NIGERIA DEVELOPMENT UPDATE  |  JUNE 2021 Resilience through Reforms Nigeria Development Update June 2021 Resilience through Reforms © 2021 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. 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. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 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 Gloria Joseph-Raji (Senior Economist), Miguel Angel Saldarriaga (Economist), and Marco Antonio Hernandez Ore (Lead Economist). The team included: Emilija Timmis, Joseph Ogebe, Ahmed Rostom, Mariano Cortes, Masami Kojima, Yue Man Lee, Cedric Okou (Recent Economic Developments and Outlook), Christina Jenq, Jonathan Lain, Tara Vishwanath (Employment), Miguel Saldarriaga, Emilija Timmis, Jonathan Lain, Tara Vishwanath (Poverty and Inflation), Elijah Kimani, Rajul Awasthi (Domestic Revenue Mobilization), Yadviga Semikolenova, Arsh Sharma, and Anshul Rana (Power). The team also included Jakob Engel, Muderis Mohammed, Foluso Okunmadewa, Bertine Kamphuis, Tekabe Belay, Sean Lothrop, and Chuka Agu. The team is grateful for valuable discussions with the Federal Ministry of Finance, Budget and National Planning, the Central Bank of Nigeria, and the National Bureau of Statistics. The team would like to thank the International Monetary Fund’s Mission Chief, Jesmin Rahman, and her team for invitations to participate in macro-monitoring missions and for their continual dialogue and collaboration. Ifeoma Ikenye and Rocio Manrique assisted the team. Anne Grant assisted in editing. Budy Wirasmo aided in designing. External and media relations are managed by Mansir Nasir. 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 Francisco Carneiro (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 marcohernandez@worldbank.org For information about the World Bank and its activities in Nigeria, please visit: www.worldbank.org/ng NIGERIA DEVELOPMENT UPDATE JUNE 2021 Structure The Nigeria Development Update (NDU) has three sections: 1. Recent economic developments and outlook: A review of the most salient economic developments over the previous 6 months and the outlook for the following two years, including a set of short-term and medium- term policy recommendations. 2. Taking a closer look: A topical review of a selection of issues that have “risen to the surface” in the previous 6 months. 3. Spotlight on Nigeria’s development agenda: A long-term view on key challenges and opportunities for Nigeria’s development agenda, including a set of actionable policy recommendations. Contents Acknowledgementsiii Abbreviations and Acronyms viii Overview1 Part 1: Recent Economic Developments and Outlook for Nigeria 5 Economic Growth: Past the pandemic-induced recession, but not yet on the road to solid growth 6 Prices: Inflationary pressures are becoming more difficult to manage 12 The External Sector: Nigeria’s outlook improves as oil prices recover 16 Monetary Policy and Exchange Rate Management: Adjustments remain critical to Nigeria’s recovery 20 The Financial Sector: Nigeria avoided a credit crunch but the banking system is showing signs of stress 23 Fiscal Policy: Despite rising oil prices, Nigeria’s fiscal position is tenuous, highlighting the need to sustain reforms26 Economic Outlook 31 Part 2: Taking a Closer Look 39 The continuing effects of the COVID-19 crisis on welfare and work 40 Poverty and inflation in Nigeria 44 iv RESILIENCE THROUGH REFORMS Part 3: Spotlights on Nigeria’s Development Agenda 49 Spotlight 1: Igniting economic growth by reforming Nigeria’s power sector 50 Spotlight 2: Options to raise revenues in a time of crisis 62 Nigeria: Key Economic Indicators 73 List of Figures  ervices and oil led the contraction in 2020. Figure 1.1. S 6  rivate consumption remained quite stable. Figure 1.2. P 6  igeria’s performance in 2021 is expected to be below the averages for Sub-Saharan Africa and for Figure 1.3. N oil-producing countries. 7  e pace of quarterly GDP growth after the recession is subdued. Figure 1.4. Th 8  igh-frequency indicators suggest that Nigeria’s economy will recover in the first half of 2021. Figure 1.5. H 9  s mobility restrictions eased and the number of COVID-19 cases declined from its peak in early Figure 1.6. A 2021, economic activity has begun to recover. 9  rowth in GDP per capita is expected to remain subdued in 2021. Figure 1.7. G 10  ood prices have driven the surge in inflation over the past 12 months. Figure 1.8. F 12  n March-April, headline inflation rate has reached its highest level since March 2017. Figure 1.9. I 12 Figure 1.10. P rices for staple goods have gone up more in border states. 12 Figure 1.11. P rice increases have been unevenly distributed across states. 13 Figure 1.12. F alling oil exports and foreign remittances widened the CAD in 2020… 16 Figure 1.13. … but a steep decline in imports kept Nigeria’s deficit narrower than those of its structural peers. 16 Figure 1.14. P ortfolio outflows and contracting FDI intensified pressure on the balance of payments. 17  e CBN continued to apply demand-management strategies to preserve its FX reserves. Figure 1.15. Th 17 Figure 1.16. C BN FX sales in the IEFX window have been limited. 21  e premium between the official and the IEFX rates widened before the formal move towards Figure 1.17. Th unification of both rates in May 2021. 21  e CBN intensified its development finance interventions in 2020 in response to the Figure 1.18. Th COVID-19 crisis. 22 Figure 1.19. C redit growth has decelerated. 24 Figure 1.20. N igeria’s financial sector is vulnerable to oil price volatility. 24 Figure 1.21. H igher oil prices are expected to boost public revenue in 2021... 28 Figure 1.22. ...but revenue outturns are expected to continue underperforming. 28 Figure 1.23. D ebt dynamics remain sustainable, but debt service consumes most of Nigeria’s fiscal revenue. 29 Figure 1.24. D espite higher oil prices, Nigeria’s fiscal deficit is expected to be one of the largest among oil- producing countries. 29  e pandemic induced a deep global recession, but a faster-than-expected recovery appears to be Figure 1.25. Th underway.31 Figure 1.26. A combination of supply- and demand-side factors is driving global recovery of commodity prices.31 v NIGERIA DEVELOPMENT UPDATE JUNE 2021 The share of people working is much higher than would be expected from previous seasonal Figure 2.1.  patterns.41 The increase in the share of people working is higher among women. Figure 2.2.  41 The commerce and service sectors expanded more than would be expected from previous seasonal Figure 2.3.  patterns.42 Incomes for some households have improved. Figure 2.4.  42 Price shocks during the COVID-19 crisis, percent of Nigerian households. Figure 2.5.  45 Most of the food that Nigerians consume is purchased, even for poor households and rural Figure 2.6.  dwellers.45 The rising prices witnessed in 2020 could increase the number of poor people by 7 million people. Figure 2.7.  46 Food insecurity is more widespread than it was before the COVID-19 crisis. Figure 2.8.  46 Nigeria’s unreliable, and for many inaccessible, power supply is a threat to economic growth. Figure 3.1.  51 The power sector is unbundled and largely privately owned. Figure 3.2.  51 The power sector must deal with four different types of problems. Figure 3.3.  52 The Government has had to step in to cover shortfalls and let the energy flow. Figure 3.4.  53 Keeping tariffs low benefits the rich more than the poor. Figure 3.5.  54 Early in 2020, it was predicted that through 2023 there would be another N3,082 trillion of tariff Figure 3.6.  shortfalls.54 FGN is already responding to the policy priorities for the power sector. Figure 3.7.  57 Nigeria’s revenue collection is far behind that of peers. Figure 3.8.  63 Revenue can be doubled with minimal disruption of the economy. Figure 3.9.  63 Figure 3.10. Driven by crises, general government revenue continues to fall. 63 Figure 3.11. CIT and VAT are the largest sources of non-oil revenue. 63 Figure 3.12. Sequenced reforms will best mobilize revenue. 64 Figure 3.13. Nigeria’s excise tax revenue is among the lowest in Sub-Saharan Africa. 65 Figure 3.14. Marginal improvement has consequential revenue implications. 65 Figure 3.15. There is ample space to raise excise rates for alcohol and cigarettes. 65 Figure 3.16. Nigeria’s excise rates are lower than those of its peers. 65 Figure 3.17. Reviewing tax expenditures alone can double current revenues. 67 Figure 3.18. Nigeria collects less in property tax revenue than its SSA peers. 69 List of Tables Key Reforms implemented by Nigerian authorities. Table 1.1.  27 Nigeria’s Economic Outlook: Three scenarios. Table 1.2.  34 Policy options to reduce inflation, protect the poor, and support the recovery. Table 1.3.  35 In 2019 more than N1.1 trillion was lost in CIT expenditures. Table 3.1.  67 Table 3.2. VAT revenue potential. 68 vi RESILIENCE THROUGH REFORMS List of Boxes Box 1.1. Rising insecurity poses severe economic risks. 10 Figure B1.1.1. C onflict and violence in Nigeria have intensified. 11 Box 1.2. Drivers of inflation in Nigeria in 2020–21. 14 Box 1.3. Accelerating export diversification to relieve Nigeria’s external volatility. 17 Figure B1.2.1. O ver the last several decades, Nigeria has remained far more dependent on oil exports than the average of other oil-rich countries. 18 Understanding operational inefficiencies and their impact. Box 3.1.  55 Figure B3.1.1. F rom Generation to Retail: Inefficiencies in the Nigeria power sector. 55 vii NIGERIA DEVELOPMENT UPDATE JUNE 2021 Abbreviations and Acronyms bps Basis points CAD Current Account Deficit CBN Central Bank of Nigeria DMO Debt Management Office FX Foreign Exchange GDP Gross Domestic Product GHS General Household Survey IEFX Investors' & Exporters' Foreign Exchange MSMEs Micro, Small, and Medium Enterprises NASSP National Social Safety Nets Program NBS National Bureau of Statistics NDU Nigeria Development Update NLPS National Longitudinal Phone Survey NPL Non-Performing Loans OMO Open-market operations SSA Sub-Saharan Africa viii RESILIENCE THROUGH REFORMS Overview In 2020, Nigeria experienced its deepest recession momentum would threaten both macroeconomic in four decades, but growth resumed in the fourth sustainability and the government’s policy credibility and quarter as pandemic restrictions were eased, oil prices would further limit the government’s ability to address recovered, and the authorities implemented policies gaps in human and physical capital—all of which would to counter the economic shock. As a result, in 2020 discourage private investment. Slow growth would put the Nigerian economy experienced a smaller contraction more pressure on the financial sector: nonperforming (-1.8 percent) than had been projected when the loans (NPLs), which have yet to reflect the impact of the pandemic began (-3.2 percent). As part of its response, COVID-19 shocks due in part to regulatory forbearance the government carried out several long-delayed policy granted by the Central Bank of Nigeria (CBN), would reforms, often against vocal opposition. Notably, the likely rise as forbearance is withdrawn. Moreover, government (1) began to harmonize exchange rates; Nigeria is experiencing a rise in insecurity. A tepid or (2) began to eliminate gasoline subsidies; (3) started uneven recovery could exacerbate social tensions, which adjusting electricity tariffs to more cost-reflective levels; would further dampen investor enthusiasm and could (4) cut nonessential spending and redirected resources lead to political instability, and more conflict. to COVID-19 responses at both the federal and the state levels; and (5) enhanced debt management and High inflation rates are worsening poverty and increased public-sector transparency, especially for oil depressing economic activity. Driven by a steep and gas operations. By creating additional fiscal space increase in food prices, since September 2019 headline and maximizing the impact of the government’s limited inflation has risen dramatically. Although inflation resources, these measures were critical in protecting the declined slightly in April 2021, it is still the highest in economy against a much deeper recession and in laying four years. In contrast to previous inflationary episodes the foundation for earlier recovery. in Nigeria, the current trend arises from multiple demand and supply shocks, compounded by policy However, several critical reforms are as yet incomplete, distortions and the exigencies of the pandemic. On which threatens Nigeria’s nascent recovery. In the the supply side, a combination of unfavorable weather, baseline scenario, Nigeria’s economy is expected to grow insecurity and conflict, and pandemic-related shocks by 1.8 percent in 2021. Despite the current favorable affecting food production and market access are pushing external environment, with oil prices recovering and food prices up. Trade restrictions, including the closure growth in advanced economies, reform slippages would of land borders in August 2019, have also pushed up hinder the renewed economic expansion and undermine prices for both food and nonfood consumer goods. On progress toward Nigeria’s development goals. In a risk the demand side, the lack of a credible monetary anchor scenario, in which the government fails to sustain recent encourages firms and consumers to expect shock-induced macroeconomic and structural reforms, the pace of price increases and incorporate their expectations into economic recovery would slow, and GDP growth could their investment and consumption decisions. The be just 1.1 percent in 2021. Gasoline subsidies have re- impact of higher inflation is severe: In 2020, rising prices emerged with the recent rise in oil prices, and a reversal alone—even without incorporating the direct impacts of of fiscal consolidation efforts on the revenue side is an COVID-19 on welfare—may have pushed an estimated especially threatening risk. Failure to sustain the reform 7 million Nigerians into poverty. Overview 1 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Limited employment opportunities pose both exchange-rate management, monetary policy, trade economic and security challenges. As in other policy, fiscal policy, and social protection: developing countries where informality is high, Nigeria’s official unemployment rate is a poor indicator of labor- • Exchange Rate Management:  Make the Nigeria market outcomes because unemployed workers receive Autonomous Foreign Exchange (NAFEX) rate1— little public support and the incentives to remain now the anchor rate for all formal foreign exchange employed are compelling, even in marginal activities (FX) transactions—more flexible in order to reduce that generate low returns. In Nigeria agriculture has long real exchange rate misalignments, boost Nigeria’s served as an employer of last resort; family farms absorb competitiveness, and narrow the spread between the excess labor during economic downturns Yet the periodic NAFEX rate and the parallel market rate, with a influx of displaced urban workers into the rural economy positive effect on inflation dynamics. keeps agricultural wage rates depressed and generates uncertainty that discourages investment in productive • Trade Policy: ( 1) Fully reopen land borders to trade capital. The informal service sector also provides and strengthen regional cooperation in combating employment, but it also typically offers low wages and smuggling. (2) Facilitate imports of staple foods and limited job security or labor protection. In addition to medicines by removing them from the list of FX their negative economic consequences, rising levels of restrictions, and replace import bans with tariffs that unemployment and underemployment are both a cause align with the ECOWAS Common External Tariff. and a consequence of conflict and insecurity. Marginally (3) Review all FX and import restrictions currently employed workers become prime recruiting targets for applied to nonfood goods and assess the pros and criminal organizations and insurgent groups like Boko cons of replacing them with tariffs. (4) Do not add Haram. Intensifying violence and widespread criminality any products to the list of import and FX restrictions. further erode the labor market, contributing to a vicious (5) Control oil-related inflationary pressures by cycle of underemployment and instability. Creating reducing gasoline smuggling. adequate productive employment is thus a priority not only for economic policy but also for national security. • Fiscal Policy: ( 1) To help control growth of the money supply, establish mechanisms to monitor Adopting a sequenced program to protect the lives and report the federal government’s stock of CBN and livelihoods of poor and vulnerable Nigerians— overdrafts. (2) Identify more flexible options for with immediate attention to reducing inflation—is borrowing to finance the federal government deficit. vital to sustain the recovery. This edition of the Nigeria (3) Totally eliminate the fuel subsidy. (4) Design a Development Update proposes near-term measures sequence of reforms to mobilize domestic non-oil designed to reduce inflation while protecting the poor revenue in a way that does not affect recovery of the and supporting the recovery. Policy proposals are economy, such as increasing “sin taxes,” charging organized around three priority objectives: (1) Reduce fees for electronic money transfers, rationalizing tax inflation by adopting policies to support macroeconomic expenditures, removing loopholes in tax laws, and stability, inclusive growth, and job creation. (2) Protect improving tax compliance by building up revenue poor households from the impacts of inflation. And (3) administration. Facilitate access to sustainable financing for small and medium enterprises in key sectors to mitigate the effects • Monetary Policy:  (1) Clearly define monetary- of inflation and accelerate the recovery. Accomplishing policy priorities and objectives, with price stability these goals will require a big push in areas as varied as specified as the primary goal. (2) Resume naira- denominated open-market operations (OMOs) based 1 NAFEX is the reference rate for FX transactions in the Investors' & Exporters' FX Window. It is also referred to as the IEFX rate in other parts of this Report. 2 Overview RESILIENCE THROUGH REFORMS on a transparent issuance schedule, and signal to shifts, incomes for some households have increased since markets that OMOs will use short-maturity securities before the crisis, although this is far from universal. Yet to control banking system liquidity. (3) Reduce CBN even if incomes are stabilizing, households are feeling the subsidized lending to medium and large corporates, impact of rising prices, which erodes their purchasing expanding the scope for commercial banks to power and means that food insecurity is still widespread. intermediate funds at a risk-adjusted lending rate. (4) Phase out excessive reliance on the cash-reserve Poverty and inflation in Nigeria:  Inflation is ratio as a high-frequency liquidity control tool and an exacerbating poverty. The headline inflation rate reached instrument to finance quasi-fiscal CBN operations. a four-year high in March 2021, and in 2020 food prices accounted for 63 percent of the total increase in inflation. • Social Protection:  (1) Leverage the National Social Most of the food that households consume is purchased Safety Nets Program (NASSP) to provide transfers to rather than self-produced, even among poor agricultural more households and temporarily increase transfers households in rural areas; food-price inflation is thus to current beneficiaries. (2) Complement NASSP a major threat to purchasing power and household with the National Home-Grown School Feeding welfare. Food insecurity is more widespread than it was Program (NHGSFP) to strengthen the food security before the COVID-19 crisis, and in November 2020 of vulnerable households. (3) Rapidly implement the about 56 percent of households reported that adults had COVID-19 Action Recovery and Economic Stimulus skipped meals in the previous 30 days. Expanding social program to support households, farmers, and firms. protection programs to provide time-bound support will alleviate the immediate effects of inflation. Over the long term, however, the Nigerian authorities need to address the sources of inflation through a mix of monetary, exchange-rate, fiscal, and trade policies, complemented How COVID-19 is affecting the by reforms that support job creation. labor market and how inflation is affecting poverty The continuing effects of the COVID-19 crisis on welfare and work:  The pandemic continues to Spotlights on the power sector and profoundly affect employment and household welfare in on mobilizing domestic revenues Nigeria. Data collected in the February 2021 COVID-19 National Longitudinal Phone Survey indicate that the number of people working in February 2021 was similar Igniting economic growth by reforming the power to the number in September 2020—much higher than Nigeria’s revenue-side challenges may be diffuse, sector:  would be expected if employment were following typical but on the spending side the electricity sector is a seasonal patterns. The higher share of people working clear priority for reforms. An estimated 43 percent of was more concentrated among women and people Nigeria’s population (85 million people) lack access to from poorer households, which indicates an “added an electricity grid—the largest energy-access deficit in worker effect”: more members take on work to help the the world. Privatization efforts have not delivered their household to cope with economic shocks. Moreover, the intended outcomes, and the power sector is now under commerce and service sectors have expanded beyond severe stress. Distribution companies report aggregate what would be expected given previous seasonal patterns, technical, commercial, and collection losses of about especially for women. Accompanying these labor market 50 percent, far above the 15 percent benchmark for Overview 3 NIGERIA DEVELOPMENT UPDATE JUNE 2021 international good practice. The inefficiencies, combined Focusing on low-hanging, revenue-yielding fruits could with uneven reforms of tariffs, have led to a breakdown yield substantial gains: increasing “sin taxes,” charging in the sector’s payment chain. For instance, in 2020 fees for electronic money transfers, rationalizing tax alone, Federal government support for the electricity expenditures, removing loopholes in tax laws, and sector exceeded its total health budget. Recognizing improving tax compliance with more disciplined revenue that power sector underperformance threatens Nigeria’s administration. In the next three years such measures post-pandemic recovery, the authorities have already can raise the tax-to-GDP ratio to about 7 percent and begun implementing some critical actions specified in bring in as much as N10 trillion. In the longer term, the Power Sector Recovery Programme (PSRP) and the fundamental reforms of the tax system will be necessary National Electrification Project (NEP) to improve sector to stimulate post-pandemic investment and economic performance and increase access to reliable electricity growth. As Nigeria tries to “build back better” after the throughout the country. For example, in November COVID crisis, a more strategic approach to revenue 2020, the government raised electricity tariffs from 56 to mobilization will also be necessary: not just taxing more, 80 percent of cost while moving to a regime of service- but taxing better; not just how much to collect, but how based tariffs and ensuring that the increases in average to collect, what to collect, and from whom. tariffs do not adversely impact those poor and low- income households hat do have access to grid electricity. To complement the tariff reforms, the government issued regulations to stop arbitrary estimated billing, accelerate mass metering, and enforce payment discipline for the distribution companies—all actions to improve the financial sustainability of the sector. There is now a need to deepen these actions through a combination of financial and policy interventions upstream and technical, operational, and investment interventions downstream. Options to raise revenues in a time of crisis: T ax revenues are necessary to run essential services, provide security to citizens, help tackle hunger and poverty, and deliver critical health and education services. Nigeria may be Africa’s biggest economy but at just 4 percent it has Africa’s lowest tax-to-GDP ratio. Together the COVID-related economic slowdown and the steep fall in oil prices in 2020 brought into clear focus the need to increase non-oil revenue even when investment, jobs, and growth also need to increase. This calls for a carefully calibrated set of policy and administrative measures that can grow revenues without discouraging investment. That rules out any increases in traditional ad valorem taxes like the value-added tax but it does afford an opportunity to fully apply tax policies already adopted and reform tax administration to seal compliance gaps. 4 Overview Part 1: Recent Economic Developments and Outlook for Nigeria NIGERIA DEVELOPMENT UPDATE JUNE 2021 Economic Growth: Past the pandemic- induced recession, but not yet on the road to solid growth In 2020 the Nigerian economy shrank by 1.8 percent. data on GDP is still preliminary, the resilience of private The COVID-19 crisis drove the economic slowdown; consumption may be explained in part by workers the external context was marked by capital outflows, moving out of services, which were severely impacted by intensified risk aversion, low oil prices, and shrinking the pandemic, to agriculture, which was less affected.2 remittances. In March 2020, the federal government imposed a lockdown on Lagos and Ogun states and Timely government support helped shore up the Federal Capital Territory, and state governments consumption and prevented an even larger set similar restrictions. These measures, combined with contraction. The government launched a COVID-19 precautionary firm and consumer behavior, put the spending program and, in contrast to previous brakes on manufacturing and services activity; essential practice, this program was budgeted and combined sectors like food, agriculture, and financial services with measures to enhance procurement and conduct continued to operate, but at diminished levels. independent audits of the spending. In addition, the Central Bank of Nigeria (CBN) provided ample support While heavily affected trade and investment are still to agriculture and manufacturing. For instance, during guarded, private consumption is showing signs of the pandemic the agricultural sector received funding resilience. In 2020 exports declined by 27.0 percent, through the CBN Anchor Borrowers’ Programme and its imports by 23.3 percent, and fixed capital formation by Agribusiness Small and Medium Enterprises Investment 7.6 percent—the worst declines since the global financial Scheme, the Nigeria Incentive-Based Risk Sharing crisis of 2009 and its aftermath. Nevertheless, private System for Agricultural Lending, and other targeted consumption went up by 2.2 percent. Although the programs. In 2020 Q4, oil prices and remittances  ervices and oil led the contraction in Figure 1.1. S  rivate consumption remained quite Figure 1.2. P 2020. stable. Contribution to GDP growth Contribution to GDP growth Percent, percentage points Percent, percentage points 4– 10 – 8– 3– 6– 2– 4– 2– 1– 0– 0– -2 – -4 – -1 – -6 – -8 – -2 – -10 – -3 – -12 – 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 J Agriculture J Oil industry J Non-oil industry J Services J Exports J Fixed capital formation J Public consumption Q Real GDP, percent y-o-y, market prices J Imports J Private consumption Q Real GDP, percent y-o-y, market prices Source: NBS and World Bank estimates. Source: NBS and World Bank estimates. 2 These issues were discussed in more detail in the December 2020 edition of the Nigeria Development Update. 6 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS rebounded, though not to their pre-pandemic levels. in oil output accelerated a contraction in services, In this improving external context, the economy investment, and credit growth. For the last 40 years, outperformed expectations, and by the end of the year growth of Nigeria’s GDP has closely tracked oil the Nigerian economy was no longer in recession. prices, and the economy continues to depend heavily on sales of crude oil. In 2019, for example, although  igeria’s performance in 2021 is expected Figure 1.3. N to be below the averages for Sub-Saharan oil represented just 10 percent of GDP, it accounted Africa and for oil-producing countries. for over 80 percent of exports and more than 50 GDP growth percent of consolidated revenues. Percent 20 – • The nonoil industrial sector, including 15 – manufacturing and construction, shrank by 3.9 percent. Lockdown measures and slowing 10 – economic activity caused a contraction in much of the nonoil industry except for cement production, 5– processed foods, and chemical and pharmaceutical 0– products. Even after firms had resumed operations, most nonoil industries were confronted by lower -5 – demand and excess inventories. Despite rising costs 00 002 04 06 08 10 12 14 16 18 20 1f 20 2 20 20 20 20 20 20 20 20 20 202 of inputs and a shortage of foreign exchange, in J Nigeria Q SSA Q Oil producing countries Source: NBS, World Bank, and IMF estimates. Q4 industrial activity recovered slightly, driven by construction and coinciding with the reopening The positive growth in agriculture in 2020 was offset of the economy, but at under 50 percent, capacity by severe contractions in services and the oil and utilization was a full 15 percentage points (pp) below nonoil sectors. the 2019 average. • In 2020 agricultural output went up by • Services output declined by 2.2 percent in 2.2 percent, slightly below 2019’s 2.4 percent 2020, but trends across subsectors were uneven. growth. Crop production, which represents Information technology and communications 90 percent of total agricultural production, drove expanded by 13.2 percent as household and firm the expansion, especially staple foods like rice, consumption of data and broadcasting services corn, beans, and cassava for domestic consumption. spiked as a result of both mobility restrictions and Agriculture was the sector least affected by precautionary behavior. Financial services grew by COVID-19, and production expanded in the second 9.4 percent as CBN monetary stimulus and lower half of the year. Its growth was supported by farmers interest rates drove expansion of credit to the private returning to work after July and the movement of sector. Health services expanded by 2.2 percent due workers from services to agriculture.3 to higher COVID-related demand. However, all other services subsectors—which are the main sources • Oil production in 2020 contracted by 8.9 percent. of urban employment—contracted sharply. Trade A tighter OPEC quota and the disruption of oil declined by 8.5 percent, accommodation and food production in the first three quarters resulted services by 17.8 percent, transportation and storage in a combination of lower oil prices and smaller by 22.3 percent, and real estate by 9.2 percent. production volumes, which diminished revenues for Moreover, total employment in services has fallen both the public and the private sectors as the decline below pre-pandemic levels. 3 The movement of labor between sectors in Nigeria—and the role of agriculture as an employer of last resort—are described in Section 2: “The Continuing Effects of the COVID-19 Crisis on Work and Welfare.” Part 1: Recent Economic Developments and Outlook for Nigeria 7 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Nigeria exited the recession in Q4 2020, but the pace Increasing mobility and rebounding oil prices are of recovery remains subdued. In Q1 2021, GDP grew supporting recovery, and while its magnitude remains by 0.4 percent, the lowest GDP growth rate recorded in uncertain, 2021 Q2 is expected to host a substantial a first quarter since 2017 (-1.0 percent). When adjusted rebound in economic activity. The projected rebound by seasonality, GDP grew by 7.5 percent in annualized is based on assessment of high-frequency indicators terms, below the rates observed in Q4 and Q3 in 2020, in Nigeria, which suggest that nonoil GDP began to indicating a deceleration. As in previous quarters, recover as early as mid-2020; it also considers statistical agriculture continued to be the most resilient sector in base effects. Last year, each week of suppressed economic the economy and grew by 2.3 percent, led by higher crop activity represented a loss of about 0.2 pp of GDP production. Industrial activity also grew by 0.9 percent, growth, but fewer restrictions are expected in the second due to a recovery in the production of cement and a half of 2021. The Nigerian Purchasing Manager’s Index more dynamic construction sector. In contrast, oil GDP for manufacturing moved into positive territory in Q1, declined by 2.2 percent, although at a lower pace than suggesting a rebound in industrial activity during the in the previous quarters (-13.4 percent on average in the first half of this year. If oil prices hold steady for the last three quarters). Services declined by 0.4 percent due rest of the year, GDP growth in 2021 is expected to be to the contraction of all its components but information among Nigeria’s fastest in the last seven years. and communication services (6.5 percent), real estate (1.8 percent), and health services (4.6 percent). The Uncertainty about the trajectory and duration of decline in services shows that in the first quarter the the COVID-19 pandemic will continue to influence economy continued to be affected by the COVID- household consumption and private investment. The induced pandemic: transportation contracted by COVID-19 crisis is far from over, and while the second 21.9 percent, accommodation and food services by wave of cases appears to have peaked and receded, how 4.6 percent, and trade by 2.4 percent. the pandemic will evolve is still unclear. Indeed, the December 2020 Business Expectation Survey Report and  he pace of quarterly GDP growth after Figure 1.4. T the recession is subdued. the CBN Consumer Expectations Survey for Q4 of 2020 Quarterly GDP growth reveal high, though easing, uncertainty and risk aversion Percent among consumers and firms. The rollout of vaccines will 20 – 14.4 likely impact the pace of the recovery, but immunization 15 – 12.2 in Nigeria is not expected to be widespread in 2021. 10 – 5– 7.5 0– The Nigerian economy is expected to grow by -5 – -2.6 -2.4 1.8 percent in 2021, though again there is high -10 – -6.0 uncertainty about the outlook. The recovery would -15 – be driven by rises in oil exports and in domestic -20 – demand. However, Nigeria’s recovery is expected to -25 – -30 – -26.4 underperform those of other oil producers, and an 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 unexpected shock to oil prices could threaten the modest ▬ GDP growth (y-o-y) ▬ GDP growth (SAAR) growth projected. Although oil prices have increased, Source: CBN data and World Bank estimates. Notes: TRAMO-SEATS methodology is used for seasonal adjustment. oil production is expected to remain relatively low at an average of 1.7 million barrels a day, down from an average of 1.9 million barrels between 2016 and 2019. GDP per capita is also projected to continue declining because the economy is forecast to grow more slowly 8 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS  igh-frequency indicators suggest that Nigeria’s economy will recover in the first half of 2021. Figure 1.5. H Heatmap of high-frequency indicators in Nigeria 2019 2020 2021 Indicators Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Nigerian Economy’s Temperature (NET) Index Headline Inflation Food sub-index Crude Oil Price Manufacturing PMI Exchange Rate Premium External Reserves Turnover -IEFX (NAFEX) FAAC MPR 91 Day T-Bill Rate Prime Lending Rate Money Supply M3 Credit to Private Sector Currency in Circulation Source: CBN, NBS, Financial Markets Dealers Quotation (FMDQ), Aboki FX, and World Bank estimates. Notes: The NET Index is a synthetic indicator built to measure the temperature of the Nigerian economy based on a set of 14 high-frequency indicators - Headline inflation, Crude oil price, Manufacturing PMI, Treasury Bill rate, Diesel price, Petrol price, Currency in circulation, Exchange rate premium (Parallel - NAFEX) and M2. NET highly correlates with quarterly GDP. The index does not provide a point estimate, but a qualitative assessment of whether the overall economy is heating up (red) or cooling down (blue). Color coding is based on the deviations of standardized values of each indicator relative to a 5-years mean. Red represents growth above the mean (the economy is heating); darker shades of red represent stronger growth. Blue represents the opposite.  s mobility restrictions eased and the number of COVID-19 cases declined from its peak in early Figure 1.6. A 2021, economic activity has begun to recover. PMI index, average mobility, and new COVID-19 cases 20 – COVID-19 Lockdown – 2,000 – 1,800 10 – – 1,600 0– – 1,400 -10 – – 1,200 -20 – – 1,000 – 800 -30 – – 600 -40 – – 400 -50 – – 200 -60 – #EndSARS protest –0 20 20 20 20 20 20 20 20 /20 /20 /20 21 21 21 21 21 /2/ /3/ /4/ /5/ /6/ /7/ /8/ /9/ /10 /11 /12 5/1 / 5/2 / 5/3 / 5/4 / 5/5 / 15 15 15 15 15 15 15 15 15 15 15 1 1 1 1 1 J PMI (deviations from 50 index points) ▬ Average mobility (percent change from baseline) ▬ New COVID cases, rhs Source: CBN, Stanbic, Google, and Nigerian authorities. Part 1: Recent Economic Developments and Outlook for Nigeria 9 NIGERIA DEVELOPMENT UPDATE JUNE 2021 than the population. Moreover, high inflation and high environment, compounding longstanding development unemployment exacerbate the macroeconomic risks, challenges related to mobilizing public revenue, and activity in the tertiary sector will not fully normalize building human capital, and a variety of concerns about unless COVID-19 is contained. By the end of 2021, infrastructure, and governance. Although the authorities Nigeria’s GDP is likely to approach its 2010 level, thus carried out bold reforms in 2021, further action is reversing a full decade of economic growth. necessary to address Nigeria’s structural challenges and accelerate GDP growth in the short and medium term.  rowth in GDP per capita is expected to Figure 1.7. G remain subdued in 2021. The government has an opportunity to accelerate the GDP growth recovery by deepening recent reforms that focus on Percent enabling private investment. Even in a best-case scenario 10 – for the global economy, an appropriate domestic policy 8– response will be crucial to lay the foundation for broad- 6– based and sustainable post-crisis recovery. 4– Despite the projected recovery, the 2020 recession 2– is expected to have lasting effects on poor and 0– vulnerable households. As explained in Section 2 of -2 – this report, the recession disproportionately impacted -4 – Nigeria’s poorest households; workers were forced f f 09 010 011 012 013 014 015 016 017 018 019 2020 021 022 to move from higher- to lower-productivity sectors; 20 2 2 2 2 2 2 2 2 2 2 2 2 J Real GDP growth Q Population growth and economic uncertainty and food insecurity were Source: NBS and World Bank estimates. heightened even among workers who returned to regular Nigeria’s economy continues to be acutely vulnerable employment. Questions about income are limiting the to both external and domestic shocks. When the investments households are willing to make in education pandemic materialized, the Nigerian economy was and health services, undermining prospects for long- still recovering from the 2016 recession. Multiple term GDP growth. In total, the pandemic-induced foreign-exchange rates, trade restrictions, and CBN recession of 2020 is estimated to have increased poverty financing of the public deficit had worsened the business in Nigeria. Box 1.1. Rising insecurity poses severe economic risks. Nigeria faces intensifying conflict and insecurity on multiple fronts. In 2020, Nigeria was added to the World Bank’s List of Fragile and Conflict-Affected Situations due to repeated instances of civil unrest, rising crime rates, intercommunity violence in central Nigeria, and the ongoing Boko Haram insurgency in the northeast, among other factors. Moreover, the situation has been worsening over the last years. The Armed Conflict and Location Event Data (ACLED) Project estimates that the number of conflict events in Nigeria increased by 150 percent between 2018 and 2020, and the number of such events between January and April 2021 has already exceeded the total for 2018. In April 2021, Amnesty International estimated that the mass kidnappings of schoolchildren by Boko Haram, which have resulted in hundreds of children being killed, raped, forced into “marriages” with insurgents, or compelled to join the group, have resulted in the closure of over 600 schools, with educational losses for tens of thousands of children. Conflicts between farmers and 10 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS Box 1.1 continued pastoralists, which first emerged in the middle belt, have spread to other parts of the country, and escalated to armed banditry, with kidnapping for ransom becoming increasingly common. The COVID-19 pandemic has aggravated several key preexisting insecurity challenges in Nigeria. The initial lockdown during the second quarter of 2020 and the subsequent economic slowdown led to widespread unemployment and underemployment. The August 2020 Nigeria COVID-19 National Longitudinal Phone Survey (NLPS) revealed that even though many Nigerians had returned to work after the early phase of the crisis, most households remained in an economically precarious situation, with more than two-thirds of respondents reporting lower incomes than in the previous year. High and rising inflation has also exacerbated economic insecurity. These factors have greatly incentivized crime as a means of earning income and made participation in an insurgent movement a more viable alternative to conventional employment.  onflict and violence in Nigeria have intensified. Figure B1.1.1. C Change in conflict events in Nigeria (2019–2020) Percent change in conflict events (2019–2020) Sokoto Katsina Jigawa Kebbi Zamfara Yobe Borno Kano Kaduna Bauchi Gombe Niger Plateau Adamawa FCT Kwara Nasarawa Oyo Taraba Ekiti Kogi Osun Benue Ogun Ondo Edo Lagos Ebonyi Enugu Cross River Anambra Delta Imo Abia Bayelsa Akwa Ibom Rivers ‡ At least 0 J 1–50 J 51–100 J Above 100 Source: World Bank estimates based on ACLED. Instability and violence are also slowing economic growth and job creation—resulting in a vicious cycle. Insecurity is driving internal displacement and crippling the economic activities of vulnerable communities. Clashes between farmers and pastoralists have severely damaged agricultural output in north-central Nigeria in recent years, contributing to rising food insecurity and food-price inflation. The latest poverty data for Nigeria (2019) indicates that the northeast and northwest of the country, which have the highest incidences of conflict events, also have the highest poverty rates. Insecurity is a powerful disincentive to both domestic and foreign investment, compounding the negative effect of weak governance and poor infrastructure. Moreover, the growth of a lucrative criminal industry centered on kidnapping for ransom is presenting appealing opportunities for young workers, especially those facing dim prospects in a weak and unstable labor market. Part 1: Recent Economic Developments and Outlook for Nigeria 11 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Prices: Inflationary pressures are becoming more difficult to manage The rate of inflation rose steadily throughout 2020 year (y/y); the increases were comparable in urban and by March 2021 had reached a four-year high centers (18.7 percent) and rural areas (17.6 percent). (Figure 1.8). The rise has been driven primarily by  The composite food index reached 22.7 percent, slightly surging food prices (Figure 1.9). By April 2021, the below the 22.9 percent recorded in March 2021 (the consumer price index was up 18.1 percent, year-on- highest rate in 15 years), due to higher prices for such staples as bread and cereals, potatoes, yams and other  ood prices have driven the surge in Figure 1.8. F inflation over the past 12 months. tubers, meat, fish, fruits, and oils and fats. COVID-19 Consumer price index restrictions prevented seasonal migration during harvest Percent change y/y time, and the resultant disruption of supply chains was 20 – compounded by security issues, border closures, and 0.3 18 – 0.9 0.4 0.1 0.2 -0.2 18.1 limited access to markets. The surges in domestic food 16 – 3.9 prices accounted for almost 70 percent of the total 14 – 12-month increase in inflation. The general increase 0.1 in food prices masks both the price spikes for certain 12 – 12.3 staple goods and significant disparities between regions 10 – (Figure 1.10 and Figure 1.11). The core inflation rate 8– 0 d d re s s th rt rs 1 also increased, reaching 12.7 percent in April 2021, led 02 oo oo wa litie shing Heal po Othe 02 ri l2 t e df t e d f foot Uti r n i r a ns r il 2 by rising prices for passenger air and road transportation, Ap po r or & Fu T A p Im mp ing n-i loth medical services, pharmaceuticals, and motor vehicles. No C Source: NBS data and World Bank estimates. n March-April, headline inflation rate has Figure 1.9. I  rices for staple goods have gone up Figure 1.10. P reached its highest level since March more in border states. 2017. Consumer price index Average price for rice in selected border states Percent change y/y Index 2019=100 21 – 17.3 (Mar-17) 180 – Border closure 19 – 160 – 17 – 140 – 15 – 13 – 120 – 11 – 100 – 9– 7– 80 – 5– 60 – 9 7 -17 -17 -17 -18 -18 -18 -18 -19 -19 -19 -19 -20 -20 -20 -20 -21 -21 9 9 9 9 9 0 0 0 0 0 0 1 1 n-1 r l t r l t r l t r l t r n-1 ar-1 ay-1 Jul-1 ep-1 ov-1 an-2 ar-2 ay-2 Jul-2 ep-2 ov-2 an-2 ar-2 Ja Ap Ju Oc Jan Ap Ju Oc Jan Ap Ju Oc Jan Ap Ju Oc Jan Ap Ja M M S N J M M S N J M ▬ CPI ▬ Core CPI ▬ Food CPI ▬ Kwara ▬ Ogun ▬ Oyo ▬ Sokoto ▬ National average Source: NBS data and World Bank estimates. Source: NBS data and World Bank estimates. 12 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS  rice increases have been unevenly distributed across states. Figure 1.11. P Inflation rates across Nigerian states April headline inflation, percent Sokoto Katsina Jigawa Zamfara Yobe Kebbi Kano Borno Bauchi Gombe Kaduna Niger Adamawa Plateau Kwara FCT Nasarawa Oyo Taraba Ekiti Kogi Osun Benue Ogun Ondo Edo Lagos Enugu Anambra Ebonyi Cross River Delta Imo Abia Rivers Akwa Bayelsa Ibom ‡ 15.6–17.3 J 17.4–19.1 J 19.2–24.3 Source: NBS data and World Bank estimates. Inflationary pressures are expected to persist for the fifth highest, behind only Zimbabwe, Zambia, South next six months, and for 2021 inflation is expected to Sudan, and Angola. exceed 16 percent. Even if domestic food production increases and supply and distribution constraints are In 2021 elevated inflation rates are expected to eased, a combination of exchange-rate management further exacerbate poverty and dampen growth. As problems, shortages of hard currency, border closures, discussed in Section 2, high inflation is expected to expansionary monetary policy, and the monetary frustrate Nigeria’s economic recovery and erode the funding of the fiscal deficit will continue to generate purchasing power of households, which will increase inflation pressures. In the first quarter of 2021 inflation both the poverty rate and the number of people living accelerated in many Sub-Saharan African countries; below the poverty line. Prices trending upward in a weak however, other countries with high inflation rates, economic recovery will limit CBN options for alleviating such as Zambia and Zimbabwe, have tightened their inflationary pressures. With firms and consumers monetary stance to mitigate the pass-through effect of both expecting inflation to remain high in the next exchange-rate depreciation and to anchor inflationary 12 months, even with conventional inflation targeting expectations. In Nigeria, absence of a credible anchor has monetary policy would be of little effect. In addition caused the inflationary expectations of both professional to worsening poverty and undermining development forecasters and businesses to spike. In 2020, Nigeria’s outcomes, a slow recovery with few jobs created inflation rate was the seventh highest in Sub-Saharan could erode investor confidence in the capacity of the Africa, but by the end of 2021 it is expected to rise to authorities to sustain adequate macroeconomic activity to support the post-pandemic recovery. Part 1: Recent Economic Developments and Outlook for Nigeria 13 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Box 1.2. Drivers of inflation in Nigeria in 2020–21. The upswing in inflation rates is proving especially hard to control because inflationary pressures are being generated by multiple demand and supply shocks. The pressures are compounded by policy factors related to containment of the pandemic and to the spending necessary to counter its effects. In addition to supply-side factors affecting food production and marketing, lack of a credible nominal anchor on the demand side is buttressing the price-shocks uncertainty that firms and consumers face when making investment and consumption decisions. The month-to-month pattern of price changes also differs from the patterns seen in previous inflationary episodes, as lockdown prevention of seasonal migration meant that food-price inflation in 2020 was disconnected from the agricultural seasonality that typically drives food prices. Exogenous factors: • Insecurity and conflict in food-producing areas, e specially northern and central Nigeria, have destroyed crops and forced farmers to abandon their land. Reduced food production exerts a cost-push force on prices, especially in conflict-affected areas and regions with limited transportation and storage infrastructure. • The COVID-19 crisis and associated containment measures  have disrupted production and supply chains while preventing seasonal migration during harvest time. Policy factors: • Trade restrictions,including the closing of land borders starting in August 2019, have contributed to rising prices for food and consumer goods. Food prices are especially sensitive to trade restrictions; domestic supply cannot adjust quickly to offset a decline in imports. • Foreign currency restrictions  are further pushing up prices of food and agricultural inputs like fertilizer. Imports of over 40 goods, including many staple foods, are currently ineligible for foreign exchange (FX) through formal windows. • Nigeria’s exchange rate management h  as contributed to the rise in inflation because currently there is in effect a cap on the price of foreign currency (nominal exchange rate) and its supply (the FX supply available in the IEFX and other windows where the central bank intervenes) in the formal markets. Even though the nominal IEFX rate has been depreciating, which has helped to alleviate inflationary pressures, it has not been doing so fast enough to equilibrate the FX market. When there is a divergence between the official/IEFX rate and the parallel FX rate, the parallel rate is the one most associated with food price dynamics. Unable to access FX in the IEFX window, businesses seek it through the parallel market and other alternative sources and factor in the parallel rate in business decisions, so that it eventually passes through to market prices for goods and services. 14 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS Box 1.2 continued • Nigeria’s monetary policy  is not consistent with prioritizing efforts to curb inflation. The tools that CBN use to achieve its policy goals sometimes contradict each other. For example, keeping the exchange rate de facto stable, promoting growth, and containing inflation. This weakens effectiveness of monetary transmission mechanisms to contain demand inflationary pressures. • Expansionary monetary policy and financing of the fiscal deficit a  dd more upward pressure on inflation rates. The y/y growth rate of M2 jumped from 6.3 percent in 2019 to 31.9 percent in 2020 as the CBN played a major role in funding a widening government deficit. This coupled with a decline in the stock of open-market securities used to control the system’s liquidity. The rapid expansion of M2 occurred in a context of contracting economic activity and minimal growth in credit to the private sector. Since June 2020, the growth in CBN loans to the federal government have accounted for 48 percent of the increase in M2. Part 1: Recent Economic Developments and Outlook for Nigeria 15 NIGERIA DEVELOPMENT UPDATE JUNE 2021 The External Sector: Nigeria’s outlook improves as oil prices recover The COVID-19 crisis intensified pressure on Nigeria’s outflows. Meanwhile, foreign direct investment (FDI) to balance of payments (BoP). In 2020 the current Nigeria, already low compared to peer countries, shrank account deficit (CAD) widened from 3.7 percent by 25 percent. of GDP in 2019 to 4.2 percent as oil exports and remittances—the two largest current account inflows— The CAD and the portfolio outflows put intense together fell by almost 30 percent (Box 1.1 describes pressure on the naira, but the impact on external Nigeria’s longstanding vulnerability to oil price reserves was contained due to the CBN’s FX volatility). Total exports plunged by 43 percent, but management strategy. Nigeria’s stock of gross external imports also fell, by 28 percent, reflecting pandemic- reserves initially declined at the outset of the pandemic related economic disruptions, slack demand, and a but then held relatively steady for the rest of the year, shortage of foreign exchange (FX). Due to the substantial partly due to the CBN’s exchange rate management drop in imports, Nigeria’s CAD did not widen as strategy and partly to support from the International dramatically as those of other oil major exporters, such Monetary Fund. By yearend-2020, gross FX reserves as Libya, Iraq, Kuwait, and Sudan, but the crisis had a were US$35 billion, equivalent to 5.9 months of dampening effect on capital inflows, especially portfolio imports. Unwilling to allow substantial depletion of the investment. Throughout 2020, high global risk aversion, external reserves because of higher foreign outflows, the uncertainty about Nigeria’s foreign exchange policies, CBN deployed its FX demand-management strategies and a low-interest-rate regime resulted in net portfolio by, e.g., continuing to exclude various items from the  alling oil exports and foreign Figure 1.12. F  but a steep decline in imports kept Figure 1.13. … remittances widened the CAD in 2020… Nigeria’s deficit narrower than those of its structural peers. Contribution to changes in Nigeria’s Current-Account Current-Account Balance as a share of GDP, Nigeria and Balance peers Percentage points Percent of GDP 4– 10 – 3– 2– 5– 1– 0– 0– -1 – -2 – -5 – -3 – -4 – -10 – -5 – -6 – -15 – 2015 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 J Net exports J Net transfers J Net income Q Change in CAB J Structural peers J Nigeria Source: CBN Source: CBN and World Bank estimates. Note: Nigeria’s structural peers are countries in which crude oil exports exceed 85 percent of total merchandise exports. Among them are Azerbaijan, Iraq, Kuwait, Libya, Qatar, and Sudan. 16 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS FX market (now 45 items) and temporarily interrupting the global economy recovers. Since January 2021, the supply of FX to Bureaux de Change (BDCs) and the commodity prices have risen substantially; in mid-March Investors’ & Exporters’ FX (IEFX) window. The CBN oil prices surged by 30 percent, to US$68 per barrel. resumed IEFX sales in September but barred commercial The recovery of commodity prices reflects resurgent banks from processing FX purchases for transactions global demand, driven in part by robust fiscal stimulus routed through buying agents or other third parties. As a in the United States and other advanced economies, as result, demand for FX rose in the parallel market, which well as supply-side factors, especially the recent OPEC+ eventually led to depreciation of the parallel market rate. production agreements. Inbound remittances are also expected to recover as rising vaccination rates and In 2021 the CAD is expected to narrow to about effective containment measures strengthen foreign labor 0.5 percent of GDP as oil prices rebound and markets.  ortfolio outflows and contracting FDI Figure 1.14. P  he CBN continued to apply demand- Figure 1.15. T intensified pressure on the balance of management strategies to preserve its payments. FX reserves. Foreign Direct Investment and Foreign Portfolio Investment Foreign exchange reserves inflows US$ billion US$ million Months of imports 14 – 45 – – 10 12 – 43 – –9 10 – 41 – –8 8– 39 – –7 6– 37 – –6 4– 35 – –5 2– 33 – –4 0– 31 – –3 -2 – 29 – –2 -4 – 27 – –1 -6 – 25 – –0 2015 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020e ▬ FDI inflows ▬ FPI inflows J Gross external reserves (end period) ▬ Equivalent months of imports, rhs Source: CBN. Source: CBN. Box 1.3. Accelerating export diversification to relieve Nigeria’s external volatility. Since the 1970s, Nigeria’s economy has become heavily focused on oil production, and formerly robust nonoil sectors have atrophied. Previously, Nigeria exported a broad range of primary commodities, including a substantial share of the world’s cocoa, palm oil, groundnuts, cotton, hides, skins, rubber, and coffee, as well as coal, tin, and other minerals. However, the discovery of commercial-scale oil reserves in 1956 spurred a surge in the 1960s of foreign investments in Nigeria’s oil industry; within a decade Nigeria’s daily oil output had reached 2.3 million barrels. Oil exports drove steady appreciation of the real effective exchange rate, eroding the competitiveness of the nonoil sectors. Agricultural exports slumped, and oil expanded from an average of 12 percent of total exports in the early 1960s to 95 percent 20 years later. Part 1: Recent Economic Developments and Outlook for Nigeria 17 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Box 1.3 continued Over the last several decades, oil has consistently represented more than 90 percent of Nigeria’s total exports, resulting in a high degree of external volatility. In 2017, Nigeria had the world’s 9th most concentrated export structure (UNCTAD 2017); and its overwhelming dependence on oil exports has left the terms of trade and balance of payments highly vulnerable to shocks. Nigeria has tried both fixed and managed- float exchange-rate regimes, and repeated oil-price-driven boom/bust cycles have forced the authorities to make large exchange-rate adjustments or deal with erosion of external reserves and depreciation of the naira. During the 2008/09 global financial crisis, the global price of crude oil fell by over 70 percent; then, from mid-2014 through early 2016, global crude prices again plunged by 70 percent. In 2020, the COVID-19 pandemic set off a worldwide economic slowdown that caused the global price of oil to once again to plummet by 70 percent between January and April. In each cycle, faltering oil exports weakened confidence in the economy, resulting in diminished or even negative net capital inflows, which intensified pressure on the naira, further discouraged investment, and slowed growth.  ver the last several decades, Nigeria has remained far more dependent on oil exports Figure B1.2.1. O than the average of other oil-rich countries. Relative shares of oil and nonoil exports, Nigeria and comparators Percent Nigeria Indonesia Egypt, Arab Rep. 100 – 100 – 100 – 80 – 80 – 80 – 60 – 60 – 60 – 40 – 40 – 40 – 20 – 20 – 20 – 0– 0– 0– 1986– 1990 2006– 1986– 1990 2006– 1986– 2010 1990 2006– 2010 2010 1981– 1985 1991– 1981– 1995 2001– 2005 1981– 1985 1991– 1995 2001– 1991– 2005 1985 1995 2001– 2005 1996– 2000 1996– 2000 1996– 2000 2011– 2015 2011– 2015 2016– 2016– 2020e 2011– 2015 2020e Oman Ecuador Mexico 100 – 100 – 100 – 80 – 80 – 80 – 60 – 60 – 60 – 40 – 40 – 40 – 20 – 20 – 20 – 0– 0– 0– 1986– 1986– 1986– 2006– 1990 2006– 1990 2006– 2010 1990 2010 2010 1981– 1981– 1985 1991– 2001– 1985 1991– 2001– 1981– 1985 1991– 1995 2001– 2005 1995 1995 2005 2005 1996– 1996– 2000 1996– 2000 2000 2016– 2011– 2015 2016– 2020e 2020e 2016– 2011– 2015 2020e 2011– 2015 J Oil exports J Non-oil exports Source: World Bank estimates. Despite repeatedly experiencing the adverse consequences of the lack of diversity in its export base, Nigeria has made little progress in reducing its dependence on oil. Successive national development plans, most recently the 2017–20 Economic Recovery & Growth Plan (ERGP),1 have stressed the need to diversify exports and fiscal revenues away from the oil sector, but these efforts have met with little success. As 1 The ERGP identified six priority economic sectors: agriculture, manufacturing, solid minerals, services, construction and real estate, and oil and gas. In addition, the Zero Oil Initiative of the National Export Promotion Council and the Ministry of Budget and National Planning is designed to boost the supply of foreign exchange from nonoil sectors by encouraging the growth of 11 export products: cotton, rice, leather, gold, soya, sugar, cocoa, petrochemicals and fertilizer, palm oil, rubber, and cement. 18 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS Box 1.3 continued of 2017, Nigeria’s score on the UNCTAD export concentration index2 was more than twice that of regional comparators like Uganda and Benin and global comparators like the United Arab Emirates and Oman. Uganda reduced its dependence on coffee exports by broadening its portfolio of manufactured goods, and Benin reduced its dependence on cotton by diversifying into commodities like oil, gas, and gold. The United Arab Emirates and Oman have made enormous efforts to diversify away from hydrocarbons by fostering the growth of manufacturing and high-value services. Nigeria can break the cycle of oil-induced volatility by diversifying its export basket. In addition to increasing macroeconomic vulnerability, international experience shows that an excessive focus on extractive industries and other sectors with limited scope for productivity gains can slow employment creation and income growth. Thus, diversification into manufacturing, commercial agriculture, and knowledge-intensive services can help stabilize the macroeconomy while stimulating structural transformation, fostering the creation of high-quality jobs, and building new competitive advantages. Numerous World Bank analyses have highlighted Nigeria’s potential to accelerate growth and promote export diversification through increased private investment in sectors like agribusiness, mining, manufacturing, and the digital economy. Agribusiness, for example, could prove transformative for Nigeria, especially in conflict-afflicted areas like the North East. Furthermore, given robust demand for raw materials and intermediate goods, the production of chemicals, leather, and construction materials could boost exports, accelerate job creation, and facilitate structural transformation by absorbing excess labor from the agricultural sector. 2 Export concentration index scores range from 1, when a single product accounts for all exports, to 0, indicating that exports are distributed across an infinite range of products. In 2017, Nigeria’s index score was 0.8; the scores for comparator countries were below 0.4. Part 1: Recent Economic Developments and Outlook for Nigeria 19 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Monetary Policy and Exchange Rate Management: Adjustments remain critical to Nigeria’s recovery Since 2020, the CBN has focused more on funding the foreign portfolio investors, pressure on the FX market government and easing financial conditions to soften intensified. In response, in 2020 the CBN cut OMO the impact of the COVID-19 crisis than on stabilizing issuances by 70 percent and in the first three months of prices. Although inflation accelerated in 2020 and 2021 by almost 60 percent. further in 2021, led by rising food prices, the CBN progressively lowered the monetary policy rate (MPR), Prolonging the CBN’s accommodative monetary citing—as its rationale—the need to support economic policy would risk further entrenching high inflation recovery. The MPR has been held at 11.5 percent since and exacerbating financial outflows. Monetary policy September, and the CBN has kept the cash reserve may remain accommodative in the near term, but the requirement at 27.5 percent and the liquidity ratio authorities should be ready to tighten the CBN’s stance at 30 percent since January 2020. The CBN has also if pressure on the external accounts intensifies as EU and expanded its interventions to mitigate the pandemic’s US bond rates continue to rise and inflation accelerates. economic impact on households and businesses: (i) it The headline inflation rate is currently far above the lowered interest rates on all its subsidized interventions, upper limit of the CBN’s 6–9 percent target band (see (ii) suspended interest payments on borrowed funds the Inflation section). under these interventions, and (iii) introduced at least five new lending facilities (Figure 1.18). It also directly As exchange rate stability continues to be a key policy financed one-third of the federal government’s fiscal objective, the CBN has pursued this by continuing deficit in 2020 through measures that included extensive to manage FX demand and employing other means use of overdrafts exceeding the CBN charter’s statutory to strengthen the value of the naira. More recently, limit of 5 percent of the previous year’s government it has taken further steps to unify the exchange rates. revenue. Supporting renewed growth was also part of the Although the CBN devalued the official exchange rate CBN’s official explanation for these policy actions. by 15 percent in March 2020 and by another 5 percent in August while also allowing the Importers’ and The CBN limited its use of open-market operations Exporters’ Foreign Exchange (IEFX) rate to depreciate, it (OMO) bills to manage liquidity and shore up was hesitant to allow further slides in the rates. However, the value of the naira,slashing its use of them from its limited interventions in the IEFX window, which the first quarter of 2020 through the first quarter of reduced the FX supply, and its restriction on access to 2021. After the 2015 oil-price crash, the CBN opened FX for 45 items pushed up demand in the parallel the market for OMO securities to foreign portfolio market, where an estimated 90 percent of manufacturers’ investors, who ultimately held up to one-third of the current FX needs are sourced. Significant spreads bills to take advantage of their high yields. In October between the official, the IEFX, and the parallel exchange 2019, the CBN allowed only banks and foreign investors rate persisted throughout 20204 and as of April 2021, to see OMO bills, excluding domestic institutional the spread between the official and the IEFX rate was investors and the public. When the collapse of yields estimated at 8 percent and between the IEFX and the on OMO securities drove repatriation of returns by parallel rate, reached 18 percent (the spread between the 4 Between March and December 2020, the average spread between the official and the IEFX rates was 5 percent and between the IEFX and the parallel rate was 19 percent; the average spread between the official and the parallel rate was 24 percent 20 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS  BN FX sales in the IEFX window have Figure 1.16. C official and the parallel rate was 27 percent). The way the been limited. exchange rate was managed limited access to FX and thus CBN IEFX interventions and market turnover adversely affected investor confidence and investment US$ billion appetite. In May 2021, the CBN formally took concrete 9– steps towards rates unification between the official and 8– 7– IEFX rates. However, the IEFX rate continues to be 6– managed and is not fully reflective of market forces. 5– Furthermore, there remains a 20 percent premium 4– between this unified rate and the parallel market rate. 3– The two-month naira-for-dollars scheme introduced 2– by the CBN in March 2021 to serve as an incentive for 1– increased remittance inflows through formal channels 0– 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 was extended indefinitely in May and was preceded by n-2 b-2 r-2 r-2 y-2 n-2 l-2 g-2 p-2 t-2 v-2 c-2 n-2 b-2 r-2 r-2 Ja Fe Ma Ap Ma Ju Ju Au Se Oc No De Ja Fe Ma Ap ▬ CBN inflows ▬ IEFX (NAFEX) turnover regulatory directives in December 2020—that mandated Source: FMDQ. all licensed operators to pay remittances in dollars. While this may indeed encourage the use of the formal  he premium between the official and Figure 1.17. T the IEFX rates widened before the formal channels, it is not clear that incentive payments will move towards unification of both rates in increase remittances to the country. May 2021. FX market rates While the CBN has taken steps towards N/US$ Percent 420 – –9 operationalizing unification of exchange rates, greater 410 – –8 flexibility will be necessary to support the recovery. 400 – –7 Until oil companies are allowed to sell FX receipts 390 – –6 to IEFX bank participants, CBN would still have an 380 – –5 important role to play as supplier of FX. In this scenario, 370 – –4 participating banks in the FX market will start to play 360 – –3 an expanded role that goes beyond just executing buy/ 350 – –2 sell orders of its clients to start acting as market makers, 340 – 12/31/20 –1 end of financial year meaning that they start to quote two-way prices buying 330 – 0 –0 /2 /20 /20 /20 /20 /3/21 /3/21 /3/21 /3/21 /3/21 and selling on its own behalf and carrying a stock of 8/3 9/3 10/3 11/3 12/3 1 2 3 4 5 ▬ Official (inter-bank) ▬ IEFX window (NAFEX) - closing FX. With increased flexibility, the CBN could start ▬ Premium in NAFEX closing over official, rhs intervening only to smooth large fluctuations, and work Sources: CBN and FMDQ. toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment. The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations. Part 1: Recent Economic Developments and Outlook for Nigeria 21 NIGERIA DEVELOPMENT UPDATE JUNE 2021  he CBN intensified its development finance interventions in 2020 in response to the COVID-19 Figure 1.18. T crisis. Timeline of new CBN interventions, 2020 March 2020 May 2020 August 2020 September 2020 N50 billion targeted Healthcare research and National gas expansion Family homes financing facility development grant project initiative Purpose: to cushion Purpose: to help Purpose: to improve Purpose: a construction the effect of COVID-19 strengthen the public access to finance finance facility to pandemic on households healthcare system with for private sector implement the federal and SMEs. innovative financing investments in domestic government's social 1. Households: of research and gas value chain. housing programme. • Term loan: Maximum of development in new and 1. Manufacturers, • Term loan: Cumulative N3 million at 5 percent improved drugs, vaccines processors, wholesale maximum limit of N200 p.a. and diagnostics of distributors: billion at not more than infectious diseases. • Term loan: Not more 5 percent p.a. • Tenor: Maximum of 3 1. Research activities: than N10 billion per years with at least one- • Maximum of N50 obligor, at not more • Tenor: 3 years year moratorium million than 5 percent p.a. 2. SMEs: up to Feb. 2021, and • Timeframe: Not more thereafter 9 percent • Term loan: Maximum of than 2 years from the N25 million at 5 percent p.a. date of release of fund p.a. • Tenor: 10 years with 2. Development/ maximum of 2-year • Tenor: Maximum of 3 manufacturing years with at least one- moratorium on principal activities: only year moratorium • Maximum of N500 million 2. SMEs, retail N100 billion credit distributors, Solar connection facility support for health sector • Timeframe: Not more households: than 1 year from the • Term loan: N50 million Purpose: to cushion date of release of fund per obligor, at not more Purpose: to expand the effect of COVID-19 than 5 percent p.a. energy access to 25 pandemic on the up to Feb. 2021, and million individuals. economy. thereafter 9 percent 1. Upstream participants: • Term loan: N2 billion p.a. • Term loan: Maximum per obligor, at not more of 70 percent of project than 5 percent p.a. • Tenor: 5 years with cost, at maximum of 9 up to Feb. 2021, and maximum of 2-year percent p.a. thereafter 9 percent moratorium on principal p.a. only • Tenor: Maximum of 10 years • Tenor: Maximum of 10 years with a 2-year 2. Downstream moratorium on principal participants (mini grid developers: • Term loan: Maximum of 70 percent of project cost, at maximum of 10 percent p.a. • Tenor: Up to 7 years 3. Home solar systems retailers and distributors: • Term loan: Maximum limit of N500, at 10 percent p.a. • Tenor: Up to 5 years Source: CBN. 22 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS The Financial Sector: Nigeria avoided a credit crunch but the banking system is showing signs of stress Despite the harsh operating environment, the Thus far, the CBN’s policy initiatives and banking system has proven generally resilient, but development-finance interventions have helped signs of stress are beginning to appear. The financial prevent a severe credit crunch in the private sector. system must continue to deal with the COVID-19 The CBN cut its monetary policy rate by 100 bps in May crisis, rising inflation, the collapse of crude oil prices in 2020 and by another 100 bps in September. Regulatory 2020 H1, a surge in unemployment, and a protracted forbearance for the restructuring of pandemic-affected disruption in the supply of foreign exchange. In exposures is now in effect until March 2022. The CBN comparable countries, this combination of shocks has has softened the terms of its development-finance caused bank balance sheets to rapidly deteriorate, yet interventions, and the new terms have been extended in Nigeria in February 2021 the nonperforming loan through March 2022; it has also launched a range of new (NPL) ratio was still 6.3 percent, largely unchanged from development-finance initiatives at subsidized interest a year earlier. The system is also still well-capitalized, rates in an attempt to ease the impact of COVID-19 on with a capital adequacy ratio (CAR) of 15.2 percent households and SMEs. It is also helping pharmaceutical in February 2021, up about 30 basis points (bps) from companies, health practitioners, and SMEs respond a year earlier.5 Dollar funding tightened abruptly in to the pandemic by injecting up to N400 billion in 2020, but the system’s overall liquidity position appears loanable funds.7 The new funding is equivalent to about comfortable; in February the 40.5 percent liquidity ratio 2 percent of private sector bank credit. was well above the prudential minimum.6 Importantly, access to international capital market has opened up The regulatory forbearance granted by the CBN for for Nigerian banks, and two of them placed 5-year restructuring loans impacted by COVID-19 was Eurobonds raising US$650 million in recent months crucial to keep the banking system sound, but in the which would help ease FX liquidity strains and extend next few quarters NPLs are expected to rise. While funding maturities. It is expected that more financial the average NPL ratio may be slow to respond to recent intermediaries in Nigeria will tap international markets disruptions, sectors with higher loan dollarization and to issue foreign currency denominated securities or those directly exposed to crude-oil prices, such as oil syndicated foreign currency denominated financing in and gas and construction, have started to see a decline order to partially meet the growing foreign currency in loan quality.8 In other sectors the impact of the crude- needs as well as upcoming foreign currency denominated oil price shock on loan quality will take several quarters maturities. to fully register. Meanwhile, forbearance is expected to be withdrawn, some corporate business models will cease to be financially viable, and with growth prospects for 5 Banks with international authorization licenses have a minimum CAR requirement of 15 percent—with a 1 percentage point add-on for domestically systemic banks; banks with national authorization licenses have a minimum CAR requirement of 10 percent. 6 Between March 31 and September 30, 2020, the system’s dollar funding declined by some US$2.6 billion (N986 billion), with similar losses in deposits and loans; and total foreign-currency-denominated liabilities as a share of total banking system liabilities dropped from 24.3 to 20.4 percent. 7 N100 billion is available from the Health Sector Intervention Facility and N300 billion from the Targeted Credit Facility. In November 2020, disbursements were N61 billion from the former and N149 billion from the latter. The initial funding for the Targeted Facility was N50 billion which was raised three times, reaching N300 billion in March 2021. 8 For example, at year end-2020 the NPL ratio was 17.7 percent in the construction sector, up 567 bps year on year, and 7.9 percent in oil and gas (upstream and downstream), up 306 bps. According to the NBS, in April 2019 the loan-dollarization ratio in construction was 23 percent and in oil and gas 60 percent respectively, in April 2019 (NBS e-library—"Selected Banking Sector Data: Sectoral Breakdown of Credit, ePayment Channels and Staff Strength (Q1 2019)”. Part 1: Recent Economic Developments and Outlook for Nigeria 23 NIGERIA DEVELOPMENT UPDATE JUNE 2021 2021 more muted, the repayment capacity of borrowers in nominal credit, which in 2020 grew by 82 percent would be under pressure, which is also likely to affect year-on-year, supported also but to a lesser extent by loan quality. Profitability is falling due to, among other development-finance institutions.10 More positively, factors, compression of net interest margins, a dramatic since March 2021 the prime lending rate of commercial slowdown in credit origination, and rising impairment banks has fallen by some 360 bps, with the maximum charges. Several banks, both large and small, now have rate lower by 274 bps as deposit funding costs dropped capital cushions that are only slightly above the minimum by 200–400 bps across different maturities. As Nigeria requirements. Corporate lending exposures account for lays the groundwork for a sustained post-pandemic most of the credit portfolio and are concentrated among recovery, if resilient, broad-based growth and job the largest borrowers; as their leverage increases, so does creation are to be ensured, broadening access to credit the risk associated with corporate lending exposures.9 In should be a priority. this context, latent material credit-risk vulnerabilities could emerge in the next few quarters. Indeed, the IMF Different credit segments are expected to recover Article IV Consultation report of December 2020 noted at different speeds, and the authorities must take that recent CBN stress tests simulating the migration special care in managing the process of withdrawing of 25 percent of the unrestructured loan portfolio to forbearance and other pandemic-related support NPL status could cause the system’s CAR to drop below measures. Reversal of the bank-debt repayment 10 percent. moratorium and forbearance measures present distinct risks to CBN as supervisor of banks and of other The continuing surge in inflation has been financial institutions. Policymakers must balance accompanied by a contraction in real credit to the continued support for businesses and households against private sector. Although in the first three months the risk that low-quality (impaired) assets will become of 2021 demand deposits continued to expand at an entrenched in the system, intensifying liquidity risks average real rate of 35 percent, real quasi-money deposits and eroding the culture of loan repayment.11 Moreover, started to fall as negative real interest rates persisted, rolling back pandemic-related support measures will illuminating the risk of financial disintermediation. reveal previously hidden deterioration in asset quality, Meanwhile, microfinance banks drove a rapid expansion raising solvency risks for more thinly capitalized  redit growth has decelerated. Figure 1.19. C  igeria’s financial sector is vulnerable to Figure 1.20. N oil price volatility. Credit growth Oil prices and financial sector stability Percent US$/bbl Percent 30 – 16 – – 160 14 – – 140 20 – 12 – – 120 10 – – 100 10 – 8– – 80 6– – 60 0– 4– – 40 2– – 20 -10 – 0– –0 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 1 6 6 7 7 8 8 9 9 0 0 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-2 r-2 l-2 t-2 n-2 Q1 -1 Q3 -1 Q1 -1 Q3 -1 Q1 -1 Q3 -1 Q1 -1 Q3 -1 Q1 -2 Q3 -2 Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc Ja Ap Ju Oc Ja ▬ Credit to private sector J Provisions coverage ratio, rhs ▬ NPLs ratio, rhs ▬ Crude oil price, lhs Source: NBS, CBN and World Bank estimates. Source: NBS, CBN, and World Bank estimates. 9 The 100 largest borrowers accounted for 47 percent of total credit in April 2019 (NBS e-library), and most large banks reportedly serve the same small group of corporations. 10 At the end of Q3 2020 microfinance institutions accounted for less than 2 percent of financial system assets. 11 On March 3d, 2021, the CBN announced that it would extend the reduction from 9 to 5 percent of the interest rate on its development intervention facilities for one year through February 28, 2022, and that a one-year extension of the repayment of credit facilities would be considered case-by-case. 24 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS banking institutions. Managing the consequences of this process will test the adequacy of the processes for dealing with banks in distress and resolving bank insolvency. Prompt regulatory development of the procedures authorized in the recently amended Banks and Other Financial Institutions Act will be critical to ensure effective application of the revised law, as will further development of the capacity of the Nigeria Deposit Insurance Corporation to assess and execute resolution plans for systemically important domestic banks. Upgrading regulation could attenuate reliance on public support, direct or indirect, from the CBN or the Asset Management Corporation of Nigeria by providing efficient tools to resolve bank insolvency while enabling the authorities to move away from regulatory forbearance when dealing with undercapitalized entities. If inflation continues to accelerate, pressures in the FX market fail to subside, or both, the CBN will likely need to raise policy rates. Accelerating inflation tends to be associated with higher inflation volatility, which in turn makes credit risk assessments less reliable and banks more cautious about lending. Part 1: Recent Economic Developments and Outlook for Nigeria 25 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Fiscal Policy: Despite rising oil prices, Nigeria’s fiscal position is tenuous, highlighting the need to sustain reforms In 2020 reforms of the power sector, reduced gasoline economies. In addition, regressive and opaque subsidies subsidies, and higher VAT rates were fundamental for fuel and electricity create economic distortions and in expanding the government’s restricted short-term reduce the fiscal space for development spending. By fiscal space. These measures, combined with greater addressing some of these issues, at least in part, the transparency, are expected to bolster revenues and government’s recent reforms are expected to increase enhance the allocative efficiency of public spending. Nigeria’s fiscal and macroeconomic resilience. Mobilizing more revenue is vital for public services and social programming, and over the longer term such In 2020, the fiscal deficit of the general government funds can be used to counter the harm inflation does to widened to 5.4 percent of GDP, the largest gap in two household welfare, expand the social safety net, increase decades. Following the twin shocks of the COVID-19 the supply of health care, and accelerate recovery of pandemic and concurrent decline in oil prices, general consumption by vulnerable households. Enhanced government revenues fell from 7.4 percent of GDP transparency will also provide crucial information for in 2019 to 6.5 percent of GDP in 2020. Plunging oil assessing debt sustainability and fiscal risks, which is prices during the first half of the year reduced oil revenue critical to ensure that Nigeria can issue commercial debt from 2.8 percent of GDP in 2019 to 2.0 percent in at a manageable cost. 2020, while nonoil revenue dropped from 4.7 percent of GDP to 4.5 percent as economic activity slowed. The government’s fiscal reforms were timely, but The Federal Government and all State Governments consistency will be critical to support a strong adopted amended budgets between July and September recovery beyond 2021. Before the pandemic, a of 2020, which prioritized spending to accommodate combination of low revenues and heavy dependence N500 billion (0.3 percent of GDP) in fiscal support on oil threatened Nigeria’s fiscal stance: in 2018–19, for COVID-19 response and adjusted the budgeted oil revenue reached just 8 percent of GDP, among the lowest price from US$57 to US$28 per barrel. Nevertheless, levels in the world, yet sales of crude oil represented non-oil revenues in 2020 underperformed relative 80 percent of exports, 30 percent of banking-sector even the revised budgetary expectations, especially the credit, and 50 percent of general government revenues. evolution of nonoil revenues, while oil revenues slightly Revenues from other sources, such as nonoil taxes, had outperformed expectations due to rebounding prices stagnated at about 4 percent of GDP due to costly tax in the second half of the year. Although the oil-savings incentives, a suboptimal VAT system, low tax rates, in Excess Crude Account have been depleted prior to weak tax administration, and burdensome compliance the COVID-19 shock, the federation account revenue requirements for taxpayers. Nigeria’s public-revenue-to- distribution was boosted by distribution of various GDP ratio is the lowest among similar oil producers, revenues savings (particularly from the past exchange and a lack of fiscal resources has resulted consistently in rate differences), which supported the fiscal inflows for low and inefficient spending. Public spending averages both the federal and subnational governments. just 12 percent of GDP and estimates of its efficiency are far below the levels of comparable middle-income 26 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS  ey Reforms implemented by Nigerian authorities. Table 1.1. K Oil-Revenue Transparency Power Sector In June the Nigerian National Status: In November 2020, electricity tariffs Status: Petroleum Corporation (NNPC) On track were adjusted from an estimated 56 Paused published independently audited percent of production cost to over financial statements for 20 subsidiaries 80 percent, and a regime of service- and corporate units for fiscal year (FY) based tariffs was established to 2018. In October NNPC published ensure that the higher average cost of audited financial statements for 22 electricity does not adversely impact units for FY2019, along with the poor and low-income households. consolidated group statement. The However, further tariff adjustments NNPC has published detailed monthly have been delayed, and full cost reports for the first half of 2020, recovery will not be achieved in 2022. including information on the volumes and values of oil and gas delivered, fiscal payments made, in-kind oil payments made, and deductions offered by NNPC. Gasoline Subsidies Debt Transparency In March 2020, the government Status: In June 2020, for the first time, the Status: established a market-based gasoline- Paused Debt Management Office (DMO) On track pricing mechanism though the published detailed information on regulations were not detailed. In loans to the federal government mid-November, the government raised that have been signed but not yet the price band from the level that had disbursed. This information was prevailed from 2016 to mid-March disaggregated by creditor and by 2020, signaling its intention to sustain project. The DMO also committed to market-based pricing. However, the continue publishing this information government lowered the gasoline twice a year. The government has prices in December 2020 against the also improved its reporting of fiscal backdrop of rising world oil prices. risks. Retail prices have yet to be adjusted to reflect the rise in benchmark prices in 2021. VAT Budgeting practices In November 2019, the government Status: In May 2020, the federal government Status: approved a Finance Bill designed On track adopted an amended budget for the On track to raise enough federal revenue to year that cut nonessential spending meet the government’s 2020 budget and raised the borrowing ceiling. targets, align Nigeria’s budgets with Although fiscal federalism does international standards, support not compel states to be fiscally small businesses, and encourage transparent and accountable to the investments in infrastructure. The federal government, all 36 states have VAT rate was also raised, from 5 to passed amended 2020 budgets. 7.5 percent, though that is still low by international standards. Part 1: Recent Economic Developments and Outlook for Nigeria 27 NIGERIA DEVELOPMENT UPDATE JUNE 2021 As in previous crises, reduced fiscal space constrained revenue increasing from 2.0 to 2.5 percent of GDP as the government’s capacity to deliver adequate services average oil prices rise from US$42 per barrel in 2020 to and to invest productively. While as in previous US$60 per barrel in 2021 while oil production remains crises, the estimated12 government capital spending subdued at 1.7 million barrels per day observed in late declined from 3.1 percent of GDP in 2019 to an 2020. However, this revenue increase will be insufficient estimated 2.8 percent in 2020, the decline has been to balance the budget. Nonoil revenue is also expected less pronounced, in part due to amended budgets that to rise moderately, driven by greater VAT collection increased the realism of both revenue and financing following the public financial reforms of 2020, which inflows. By contrast, recurrent expenditures grew from increased the VAT rate from 5.0 to 7.5 percent; phasing 8.0 percent of GDP in 2019 to 8.5 percent in 2020, as out of the tax relief measures, and the implementation state and federal government adjusted personnel costs in of Finance Act 2020. Gradual fiscal consolidation over line with new minimum wage law, and booted by the time is expected to be supported by expenditure savings rising cost of debt service at the federal government level, arising from the phasing out of electricity and fuel which increased from 2.0 percent of GDP to 2.4 percent subsidies. Recurrent spending is expected to remain over the period. rigid, with continued implementation of minimum wage law and sustained debt service costs. Overall, the general Although rising oil prices are easing fiscal pressures, government’s fiscal deficit is expected to narrow only Nigeria remains highly vulnerable to external and marginally from 5.4 percent of GDP in 2020 to [about domestic shocks. The performance of the public 5 percent] percent in 2021, and Nigeria’s fiscal position finances depends heavily on oil revenues, but the impact is projected to remain tightly constrained. of oil-price changes is not symmetrical. A US$10 increase in the price of a barrel of oil could reduce the Despite the faster-than-expected economic recovery, fiscal deficit by 0.4 percent of GDP in absence of fuel the revenue projections in the 2021 Budget are subsidy, but a similar decrease could widen the fiscal unlikely to be met. The budget assumes that the deficit by more than 0.4 percent of GDP. In the baseline benchmark oil price will recover from US$28 to US$40 scenario, general government revenues are projected per barrel, below the level of US$64 observed in April to remain below 7 percent of GDP 2021, with oil 2021, and that aggregate oil production will rise from  igher oil prices are expected to boost Figure 1.21. H ..but revenue outturns are expected to Figure 1.22. . public revenue in 2021... continue underperforming. Fiscal revenues and oil prices Federal government fiscal deficit Percent of GDP US$/bbl Percent of GDP 9– – 80 5.0 – 8– – 70 4.5 – 7– 4.0 – – 60 3.5 – 6– – 50 3.0 – 5– – 40 2.5 – 4– – 30 2.0 – 3– 1.5 – 2– – 20 1.0 – 1– – 10 0.5 – 0– –0 0– 2016 2017 2018 2019 2020e 2021f 2022f 2023f 2018 2019 2020e 2021f ▬ Revenues ▬ Oil price (Bony Light), rhs J Budget Q Actual Source: Office of the Accountant-General of the Federation (OAGF) and World Bank Source: 2018–2021 Budget Proposals, Office of the Accountant-General of the Federation estimates. (OAGF) and World Bank estimates. 12 Federal Government actual spending figures are available; state capital spending is estimated. 28 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS 1.8 to 1.9 million barrels per day. The proposal also in the Amended Federal Government Budget 2020 assumes an official exchange rate of N379/US$, an allowed for more transparent borrowing from both annual GDP growth rate of 3.0 percent (above the domestic and external sources but were not sufficient to current average market expectation of 2.1 percent), avoid tapping into the Central Bank financing. The total and an annual inflation rate of 12.0 percent, though debt stock (including the estimated borrowing from the rate would have to drop below 10 percent in the the Central Bank) 23.6 percent in 2019 to 27 percent second half of the year to reach this target. Reflecting in 2020The timely passage of the amended budgets at these assumptions, the 2021 Budget net oil revenue both the Federal and State levels helped limit recourse to projections are 98.0 percent higher than those included central bank financing, though it remained significant at in the 2020 Amended Budget, and total budgeted 2.8 percent of GDP. federal government spending is expected to increase by 11.0 percent. The high cost of debt service is increasing fiscal rigidity, but Nigeria’s public debt stock remains In the absence of sound fiscal buffers, the additional moderate by international standards. While faster- expenditure needs arising from the COVID-19 crisis than-expected GDP growth, higher oil prices, will ease have required increased borrowing. Excess crude some debt sustainability concerns, the debt continues savings were depleted before 2019, and low oil prices to rise, projected to exceed 30 percent of GDP after have not allowed the government to rebuild them. 2021. Nigeria’s public debt is expected to remain largely The resulting lack of fiscal buffers (beyond savings domestic and mostly issued by the Federal Government. from past exchange rate differences and other funds) While debt levels remain relatively moderate, debt Combined with falling and underperforming revenues growth outpaces the growth in revenues. Given Nigeria’s led to increase borrowing, including from the CBN. chronically low revenues, the debt-service-to-revenue Consequently, Nigeria’s deficit financing needs have ratio at the general government level is continue rising, steadily driven up the debt stock, and the rising cost of averaging about 30 percent by the end of 2021, further debt service is outpacing revenue growth and eroding constraining an already limited fiscal envelope. These the government’s fiscal space. Higher borrowing limits pressures are particularly acute at the federal government  ebt dynamics remain sustainable, but Figure 1.23. D  espite higher oil prices, Nigeria’s fiscal Figure 1.24. D debt service consumes most of Nigeria’s deficit is expected to be one of the fiscal revenue. largest among oil-producing countries. Federal government debt stock and service General government fiscal deficit Percent of GDP Percent of revenue Percent 30 – – 120 0– 25 – – 100 -1 – -2 – 20 – – 80 -3 – 15 – – 60 -4 – 10 – – 40 -5 – 5– – 20 -6 – 0– –0 -7 – 2016 2017 2018 2019 2020e 2021f 2022f 2023f 2020e 2021f J Debt service, rhs ▬ Debt, lhs J Nigeria J Oil exporters J SSA oil exporters Source: Office of the Accountant-General of the Federation (OAGF) and World Bank Source: World Bank Macro Poverty Outlook. estimates. Part 1: Recent Economic Developments and Outlook for Nigeria 29 NIGERIA DEVELOPMENT UPDATE JUNE 2021 level: as it contracts most of the public debt, it bears most of the debt service costs, systemically requiring more than 50 percent of its retained revenues (and nearly 100 percent in 2020). Despite this high ratio, a January 2021 IMF assessment determined that Nigeria’s debt stock would remain sustainable under a variety of individual macroeconomic shocks, though it remains highly vulnerable to a combination of shocks. In the fourth quarter of 2020, the Nigerian legislature approved a medium-term expenditure strategy for 2021–23 that includes about US$18 billion (US$6 billion annually) in support from international financial institutions and Eurobond issues. The government has raised its public debt limit to 40 percent of GDP to incorporate increased budget shortfalls over the medium term and to accommodate the securitization of CBN deficit financing as long-term debt, which will increase debt transparency and may reduce debt servicing costs, the government’s use of CBN overdrafts is more expensive than other financing options. Repeated recourse to large- scale central bank financing could hinder the CBN’s ability to curb inflation. 30 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS Economic Outlook The Global Economy: Beginning the renewed expansion will not be sufficient to offset the to recover, but new waves of deep recession of last year, and the recovery is expected COVID-19 could threaten the to be uneven. Rapid growth is projected for the United outlook States, China, and some advanced economies, but many middle- and low-income countries are expected Like much of the world, Nigeria’s economic outlook to trail their high-income counterparts. However, the still depends on the trajectory of the COVID-19 global recovery should strengthen over the medium pandemic. Despite major progress on vaccine term as widespread vaccinations bolster confidence and distribution, COVID-19 continues to spread, with consumption and trade flows are gradually released. some countries now confronted by outbreaks of more contagious variants of the virus. A combination of Despite the improving outlook, for 2022 aggregate vaccines and containment measures has helped slow the global economic growth is likely to be 4.4 percentage spread of the virus, in particular, in advanced economies. points below pre-pandemic projections. Near- However, vaccinations have been heavily concentrated term prospects for lower-income countries (LICs) are in advanced and emerging economies, with less than especially grim, with the gap between pre- and post- 1 percent of total vaccinations administered in Sub- pandemic growth projections almost twice as large as Saharan Africa as of early June. that gap for advanced economies. After contracting by an estimated 3.7 percent in 2019, aggregate GDP growth Global economic activity is accelerating, but the in SSA is projected to rebound modestly, to 2.7 percent recovery is far from solid. After contracting by in 2021 and 3.3 percent in 2022. Over the long term, 4.3 percent last year, in 2021 aggregate global growth is the pandemic’s corrosive effects on human and physical projected to recover to 4 percent (Figure 1.25). However, capital accumulation are expected to leave deep scars  he pandemic induced a deep global Figure 1.25. T  combination of supply- and demand- Figure 1.26. A recession, but a faster-than-expected side factors is driving global recovery of recovery appears to be underway. commodity prices. Growth rates Expected annual changes in key commodity prices Percent 8– 50 – 46.0 45 – 6– 40 – 37.7 35.7 4– 35 – 2– 30 – 26.9 25 – 0– 20.1 20 – 17.4 -2 – 15 – 10.9 10 – -4 – 5– -6 – 0– il Tin er ga r ize m tto n eo ) pp Su Ma inu Co -8 – udrage Co m 2010 2012 2014 2016 2018 2020 2022 r C ve Alu (a J World ▬ Advanced economies ▬ EMDEs Source: World Bank. Source: World Bank Commodity Markets Outlook. Part 1: Recent Economic Developments and Outlook for Nigeria 31 NIGERIA DEVELOPMENT UPDATE JUNE 2021 on global output, especially in LICs. By disrupting while oil prices have rebounded to pre-pandemic education, undermining health outcomes, crowding levels, Nigeria’s modest projected recovery could be out investment, and compelling households to adopt threatened not only by the continuing uncertainty coping strategies that are economically detrimental, the but also by oil-sector volatility—unexpected shocks pandemic has created barriers to achievement of critical to oil prices or production, weaknesses in the financial development goals for many years to come. sector, high inflation, and worsening unemployment. Even in the most favorable global context, an effective Rising prices are expected to accelerate the recovery of policy response will be crucial to lay the foundation for commodity exporters. Commodity prices have shot up robust recovery. Especially vital to Nigeria’s recovery will since the start of 2021, in response to resurgent global be revenue-focused fiscal consolidation, reprioritizing demand supported by positive supply-side factors. In spending, better management of spending and debt, particular, for oil exporters, prices are expected to average reforms to stabilize the financial sector, and gradual $56/bbl in 2021 before rising to $60/bbl in 2022. This adoption of a more flexible foreign-exchange regime. path reflects the improved outlook for global economic growth and a more gradual increase than previously In the baseline scenario, growth in Nigeria’s GDP expected in production by OPEC and its partners is projected to recover only slightly in 2021, to an (OPEC+). However, further slippage in oil demand, annual average of 1.8 percent, before gradually perhaps arising from a renewed outbreak of COVID-19, rising over the medium term. As international borders could put considerable additional pressure on the gradually reopen, telecommunications services, trade, OPEC+ production agreement. An end to the agreement agriculture, and construction are expected to drive and a sudden rise in global production could push oil growth; oil prices would remain close to pre-pandemic prices far lower than currently expected. A further levels; and mobility restrictions would be lifted. Though risk is the response of U.S. shale to higher prices—an agricultural output should benefit from an influx of unexpectedly fast recovery in U.S. production would displaced urban labor, its growth will come at the expense also put heavy pressure on the OPEC+ producers. of other sectors. In the baseline scenario, the Nigerian authorities sustain the 2020 reforms, especially reforms to electricity and fuel subsidies, which are necessary to generate the fiscal space needed to continue supporting the COVID-19 response. However, the reforms do not Nigeria’s Outlook: Sequenced address the two main sources of macro imbalances in policy reforms are crucial if there is 2021: exchange rate mismanagement and high inflation. to be a strong and resilient recovery Thus, reforming the management of the exchange rate is not expected, so there will be more pressure on the There is considerable uncertainty about Nigeria’s parallel exchange rate; the CBN will have less flexibility economic outlook because it is so dependent on to clear the FX backlog—and foreign investors will have the evolution of the COVID-19 pandemic, the less appetite to invest in Nigeria. Inflation is expected global economic recovery, oil prices, and the speed to continue accelerating even if supply constraints are of reforms in Nigeria. A renewed global surge in adequately managed, and the vicious cycle of high COVID-19 cases, driven by more transmissible strains, parallel FX rates (which means high premiums) and has intensified the already massive uncertainty about the high demand-driven inflation is likely to make monetary duration of the pandemic and the pace of vaccination, policy less effective. If inflation expectations are not and the uncertainty will continue to influence private anchored, investment and consumption decisions will investment and household consumption. Moreover, continue to be suboptimal. Thus, Nigeria’s vulnerabilities 32 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS are likely to stay high. While the higher oil prices should 2022, and surpass population growth in 2023, and result into higher reserves (although despite higher inflation would average 12.0 percent in 2022 before exports they did not go up much in the first quarter of falling to 10.0 percent in 2023. 2021), low levels of public and private investment would continue to contain growth. In such a scenario, concerns In a third scenario, in which the policy assumptions about poverty and the direction of the economy can be of the baseline scenario are reversed and the global expected to increase. context is unfavorable (lower commodity prices and a persisting global health crisis), the economic In an alternative scenario in which the government recovery would be significantly slower. This scenario undertakes a sequenced program to stabilize inflation assumes the reversal of revenue-based fiscal consolidation and protect the livelihoods of poor and vulnerable efforts, such as reducing electricity and gasoline households, over the medium term Nigeria will subsidies; reversal would diminish foreign and domestic be in a better position to support faster economic investment, significantly dampening Nigeria’s growth recovery. This scenario assumes that the authorities prospects. Less public spending would widen Nigeria’s adopt much-needed exchange-rate management reforms; already substantial gaps in human and physical capital, advance monetary, fiscal, and trade measures that help worsen public service delivery, and damage investor control inflation; and opt for policies that support confidence. As a result, GDP growth would reach only macroeconomic stability, inclusive growth, and job 1.1 percent in 2021; thanks to a base effect; inflation creation (Table 1.2). Easing import and FX restrictions, rates would be higher, job creation weaker, and poverty which lead to higher prices for both imported goods and would rise. domestic substitutes, would contribute to price stability. Improved exchange-rate management would reduce pressure on external accounts and improve the business environment, thus encouraging private investment, both domestic and foreign. Programs that expand access Policy Options: Sustained reform to financing for micro, small, and medium enterprises momentum is critical to reduce (MSMEs) would accelerate domestic investment and inflation, support a robust recovery, spur robust recovery. Furthermore, building up the and protect livelihoods delivery of social protection programs will help ease the immediate impact of inflation on poor and vulnerable The COVID-19 pandemic has exacerbated underlying households. In this scenario, annual GDP growth is also structural challenges in the Nigerian economy, projected to average 1.8 percent in 2021 because at first resulting in a combination of low growth and high the positive impact of the proposed growth-enabling inflation; if recovery is to be rapid and broad-based, measures would be counterbalanced by inflation control continued reforms will be necessary. Efforts to protect and stabilization measures, which explains why in the the welfare of poor and vulnerable Nigerians and alternative reform scenario growth is not higher: in accelerate the resumption of economic activity need to order to control inflation, the authorities would need to include measures to stabilize inflation. In 2020 alone, rein in expansive monetary policy and CBN financing poverty is expected to increase due to a combination of of the government deficit. The impact on inflation is COVID-19-related price shocks, depressed economic not expected to be immediate. However, starting in activity, and rapid population growth. Moreover, food 2022 expected GDP growth and inflation dynamics insecurity has increased. At its current elevated level, would contribute to a more adequate macro financial even a stable inflation rate for the rest of 2021 could framework: growth is expected to reach 2.5 percent in continue pushing more Nigerians into poverty. Part 1: Recent Economic Developments and Outlook for Nigeria 33 NIGERIA DEVELOPMENT UPDATE JUNE 2021  igeria’s Economic Outlook: Three scenarios. Table 1.2. N Scenario 2: Reduce inflation Scenario 1: Baseline Scenario 3: Risk scenario and protecting the poor Assumptions Policy: The authorities sustain Policy: The authorities sustain Policy: The authorities fail to current reform efforts in key current reform efforts in key sustain recent reforms, including macroeconomic policy areas, macroeconomic policy areas and changes to electricity and gasoline including revenue-based fiscal advance reforms to stabilize inflation subsidies, and no adjustments are consolidation, expenditure and promote inclusive growth and job made to the nominal exchange reprioritization, debt management, creation, for example by promoting rate. and financial-sector stability, but a fully flexible exchange-rate, trade fail to advance measures to make policies, and social protection Oil price: Oil prices average exchange-rate management more measures. US$56 per barrel in 2021 and flexible and lower inflation. US$56 in 2022. Oil price: Oil prices average US$56 Oil price: Oil prices average per barrel in 2021 and US$60 in COVID-19: No third wave and US$56 per barrel in 2021 and 2022. vaccine deployment speeds up in US$60 in 2022. 2022, but the global health crisis COVID-19: No third wave and vaccine does not abate in most emerging COVID-19: No third wave and deployment speeds up in 2022. and developed economies vaccine deployment speeds up in throughout the first half of 2022. 2022. GDP, 2016–23f Fiscal Balance, 2016–23f 4– -3.0 – 3.1 3– 2.5 -3.5 – 2.2 2.3 1.9 2.1 -3.8 2– 1.8 -3.6 2.0 -4.0 – 0.8 1.6 -4.1 -4.2 1– -4.5 -4.5 1.1 -4.5 – -4.4 0– -4.5 -4.6 -4.6 -5.0 – -1 – -1.6 -2 – -5.5 – -5.4 -1.8 -5.4 -5.6 -3 – -6.0 – -5.8 2016 2017 2018 2019 2020e 2021f 2022f 2023f 2016 2017 2018 2019 2020e 2021f 2022f 2023f ▬ Reducing inflation and protecting the poor ▬ Baseline ▬ Risk scenario ▬ Reducing inflation and protecting the poor ▬ Baseline ▬ Risk scenario Current account balance, 2016–23f Inflation, 2016–23f 15 – 20 – 18.5 10.4 18 – 17.5 10 – 16.5 15.6 16 – 16.5 14.0 5– 3.9 13.2 14 – 12.1 15.0 2.7 1.0 0.7 14.0 0.4 12 – 11.4 0– 0.8 12.0 12.0 -0.2 0.5 10 – -5 – -2.7 10.0 -3.5 8– -4.2 -5.0 -10 – 6– 4– -15 – 2– -17.0 -20 – 0– 2016 2017 2018 2019 2020e 2021f 2022f 2023f 2016 2017 2018 2019 2020e 2021f 2022f 2023f ▬ Reducing inflation and protecting the poor ▬ Baseline ▬ Risk scenario ▬ Reducing inflation and protecting the poor ▬ Baseline ▬ Risk scenario 34 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS This edition of the Nigeria Development Update Because such action could hit poor households hard proposes immediate policy actions to stabilize in the short term, social protection systems must be inflation, restore growth, and protect the lives and reinforced to prevent any further deterioration in livelihoods of Nigerians. Because inflationary pressures consumption and welfare. Half-measures will not be arise from multiple sources, stabilizing and reducing enough to divert the current inflationary trend and lay inflation will require a sequenced and coordinated the foundation for robust recovery—and policy reversals package of reforms that encompasses exchange-rate pose a major risk to Nigeria’s economic outlook. management and monetary, fiscal, and trade policy.  olicy options to reduce inflation, protect the poor, and support the recovery. Table 1.3. P Immediate Priorities Medium-Term Priorities Area (Next 3 to 6 months) (Next 6 to 18 months) Reduce inflation by adopting policies that support macroeconomic stability, inclusive growth, and job 1.  creation Exchange • To build credibility, communicate the • Carry out measures to deepen the FX Rate exchange-rate management strategy. For market, such as re-establishing the dollar Management example, assure market participants using interbank market and again enabling the Secondary Market Intervention Sales commercial banks to trade FX on their own (SMIS) and IEFX windows of a well-defined behalf and not solely to fill client orders. schedule of FX auctions (e.g., for the next This would help increase the depth and 3 months and then on a rolling basis), liquidity of the FX market while improving consistent with projections for FX inflows. price discovery. Banks would also be able The amounts to be auctioned should to absorb some unexpected FX demand respond to the CBN’s need to rebuild the and supply shocks, gradually lessening stock of international reserves to safer the need for CBN interventions. Banks levels. would still be subject to net open position limits and other prudential requirements. • Regulate the auction processes, at least The reestablishment of the dollar interbank initially, by using pre-defined exchange- market would also help participants rate bands to control possible immediate reallocate FX liquidity and comply with overshooting. These bands could be prudential standards. relaxed as the market develops and the system gains credibility. Reserve • Merge all exchange-rate windows into extraordinary FX interventions (e.g., a single window that reflects market unscheduled auctions) for episodes of fundamentals. intense market volatility. Part 1: Recent Economic Developments and Outlook for Nigeria 35 NIGERIA DEVELOPMENT UPDATE JUNE 2021  olicy options to reduce inflation, protect the poor, and support the recovery. (continued) Table 1.3. P Immediate Priorities Medium-Term Priorities Area (Next 3 to 6 months) (Next 6 to 18 months) Trade • Fully reopen land borders to trade and • Based on the results of the analysis of strengthen regional cooperation to combat nontariff measures, replace import bans smuggling. Extend to Benin the ECOWAS with tariffs, which will increase revenues, Customs Mutual Assistance Agreement that lower domestic prices, and reduce Nigeria is currently piloting with Niger. smuggling and criminality along the border. • Facilitate imports of staple foods and • Finalize plans to implement the African medicines by removing them from the list Continental Free-Trade Area Phase 1 of FX restrictions and replacing import protocols and annexes and identify a bans with tariffs that reflect the ECOWAS mechanism for addressing the cost of trade Common External Tariff. adjustments to workers. Compile a list of excluded products. • Review the FX restrictions and import bans currently applied to nonfood goods and • Put in place high-priority measures to assess the implications of replacing them reduce trade and transportation costs with tariffs. This analysis should include by addressing delays in border and effects on households, firms, and public port clearance. Such measures include revenues, as well as on the desired policy simplifying and harmonizing documents, outcome of protecting domestic producers streamlining and automating procedures, without incentivizing smuggling. and making more information available. • Refrain from adding any new products to the list of import bans and FX restrictions. • To control oil-related inflationary pressures, reduce gasoline smuggling by (1) better monitoring exports and imports; (2) publishing guidelines for fuel products sold in Nigeria to ensure that they reflect import- parity and do not incentivize smuggling; and (3) making arrangements to ensure that sales of crude oil to domestic refineries and domestic sales of refined fuel products reflect market-based prices that are aligned with international prices and market exchange rates. Fiscal • To help contain the growth of the money • To help contain the growth of the money Policy supply, establish mechanisms to monitor supply over the medium term, analyze the federal government’s stock of CBN the cost of the fiscal-subsidy elements overdrafts (i.e., the historical stock of of the CBN’s quasi-fiscal interventions, accumulated ways and means), the flow including: (i) power-sector financing; and of the overdraft facility (i.e., its monthly (ii) subsidized CBN lending schemes use), and its servicing cost (i.e., interest for agriculture, industrial development, payments). COVID-19 response, etc. • Adopt a mechanism to increase flexibility • To further reduce the federal government’s between borrowing options to finance the recourse to CBN financing, improve the federal government deficit. Currently, the accuracy of budgetary revenue forecasting. legislature approves a fixed ceiling for each Overoptimistic revenue forecasts and the domestic and external loan contracted to resulting shortfalls lead to larger-than- finance the domestic deficit; when external anticipated deficits, creating additional financing falls short of approved plans, financing needs for which borrowing has domestic borrowing is not automatically not been approved by the legislature, which increased to cover the shortfall, resulting encourages the use of CBN financing. in recourse to CBN financing, which accelerates the growth of the money supply • Adopt a mechanism to allow increased and can lead to higher inflation. borrowing to cover additional financing needs arising from revenue shortfalls. 36 Part 1: Recent Economic Developments and Outlook for Nigeria RESILIENCE THROUGH REFORMS  olicy options to reduce inflation, protect the poor, and support the recovery. (continued) Table 1.3. P Immediate Priorities Medium-Term Priorities Area (Next 3 to 6 months) (Next 6 to 18 months) Monetary • Clearly define key monetary-policy priorities • Establish a Monetary and Fiscal Policy Policy and objectives and signal the government’s Coordination Council to clarify joint commitment to price stability as the primary policy objectives and identify areas of objective while remaining aware that in coordination. The council should focus the next few months the CBN will continue on eliminating unsustainable monetary to support both economic recovery and a and quasi-fiscal interventions while limited funding of the government as the strengthening debt sustainability and country emerges from the COVID-19 crisis. advancing Nigeria’s development priorities. As in other emerging markets, the council • Resume naira-denominated open-market should be chaired by a high-ranking official, operations (OMOs) with a transparent and it should include the CBN Governor, schedule for issuing securities and a clear the Federal Minister of Finance, Budget, message that OMOs will use short-maturity and National Planning, and independent securities to achieve price stability. experts. • Reduce CBN lending to medium and large corporates under its subsidized funding schemes to expand the scope for commercial banks to intermediate funds at a risk-adjusted lending rate. • Phase out excessive reliance on the cash- reserve ratio as a “high-frequency” liquidity control tool and an instrument to finance the CBN’s quasi fiscal operations, as it implicitly taxes financial savings mobilization. 2. Protect poor households from the impacts of inflation Social • Leverage the National Social Safety Nets • Given the government’s current fiscal Protection Program 1 (NASSP 1) and the proposed and macroeconomic challenges, a public NASSP II which is under discussion, with expenditure review could shed light on a plan to provide cash transfer support to whether the resources allocated to Nigeria’s additional 5 households in the NSR in rural Social Protection and Jobs Programs and areas and possible expansion of the Rapid- other untargeted programs are adequate Response Register (RRR) of vulnerable and are being used in the most cost- beneficiaries in urban and peri-urban areas effective and pro-poor manner. The results to include another 7.2 million households in could provide useful guidance on how to addition to the two million already targeted strengthen expenditure management and by the COVID-19 response effort. These reform the subsidy regime. proposed measures would allow the program to cover 16.2 million already poor, • Integrate the NHGSFP and other social newly poor, and vulnerable households assistance programs into the National in all 36 States and the Federal Capital Social Register (NSR) and State-level social Territory. registers. Expand the NSR and State- level social registers so that other existing • Rapidly implement the CARES program to and future social programs could use the support households, farmers, and firms. available data to quickly identify and enroll By the end of 2022, the CARES program households for future support and ensure aims to support approximately two million that programs effectively reach targeted households, 750,000 farmers, and 70,000 groups. firms. • Augment social protection programs with improved mechanisms for payment delivery, such as that developed through the NASSP, which could be enhanced by using digitization to facilitate payment delivery and strengthen accountability. • Graduate existing NASSP beneficiaries into productive-inclusion activities such as workforce training, asset and livestock transfers, and livelihood grants. Part 1: Recent Economic Developments and Outlook for Nigeria 37 NIGERIA DEVELOPMENT UPDATE JUNE 2021  olicy options to reduce inflation, protect the poor, and support the recovery. (continued) Table 1.3. P Immediate Priorities Medium-Term Priorities Area (Next 3 to 6 months) (Next 6 to 18 months) Facilitate access to financing for MSMEs in key sectors to mitigate the impact of inflation and accelerate the 3.  recovery MSMEs and • Identify criteria for enabling MSMEs to • Roll out financing for targeted MSMEs while Job Creation access appropriate forms of equity financing monitoring enrollment and assessing the and launch a scoping exercise to enroll and reliability of the streamlined process, and screen eligible MSMEs, develop parameters without increasing CBN’s interventions. for debt restructuring, and create Develop a streamlined process that offers performance indicators for viable delinquent clear incentives to formalize and register MSMEs. informal MSMEs. • Screen and enroll eligible MSMEs and build • Implement targeted labor-intensive public their capacity for debt restructuring. works and infrastructure microprojects to support employment while bolstering the capital stock. • Issue guidelines for adapting procurement procedures to support and encourage SMEs to participate in public procurement. References World Bank. (2020b). Rising to the Challenge: Nigeria's COVID Response; Nigeria Economic Update, December 2020 edition. Washington, D.C.: The World Bank. International Monetary Fund (2020). Nigeria 2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Alternate Executive Director for Nigeria. Washington, DC. United Nations Conference on Trade and Development (2019). UNCTAD/Stat/IE/2019/1. Geneva. 38 Part 1: Recent Economic Developments and Outlook for Nigeria Part 2: Taking a Closer Look NIGERIA DEVELOPMENT UPDATE JUNE 2021 The continuing effects of the COVID-19 crisis on welfare and work Summary: The share of people working in February household—who were working plunged as lockdown 2021 is similar to the share in September 2020, which restrictions were introduced in April and May 2020, but is much higher than would be expected if working rates rose and stabilized as restrictions were eased. However, followed typical seasonal patterns. The higher share of many household heads shifted to agriculture as they people working is concentrated among women and people returned to work. Meanwhile, widespread reports of from poorer households, which suggests an “added worker declining income and heightened food insecurity effect,” in which additional household members increase suggested that households remained economically their labor supply in order to cope with economic shocks. precarious. Using new data collected in the February Also, the commerce and service sectors have expanded 2021 NLPS, it is now possible to verify whether these beyond what would be expected given previous seasonal labor market trends have continued. These data not patterns, especially for women. Accompanying these labor only provide more up-to-date information on the market shifts, incomes for some households have increased labor market but also include all household members since before the crisis, although that is far from universal. of working age rather than just one respondent in each Yet even if incomes are stabilizing, households are feeling the household.13 impact of rising prices, which erodes their purchasing power and means that food insecurity remains widespread. The share of people working in February 2021 was higher than New high-frequency data provide would be expected, especially an updated picture of how the among women and people from COVID-19 crisis is affecting the poor households Nigerian labor market In February 2021, about 69.6 percent of working- Using new data, this brief builds on the previous age Nigerians were working, similar to the level in edition of the Nigeria Development Update (NDU) September 2020 but much higher than would be by asking whether the post-lockdown return to expected for this time of the year. Usually, the share work has been sustained and whether household of people working in July–September is higher than in incomes remain precarious. Since the COVID-19 crisis January–February: surveys from previous years show a began, Nigeria’s National Bureau of Statistics (NBS) regular and significant seasonal contraction between the has collaborated with the World Bank to collect data July-September post-planting season and the January- each month to track the economic and health impacts February post-harvest season of the agricultural cycle. of the crisis through the Nigeria COVID-19 National For example, the share of people working dropped by Longitudinal Phone Survey (NLPS). Using these data, 13.6 percentage points (pp) between July/September the previous NDU demonstrated that the share of 2018 and January/February 2019, but by only 2.1 pp household heads—the main income earners in each between September 2020 and February 2021 (see Figure 13 Working age refers to all individuals aged 15 to 64. 40 Part 2: Taking a Closer Look RESILIENCE THROUGH REFORMS 2.1). Similar patterns were observed for people who are Women and poorer households are contributing out of the labor force—those economically inactive. more to the relatively high share of people working, Between July/September 2018 and January/February which is consistent with an “added worker effect,” 2019 the number of people who were economically where more household members participate in the inactive rose by 11.0 pp, but between September 2020 labor force in response to economic shocks. In the and February 2021 there was no increase at all. As such, pre-COVID agricultural cycle,14 the share of men individuals who would not normally work in the post- working contracted by 12.7 pp between the post- harvest season are instead continuing to work. planting and post-harvesting seasons, but by only 4.2 pp in the current 2020/21 agricultural cycle (see Figure 2.2, A). Yet for women the difference in seasonal  he share of people working is much Figure 2.1. T higher than would be expected from changes was even larger: in the pre-COVID agricultural previous seasonal patterns. cycle, the share of women working contracted by 14.4 Working situation pp, but in 2020/21 there was virtually no change in Percent individuals, 15–64 years old the share of women working (Figure 2.2, B). Similar 100 – 11.7 +11 22.7 14.6 +0.0 14.6 gender differences emerge when examining how the 80 – 9.4 1.7 7.2 6.7 seasonal expansion in the share of women and men 6.6 9.1 9.8 3.8 who were out of the labor force entirely (economically 60 – inactive) changed from before the crisis to the present 40 – 77.3 -13.6 agricultural cycle. Moreover, the relatively high share 71.7 -2.1 69.6 63.7 of people working is also concentrated in households 20 – in the poorest quintiles of the pre-crisis consumption 0– distribution. These patterns of heightened labor supply Jul–Sep 2018 Jan–Feb 2019 Before COVID-19 Sep 2020 Feb 2021 During COVID-19 are consistent with the added worker effect. 2018/19 Season (GHS Wave 4) 2020/21 Season (NLPS) J Currently working J Temporarily absent J Unemployed J Economically inactive Source: Nigeria General Household Survey (GHS), Wave 4; Nigeria COVID-19 National Longitudinal Phone Survey (NLPS) Note: This figure includes 4,018 observations that represent households with information for all rounds (GHS-W4 Post Planting, GHS-W4 Post Harvest, NLPS R5 and NLPS R10).  he increase in the share of people working is higher among women. Figure 2.2. T Panel A. Working situation, Males Panel B. Working situation, Female Percent individuals, 15–64 years old Percent individuals, 15–64 years old 100 – 100 – 9.6 +8.6 10.8 +0.0 10.8 13.7 +13.3 18.2 18.2 +0.1 18.3 6.2 5.8 5.9 27.0 1.3 5.1 80 – 8.9 9.2 80 – 12.3 8.5 7.4 2.8 2.0 10.6 7.9 9.0 60 – 60 – 4.7 40 – 82.8 -12.7 78.3 -4.2 40 – 70.1 74.1 72.0 -14.4 65.3 -0.0 65.3 57.7 20 – 20 – 0– 0– Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 Season (GHS Wave 4) 2020/21 Season (NLPS) 2018/19 Season (GHS Wave 4) 2020/21 Season (NLPS) J Currently working J Temporarily absent J Unemployed J Economically inactive J Currently working J Temporarily absent J Unemployed J Economically inactive Sources: GHS and NLPS data. Notes: This figure is based on 4,018 observations for households surveyed in all rounds (GHS-W4 Post Planting, GHS-W4 Post Harvest, NLPS R5 and NLPS R10). 14 The agricultural cycle was measured from July-September 2018 for the post-planting season to January–February 2019 for the post-harvest season for the pre-COVID period. The agricultural cycle was measured from September 2020 for the post-planting season to February 2021 for the post-harvest season for the crisis period. Part 2: Taking a Closer Look 41 NIGERIA DEVELOPMENT UPDATE JUNE 2021 The commerce and service sectors Any increase in incomes may be have expanded offset by rising prices, leaving the welfare of households precarious The share of Nigerians engaged in commerce and Accompanying these labor market shifts, incomes for services expanded more than would have been some households, though far from all, have improved. expected between September 2020 and February About 40.5 percent of households reported that their 2021. Between July/September 2018 and January/ income had gone up between the August 2019–January February 2019, the share of working-age Nigerians 2020 and the August 2020–January 2021 periods. engaged in commerce rose by 2.8 pp, but between Incomes from agricultural work were even more likely September 2020 and February 2021, the share rose to have improved: 51.9 percent of farm households by 6.7 pp (see Figure 2.3). In “services and public indicated that their incomes had gone up in the second administration,” between July/September 2018 and period, perhaps because rising food prices benefit some January/February 2019 the share of workers contracted food producers.15 Yet nonfarm enterprises—many of by 2.6 pp, but between September 2020 and February which may be in the commerce and service sectors 2021 the share expanded by 2.5 pp. This expansion that expanded—fared worse: about 42.3 percent of appears to have been driven mainly by women. households relying on non-farm enterprises indicated Two factors may explain these differences. First, the that enterprise income had decreased (see Figure 2.4). commerce and service sectors were more adversely ncomes for some households have Figure 2.4. I affected at the onset of the COVID-19 crisis in 2020 improved. due to both lockdown restrictions and social distancing. Second, during the post-harvest season, only sectors Household farm 34.2 13.9 51.9 other than agriculture can absorb additional labor.  he commerce and service sectors Figure 2.3. T Non-farm family business 42.3 13.9 43.8 expanded more than would be expected from previous seasonal patterns. Wage employment 22.0 44.0 34.0 Size of economic sectors Percent individuals, 15–64 years old 100 – Total income 38.4 21.1 40.5 22.7 +13.0 28.3 +2.0 30.4 80 – 36.3 0 20 40 60 80 100 17.0 -2.6 12.6 +2.5 J Decreased J No change J Increased 60 – 15.1 14.4 Source: NLPS, Round 9. 14.3 Notes: This figure includes 4,018 observations of households with information for all rounds +2.8 18.8 +6.7 (GHS-W4 Post Planting, GHS-W4 Post Harvest, NLPS R5 and NLPS R10). Bars represent 40 – 9.3 17.0 25.5 households that had earned income from the indicated source in the previous 12 months. 5.0 “Decreased” includes the small share of households that did not receive any income from 11.4 7.9 that source between August 2020 and January 2021, despite normally doing so. 20 – 36.7 35.2 20.9 21.1 0– Even if incomes for some households are stabilizing, Jul–Sep 2018 Jan–Feb 2019 Before COVID-19 Sep 2020 Feb 2021 During COVID-19 this may not be enough to offset rising inflation, 2018/19 Season (GHS Wave 4) 2020/21 Season (NLPS) which is limiting purchasing power and leaving J Agriculture J Industry J Commerce J Services and public administration J Not working households food insecure. As the section on ‘Inflation Sources: GHS and NLPS. Notes: This figure is based on 4,018 observations for households surveyed in all rounds and Poverty’ demonstrates, throughout 2020 inflation, (GHS-W4 Post Planting, GHS-W4 Post Harvest, NLPS R5 and NLPS R10). especially for food items, accelerated substantially. These price increases may negate any increase in nominal income that households are reporting, because for both 15 See section on ‘Poverty and Inflation in Nigeria’ for a further discussion of rising food prices and overall price inflation. 42 Part 2: Taking a Closer Look RESILIENCE THROUGH REFORMS poor and non-poor households, the majority of food items are purchased rather than produced at home. Indeed, this could explain the added worker effect seen in the NLPS data: poorer households may be experiencing steeper declines in their purchasing power and are coping by becoming more active in the labor force. Moreover, despite having abated somewhat since the peak of the COVID-19 crisis in April/May 2020, food insecurity is still widespread: for example, in November 2020, in 56.1 percent of households’ adults had skipped meals in the previous 30 days. With incomes uncertain, prices rising, and food insecurity elevated, the welfare of Nigerian households is far more precarious than it was before the COVID-19 crisis. Part 2: Taking a Closer Look 43 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Poverty and inflation in Nigeria Summary: Inflation reached a 4-year high in March was affected by factors restricting access to markets and 2021, with food prices accounting for 63 percent of the total by declining crop yields. On the demand side, arguably rise in inflation in 2020. Even among poor agricultural the main explanation is that firms and consumers expect households, most of the food that households consume is prices to rise during shocks and incorporate those purchased rather than produced at home, so inflated food expectations into their investment and consumption prices are a major threat to purchasing power and welfare. decisions (see Chapter 1 on recent economic Food insecurity is more widespread than it was before the developments, section on Inflation). The pattern of COVID-19 crisis: in November 2020, in 56.1 percent inflation measured month-to-month is different from of households, adults had skipped meals in the previous previous years because in 2020 rising food prices were 30 days. In the short run, expanding social protection to not connected to agricultural seasonality patterns as they provide time-bound support could alleviate the effects of had been before. Inflation threatens economic activity inflation. In the medium and long run, however, it will and job creation, jeopardizing prospects for a sustainable be vital to address the sources of inflation through a mix of recovery. The combination of inflationary pressure and monetary, exchange rate, fiscal, and trade policies as well as the contraction in the real economy witnessed in 2020 effecting reforms to support job creation. is projected to leave per capita income, in inflation- adjusted terms, close to what it was in 1980. High inflation distorts the consumption, investment, and saving decisions of the government, households, and firms, as well as their long-term borrowing and lending Inflation’s climb to a 4-year high decisions, which ultimately threatens macro-fiscal and in March 2021 was driven by both financial stability. supply and demand factors Driven by a surge in food prices, inflation reached a 4-year high in March 2021. Between March 2020 and March 2021, inflation for all items in the CPI basket Increasing prices threaten rose from 12.3 percent to 18.2 percent, while for food household purchasing power items it rose from 15.0 percent to 22.9 percent, the highest level of food price inflation recorded in the last two decades. Indeed, the rise in food prices accounts for Nigerian households are directly feeling the effects 63 percent of 2020’s total rise in inflation. In 2019 and of accelerating inflation. According to the monthly 2020, Nigeria had the 7th highest inflation rate in Sub- Nigeria COVID-19 National Longitudinal Phone Saharan Africa. Survey (NLPS), between July 2020 and December 2020, 82.7 percent of households saw rises in the A combination of supply and demand factors, some prices of the major food items they consume, compared of which resulted from policy decisions, explain the with 18.5 percent of households reporting such a rise in inflation. On the supply side, food production shock between January 2017 and January 2019 (see 44 Part 2: Taking a Closer Look RESILIENCE THROUGH REFORMS Figure 2.5). Moreover, about 62.0 percent of households Yet both poor and non-poor households still buy most also reported an increase in the prices of farming or of the food they consume: about 33.1 percent of the business inputs. consumption basket comes from purchased food for households in the bottom 40 percent, compared with Most of the food that Nigerians consume is 33.6 percent for the top 60 percent. Similarly, while purchased. According to the 2018/19 NLSS, about rural households produce more of their own food than 24.1 percent of the consumption basket comes from urban households, the majority of the food that they own-produced food for households in the bottom consume is also purchased. 40 percent of the consumption distribution compared with 12.9 percent for the top 60 percent (see Figure 2.6).  rice shocks during the COVID-19 crisis, Figure 2.5. P percent of Nigerian households. Types of shocks Falling purchasing power could Share of households, percent increase poverty and food 100 – 90.1 insecurity 85.4 82.0 80 – 66.9 Falling purchasing power could push 7 million more 62.0 60 – Nigerians into poverty. The welfare losses associated 46.0 with the price rises in 2020 can be calculated by assessing 40 – how much the cost of households’ consumption baskets 20 – 18.1 increased (see Annex for details). Consumption for the 7.9 average Nigerian would need to rise by 4.9 percent to 0– Between Between Between Between maintain the same level of welfare as before the 2020 Jan 2017 mid-Mar and Apr/May and Jul and and Jan 2019 Apr/May 2020 Jul 2020 Dec 2020 price rises, which corresponds to just under 9,500 naira J Increase in price of farming/business inputs per person per year in nominal 2018/19 terms. By J Increase in price of major food items consumed Source: 2018/19 GHS, NLPS, and World Bank estimates. calculating the different welfare losses for each decile of  ost of the food that Nigerians consume is purchased, even for poor households and rural dwellers. Figure 2.6. M Panel A. Consumption breakdown by decile Panel B. Consumption breakdown by urban-rural Share of the consumption basket, percent Share of the consumption basket, percent 100 – 100 – 80 – 80 – 60 – 60 – 40 – 40 – 20 – 20 – 0– 0– 1 2 3 4 5 6 7 8 9 10 Rural Urban Total Decile of the real consumption distribution J Own-produced food J Purchased food J Meals outside the home J Education J Own-produced food J Purchased food J Meals outside the home J Education J Health J Housing J Other non-food J Health J Housing J Other non-food Source: 2018/19 NLSS and World Bank estimates. Note: Estimates exclude Borno. Individual weights are used so charts represent full population. Bars show the share of the consumption basket devoted to each type of good, including zeroes (so the basket adds up to 100 percent). Deciles created using temporally- and spatially deflated consumption aggregate. Part 2: Taking a Closer Look 45 NIGERIA DEVELOPMENT UPDATE JUNE 2021 the consumption distribution, it is possible to ascertain 2020 about 58.3 percent of households dealt with the how poverty would change when prices rise. It emerges price shocks by consuming less food; 26.3 percent that the 2020 price increases could push up the poverty reduced their non-food consumption. The relatively headcount rate by as much as 3.5 pp—7.2 million high share of people who are working (see section on people per the population estimates in the 2018/19 employment) may also be a signal that households are NLSS (see Figure 2.7). increasing their labor supply to offset lost purchasing power. It is therefore not surprising that food insecurity With purchasing power reduced, food insecurity is continues to be more prevalent than it was before more widespread than it was before the COVID-19 the pandemic struck: in November 2020, adults in crisis. The NLPS data confirm that Nigerian households 56.1 percent of households had skipped meals in the adopted negative coping strategies in response to the previous 30 days and 48.0 percent of households ran out 2020 price shocks. Between July 2020 and December of food entirely (see Figure 2.8).  he rising prices witnessed in 2020 could increase the number of poor people by 7 million people. Figure 2.7. T Panel A. Poverty headcount rate Panel B. Absolute number of poor people Percent Millions 50 – 100 – 90.1 45 – 43.6 82.9 40.1 40 – 80 – 35 – 30 – 60 – 25 – 20 – 40 – 15 – 10 – 20 – 5– 0– 0– Before price shock After price shock Before price shock After price shock Source: NBS price data, 2018/19 NLSS, and World Bank estimates. Note: Estimates exclude Borno. Poverty calculated using national poverty line. Population taken from the sum of the 2018/19 NLSS weights.  ood insecurity is more widespread than it Figure 2.8. F was before the COVID-19 crisis. Policy options Food Insecurity (percent of HHs experienced), 2018 to 2020 Share of households, percent 80 – 74.7 70.2 Expanding social protection in the short run to 70 – provide time-bound support could alleviate the effects of inflation. In particular, the flagship social 60 – 56.1 60.4 50 – 43.3 58.3 48.0 transfer program, the National Social Safety Nets 40 – 39.2 27.3 Project (NASSP), could be scaled up both horizontally, 30 – 34.1 by adding new beneficiaries, or vertically, by increasing 20 – 25.1 25.4 18.3 benefits. The expansion could go beyond current efforts 10 – 13.5 to scale up NASSP and other programs in urban areas 6.4 0– GWS W4 GWS W4 Round 1 Round 2 & 4 Round 7 in response to the COVID-19 crisis through the Rapid PP (Jul–Sep PH (Jan–Feb (Apr/May (Jun–Aug (Nov 2020) 2018) 2018) 2020) 2020) Response Register. Both rural and urban areas could ▬ Adult(s) in the household had to skip a meal ▬ Houshold ran out of food be selected using Nigeria’s new poverty map, which ▬ Adult(s) in household went without food for a whole day Source: 2018/19 GHS, NLPS, and World Bank estimates. uses Big Data and machine learning techniques to 46 Part 2: Taking a Closer Look RESILIENCE THROUGH REFORMS construct granular measures of welfare for each ward in Nigeria. One concern is that cash transfers might intensify inflationary pressures more than in-kind transfers, especially in remote areas where the supply of goods and services is limited. Yet evidence from similar contexts suggests that cash transfers may in fact boost the consumption of non-recipient as well as recipient households—leading to spillover effects—without substantially increasing local price inflation (Egger, Hausehofer, Miguel, Niehaus, & Walker, 2019). In the medium and long run, however, it will be vital to address the sources of inflationary pressures. This requires a sequenced and coordinated mix of monetary, exchange rate, fiscal, and trade policies to reduce inflation while laying foundations to control inflation over the following 6 to 18 months. Attempts to ease inflationary pressure should be accompanied by policies to boost job creation (see section on employment) because the labor market will be the main vehicle for sharing any proceeds from growth to individuals and households and for sustainably reducing poverty. Part 2: Taking a Closer Look 47 NIGERIA DEVELOPMENT UPDATE JUNE 2021 References • A  s prices rise, households may purchase less expensive items, which could reduce some of the measured impacts: the analysis does not capture this type of Egger, D., J. Hausehofer, E. Miguel, P. Niehaus, and substitution. M. Walker (2019). General Equilibrium Effects of Cash Transfers: Experimental Evidence from • Th  e analysis focuses only on overall consumption, Kenya. National Bureau of Economic Research, without separating purchases from own production, Cambridge, MA. and does not consider the effects of price rises on the earnings of households that are net producers. For example, households that sell the goods for which prices are rising may enjoy higher profits. Annex: Approach and caveats for welfare calculations One way to understand the extent of the welfare losses caused by higher prices and reduced purchasing power is to calculate the money needed to maintain household welfare at the same level even as prices rise—the “compensating variation.” Household exposure to price shocks depends on the share of overall consumption they devote to each good, which is captured by the 2018/19 Nigeria Living Standards Survey (NLSS). Calculating the compensating variation then hinges on mapping the item-level price data published by the Nigerian National Bureau of Statistics (NBS) into the consumption basket from the 2018/19 NLSS. To gain a more granular picture of welfare losses for different types of households, the approach can be applied separately to each decile of the consumption distribution. While these calculations make clear how severely inflation affects welfare, they are subject to many caveats, which underlines the need for more data: • Th  e NBS data on which the analysis is based comprise just 43 food items for which prices are made public, covering less than one-third of the average Nigerian consumption basket. Prices were likely increasing for other items in the basket, which would deepen the effects on purchasing power, welfare, and poverty. 48 Part 2: Taking a Closer Look Part 3: Spotlights on Nigeria’s Development Agenda NIGERIA DEVELOPMENT UPDATE JUNE 2021 Spotlight 1: Igniting economic growth by reforming Nigeria’s power sector Summary: Electricity not only fuels productivity, it is The country that currently has the a vital catalyst in health, education, and other forms of least access to electricity in the social development. According to the latest Tracking SDG7 world needs a power sector capable report, 85 million Nigerians (43 percent of the population) of meeting demand as it grows have no access to electricity. Lack of reliable power stifles economic activity; in Nigeria, annual economic losses Nigeria’s power sector problems have serious from lack of reliable power are estimated at 5 to 7 percent repercussions for economic growth. With 43 percent of GDP—at a cost of US$25 billion). The transition to of the population (85 million people) lacking access to a largely privately owned sector did not bring about the grid electricity, Nigeria has the world’s largest energy outcomes expected. Distribution companies (DISCOs) access deficit (Figure 3.1). Nationwide, for the poorest report inefficiencies measured by aggregate technical, 40 percent of the population, access to grid electricity is commercial and collection (ATC&C) losses at about 50 an abysmal 31 percent. Similar disparities exist between percent, far above the 15 percent that is international good regions and between rural and urban areas. Even those practice. The inefficiencies combined with the irregularity who are connected to the grid cannot rely on the supply; in applying the tariff policy have led to a breakdown of they must deal with frequent outages. Firms cite lack the electricity payment chain. The cumulative shortfalls in of reliable power supply as the top constraint to their tariff collections for 2015–19 were estimated at N1,678 business. In the 2020 Doing Business Report, of the billion (~US$6.0 billion). In 2019 the tariff shortfall rose 190 countries surveyed, Nigeria ranked 169th globally to N524 billion (~US$1.7 billion), which was more than on the getting electricity indicator, and it was 33rd of the the total Federal Government of Nigeria (FGN) health 46 countries in SSA. In the report the reliability of its budget.16 It was also fiscally unaffordable. The FGN has electricity scored 0. recognized that the severely underperforming power sector threatens Nigeria’s recovery from the oil price shock and the With the electricity supply unreliable and COVID-19 crisis; in 2020 it began to take critical action insufficient, businesses and wealthy homes have to help turn the sector around. turned to expensive gasoline-run generators. It is estimated that in Nigeria over 22 million gasoline generators (“gensets”) power about 26 percent of all households and 30 percent of MSMEs; their net capacity is eight times more than the national grid. Inhalation of smoke from gensets is linked to about 1,500 deaths annually. In 2018 alone the FGN is estimated to have spent N490–N670 billion (US$1.6–2.2 billion) on subsidizing gasoline consumption for them. On top of that, ordinary Nigerians spent an estimated N3.7 trillion (~US$12 billion) on purchase and operation of gensets. Annual economic losses from the unreliable electricity 16 In 2019 the tariff shortfall was N524 billion; the FGN budget for health was N428 billion. 50 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS  igeria’s unreliable, and for many inaccessible, power supply is a threat to economic growth. Figure 3.1. N Nigeria’s consumption per capita, installed capacity, renewable share, access to electricity and on the Getting electricity indicator in the Doing Business Report Consumption Capacity Renewables People without electricity access, in million (kwh/capita) (MW/million) (Share in generation) LMIC LMIC Nigeria 85 26 LMIC 138 515 DR Congo 68 Nigeria Nigeria Nigeria 66 17 India 64 148 Pakistan 61 Procedures Time Ethiopia 60 Getting electricity, 2020 33.3 Tanzania 36 56.1 Uganda 25 Score: 47.4 Bangladesh 24 Rank: 169 Cost Reliability 0.0 Mozambique 20 Madagascar 19 96.3 0 10 20 30 40 50 60 70 80 90 Source: Consumption, capacity and renewables from IEA and EIA. People without alectricity access from Tracking SDG7, 2020. Getting electricity from Doing Business 2020.  he power sector is unbundled and largely privately owned. Figure 3.2. T Electricity grid Sector unbundled into 6 Generation State owned Transmission Company (TCN) 11.8 million Grid customers in 2020. companies (GENCOs) Hydro (33 percent) Distribution sector is privatized - includes and Gas (67 percent) based generation mix Government-owned Nigerian Bulk Electricity 11 DISCOs divided geographically Trading Company (NBET) fulfills the role of bulk trader NBET buys electricity from GENCOs, including Independent Power Producers (IPPs), under Power Purchase Agreements (PPAs) and resells it to DISCOs under Vesting Contracts Source: World Bank 2020. Note: Thickness of the curved bars indicate volume of energy (GWh) flowing. Part 3: Spotlights on Nigeria’s Development Agenda 51 NIGERIA DEVELOPMENT UPDATE JUNE 2021 supply are estimated at about N7–10 trillion resells it to DISCOs. The transition from a publicly- (~US$25 billion)—5–7 percent of the GDP. owned to a largely privately-owned power sector did not bring the expected performance and service quality Nigeria’s power sector is unbundled and since 2013 outcomes. Government ministries and agencies, the has been largely privately owned, but the transition Nigeria Electricity Regulatory Commission (NERC), did not produce the expected results. After the and the private sector have all fallen short of their Electric Power Sector Reform Act was passed in 2004, expected contributions to the sector turnaround. the sector was unbundled into six generation companies (GENCOs), eleven distribution companies (DISCOs), Inconsistent application of tariff policy has made and the Transmission Company of Nigeria (TCN). sustainable electricity operations difficult. Although By 2013 the DISCOs and GENCOs had all been sector regulator NERC periodically issues Multi-Year privatized. Three of the five thermal GENCOs, which Tariff Orders ( MYTOs18) they are not actively enforced, use natural gas as fuel, were sold in their entirety to new with frequent delays often due to external factors like owners, and three hydro GENCOs were transferred to litigation. This delay causes the financial situation of private operators through concession contracts. TCN sector companies, especially DISCOs, to deteriorate is still a government-owned monopoly. In the current and leaves NERC unable to enforce the contractual stage of market development, known as the Transitional obligations of the privately-owned GENCOs and Market,17 the government-owned Nigerian Bulk DISCOs. There is also a lack of clarity about how to Electricity Trading Company (NBET) fulfills the role reduce losses and meet the capital expenditure targets of bulk trader. NBET buys electricity from GENCOs, specified in the Performance Agreements between including independent power producers (IPPs), and  he power sector must deal with four different types of problems. Figure 3.3. T Comprehensive measures to move Nigeria’s power sector forward sustainably are needed NGA today: DISCOs on average report 50 NGA today: Tariff regulation and all market percent of ATC&C losses which are far contracts haven’t been enforced since above the <15 percent good practice and privatization (2013) and policy direction has what is allowed in their performance been inconsistent agreements cy al Po egu nv en n R E lic la . ci tio y tor a Effi er an y Who? Who? p d O BPE, NERC, TCN, DISCOs MoP, NERC Who? Who? pp cal ble In FGN, private investors, MOFBP, CBN, BOF, DMO fr Su Fis ina commercial banks as a tr t st or u Su ct ur e NGA today: FGN is spending US$ 1.5 billion NGA today: The capex allowance for all 11 per year to fund tariff shortfalls and under a DISCOS combined is NGN 56 billion (US$ BAU scenario, FGN liabilities could rise to 155 million), far below what is needed more than US$ 2 billion per year Source: World Bank 2020. 17 This is an intermediate step consisting of a bulk buyer (to interface between GENCOs and DISCOs) envisaged ass leading ultimately to a fully functioning willing-buyer (DISCO) and willing-seller (GENCO) with no intermediary. 18 The MYTO methodology followed in Nigeria uses an incentive-based regulation that seeks to reward performance above certain benchmarks. 52 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS DISCOs and the Bureau of Public Enterprises (BPE), (US$6.0 billion). To ensure that the GENCOs and which are used to determine the tariff policy. gas suppliers received enough payments to continue generating electricity, since 2017 the FGN has borrowed The distribution segment is struggling with a total of N1,301 billion (US$4.2 billion). In 2019 total exceptionally high losses and low collections. The FGN support reached N524 billion (US$1.7 billion), sector’s aggregate technical, commercial, and collection 0.4 percent of GDP—higher than the N428 billion (ATC&C) losses are extremely high, with DISCOs budget for health and just 20 percent less than the reporting on average 50 percent in 2020, versus N650 billion budgeted for education. 26 percent allowed by NERC in the tariff policy. These high losses are exacerbated by inadequate metering of The FGN wanted to keep electricity tariffs low to end-use customers and the failure of many ministries, protect the economically disadvantaged, but most departments, and agencies (MDAs) of federal, state of the benefits went to the relatively wealthy. Every and local governments to pay their electricity bills. The Nigerian who receives electricity from a DISCO high losses, coupled with lack of payment discipline by pays less19 for electricity than the cost of supplying it. DISCOs and inadequate contractual enforcement of However, 80 percent of the spending on tariff shortfalls those payments by NBET and NERC, results in low benefits the richest 40 percent of the population; only remittances to NBET by the DISCOs (Box 3.1). 8 percent benefits the bottom 40 percent, and of this less than 2 percent benefits the poorest 20 percent. Lack of cost-reflective tariffs since 2012 and low Significant resources spent on funding tariff shortfalls remittances of DISCOs to NBET forced the FGN to disproportionately benefit the relatively wealthy who intervene and cover the shortfall—a significant fiscal have access to the grid and use more electricity, so that burden. The FGN is responsible for funding the tariff ultimately a big chunk of government support goes to shortfalls, which are the difference between allowed those who do not really need help with paying bills. and cost-reflective tariffs. Since 2012, the tariff shortfall widened significantly because allowed tariffs stayed flat The need to turn the power sector around has long but cost-reflective tariffs shot up due to foreign exchange been recognized by all parties—the government, depreciation and domestic inflation. The cumulative the electric supply industry, the private sector, and shortfalls for 2015–19 were an estimated N1,678 billion international partners—as one of Nigeria’s most  he Government has had to step in to cover shortfalls and let the energy flow. Figure 3.4. T Annual tariff shortfalls (difference between allowed and cost- Remittance gap (includes both tariff and nontariff shortfalls) reflective tariffs) N/kwh N billion 60 – 731 120 – 54.5 In 2020, the DISCOs could not pay for 107 50.4 70 percent of the energy they bought, 98 50 – 47.5 100 – a sum of 511 billion. The NBET billed the DISCOs 731 billion but received 90 only 220 billion. 84 23.8 70% 80 – 59 40 – 16.7 19.7 Tariff policy has not 63 65 58 56 69 allowed tariffs to be cost- 60 – 52 49 30 – reflective. The FGN is 48 responsible for funding 37 43 47 the tariff gap. 40 – 27 41 49 20 – 40 48 30.8 30.7 30.7 30% 20 – 34 36 34 25 29 10 – 20 18 8 12 9 0– 3 4 la Jos rt o a u in Eko uja an keja AlCl s Yo ou Kan adun Enug Ben Ab Ibad I 0– O arc K 2017 2018 2019 DIS o rt H P J Average allowed tariff J Cost reflective tariff J Remittance J Gap Source: Nigerian Electricity Supply Industry (NESI) data, NERC. 19 This excludes the amount spent by consumers on gasoline, gensets, solar and other alternatives to augment the unreliable supply. Part 3: Spotlights on Nigeria’s Development Agenda 53 NIGERIA DEVELOPMENT UPDATE JUNE 2021  eeping tariffs low benefits the rich more than the poor. Figure 3.5. K Distribution of government spending to meet the tariff shortfall Percent of population 90 – 60 – 58.6 Only 22 percent of the poorest households 82.1 For every 10 the government spends on meeting the tariff 80 – have access to electricity shortfall, 8 goes to the richer households who don't need help 75.3 50 – paying their bills 70 – 60 – 57.4 40 – 50 – 39.7 30 – 40 – 25.3 30 – 20 – 22.3 20 – 10 – 9.1 10 – 5.6 1.6 0– 0– Poorest 20 Richest 20 Poorest 20 Richest 20 percent 2 3 4 percent percent 2 3 4 percent Population quintiles, based on per capita expenditure Source: World Bank 2020.  arly in 2020, it was predicted that Figure 3.6. E through 2023 there would be another serious barrier to economic growth and a threat to fiscal N3,082 trillion of tariff shortfalls. sustainability. Estimated new annual tariff shortfalls 2020–23 if tariffs remained unchanged N billion The FGN is committed to reducing annual tariff 4,000 – shortfalls and in November 2020 took a significant Cumulative tariff shortfall will be 3,083 billion, over four times the 2019 budget allocation for Education and over seven times 887 step by introducing a service-based tariff (SBT),21 the allocation for Health 3,000 – which effectively increased tariffs by an average 822 of 38 percent. The FGN has targeted reducing new tariff shortfalls from N502 billion in 2020 to less than 2,000 – 768 N300 billion in 2021 in its PSRP Financing Plan as it moves power sector towards full cost recovery and 1,000 – 606 Education budget a fair electricity pricing policy. The transition to the 524 Health budget SBT and the increased payment discipline will enable 0– 2019 2020e 2021f 2022f 2023f DISCOs to increase collection efficiency and remittances Estimates based on inaction to NBET and TCN, further improving the sector Source: NESI Data, NERC, and FGN Budget 2019. finances and enabling increased, better quality electricity supply to Nigerians. Reducing the tariff shortfall to critical development priorities. The cost of inaction improve financial and fiscal sustainability is one of the is very high. At the start of 2020, it was estimated that comprehensive reforms needed to turn the power sector if the sector continued its current performance and around (see next section). tariffs stayed not only flat but far below cost-recovery, through 2023 the FGN would have to provide another N3.082 trillion20 (US$7.94 billion) in regressive subsidies that benefit mainly the wealthiest consumers. And this massive spending would not have bought any improvements in service quality. Apart from taking money away from other important social development efforts, the power sector itself would continue being a 20 This analysis/scenario assumes no action on part of FGN in addressing tariff shortfalls. In reality, FGN did move in 2020 to narrow tariff shortfalls. 21 The SBT was introduced on September 1,2020 and suspended for October, but has been in effect since November 1, 2020. 54 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS  nderstanding operational inefficiencies and their impact. Box 3.1. U Operational inefficiencies in the sector are numerous. To understand their extent and the impact they have on sector finances, it is helpful to travel along the supply chain using 2020 data from NERC: Generation:  Nigeria has about 12,500 MW of installed capacity, dominated by natural gas (88 percent) with hydro making up the rest. However, just over 51 percent of this capacity was not available in 2020 due to maintenance and repair work. Of the 6,158 MW available during the year, an average of just 4,087 MW was actually used for generation, because of both insufficient gas supply, transmission and distribution constraints, and the inability of DISCOs to purchase power. As a result, in 2020 only 33 percent of installed capacity was used.  rom Generation to Retail: Inefficiencies in the Nigeria power sector. Figure B3.1.1. F In 2020, from a total installed capacity of about 12,500 MW, only 4,087 was available for generation—a loss of about 67 percent 12,500 -51% Hydro DISCOs received 29,819 GWh but managed to deliver only 22,163 GWh to end users, 25 percent was lost due to theft and poor infrastructure 6,341 DISCOs billed 816 billion but managed to Thermal (gas) collect only 542 billion, losing 33 percent -67% of revenues Transmission losses 2,071 are around 7 percent -25% Electricity 6,158 generation 2,362 7,656 -33% Revenue 4,087 32,181 29,819 274 22,163 816 542 ble ble al e y s y n y s n e led ity ila city tion rag n erg t los erg d utio s erg d ing tio y nu tal city vaila y a era acit Averatio Ennt ou TX eneive striblosse l en bille bill llec nc ve cted Ins p a n-a apac Ava a p p e e O c i t a tal Cofficie Re l l e ca No c c -op ca ge n s C re D To To ine co No n DIS MW GWh billion Source: NESI data, NERC. Transmission and Distribution: The 4,087 MW of generation capacity available was used to generate 32,181 gigawatt hours (GWh) of electricity. This was sent to DISCOs, which received just under 30,000 GWh—a transmission loss of 7 percent, about 3 percent above benchmarks. Distribution network losses are also quite high. The DISCOs delivered only 75 percent of the electricity they received, losing 7,656 GWh to poor infrastructure and theft. In all 32 percent of electricity is lost during transmission and distribution. Retail: D ISCOs could bill 22,163 GWh of electricity to their customers (60 percent of whom are not metered). This should have ideally generated N816 billion in revenue for the DISCOs, but they were unable to collect only 33 percent of these revenues leading to collection of only N542 billion in 2020. Thus, inefficiencies in the distribution sector contribute a significant portion of the 50 percent aggregated technical, commercial and collection (ATC&C) losses. Part 3: Spotlights on Nigeria’s Development Agenda 55 NIGERIA DEVELOPMENT UPDATE JUNE 2021 A holistic approach integrating to prepare and carry out performance improvement comprehensive measures is plans (PIPs), issuance of the order to cap estimated necessary to address Nigeria’s billing, and launching the extraordinary MYTO review power problems sustainably to set new conditions for DISCOs and TCN. There is also widespread agreement within the government Addressing problems of power sector offers Nigeria that improvements in sector performance are necessary an opportunity to tackle longstanding challenges and conditions for future public funding, i.e., no more give the economy a boost. To address the economic unconditional funding. challenges that have arisen from the oil price shock and COVID-19, in July 2020 the FGN launched a Increasing the capacity and reliability of the N23 trillion (US$5.9 billion) Nigerian Economic transmission network is critical to the sector’s Sustainability Plan (NESP). The NESP lays out an financial viability. Insufficient investment in ambitious package of policy measures and programs to transmission has curtailed the network’s capacity to stimulate activity and create jobs through investments transport power, contributing to the fact that only in agriculture, roads, renewables, and housing. But any 33 percent of the installed capacity is usable. There is a economic recovery program will be severely challenged clear need to refurbish the transmission infrastructure by minimal access to electricity, an insufficient power to enhance system stability and ensure that the grid can supply, and a financially unviable power sector. However, dispatch generation at lower cost while increasing the the focus on kickstarting the economy, and the general supply. At the same time, Nigeria is a critical member of push to place it on a stronger and more sustainable the West Africa Power Pool (WAPP), the regional market recovery path, provide a new impetus to reforms in the launched in 2018, which can significantly improve the sector. electricity supply not just in Nigeria but throughout all of West Africa. By the mid-2020s it is expected that all There is a broad political consensus and real 14 countries in the WAPP will be interconnected; efforts commitment to start turning around the sector by are already underway to increase the capacity of the taking critical actions set out in the Government’s network and to reinforce it in order to increase domestic Power Sector Recovery Programme (PSRP), some supply and accrue the benefits of regional trade. of which has already been done. The PSRP is a comprehensive package of financial, operational, Because DISCOs own and operate the Nigerian governance, and policy interventions for restoring the distribution network, they are central to the turn- sector’s financial viability, improving service delivery, around of sector performance. The PSRP recognizes reducing its fiscal burden on the government budget, poor revenue collection and remittances, as well as strengthening sector governance and transparency, insufficient investment, as factors in the inadequacy of and ensuring that contracts are enforced and reforms DISCO performance. Recognizing the critical need communicated. Given how urgent it is to address the to improve distribution and transmission networks the multiple challenges in the sector, a Presidential Working FGN has provided N240 billion to improve services Group has been created to coordinate and monitor the and resolve transmission and distribution bottlenecks. sector reforms. The FGN has chosen to undertake critical Programs such as the National Mass Metering Program PSRP actions in all four areas: (a) policy and regulatory aim to increase metering significantly to help DISCOs environment; (b) fiscal and financial sustainability; (c) increase their billing transparency and collection operational efficiency; and (d) network infrastructure. efficiency. PIP preparation and activation under NERC It will not be easy to reverse many of the important guidelines will ensure that investment planning is fact- regulatory actions, such as NERC requiring DISCOs based rather than speculative. Timely adherence to PIPs 56 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS will improve the technical and financial performance, solar capacity is a critical component of the least-cost and the governance, of DISCOs, reducing ATC&C generation path that can keep the sector in line with losses, increasing collection rates, and connecting more the Nationally Determined Contribution targets. A customers to the grid. This will eventually enable the framework that addresses credit risk for buyers and sector to end FGN assistance and fill its investment allows market-based mechanisms for bilateral deals needs by accessing private financing. between generators and DISCOs will be required if grid- based solar is to take off. Increasing operational efficiency and improving infrastructure are essential for a transition to clean There is widespread acknowledgment that increasing energy. The energy sector is the largest contributor access to electricity is critical to Nigeria’s plans for to Nigeria’s greenhouse gas (GHG) emissions. The recovery from COVID-19 and the oil price shock. To country has committed to cutting its GHG emissions achieve universal access to electricity by 2030, Nigeria by 45 percent by 2030, primarily from the energy would need to connect 500,000 to 800,000 households sector; 22 percent of the targeted emissions can be met every year. Both grid-extension and off-grid solutions by replacing the more than 20GW of gasoline-based will be needed to provide timely quality services to generator capacity that Nigerians use to supplement unserved and underserved households and businesses, grid-based electricity. In the short to medium term, especially as the country recovers from the impact of the distributed solar-based solutions for homes and rooftops, pandemic. Recognizing the need for action outside the and mini grids, can be used to replace the gensets grid-connected areas that the DISCOs currently service, using innovative business models and financing that the FGN launched the Rural Electrification Strategy and meets the needs of end-users, developers, and local Implementation Plan and the Nigeria Electrification finance institutions. In the long run, grid-connected Project to focus on underserved rural populations and  GN is already responding to the policy priorities for the power sector. Figure 3.7. F Reform programs implemented Achieving Universal Access Resetting the Nigerian Power Sector Rural Electrification Strategy and Ÿ Strengthen DISCO Implementation Plan (RESIP) corporate governance Ÿ Tariff RESET and Ÿ DICSO Business Continuity management Regulations in place information systems Ÿ Strengthened cy al Po egu nv Ÿ en n NERC performance financial and R E lic la . ci tio Nigeria Electrification Project (NEP) monitoring system operational y tor a Effi er an y Ÿ transparency p Performance d O Improvement Plan (PIP) for DISCOs PSRP pp cal ble Solar Solar In fr Su Fis ina home systems mini-grids as a tr Ÿ Ÿ t st or uc PIP implementation A Financing Plan in Su tu by DISCOs and place ensures tariff re leverage other shortfalls are fully financing for PIPs funded Energizing Energizing education economies Source: REA and FGN. Part 3: Spotlights on Nigeria’s Development Agenda 57 NIGERIA DEVELOPMENT UPDATE JUNE 2021 rural institutions. The Rural Electrification Agency has since established the Rural Electrification Fund. Additionally, the FGN launched the Solar Power Naija initiative in April 2021 that aims to roll out 5 million solar connections in communities that are not connected to the grid. Key policy options for the power sector What Impact these Reforms Why Reforms Are Needed Which Reforms Are Critical Could Have Strengthening the Policy and Regulatory Environment • One of the biggest challenges • Carry out an extraordinary tariff • DISCO payment discipline is in the sector is inadequate review for all DISCOs and before strengthened and enforced. enforcement of sector contracts. year end 2021 issue new MYTOs Delays in issuance of MYTOs to set the revenue requirements • Regulatory conditions are on tariff reviews and effective for these companies for 2022–25. predictable and defined through application of their outcomes hurt 2025. the sector. Performance targets Who: NERC • The investment climate improves. for DISCOs under current MYTOs • Include in revenue requirements fall short. allowances for capital and operating expenditures and estimated total aggregated technical and commercial losses in supply, based on Performance Improvement Plans (PIPs) approved by the Regulator. Who: NERC • Sector institutions fully commit to adhere effectively to sector contracts and regulations. Who: NERC, TCN, NBET, FGN • Improve the investment climate, including economic procurement of generation capacity pursuant to a Least Cost Development Plan (LCDP) and clarification of the monetary and fiscal policies that provide incentives for private investments in the power sector. Who: FGN 58 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS What Impact these Reforms Why Reforms Are Needed Which Reforms Are Critical Could Have Achieving Fiscal and Financial Sustainability • The FGN cannot afford the more • Move toward full cost recovery • Tariff shortfalls are fully funded than N500 billion (over US$1 with tariff adjustments through and gradually reduced to zero. billion) of new tariff shortfalls new MYTOs, accompanied by annually. DISCOs do not pay up measures to protect the poor and • The fiscal burden of the power to 70 percent of their invoices to enforce payment discipline. sector on the FGN is reduced. NBET. • The financial situation of DISCOs Who: NERC improves as tariffs come to better • Implement the PSRP Financing reflect current conditions and the Plan to fully fund new tariff costs of efficient service delivery. shortfalls and clear historical arrears with sustainable sources of funds. Who: FGN (Federal Ministry of Finance, Budget and National Planning - Budget Office of the Federation) Improving Operational Efficiency • Operational inefficiencies in the  ddress constraints in the A • Minimum supply necessary for system result in massive financial transmission and distribution grid stability is achieved. as well as economic losses. segments and maintenance issues There is an immediate need to in generation. • The distribution network is ensure that the transmission and increasingly reliable. • Implement PIPs22 approved distribution networks receive at by NERC in late April 2021, • Operations in all business least the minimum level of supply to be reflected in MYTOs of areas of DISCOs are efficient, that allows the grid stability and extraordinary review for 2022–25. transparent, and accountable. reduction of system outages. Who: DISCOs • Investor confidence increases • Systematically oversee DISCO as DISCOs emerge as credible performance after MYTOs are commercial partners. issued, and adopt corrective • Sector credibility and investor action (including license confidence both increase. revocation) when DISCOs fail to adhere to PIPs and deliver on MYTO provisions. Who: NERC • Follow corporate governance and transparency best practices. Who: DISCOs • Increase accountability and transparency: • Timely publish financial statements of DISCOs audited according to International Financial Reporting Standards. Who: DISCOs • Publish key operational and financial performance data of the sector every quarter. Who: NERC 22 DISCOs prepared PIPs based on guidelines issued by NERC in 2019 that could incorporate tools (information systems, revenue protection programs, etc.) to improve efficiency and enhance transparency and accountability in operations. Part 3: Spotlights on Nigeria’s Development Agenda 59 NIGERIA DEVELOPMENT UPDATE JUNE 2021 What Impact these Reforms Why Reforms Are Needed Which Reforms Are Critical Could Have Expand and Improve Infrastructure • Substandard infrastructure • Define technical and operational • ATC&C losses are reduced from is a major factor in sector interventions required to turn- an unsustainable 50 percent. inefficiencies. There is an urgent around operations. need to improve and expand the • Quality of service improves. network to improve the quality of • Identify the capital investments required to do so in the PIPs. • Better collection increases supply. revenues • Poor access to electricity Who: DISCOs • Increase i transfer capacity of the severely impacts the economic • To close the metering gap, transmission network. prospects of all Nigerians. About effectively implement programs 43 percent (~85 million people) of for metering of customers. • Dispatch least-cost generation the population has no access to and enhance regional trade to electricity. Who: DISCOs optimize costs. • Tackle electricity theft and bill • Increase access. collection to reduce the critically high ATC&C losses. Who: DISCOs • Upgrade, rehabilitate, and reinforce transmission lines. Who: TCN • Adopt a dual strategy to expand access to electricity service that involves off-grid access solutions, such as mini grids and solar home systems. Focus on underserved rural populations and rural institutions, such as schools, health centers, and administrative buildings as well as rural businesses, farms, and enterprises for job creation and economic development. Who: FGN, REA Clean Energy Transition • The energy sector is the largest  hort and Medium Term S • Renewables comprise a larger contributor to GHG emissions. • Create enabling regulatory and share of the generation mix. Over 20GW of gasoline policy for unlocking Distributed genset capacity is employed • GHG emissions from the power Photovoltaic (DPV) solar market. sector are reduced. by households and small businesses, about 8 times more Who: NERC, FGN, State than the national grid. Governments, CBN, DFIs • Identify innovative-use cases and business models for scaling up DPV. Who: Private sector, DFIs, FGN  ong Term L • Define enabling conditions for development of large-scale grid connected solar projects. Who: NERC, FGN, DISCOs, GENCOs 60 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS References Access to Energy Institute, 2019. “Putting an End to Nigeria’s Generator Crisis: The Path Forward.” Federal Government of Nigeria, 2018. Power Sector Recovery Programme 2017–21 IEA, IRENA, UNSD, World Bank, WHO. 2020. Tracking SDG 7: The Energy Progress Report. World Bank, Washington DC World Bank 2020, Programme Appraisal Document, Power Sector Recovery Operation. Washington DC. Part 3: Spotlights on Nigeria’s Development Agenda 61 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Spotlight 2: Options to raise revenues in a time of crisis Summary: Nigeria is Africa’s biggest economy but has the Africa’s biggest economy also has lowest tax-GDP ratio on the continent of just 4 percent. Tax Africa’s lowest tax-to-GDP ratio: revenues are necessary to ensure essential services, provide Nigeria must mobilize far more security to citizens, help tackle hunger and poverty, and revenue if it is to capitalize on its deliver critical health and education services. The COVID- immense economic potential related economic slowdown coupled with the plunge in oil prices in 2020 brought into sharp focus the need to increase To achieve sustainable, and inclusive, growth; build non-oil revenue in a time of crisis when investment, jobs, a resilient economy; and achieve the aspirations of and growth also need to increase. This calls for policy and its people, Nigeria must address its perennially low administrative measures that are carefully calibrated to revenue mobilization. Its 2019 tax-to-GDP ratio of grow revenues without negatively impacting investment. 4.2 percent was less than one-third of the SSA regional This rules out any increases in traditional ad valorem taxes average. This is the product of many years of overreliance like the value-added tax (VAT) but opens a window to fully on resource revenues from oil and gas, a strategy that implement the already existing tax policies and reform tax is no longer viable due to the volatility of oil demand administration to seal compliance gaps. There is potential and prices and to inefficiencies in the oil sector. The for harvesting revenue-yielding fruits such as increasing inefficiencies have perpetuated a vicious cycle of under- “sin taxes,” charging fees for electronic money transfers, investment, low human development, and low incomes. rationalizing tax expenditures, removing loopholes in tax laws, and improving tax compliance by reinforcing revenue The COVID-19 pandemic has added more pressure administration. Over the next three years, measures like on already subdued domestic revenue and threatens these could raise the tax-to-GDP ratio to about 7 percent, to push Nigeria further into deficit. In addition to the bringing in an additional N10 trillion. In the longer term, drop in oil and gas revenue, as economic activity slowed. fundamental reform of the tax system is needed to stimulate and, in some cases stalled, the pandemic has also had post-pandemic investment and economic growth. As Nigeria adverse impacts on other revenue streams. Households tries to “build back better” after the COVID crisis, the consumed less, and corporate profits fell, reducing VAT approach to revenue mobilization needs to be more strategic: collections and corporate income tax (CIT)—two of the not just taxing more, but taxing better; not just how much largest sources of non-oil revenue. The pandemic has also to collect, but how to collect, what to collect, and from reduced the scope for tax administration enforcement whom. actions; and minimal use of automation in tax administration precluded any leveraging of technology to improve compliance. While COVID-19 wrought many challenges, it also brings about a rare opportunity to make changes that could give revenues a major boost in the long run. Further pressure on oil prices and diminished demand 62 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS forces the Nigerian government to seek alternative However, avenues for accelerating DRM should be sources of revenue that are easy to tap into at minimal limited to those that do not jeopardize investment, disruption to the economy. Normally, the ease of growth, or jobs. While Nigeria’s economy has collecting resource revenues renders alternative sources performed better than expected, in 2020 it was hit by secondary. In other words, the continuing COVID-19– the deepest recession in almost four decades, and growth related economic challenges may have a silver lining. this year is still expected to be moderate. Revenue-raising The revenue streams suggested below and administrative policies and administrative actions must be carefully reforms to bridge compliance gaps are likely to be sticky chosen so as not to undermine an already weak growth beyond the pandemic. This would be a boon to the recovery path. economy, especially if resource revenues recover.  igeria’s revenue collection is far behind Figure 3.8. N  evenue can be doubled with minimal Figure 3.9. R that of peers. disruption of the economy. Total revenue compared to peers Potential revenue gains at median of peers Percent of GDP N billion 50 – 12,000 – 10,000 – 40 – Additional NGN 8,000 – ~6 trillion (~$15 billion) 30 – 6,000 – 20 – 4,000 – 10 – 2,000 – 0– 0– O LS NAM G F A A B N N N R IV ZA A A E D N A 08 09 10 11 12 13 14 15 16 17 18 CO ZA BW RW ZM SE KE MD CM C T GH UG ZW CO SD NG 20 20 20 20 20 20 20 20 20 20 20 Source: Federal Inland Revenue Service (FIRS) and IMF 2018 Revenue Statistics. Source: FIRS and IMF 2018 Revenue Statistics.  riven by crises, general government Figure 3.10. D  IT and VAT are the largest sources of Figure 3.11. C revenue continues to fall. non-oil revenue. Trend in oil and non-oil revenue Share of non-oil revenues sources in 2020 Percent of GDP 14 – Other Fund FN 12 – G O th Re T er CI 10 – s v Re v 5.9 8– 5.1 Custom s 6– 4.6 4.2 5.1 e Sta 4– 4.3 4.2 dg tes 4.2 bu s tra nd IG R 5.8 Ex Fu 5.2 2– 3.6 3.2 3.0 VAT 2.3 2.1 1.6 0– 2013 2014 2015 2016 2017 2018 2019 2020 J Oil and gas revenue J Non-oil revenue Source: FAAC data from the FIRS. Source: FAAC data from the FIRS. Part 3: Spotlights on Nigeria’s Development Agenda 63 NIGERIA DEVELOPMENT UPDATE JUNE 2021  equenced reforms will best mobilize revenue. Figure 3.12. S Immediate Medium Term Long Term Enhance excise rates  on "sin Rationlize tax expenditure: Improve revenue from cross goods" and establishing ecise on Nigeria offers a wide range of tax border transactions and other petrol and diesel at a token rate. concessions that cover a range international tax measures. of taxes, with the largest impact These range from improvement Implement the Electronic Money being in CIT and VAT. Nigeria does of personal income tax from Transfer levy. This revenue have a legislative framework in undisclosed overseas deposits source is sustainable and is likely place for measurement and grant and illicit financial flows through to grow in coming years. of tax expenditures (the Fiscal better use of information gained Responsibility Act, 2007), which under exchange of information, to Improve overall tax compliance can be leveraged to rationalize VAT on online transactions, and with focus on VAT. Complemented ineffective tax incentives. CIT from accurate application of by measures to enhance the transfer pricing rules. efficiency of FIRS through ICT Reforms key tax statutes at the capacity, HR management and Federal level, i.e. the Corporate Enhance Internally Generated training of staff, organizational Income Tax Act (CITA) and the Revenues (IGR). Efforts are reforms and process Value Added Tax Act (VATA), needed to improve States' improvements. including plugging loopholes, collection of PIT and other taxes rationalization of the treatment of such as the property tax. expenditures (CITA) and credits (VATA), and development of anti- fragmentation rules. The economy has adequate space Excises can help lower the cost of for administrative and policy environmental pollution, improve reforms that do not negatively health prospects, and boost tax impact investment and growth revenue by up to 1 percent of GDP World Bank estimates that Nigeria’s non-oil revenue Although the rates were increased in 2017, at potential is more than twice what it currently 0.04 percent of GDP, Nigeria’s excise taxes are among  ith the right reforms, it should be possible collects; w the world’s lowest. While the primary purpose of an to reach a tax-to-GDP ratio comparable to regional excise is to internalize the social costs of harmful goods peers like Ghana and Uganda at 12 percent and Kenya like alcohol and tobacco, their revenue contribution can at 15 percent. The government has already taken major also be important. Nigeria does not subject liquid fuel to steps to reform the VAT, and has prepared its first tax tax, which is unfortunate since excises could capture the expenditures statement. There is now an opportunity to cost burden of fuel on the environment, and this revenue build on this momentum, especially given the urgent source is inherently stable because demand for fuel is need to marshal resources for post-COVID recovery. inelastic. In view of the complex political economy and the administrative and legal constraints that obtain in Enhancing the excise regime offers an immediate Nigeria, a sequenced reform approach is likely to achieve opportunity for revenue increases; an appropriate the best outcome. excise rate on beer alone could raise up to 64 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS  igeria’s excise tax revenue is among Figure 3.13. N  arginal improvement has consequential Figure 3.14. M the lowest in Sub-Saharan Africa. revenue implications. Excise tax Excise tax Percent of GDP Percent of price 7– 1.2 – Highest=6.24 6– 1.0 – 5– 0.8 – 4– Excise reforms have 0.6 – potential to raise revenue 3– by 1 percent of GDP~ NGN 1.5 trillion ($4 billion) 0.4 – 2– 1– 0.2 – NGA lowest=0.04 0– 0– O C A F A A A N I N N R B V A O A LS SY TZ ZA UG RW GH KE ML MD SE CM ZM CI BW AG NAMNG Côte d'Ivoire Botswana Angola Namibia Nigeria Source: IMF World Revenue Longitudinal Data. Source: IMF World Revenue Longitudinal Data.  here is ample space to raise excise Figure 3.15. T  igeria’s excise rates are lower than Figure 3.16. N rates for alcohol and cigarettes. those of its peers. Excise tax Excise tax Percent of price Percent of price 350 – Nigeria 300 – Moving to the ECOWAS recommended level of Cameroon 250 – 50 percent more than doubles excise revenues Kenya 200 – 150 – Senegal 100 – Ghana 50 – Uganda 0– Wine Beer Spirit Cigarettes 0 50 100 150 200 250 J Highest J Median J Nigeria J Lowest J Cigarettes J Spirit J Beer J Wine Source: PWC Worldwide Tax Summaries. Source: PWC Worldwide Tax Summaries. N600 billion. On alcohol and tobacco, Nigeria applies The electronic money transfer an ad valorem rate of 20 percent, which is less than half (EMT) levy is a stable revenue the median of its African peers. To effectively tap into source with potential to raise up to this revenue source, Nigeria could retain the current N462 billion in 2021 ad valorem excises but augment them with specific ones. World Bank estimates show that retaining the The EMT levy, introduced in the Finance Act 2020, current rates and gradually increasing the specific which amended the Stamp Duty Act, taps into the duty component to achieve tax incidence consistent growth in electronic funds transfer in Nigeria and with regional peers will generate additional revenue can be administered at low cost. To maximize its of N955 billion in the first year. Specific excises are impact, Nigeria must promptly issue regulations for the preferable because they are simpler to administer and less imposition, administration, collection, and remittance vulnerable to avoidance through undervaluation. of the levy. Because the levy is quite wide in scope and Part 3: Spotlights on Nigeria’s Development Agenda 65 NIGERIA DEVELOPMENT UPDATE JUNE 2021 presents interpretation problems, regulations should VAT reforms introduced in the specify exclusions from the scope and specify in detail Finance Act 2019 can raise 0.4 processes for administering the levy. Enforcement of percent of GDP in revenue, and some elements of the charge, such as inter-bank transfers, another 1.4 percent could come could be challenging in view of possible resistance from from better compliance the banks and could be sub-optimal for overall tax compliance by incentivizing cash transactions. In terms While raising VAT rates is not viable in the short of administration, there is also need for more clarity on term due to the financial burden it would impose on who should be the competent authority to administer the poorest Nigerians, broadening the VAT base and transactions between individuals. improving compliance would significantly raise VAT revenue. The Finance Act 2020 introduced VAT taxation of cross-border business-to-consumer digital supplies to align with the CIT digital tax introduced in Finance Act 2019. Proper application of this provision would Reforms of corporate income tax significantly boost VAT revenues and open up room (CIT) can seal loopholes without for future revenue growth as cross-border consumption raising the tax burden on compliant of digital products continues to grow. In addition, an corporations, potentially raising anti-fragmentation rule should be introduced to prevent revenue by 0.7 percent of GDP splitting of business operations into small companies in order to fall below the VAT filing threshold introduced In the current environment, in which raising CIT in Finance Act 2019. rates could suppress economic growth, targeting compliance and rationalization of tax expenditures In the medium term, the current 7.5 percent VAT provides an avenue for CIT-related growth: rate, one of the lowest in SSA, can be raised to (1) An anti-fragmentation rule could be included in the international levels of 10–15 percent. The limited Corporate Income Tax Act (CITA) to prevent medium input tax credit mechanism means that the Nigerian and large companies from fragmenting business activity VAT operates more like a turnover tax applying at all into multiple companies to take advantage of the levels of production and distribution. The mechanism exemption for small companies with turnover of less should be reviewed and reformed, with the long-term than N25 million. (2) The definition of “dividends” goal of a broad-based VAT regime with a single rate should be revised to include “disguised” dividends to and a comprehensive input tax credit mechanism. This prevent companies from funneling corporate profits would be the most efficient way to collect VAT revenue. to shareholders without paying tax. In the medium term, a technical diagnostic review of the CITA will be necessary to identify loopholes and technical deficiencies in current law and to rationalize costly tax incentives. Any progress toward more compliance in the current In the medium term, tax environment is likely to be sticky, however, persisting concessions should be rationalized beyond the COVID-19 induced economic crisis. to reduce market distortions How governments deploy tax expenditures is critical, especially in the current economic context. Selective and targeted use of concessions can provide a lifeline 66 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS n 2019 more than N1.1 trillion was lost in Table 3.1. I  eviewing tax expenditures alone can Figure 3.17. R CIT expenditures. double current revenues. Four main CIT concessions Cost of tax concessions in 2019 N billion Trillion naira Tax Expenditure 5– Main CIT Concession Claimed (Billion NGN) Interest on loans for agriculture, 999.7 4– fabrication and cottage industry Interest on securities 57.7 3– Research and development 34.1 Deductibles under S.23(1) CITA 17.8 2– Total TEs from four main 1,109.4 concessions 1– 0– Companies Income Tax Value Added Tax Customs Duties J Estimated revenue forgone J Actual revenue received ‡ Potential total Source: World Bank staff calculations. Source: World Bank staff calculations. for struggling entities, especially those hit hardest by During crises, improving tax COVID-19. Rationalization could also greatly ease administration by fixing compliance perennial revenue losses by closing loopholes in order to gaps can bridge the revenue gap foster healthy market competition between corporations. caused by low economic activity The Nigerian tax system includes many concessionary measures intended to achieve various policy goals, but A central lesson from the COVID-19 pandemic has that can only come at the cost of lower tax revenues. been that it is critical for revenue administration These tax expenditures influence choices and create authorities to maintain operations and business incentives for persons and businesses to alter economic continuity23 during a crisis. Before any revenue behavior. For more efficient use of tax expenditures, authority can tackle tax administration issues in times of the policy objectives for underlying individual tax crisis, it must first remain viable. Achieving this not only expenditures must be clearly defined and the associated depends on the availability of reliable ICT platforms costs monitored. but also on good processes to enhance decision making in a rapidly changing environment in order to keep staff There has been progress: in 2020 the government for and taxpayers safe while still offering critical services to the first time published a Tax Expenditures Statement both taxpayers and the government. Nigeria’s revenue (TES). The TES supplements the government’s Annual agencies, FIRS and NCS, are working to accelerate the Budget by providing data for analyzing the cost, move to digital revenue administration. The goal is to benefit, and effectiveness of individual tax expenditures provide taxpayer-friendly, world-class online services, in achieving policy goals. Ultimately, the TES will characterized by efficient, paperless operations, and allow for greater transparency, and will also inform enhanced by ICT-enabled enforcement to optimize discussion of the equity and efficiency of the tax system. revenue. According to World Bank estimates, N1.1 trillion in CIT, N3.1 trillion in VAT, and N347 billion in customs With critical operations in place, investment in VAT duties were forgone. compliance is likely to provide the best returns. A 2019 World Bank analysis of the VAT gap in 2019 found it to be as wide as N3.1 trillion. It estimated that 23 OECD, “Covid-19: Revenue Administration Implications, The World Bank Group, April 2020; CIAT/IOTA/OECD (2020), Tax Administration Responses to COVID-19: Business Continuity Considerations, OECD, Paris. Part 3: Spotlights on Nigeria’s Development Agenda 67 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Table 3.2. VAT revenue potential. N million Focus Area Value Total VAT reported for 2010 (NBS) 560,998 Total VAT reported for 2019 (NBS) 1,188,581 Growth 2.12 Compound average growth rate (CAGR) 8.70% Rate used (2019) 5% Potential VAT revenue, assuming no policy or administrative leakage 4,323,381 Total leakage calculated 3,134,799 Potential VAT on capital under current policy 1,089,278 Revenue gain potential factor 3.6 Potential VAT revenue from tax on capital 92% Source: World Bank staff calculations. one-third was due to policy gaps, such as exemptions, While physical infrastructure, such as ICT and two-thirds to compliance gaps. The 2020 increase in equipment, is important, equally critical is the VAT rate from 5 to 7.5 percent is likely to widen the organizational efficiency. Currently, efficiency is VAT compliance gap by at least 50 percent, and perhaps obstructed by overlapping management structures, more if rising inflation is taken into consideration. Gains lack of standard operating procedures, and inconsistent from improved compliance can allow the government work processes. These challenges can be resolved in to sustain critical spending without overburdening large part by redesigning the organization, improving taxpayers in economic downturns. and digitalizing business processes, standardizing work procedures, and building capacity and otherwise improving human resources (HR) management. Staff should be trained and regularly retrained to improve both efficiency and retention. Over the long term, Adopting a digital transformation appropriate HR policies, planning, and processes need strategy for an ICT-driven FIRS to be put in place, supported by robust monitoring and and enhancing its organizational evaluation. Reforms underway should be periodically efficiency will allow FIRS to weather evaluated, using standard tools like the World Bank future crises better Group’s DIAMOND assessment methodology. Done well, digital transformation of FIRS operations may be a positive consequence of the pandemic. Considering the drop in revenue collection since Reforms to state tax administration the onset of COVID-19, FIRS is crafting a digital can supplement federal revenue transformation strategy to establish a strong ICT collection efforts, internally backbone for the tax authority. The three-year Strategy generated revenue (IGR) being (2021–23) intends to align IT priorities to FIRS the third largest source of non-oil business needs, highlight areas to be supported for stable revenue after VAT and CIT operations in future, identify application and IT service development priorities, and provide a framework for A significant part of the fiscal challenge in Nigeria continuous improvement of IT service delivery within stems from the distribution of tax administration the FIRS and a roadmap to achieve its objectives. between Federal and State levels. While there are 68 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS political and constitutional constraints on what taxes can instrument. This tax generates significant revenues in be collected, it is still possible to make improvements some Sub-Saharan African countries, notably South that can materially affect the amount of revenue Africa, where it generates more than 1 percent of collected. Of note is the revenue potential from personal national GDP. Based on information collected from income tax (PIT) and property taxes. Nigerian states, total property tax revenue is estimated at 0.01 percent of national GDP, with most collecting less The PIT collected by states is low due to tax evasion; than N400 per capita. certain classes of taxpayers escape the income tax net entirely. A major problem is underreporting by high- Significant revenue can be generated from land use net-worth individuals (HNWIs) and unincorporated charges (LUC) to complement state IGR. This can business. There is also a large informal sector, with many be done by broadening the tax base, creating a database small-scale traders and businesses that do not report of properties and LUC payers within a geographic income. While enforcement should be conducted in information system (GIS), improving the information all these areas, resources would be best used in pursuit on taxable properties, revising the assessment basis of high-potential areas such as taxing HNWIs. Income for the LUC, reviewing the current tariff structure, data may be limited but it is possible to estimate HNWI strengthening supporting legislation, and simplifying tax income based on third-party sources of information, compliance. However, several factors make reforming such as property cadasters, land use charge records, and this revenue source daunting. other third-party sources, such as financial intermediaries and shareholder registers. Foreign income can be 1. Incomplete or inaccurate records on potential identified from the Automatic Exchange of Information taxpayers and insufficient information on data available through international initiatives. properties do not support effective property taxation. In several states and administration is  igeria collects less in property tax Figure 3.18. N revenue than its SSA peers. carried out using manual approaches, paper-based Property Tax Collection property files, maps, and other legal documents. Lack Percent of GDP of a computerized database of properties severely 5– impedes tax administration and does not allow states to leverage the efficiencies of technology. A few states 4– (notably Kaduna, Edo, Nasarawa, and Lagos) have 3– set up GIS Administration Agencies to help them identify property records. 2– Raising property revenue to 0.2 percent of GDP 2. In transfer deeds, property values are often not 1– would raise revenue by NGN 300 billion accurately stated, in part to reduce stamp duty 0– liability, in part due to lack of laws to enforce A N R F V LI N O R A N A S G T A D A US CA GB ZA CI M SE AG CM BF KE TZ MU CO MR BW CO NG honest disclosure. Because property values are Source: IMF, Government Financial Statistics, 2017; except Nigeria: World Bank estimate. under-reported, the properties are under-taxed. Where states prescribe valuation of properties, the In addition to PIT, recurrent immovable property tax assessment methods for the LUC are not able to is a stable source of revenue for subnational and local capture market values because market data is not governments all over the world. In advanced countries reliable. Several states have therefore resorted to such as the US, Canada, and UK, as much as 3 percent setting low, flat rates per property, even when the of national GDP annually is collected through this tax revenue collected is relatively small. Part 3: Spotlights on Nigeria’s Development Agenda 69 NIGERIA DEVELOPMENT UPDATE JUNE 2021 3. Some states lack the legislation necessary to support the LUC levy. In others, the legislation is not fully compliant with the Constitution. Where there is legislation, it is poorly enforced, lowering collection rates. 4. Cumbersome compliance requirements  necessitate several visits to banks and government offices. Because LUC revenue is low, it should be possible to make payments via mobile money and other nontraditional mechanisms, especially when taxpayers do not have bank accounts. 70 Part 3: Spotlights on Nigeria’s Development Agenda RESILIENCE THROUGH REFORMS Key policy options to mobilize revenues in a time of crisis Which reforms are critical and when could they be carried out Why reforms Reforms that can Reforms that can Structural initiatives and What the impact are needed be carried out be carried out institutional reforms that of reforms would be in 1–6 months within 18 months can put on a firm footing in the next 3 years Non-oil revenues • Reform excise tax • Fully implement VAT • Build the capacity 9 Tax policy and have been rates. and CIT compliance of federal tax and administration stagnant due to programs. customs administration reforms can help a sub-optimal • Implement the to improve increase Nigeria’s VAT system, Electronic Money • Make desk audits compliance. tax-to-GDP ratio in extensive use of Transfer levy. more effective. the medium term from tax incentives, • Establish a modern, 4 to 7 percent, thus • Launch VAT • Review CIT law; digital ICT-based lack of effective compliance bring international helping to reduce enforcement, and tax administration the fiscal deficit, and improvement tax rules in line with that uses Big Data the high costs of initiatives. global good practices increase fiscal space tax compliance. effectively and is for investments in with emphasis on the powered by risk • Craft the Digital practical. human capital and the Transformation engines to ensure infrastructure needed Strategy for ICT in • Rationalize ineffective smart enforcement. to connect farmers FIRS, laying the tax incentives. and firms to markets foundation for a tech- and youth to jobs. driven, efficient tax • Improve how Customs administration. administers VAT, duty. 9 Advance health and and excises environment policy • Build capacity in the goals by capturing audit and taxation of more of the negative large business. externalities of consumption of harm goods. 9 Increase non-oil revenues from excise, EMT levy, VAT, incentives, and international tax reforms. Adopt a public Enhance FIRS efficiency engagement strategy by supporting reforms that links revenue to the structure of the mobilization to organization, ensuring increased investment that management in infrastructure and approaches and human capital. standard operating procedures are consistent and, supported by effective HR management. 9 Improve state level 9 Introduce a well- 9 Establish consolidated 9 State IGR reforms PIT and improve designed, progressive state revenue would: provide state-Federal and properly accounts as part of taxpayer clarity cooperation in tax administered property state TSAs. and reduce double- administration. tax expand electronic taxation; reduce tax payments and leakages from IGR stop cash payments. sitting in individual MDA accounts; induce more efficient land use and provide revenue to states and local governments. Part 3: Spotlights on Nigeria’s Development Agenda 71 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Which reforms are critical and when could they be carried out Why reforms Reforms that can Reforms that can Structural initiatives and What the impact are needed be carried out be carried out institutional reforms that of reforms would be in 1–6 months within 18 months can put on a firm footing in the next 3 years Tax design • Streamline the • Record and harmonize 9 More post-tax is impeding VAT, eliminating IGR policies and profits available for business growth unnecessary administration across investment. by (1) increasing frictions that impinge states and minimize working capital on productivity, double taxation in 9 Lower compliance requirements; and avoiding tax terms of federal costs for SMEs that (2) the high cost cascading. policies. give them an incentive of compliance, to become formalized. with no • Ensure prompt VAT refunds, after putting in 9 Paperless operations, simplification equipped with sharp, measures yet place strong controls. ICT-enabled risk- available for • Establish a valuation based enforcement. small business, database of high- which makes value urban properties 9 High working capital the tax policy for the LUC. requirements regressive. obviated. Inefficient • Improve NCS • Modernize the FIRS 9 Improved tax morale Customs administration of and NCS to create because of more Administration border entries and a taxpayer-friendly clarity about taxes reduces trade reduce processing organization providing by reducing double and tax collection times. world-class online taxation incidents, services. negative experiences • Simplify tax with tax officials, and assessment and lack of how taxes are payment mechanisms used. as part of ICT development in FIRS. Shadow economy • Focus on HNWIs for • Pilot internal • Successfully embed 9 The demonstration is estimated at PIT enforcement. cooperation with one a Compliance Risk effect of HNWIs being over 50 percent. state IRS (Lagos) to Management system subject to taxation • Introduce well- strengthen PIT, CIT based on objective risk will improve voluntary designed simplified and VAT enforcement. criteria. compliance and widen PIT regimes for SMEs; the tax base. SMEs operating as companies are exempted from CIT. 72 Part 3: Spotlights on Nigeria’s Development Agenda Nigeria: Key Economic Indicators NIGERIA DEVELOPMENT UPDATE JUNE 2021 Economy 2015 2016 2017 2018 2019 2020e Real GDP Growth (percent yoy) 2.7 -1.6 0.8 1.9 2.2 -1.8 Nominal GDP (naira tr) 95 103 115 129 146 154 Oil Production (mb/d) 2.1 1.8 1.9 1.9 2.0 1.9 Oil Price (Bonny light, US$/bbl) 54 45 55 72 65 42 Inflation (percent average) 9.0 15.6 16.5 12.1 11.4 13.2 Real sectoral growth (percent yoy) 2015 2016 2017 2018 2019 2020e Real GDP Growth 2.7 -1.6 0.8 1.9 2.2 -1.8 Agriculture 3.7 4.1 3.4 2.1 2.4 2.2 Industries -2.2 -8.9 2.1 1.9 2.3 -5.8 Industry-Oil -5.4 -14.4 4.7 1.0 4.6 -8.9 Industry-NonOil 0.1 -5.0 0.6 2.4 0.9 -3.9 Services 4.8 -0.8 -0.9 1.8 2.2 -2.2 Oil GDP -5.4 -14.4 4.7 1.0 4.6 -8.9 Non-Oil GDP 3.7 -0.2 0.5 2.0 2.1 -1.3 GDP Composition (percent) 2015 2016 2017 2018 2019 2020e Total GDP 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 20.9 21.2 21.1 21.4 22.1 24.4 Industries 20.4 18.4 22.5 26.0 27.7 28.6 Industry-Oil 6.4 5.3 9.1 10.5 8.6 6.7 Industry-NonOil 14.0 13.1 13.4 15.5 19.1 21.9 Services 58.8 60.4 56.4 52.6 50.2 47.0 Oil GDP 6.4 5.3 9.1 10.5 8.6 6.7 Non-Oil GDP 93.6 94.7 90.9 89.5 91.4 93.3 Source: Nigerian authorities and World Bank calculations. 74 Nigeria: Key Economic Indicators RESILIENCE THROUGH REFORMS Monetary and Financial Sector (percent yoy, end of period, unless 2015 2016 2017 2018 2019 2020e indicated otherwise) Money Supply (M2) -2.9 11.8 -5.4 5.5 5.0 31.0 Narrow Money 1.1 21.7 -10.3 -4.4 -7.0 51.7 Net Foreign Assets -24.0 41.5 45.3 22.4 -22.8 26.4 Net Domestic Credit 6.2 23.5 -1.9 0.6 28.8 17.6 Credit to Government 53.6 23.8 -9.9 -18.1 87.0 30.8 Credit to Private Sector 3.2 23.5 1.4 1.9 17.6 12.9 Monetary policy parameters: Monetary Policy Rate (absolute rate, end of period) 11.0 14.0 14.0 14.0 13.5 11.5 Liquidity Ratio (absolute rate, end of period) 30.0 30.0 30.0 30.0 30.0 30.0 Cash Reserve Requirement (absolute rate, end of period) 20.0 22.5 22.5 22.5 22.5 27.5 Financial Market Indicators (end of period) Stock Market (NSE) Index 28,642 26,875 38,243 31,431 26,842 40,271 Fitch Sovereign Long Term Foreign Debt Rating BB- B+ B+ B+ B+ B Moody's Sovereign Long Term Foreign Debt Rating Ba3 B1 B2 B2 B2 B2 S&P Sovereign Long Term Foreign Debt Rating B+ B B B B B- External Sector 2015 2016 2017 2018 2019 2020e Exchange rate - official (N/US$, end of period) 197 305 306 307 307 380 Exchange rate - parallel (N/US$, end of period) 267 490 363 363 362 465 Real effective exchange rate index (end of period) 67 86 99 87 79 79 Current Account Balance (percentage GDP) -3.2 0.7 2.8 1.0 -3.8 -4 Current Account Balance (US$ bn) -15.4 2.7 10.4 3.9 -16.7 -17.0 Exports of Goods and Services (US$ bn) 49.0 38.4 50.8 66.0 69.9 40.0 o/w oil and gas exports (US$ bn) 42.4 32.0 42.3 56.6 54.5 31.4 Imports of Goods and Services (US$ bn) 71.9 47.0 50.9 71.6 100.8 72.1 Net Income (US$ bn) -12.7 -8.6 -11.5 -14.7 -12.5 -5.8 Net transfers (including remittances) (US$ bn) 20.2 19.9 22.0 24.1 26.4 21.0 Net Direct Investment (US$ bn) 1.6 3.1 2.2 0.6 1.8 2.7 Net Portfolio Investment (US$ bn) 0.9 1.7 3.7 -7.2 9.0 -3.6 Net Other Investment (US$ bn) -9.2 -4.9 -5.2 -9.7 0.3 4.3 External Reserves (US$ bn, end of period) 29.1 25.8 38.8 43.1 38.6 36 Equivalent months of imports of G&S 4.8 6.6 9.1 7.2 4.6 6 Source: Nigerian authorities and World Bank calculations. Nigeria: Key Economic Indicators 75 NIGERIA DEVELOPMENT UPDATE JUNE 2021 Nigeria: General Government Fiscal Summary - preliminary Actual (percentage GDP) 2015 2016 2017 2018 2019 2020e Total revenues 7.5 5.9 6.7 8.1 8.2 6.5 Federally collected 6.4 4.8 5.4 6.6 5.9 5.2 Oil and gas revenues 3.2 1.6 2.3 3.6 3.0 2.0 Non-oil revenues and other revenues 3.2 3.1 3.1 3.0 2.9 3.1 Independent and other revenues 1.1 1.2 1.3 1.5 2.3 1.4 Total expenditure 10.7 9.7 10.7 12.3 12.7 11.9 Overall balance (general government) -3.2 -3.8 -4.0 -4.2 -4.6 -5.4 Public Debt (net) 14.2 17.3 18.9 19.3 21.7 24.1 Source: Nigerian authorities and World Bank calculations. Notes: /1 After budgeted and discretionary deductions, but before derivation. /2 Includes Solid Minerals, NLNG Dividend, and Signature Bonus; exchange rate difference, excess petroleum profit tax. Nigeria: Federal Government Fiscal Accounts - preliminary Actual (percentage GDP) 2015 2016 2017 2018 2019 2020e Total Revenue 2.7 2.0 2.4 3.0 3.2 2.2 Share of federally collected revenues 2.5 1.7 2.0 2.5 2.4 1.8 Oil, Gas and Mineral Revenue (incl. signature bonus) 1.5 0.7 1.0 1.5 1.4 0.8 Non-Oil Revenue 1.0 1.0 1.0 1.0 0.9 1.0 FG Independent revenues and grants 0.3 0.3 0.4 0.6 0.9 0.3 Total Expenditure 5.0 4.7 5.7 6.3 6.8 6.8 Recurrent Expenditure 4.4 3.9 4.4 4.8 5.1 5.8 Personnel Cost (including Pensions) 2.2 1.8 1.8 1.8 1.8 2.1 Overhead Cost 0.1 0.1 0.2 0.1 0.2 0.5 Other recurrent (incl. COVID-19 intervention and na 0.7 1.1 1.2 1.5 1.0 power sector) Interest payments 1.1 1.2 1.4 1.7 1.7 2.2 Capital Expenditure (incl. COVID-19 intervention) 0.6 0.7 1.2 1.5 1.7 1.0 Overall Fiscal Balance -2.2 -2.7 -3.3 -3.2 -3.6 -4.7 Source: Nigerian authorities and World Bank calculations. Notes: The reported revenue and fiscal balance figures differ from the published Federal Government budget figures as the World Bank excludes the non-revenue items under international classification. Total expenditure for some years differs from the Federal Government reports as the World Bank excludes debt amortization payments from expenditure. Figures exclude government-owned enterprises and donor funding. /1 Includes other extractives revenues. /2 The actual capital spending reported for the calendar year. /3 Other Outflows include irregular items. 76 Nigeria: Key Economic Indicators Nigeria Development Update June 2021 View this report online: www.worldbank.org/en/country/nigeria Vision and Mission by Odeyemi Oluwaseun Odeyemi Oluwaseun was born in 1989 and is a native of Ogun State in Nigeria. In 2015 he obtained his National Diploma in fine art from the Polytechnic Ibadan, and in 2019 his Bachelor of Arts in fine and applied art at Obafemi Awolowo University. He continued to sharpen his skills with industrial training at Universal Studios of Art. Oluwaseun’s work spans different styles including oil, pastel, Conte, charcoal, acrylic, and watercolor paintings. His works in both local and international collections are managed by the MastersofArt Gallery in Lagos, Nigeria. He has participated in different exhibitions, including the So Far, Nosa, and Infectivity exhibitions, Artcom’s 70th international cultural exposition of arts, Mydrim art fair, La grand bazart, Limcaf Charity Art, and Union Bank’s art competition where he won the student price in 2017. His mixed media on canvas “Vision and Mission” shows the intensity of ambition and the journey of life. In Oluwaseun’s words, “there are many alternatives or distractions along the way but stay staying true to the ladder will lead you up.” 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.