High Oil Prices, Reform Agenda Improve Nigeria's Prospects

Economy has grown robustly through global downturn, domestic banking crisis

Important to strengthen bank regulation, supervision

Reforms, particularly in infrastructure, crucial for economic development

The IMF says in its regular assessment of the west African nation’s economy that there is room for the authorities to further strengthen management of the economy and reach development goals.

The IMF review notes that the government has launched an economic program that aims to sustain the robust growth of the economy but also ensure substantial employment creation and poverty reduction. For this, IMF economists urge more effective spending on infrastructure and the expansion of more labor-intensive sectors.

Nigeria’s macroeconomic performance has been generally positive in recent years, the IMF review says. The economy grew, on average, by more than 7 percent over the past three years and inflation is trending downward. Substantial oil saving buffers, built before the 2008 global crisis, provided room for Nigeria to implement countercyclical policies to minimize the impact of the crisis on the domestic economy. However, while Nigeria’s growth has been among the highest in sub-Saharan Africa, poverty remains high and progress on many of the poverty-reducing Millennium Development Goals has been slow.

Booming oil revenue

Nigeria is Africa’s largest oil producer, and national oil production rose in 2010 just before global geopolitical factors helped spur an increase in world oil prices. Higher oil prices boosted budget revenues and softened the impact of lower tax receipts in recent years, while creating room for investment spending in the priority sectors (see chart).

With the outlook for the global economy subject to substantial downside risks, there is room for Nigeria to further strengthen macroeconomic management and improve its economy’s resilience, including

• Rebuilding fiscal buffers. The government’s planned fiscal consolidation for 2012–15 will be essential to rebuild reserves that could once again be used as a buffer in the event of a major downturn in oil prices.

• Strengthening the management of oil revenues. The establishment of a sovereign wealth fund will help improve oil revenue management, especially if there are clear rules governing withdrawals from the fund, the management of its resources, and the setting of the reference oil price upon which the budget is based.

• Focusing monetary policy on inflation. A...