The Executive Board of the International Monetary Fund (IMF) has concluded consultation on the Nigerian economy. The IMF Directors noted that the country’s strong external position and low debt helped mitigate the impact of the global financial crisis while accommodative monetary policy have resulted in high inflation and a loss in international reserves.

The IMF sees Nigeria as having weathered the global economic recession and its own domestic banking crisis reasonably well. Economic growth in the first half of 2010 remained above 7.5 per cent and is expected to reach about 8.5 per cent for the whole year on the back of a recovery in oil production and continued strong growth in other sectors.

The global financial body says inflation has been stuck in the low double digits for the past two years and foreign reserves have been falling as the Central Bank of Nigeria has focused on maintaining exchange rate stability and low interest rates.

The fiscal stimulus intensified in 2010, notwithstanding the already solid growth performance and high inflation. After rising by 10 per cent in 2009, consolidated public spending increased by 37 per cent in 2010. The non-oil primary deficit has increased by five percentage points to 32 per cent of non-oil Gross Domestic Product (GDP).

IMF says despite world oil prices well in excess of the budget benchmark price, government spent all current oil revenues and drew on savings in the Excess Crude Account, at a time when stabilisation called for a rebuilding of buffers. Despite high inflation, the CBN reduced the rate on its standing deposit facility. In response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but short-term real interest rates remain negative.

Accordingly, the economic outlook remains positive and risks are generally balanced. Nigeria’s economy is projected to grow by seven per cent in 2011, moderating gradually in subsequent years. Inflation is projected to decline to nine per cent by the end of 2011. Near-term risks to growth mostly relate to domestic factors. On the upside, a shift in government spending towards capital formation and planned reforms in the power sector could boost growth, and passage of the Petroleum Industry Bill could unlock additional investments in the oil sector.

It is also obvious that there is a greater risk of lower rather than higher oil production. "The inflation risk hinges crucially on the 2011 budget. The National Assembly could pass a more expansionary budget for 2011 than was submitted, undermining the CBN’s ability to deliver on inflation. Speculation against the naira could become intense should reserves continue to fall," IMF said.

Directors supported the authorities’ planned fiscal consolidation to rebuild fiscal space and contain price pressures. They welcomed efforts underway to strengthen nonoil revenues, as well as the draft budget for 2011, which aims to reverse the expansion in real public spending in 2010. Directors also saw the need for a strong oil-revenue rule to prevent policy pro-cyclicality going forward. In this regard, they welcomed the authorities’ intention to establish sovereign wealth funds under the Nigerian Sovereign Investment Authority (NSIA) to shield the budget from oil-revenue volatility and enhance the management of oil wealth. However, noting that one of the NSIA funds would finance infrastructure projects, they encouraged the authorities to channel such expenditures through the budget in order to safeguard the stabilisation function of the NSIA and the quality of public investment.

Directors considered the central bank’s recent increase in policy rates appropriate. Further monetary tightening may be needed should inflation pressures continue. Directors took note of the staff’s assessment of an overvaluation of the naira, and stressed that greater exchange rate flexibility would prevent one-way bets in the foreign exchange market and cushion external shocks.