose” in NBS price data PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 35 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Figure 2.4. Without tariff evasion, Nigeria’s revenue would have been significantly higher The positive impacts on poverty reduction would be seen across various states (Figure 2.5), with the largest Tariff Revenue from goods subject to FX restrictions on imports and import bans (million US$) gains in Kaduna, Ekiti, Enugu, FCT, Kwara, Anambra, Adamawa, Cross River, and Kebbi, and the smallest in Rivers, Akwa Ibom, Ondo, Abia, Imo, and Ebonyi. Figure 2.5. The impact of removing FX restrictions and imports bans would vary by state depending on what households consume and produce Source: World Bank staff calculations using COMTRADE. Note: The graph depicts the evolution of tariff revenue of goods subject to FX bans (introduced in 2015) and import bans. The dotted line “counterfactual revenue” depicts the estimated revenue that would have been collected had FX bans not been introduced. The red line “Evasion” denotes the tariff evasion induced by the introduction of FX restrictions. Sample period: 2010–2019. Sources: 2018/19 NLSS (for consumption data), NBS (for price data), Humanitarian Data Exchange (for map shape files), and World Lifting Import Restrictions: A Pathway to Bank staff estimates. Improved Welfare Note: Estimates exclude Borno. Poverty calculated using Nigeria’s national poverty line. Income and poverty changes were calculated Removing import restrictions is pro-poor and will using the HIT model, in which 2018/19 NLSS data were incorpo- enhance consumer welfare, as they have adversely rated. Income captured by households’ consumption, a measure of affected Nigerians' purchasing power. The impact of their welfare. NBS price data from 2015 to 2017 and information on previous trade policies were used to estimate the pass-through from restrictive trade policies on prices has added pressure on trade policies to prices. Nigerian households. Dabelan and Nga (2018) show that removing import bans in Nigeria could lower national Eliminating import restrictions would also enhance poverty rates by up to 2.6 percentage points. Import firms’ export potential and support economic restrictions disproportionately affect goods that are diversification. A counterfactual analysis using a consumed more by the poorer households. For example, gravity model shows that import restrictions did not rice—a staple food for about 84 percent of Nigerian yield significant economic gains by enhancing exports households and consumed in both locally-produced and competitiveness and enabling the country to export new imported varieties—has seen escalating prices, a trend products, especially in the non-oil sector (Figure 2.6). For exacerbated by import restrictions. Recent World Bank instance, in 2021, Nigeria's unrealized export potential estimates show that removing import restrictions could in sectors such as foodstuffs, vegetables, animals, and lower the prices of affected items by 4.7 percent. This metals was about US$ 4.5 billion (Figure 2.7), or US$ would lead to an overall increase in purchasing power 13 billion (including petroleum) and 22.5 percent of its which, in turn, would lift about 1.3 million people total exports. Meanwhile, Nigeria’s imports would have (around 0.6 percent of the population) out of poverty. been US$3.7 billion higher had FX not been restricted 36 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Figure 2.7. Despite the FX restrictions Nigeria still (Figure 2.8), implying that, in sum, the trade balance had a large unrealized export potential in 2021 in 2021 could have been US$9.3 billion higher without 03 - Foodstuffs 1,000 FX restrictions and assuming a scenario where full trade 02 - Vegetable Products 894 potential was realized. Overall, this suggests that import 12 - Metals 809 restrictions, intended to enhance the competitiveness of 01 - Animal Products 419 09 - Textiles 255 domestic industries, might in fact have had the opposite 05 - Chemical Products 197 effect. 13 - Machines 191 08 - Wood / Paper Goods 191 Figure 2.6. Lifting import restrictions will not affect nega- 06 - Plastics and Rubbers 169 tively economic diversification and export competitiveness 04 - Mineral Products 157 gains 15 - Miscellaneous 92 07 - Animal Hides 78 Number of products 11 - Stone and Glass 20 90 84 84 10 - Footwear and Headwear 17 80 14 - Transportation 1 70 export potential across industries (million US$) 61 60 60 Source: World Bank staff calculations using COMTRADE. 51 50 40 34 34 Figure 2.8. Imports of restricted FX products 30 would have been US$3.7 billion higher had they 20 not been restricted 10 10 10 Imports actual versus predicted on FX restricted products 0 0 (million US$) S1 FX S2 FX S3 Realization S4 Removal of S5 Removal of 20 restrictions restrictions into of Export FX restrictions FX restrictions lifted but no place but full Potential and full export and non- gains in export export potential potential ressource 18 potential export potential 16 Diversity ( new products gain comparative advantage) New products 14 Source: World Bank staff calculations using COMTRADE. 12 Note: There are five scenarios. S1. FX Restrictions Lifted - This 10 scenario solely contemplates the impact on the export structure if 8 FX restrictions are entirely removed, without any alterations to the existing export potentials (we use the counterfactual estimates for 6 the imports to estimate the export structure of Nigeria). S2. Full 2009201020112012201320142015201620172018201920202021 Realization of Export Potential: Under this scenario, we maintain the FX restrictions (hence we use realized trade in 2021) but allow Ni- Up to 2014 After 2015 Predicted_Values geria to fully realize its export potential across all HS4 products. S3. Source: World Bank staff calculations using COMTRADE. Selective Realization of Export Potential: This scenario mirrors the second, with one critical difference—Nigeria maximizes its export potential only in products that exclude natural resources (but FX restrictions are kept). The intent is to gauge the limitations of natural resource in exploiting the export potential. S4. Combined Scenar- io - Restrictions Lifted & Full Export Potential Realized: Merging the conditions of the first and second scenarios, this analysis seeks to understand the compound effects on Nigeria's export structure when both FX restrictions are removed, and the full export potential is achieved. S5. Combined Scenario - Restrictions Lifted & Selective Export Potential Realized: By amalgamating the conditions of the first and third scenarios, we aim to discern the collective implications when FX restrictions are annulled, and Nigeria taps into its non- resource-based export potential. PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 37 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Furthermore, the unrealized export potential in and Côte d’Ivoire, as well as with global trading partners existing and new markets remained high especially in including the United States, Spain, Indonesia, France, the presence of import restrictions. Nigeria's potential and Turkey (Figure 2.9). Access to these markets is to diversify its export markets becomes evident when crucial for Nigeria's export diversification and broader considering the unrealized export potential during the economic diversification initiatives. However, under the period of FX restrictions (from 2015 onward). The FX restrictions, these objectives were not achieved. In country holds substantial export opportunities of non- fact, Nigeria's market diversification diminished even oil products with neighboring countries, such as Ghana further during this period (World Bank 2022). Figure 2.9. Nigeria’s unrealized export in 2021 in presence of FX restrictions (US$ million) FRA , 211 TUR , 149 GBR , 148 CHE , 147 CIV , 348 BRA , 89 NLD , 85 BEN , 71 DEU , 115 SWE , PRT , GHA , 596 IND , 136 CAN , 70 TGO , 59 51 50 ITA , KWT , 39 48 … … … … ESP , 287 THA , ZAF , 119 SEN , 114 38 … … … … VNM , … 46 POL , … … … … 37 … USA , 511 IDN , 212 NER , 117 ARE , 105 … … ... Source: World Bank staff calculations using COMTRADE. Despite the overall welfare economic gain, there will less-distorted prices will allow resources to shift to more be some economic losers. productive firms and sectors, rather than protected ones. Moreover, competition with imports will incentivize FX restrictions and import bans, through their Nigerian firms to improve their productivity, and gain protectionist stance, did support some businesses and better access to capital and intermediate goods from sectors, especially manufacturing companies in minerals, overseas. This will strengthen Nigeria's integration into metals, and chemical products. However, in Nigeria’s regional and global markets, benefiting from the African case the economic losses for these sectors could easily be Continental Free Trade covered by the benefits to consumers and sectors such as foodstuff, animal and vegetable products, textiles (Figure 2.10). These sectors will become more competitive, as 38 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Figure 2.10. Winners and losers at the sectorial level from removing FX restrictions in 2021 (US$ The Way Forward million) 03 - Foodstuffs Nigeria’s decision to remove the FX restrictions on 01 - Animal Products the 43 items is a step in the right direction in terms 02 - Vegetable Products 09 - Textiles of loosening trade restrictions. The aggregate gains 13 - Machines from this decision are expected to be high, especially for 08 - Wood / Paper Goods consumers who are already facing a high inflationary 15 - Miscellaneous 06 - Plastics and Rubbers environment. The decision also allows the CBN to 10 - Footwear and Headwear refocus on its core mandates for monetary policy 14 - Transportation and exchange rate management, and reduces major 11 - Stone and Glass 07 - Animal Hides distortions in the economy. However, the economic 05 - Chemical Products gains from this policy direction can be enhanced by 12 - Metals lifting the outright import bans. 04 - Mineral Products -600 -400 -200 0 200 400 600 US$ Million While the removal of import restrictions may present Source: World Bank staff calculations using COMTRADE. challenges to certain sectors, these can be mitigated for some of them with a comparative advantage. Area (AfCFTA) and attracting more FDI. But these Reducing the overall cost of doing business is a crucial positive outcomes would also require supporting first step. This can involve facilitating custom processes, macroeconomic and structural policies to facilitate reducing domestic and international trade and transport private sector development, including through costs, and removing institutional barriers to doing macroeconomic stability, infrastructure availability, and business. Concurrently, a careful review of the tariff a conducive business environment. structure on certain banned import items, particularly those where Nigeria holds a comparative advantage, In Nigeria, import restriction policies had very and to commit to a simple and enduring tariff structure limited effectiveness, exacerbated by the country's with more discipline. This review should aim to provide porous borders, the large informal sector, and a balanced approach where tariffs could be slightly underdeveloped domestic supply chains. The ban on adjusted to replace import restrictions and, therefore, to the use of FX for imports had harmed the credibility of support domestic industries without counteracting the the CBN by conflating FX and trade policy, detracting advantages of more open trade. In the medium term, the from its core mandate of price stability, and ultimately tariffs could be phased out to allow for better resource reducing its effectiveness in reducing inflation. These allocation in the economy. Through this dual approach import restrictions effectively act as a tax, especially on of easing business operating conditions and fine-tuning poorer households and businesses, due to higher prices. tariff policies, the negative impacts on the disadvantaged They also cause the misallocation of resources, hindering sectors may be reduced, while still capitalizing on the growth of competitive firms and sectors. Removing these broader economic benefits of the lifted FX restrictions. import restrictions increases competition, prompting domestic firms to upgrade their production processes, Beyond removing import restrictions, several and also enhances access to capital and intermediate complementary reforms are needed to support goods from other countries. Nigeria's structural agenda and overall gains in competitiveness and economic diversification. These policies are summarized in Table 2.1. PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 39 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Table 2.2. Policy options to support Nigeria’s trade policy What measures are proposed? Why are the measures What is the likely impact that mea- needed? Short–medium term Medium–long term (18–36 sures will have? months) (6–18 months) Supportive environment for export growth and competitiveness • Facilitate imports of staple foods • Tariff revenues will increase Nigeria’s highly restric- and medicines by removing them • Following a review of the • Prices of banned products will tive trade regime has from the list of import bans, and impact of existing restric- fall Cheaper intermediate inputs a negative impact on applying tariffs that reflect the tions, remove import bans for many industries would foster domestic revenues, common external tariff of the on 25 products or replace substantial growth and job cre- the welfare of citizens, Economic Community of West bans with tariffs ation in these sectors· and the productivity African States· • Reform tariff schedule to • A more predictable trade policy and competitiveness of • Review tariffs to reduce the reduce input costs could increase investment and firms. costs of key inputs for domestic production efficiency producers Reduce domestic and international trade and transport costs • Introduce National Single • Simplify and harmonize export Window. Nigeria stands to gain and import procedures (documen- • Expedite implementation of from reforms that tations, paperless trade, digital reforms for the WTO TFA address high costs and trade) under the WTO and under • Reducing customs delays and delays at the border, • Improve governance and the African Continental Free trade costs will significantly en- positioning the country enhance the transparency and Trade Area hance the integration of Nigerian as a commercial center efficiency of customs procedures, • Expand and maintain port firms into national, regional, and for the region and a speeding up clearance time infrastructure and improve continental value chains springboard into region- • Address bottlenecks such as port logistics· al value chains logistics, congestion, and trans- • Implementation of the Au- portation costs thorized Economic Operator program Create an appropriate policy and institutional infrastructure to support trade priorities • Trade policy formulation will Improve Nigeria’s trade • Improve the institutionalization of • Clearly delineate the roles improve, and be more indepen- policy institutional trade policy within the Ministry of of institutions in trade policy dent from ad-hoc institutional framework Finance and FMITI formulation interventions (incl. CBN inter- ventions) 40 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results References Artuc, E., Engel, E., G. Falcone, Lain, J., G. Porto, B. Rijkers and M. Shuaibu. 2023 (forthcoming). “Quantifying Tariff Evasion in Nigeria.” Mimeo. Artuc, E., G. Porto and B. Rijkers. 2023 (forthcoming). “Welfare Enhancing Evasion: Evidence from Nigeria.” Mimeo. The household impacts of tariffs Simulation Tool can be accessed at https://www.worldbank.org/en/research/brief/hit/ Dabelan, A. and T.V. Nga. 2018. “The Short-Run Impact of Import Bans on Poverty: The Case of Nigeria (2008–2012).” World Bank Economic Review 32(2). https://doi.org/10.1093/ wber/lhw030 Treichel, V., M. Hoppe, O. Cadot and J. Gourdon. 2012. “Import Bans in Nigeria Increase Poverty”. Africa Trade Policy Notes. March 2012. Africa Trade Journal 2012 V. Stojkoski and A.Stojanov. 2023 (forthcoming). “Nigeria’s missing trade and its impact on the export structure” World Bank. 2022. Nigeria Country Economic Memorandum: Charting a New Course - Synthesis Report . Washington, DC: World Bank Group. http://documents.worldbank.org/curated/en/099020012132216124/ P1761970c336260ce0bd0e0ebd98a53275d PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 41 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Nigeria: Key Economic Indicators Economy 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Real GDP Growth (% yoy) -1.6 0.8 1.9 2.2 -1.8 3.6 3.3 2.9 3.3 3.7 4.1 Nominal GDP (Naira tr) 102.6 114.9 129.1 145.6 154.3 176.1 202.4 243.0 289.8 342.6 397.8 Oil Production (mb/d) 1.8 1.9 1.9 2.0 1.8 1.6 1.4 1.5 1.5 1.6 1.6 Oil Price (Bonny light, US$/bbl) 45 55 72 65 42 66 105 81 83 85 85 Inflation (%, average) 15.6 16.5 12.1 11.4 13.2 17.0 18.8 24.5 21.7 19.6 17.1 Real sectoral growth (%, yoy) 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Real GDP Growth -1.6 0.8 1.9 2.2 -1.8 3.6 3.3 2.9 3.3 3.7 4.1 Agriculture 4.1 3.4 2.1 2.4 2.2 2.1 1.9 1.2 1.9 2.1 3.2 Industries -8.9 2.1 1.9 2.3 -5.8 -0.5 -4.6 0.3 1.9 2.2 2.3 Industry-Oil -14.4 4.7 1.0 4.6 -8.9 -8.3 -19.2 -5.4 -0.7 0.2 0.1 Industry-NonOil -5.0 0.6 2.4 0.9 -3.9 4.4 3.3 2.7 2.9 2.9 3.1 Services -0.8 -0.9 1.8 2.2 -2.2 5.6 6.7 4.4 4.5 4.9 5.1 Oil GDP -14.4 4.7 1.0 4.6 -8.9 -8.3 -19.2 -5.4 -0.7 0.2 0.1 Non-Oil GDP -0.2 0.5 2.0 2.1 -1.3 4.4 4.8 3.3 3.6 3.9 4.3 Sources: NBS and World Bank estimates. External Sector 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Exchange rate - official (N/US$, end of period) 305 361 364 363 396 422 450 - - - - Exchange rate - parallel (N/US$, end of period) 490 363 363 362 470 569 747 - - - - Real effective exchange rate index (end of period) 86 99 87 79 79 73 63 - - - - Current Account Balance (%GDP) 1.3 3.6 1.7 -2.9 -3.7 -0.7 0.2 0.2 0.1 -0.0 -0.0 Exports of Goods and Services (US$ bn) 38.4 50.8 66.0 69.9 39.9 50.9 69.1 60.7 57.9 66.1 76.2 o/w oil and gas exports (US$ bn) 32.0 42.3 56.6 54.5 31.4 40.8 57.1 48.8 46.6 54.5 63.0 Imports of Goods and Services (US$ bn) -47.0 -50.9 -71.6 -100.8 -72.2 -67.5 -77.0 -70.1 -68.7 -77.2 -88.3 Net transfers (including remittances) (US$ bn) 19.9 22.0 24.1 26.4 21.0 22.0 21.8 22.2 22.5 22.7 23.1 Net Direct Investment (US$ bn) 3.1 2.1 0.2 2.0 0.9 1.5 -0.1 0.4 1.4 2.0 2.3 Net Portfolio Investment (US$ bn) 1.9 10.3 -0.0 3.1 -3.7 5.4 3.9 3.8 5.2 5.2 5.4 External Reserves (US$ bn, end of period) 24.9 35.8 42.4 39.6 35.5 41.2 37.2 34.3 36.0 33.9 30.7 Equivalent months of imports of G&S 6.3 8.4 7.1 4.7 5.9 7.3 5.8 5.9 6.3 5.3 4.2 Sources: CBN, FMDQ, Nairametrics and World Bank estimates. 42 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Monetary and Financial Sector (% change yoy, end of period, unless indicated otherwise) 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Money Supply (M2) 17.8 2.3 12.1 6.3 31.4 17.5 16.5 - - - - Narrow Money 31.5 -0.9 5.2 -10.4 50.4 14.0 14.8 - - - - Net Foreign Assets 61.8 69.6 18.5 -68.5 26.4 27.5 -54.5 - - - - Net Domestic Credit 24.3 -3.5 6.3 31.2 14.4 17.8 36.2 - - - - Credit to Government 68.6 -25.4 33.7 94.9 21.2 20.4 78.2 - - - - Credit to Private Sector 17.4 1.4 1.9 17.6 12.0 16.8 19.5 - - - - Monetary policy parameters: Monetary Policy Rate (absolute rate, end of period) 14.0 14.0 14.0 13.5 11.5 11.5 16.5 - - - - Liquidity Ratio (absolute rate, end of period) 30.0 30.0 30.0 30.0 30.0 30.0 30.0 - - - - Cash Reserve Requirement (absolute rate, end of 22.5 22.5 22.5 22.5 27.5 27.5 32.5 - - - - period) Financial Market Indicators (end of period) 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Stock Market (NSE) Index 26,624 32,161 37,186 29,060 27,485 40,097 48,941 - - - - Fitch Sovereign Long Term Foreign Debt Rating B+ B+ B+ B+ B B B- - - - - Moody’s Sovereign Long Term Foreign Debt B1 B2 B2 B2 B2 B2 B3 - - - - Rating Sources: CBN, NGX, FITCH, Moody and S&P. PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 43 NIGERIA DEVELOPMENT UPDATE | DECEMBER 2023 Nigeria: General Government Fiscal Summary - preliminary 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f Actual (%GDP) Total revenues 5.9 6.8 8.2 7.4 6.5 6.7 6.7 7.6 8.8 9.5 10.2 Federally collected 4.8 5.4 6.6 5.9 5.2 4.9 5.0 5.3 6.9 7.7 8.3 Oil and gas revenues 1.6 2.3 3.6 3.0 2.0 2.0 1.8 2.0 3.5 3.6 3.9 Non-oil revenues and other revenues 3.1 3.1 3.0 2.9 3.1 2.9 3.2 3.3 3.4 4.1 4.4 Independent and other revenues 1.2 1.4 1.6 1.5 1.4 1.7 1.7 2.3 1.9 1.9 1.9 Total expenditure 9.7 10.9 11.8 12.0 11.6 13.2 11.7 12.7 12.9 13.2 13.4 Overall balance (general government) -3.8 -4.1 -3.6 -4.6 -5.1 -6.6 -5.0 -5.1 -4.1 -3.7 -3.2 Public Debt (net) 21 24 28 31 36 39 40 42 41 38 36 Domestic debt 17 19 22 24 28 29 31 31 30 28 27 External debt 3 5 6 6 8 10 9 11 12 10 9 Nigeria: Federal Government Fiscal Accounts - preliminary Actual (%GDP) Total Revenue 2.0 2.4 3.0 2.8 2.2 2.6 2.4 2.9 3.4 3.8 4.2 Share of federally collected revenues 1.7 2.0 2.5 2.4 1.8 1.8 1.9 2.0 2.7 3.1 3.5 Oil, Gas and Mineral Revenue (incl. signa- 0.7 1.0 1.5 1.4 0.9 1.0 0.7 0.8 1.5 1.6 1.8 ture bonus) Non-Oil Revenue 1.0 1.0 1.0 0.9 0.9 0.8 1.1 1.2 1.2 1.5 1.7 FG Independent revenues and grants 0.3 0.4 0.6 0.4 0.4 0.8 0.6 0.9 0.7 0.7 0.7 Total Expenditure 4.7 5.7 6.1 6.9 6.9 8.1 7.0 8.1 7.5 7.4 7.4 Recurrent Expenditure 3.9 4.4 4.7 5.2 5.3 5.1 5.9 6.0 5.8 5.7 5.8 Personnel Cost (including Pensions) 1.8 1.8 1.8 1.8 2.1 2.0 1.9 2.0 2.0 1.8 1.7 Overhead Cost 0.1 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.2 Other recurrent 0.7 1.1 1.0 1.5 0.9 0.5 0.5 0.6 0.6 0.7 0.7 Interest payments 1.2 1.4 1.7 1.7 2.2 2.4 3.2 3.2 2.9 3.1 3.2 Capital Expenditure 0.7 1.2 1.5 1.7 1.6 3.1 1.1 2.1 1.6 1.7 1.6 Overall Fiscal Balance -2.7 -3.3 -3.1 -4.1 -4.7 -5.6 -4.6 -5.2 -4.1 -3.7 -3.2 Sources: OAFG and Budget Office of the Federation. 44 PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA TURNING THE CORNER: From reforms and renewed hope to results Endnotes 12 Around N22.7 trillion of the stock of Ways and Means financing was restructured to 40-year tenor 1 The supplementary budget focused on higher security instruments with an interest rate of 9 percent, as and infrastructure spending, and also included higher opposed to financing terms of one-year repayment personnel costs, especially to cover a proportion of the and interest rates at monetary policy rate plus 3 wage award following the subsidy removal. percent (about 21.75 percent). 2 For additional reforms focused on improving the 13 The initial list with 41 product categories in 2015 growth outlook for Nigeria, please refer to World was extended to 43 as fertilizer and maize were Bank’s Nigeria Country Economic Memorandum: later added in December 2018 and July 2020 , Charting a New Course (2022). respectively. See references: https://www.cbn.gov. 3 Source: World Bank's projections based on NLSS ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf. 2018-19. https://www.cbn.gov.ng/Out/2018/TED/TED. 4 The BOP accounts reported by the CBN have FEM.FPC.GEN.01.006.pdf. https://www.cbn. historically had large errors and omissions, which are gov.ng/Out/2020/CCD/Importation%20of%20 presented without any explanation. In 2022, the net Maze%20TED2.pdf errors and omissions reported in the BOP accounts was 14 https://customs.gov.ng/?page_id=3075 about negative US$7 trillion. 15 https://guardian.ng/news/forex-restriction-on-41- 5 In May 2022, Nigeria passed the National Health items-inimical-to-real-sector/ Insurance Authority Bill 2022 seeking to expand 16 https://stat.unido.org/country/NGA.pdf coverage for 89 million citizens unable to afford the 17 These are conservative estimates and do not costs of health care. consider smuggling (underreporting of exports 6 There are three funds under the aegis of Nigeria and imports) and thus focuses on only actual Sovereign Investment Authority (NSIA), namely trade flows. Nigeria Infrastructure Fund (NIF), Future Generations 18 The revenue loss only from FX restrictions is Fund (FGF), and the Stabilization Fund (SF). estimated to have been US$200 million between 7 There was an 8 percent nominal decline in holdings 2015 and 2019, or US$40 million annually. between end-2022 and end-June 2023. 19 Rijkers et al. 2023. 8 The minimum CAR set by the CBN is 10 percent for banks with a national license and 15 percent for banks with an international license, with an additional 1 percent for banks designated as domestically systemically important. 9 Other effects of the large depreciation on banks’ balance sheets are seeing in the jump of the ratio of US dollar-denominated liabilities between May and June 2023, from 23.4 to 30.6 percent. A similar patter, albeit less pronounced, is observed with regards to the share of foreign currency assets 10 It is assumed that NNPC is deducting for fuel subsidy arrears which the Federation owed NNPC, but clarity on that has not yet been received. 11 The stock of Ways and Means financing up until October 2022. PART 2: SPOTLIGHT ON NIGERIA'S DEVELOPMENT AGENDA 45 Nigeria Development Update December 2023 View this report online: www.worldbank.org/en/country/nigeria Almost there by Jimmy Nwanne Jimmy Nwanne is a Nigerian artist who lives and works in Kaiserslautern, Germany. Born in Kaduna, Nigeria, he studied Fine Arts with painting as his major at Nnamdi Azikiwe University in Awka, Nigeria. Whether as portraiture or composition, Nwanne’s works look at the relationship between life, identity and migration. The freedom to make a composition, a portraiture, by rearranging the natural place of something into another, in order to communicate an idea is what is usually being explored. The piece simply touches on the story of success, someone finding love. People forge ideas, people mold dreams, and people create art. To connect local artists to a broader audience, the cover of this report and following editions will feature art from Nigeria.