Global Insight Perspective
Significance	A recent IMF review of Nigeria's Policy Support Instrument has revealed above-projected performance for key indicators, pointing to an improved macro-economic environment.
Implications	Stronger fiscal and monetary policies combined with higher-than-expected oil prices have carried the economy.
Outlook	If the government speeds up much-needed reforms, such as privatisation and price liberalisation, increased foreign investment could help revive the country's ailing industrial sector. Redirecting oil revenues into infrastructure and the non-oil sector, particularly agriculture, should lead to a period of true long-term economic revival.

Nigeria's economic performance has rebounded since registering a disappointing 1.2% growth in 2002. Over the last five years (including 2007 projections) growth has averaged 7.3%; the year 2007 is projected to show above-average growth reaching 7.5%. Recent economic success in Nigeria has been helped in no small part by strong global demand for oil and increased oil-sector investment inflows, but the performance of the non-oil sector must not be overlooked. The latest review of the IMF's Policy Support Instrument (PSI) with Nigeria shows that the non-oil sector has significantly and consistently overshot expected and programmed growth rates. The PSI programmed 4.9%, 5.0%, and 5.4% growth rates for 2005 through 2007, but actual growth overshot these expectations, registering 8.6%, 8.9%, and 8.0%, respectively. These strong performances, combined with higher-than-expected oil prices, have carried the economy through a decrease in oil production emanating from security issues in the Niger Delta. The effects of stronger economic and fiscal management, a sustained push for structural reform, and improved climatic and external environments have also had deeper benefits for the economy, helping to strengthen fiscal and external positions significantly, improve confidence, and reduce inflation over the last three years.

Oil and Agriculture Remain Essential; Significant Improvement in Other Sectors Emerging

Estimates from the Central Bank of Nigeria (CBN) put average real GDP growth at 7.5% in the first quarter of 2007, up from 6.1% in the fourth quarter of 2006. The non-oil sector, which grew an estimated 9.2%, was the major driver during the first quarter. For the quarter in question, crude oil production, including condensates and natural gas, estimated at 2.15 million barrels per day, was 8.1% lower than the level in the preceding quarter. The decline in oil production, caused by instability in the Niger Delta, and disruption in the supply of oil products, as a result of periodic vandalism of oil pipelines, are the major underlying reasons behind the slower growth. Although Nigeria's resource-dependent economy remains dominated by the energy and agricultural sectors, other industries are gaining momentum, particularly construction, telecommunications, transportation, retail and wholesale, structural metal products, and general industrial machinery. Although other sectors such as utilities, construction, and finance are relatively small and underdeveloped, there are hopeful signs that these sectors will begin to provide more support for overall economic activity. Nigeria will need to grow by 13-15% through to 2020 to reach its goal of featuring in the top 20 economies in the world by 2020. The higher growth rates targeted by the government will remain elusive in the medium term because of structural economic problems, which the administration of former president Olusegun Obasanjo (despite some efforts) was unable to rectify during the past seven years. Nevertheless, reform programmes by both current president Umaru Yar'Adua and former president Obasanjo have been fairly successful, with delays over the last three years addressed and current delayed reform delays facing legitimate reasons.

Monetary Policy Has Improved But Faces Pressure

Nigeria has experienced a strong build-up of reserves, from around US$5.50 billion in 1999 to US$43.38 billion as at 28 May 2007. Strengthening oil revenues, high oil prices, and stronger revenue management have enabled the CBN to take control of poor reserve accretion and turn the situation around, even after paying off huge amounts of international debt. Between December 2006 and September 2007, reserves continued their upward trend from US$41.96 billion to US$47.48 billion.

Inflation is now firmly in the single digits and has again performed better than targeted through 2005, 2006, and 2007, with the inflation rate registering 11.6%, 8.5%, and 6.0% against targets of 18.5%, 8.5%, and 6.2%, respectively. Currently, headline inflation rests below 5%, driven by lower food prices with agricultural production aided by stronger climatic conditions and government programmes. Core inflation averaged around 5.8% through the first seven months of 2007. Money supply growth has remained on target and stronger exchange-rate policies, a favourable sovereign rating, and a stronger consolidated and more vibrant financial sector have also increased confidence in the economy and central bank.

Fiscal Policy Still Poses Negative Risks to Macro-Economic Stability

Nigeria's fiscal policy has been expansionary throughout the last five years, with the major thrust of the 2006, 2007, and planned 2008 budget increasing social programmes and developing infrastructure. Nigeria's 2007 budget proposed increasing spending by 21% to 2.3 trillion naira (US$18.3 billion) during fiscal 2007, from 1.9 trillion naira in the 2006 budget. With its focus on development, the budget attributes 77% of the growth in spending to increased developmental spending targeted at accelerating and scaling up the provision of basic infrastructure and human resources capital. The 2007 budget proposed to fund six major development projects across three main sectors—railway, power, and natural gas—at a programmed total cost of US$55.9 billion.

Actual spending has increased above target through 2007, however, as the government has been accelerating spending in investment projects and there is a carryover of capital spending from 2006 (the government intends to eliminate carryovers in the futures), but improved revenues from the non-oil sector have helped reduce these effects on the budget balance. In a bid to fund increased spending and a push by states to increase the freedom with which they spend their share of oil savings and receipts, the government is revisiting its oil-price fiscal rule. This has the possibility of putting further strain on current monetary policy as it may allow states to increase spending and put more pressure on inflation.

Outlook and Implications

Nigeria's macro-economic management has improved significantly over the past decade. Improvements in the management of oil revenues and the set-up of the fiscal accounts have led to significant improvements in fiscal policy and budgetary control. Tighter control on monetary policy, financial sector reforms, and the use of oil revenues to reduce Nigeria's debt load significantly have bolstered the country's external position. However, pressures are rising on the fiscal account, which could lead to macro-economic disability if increases in spending are not kept in reason. Nevertheless, the future is increasingly bright for Nigeria, and although performance in the past decade was less than optimal, Nigeria's vast oil and gas resources imply that with a set of appropriate economic policies, the country can achieve sustainable high rates of economic growth in the long run. The nation's crude oil reserves currently stand at 33.3 billion barrels, 6.7 billion short of the federal government's 2010 target of 40.0 billion. Nigeria currently has the world's seventh-largest natural gas reserves, with 159 trillion cubic feet. Nigeria's large oil and gas reserves have attracted substantial investor interest, and will continue to do so in the future. A major gas pipeline linking Nigeria, Ghana, Benin, and Togo is being planned for 2008, after which Nigeria will be able to deliver 400 million cubic feet of natural gas per day to the West African sub-region. Similarly, the development of a trans-Saharan pipeline will increase natural gas production and exports. If the government speeds up much-needed reforms, such as privatisation and price liberalisation, increased foreign investment could help revive the country's ailing industrial sector. Redirecting oil revenues into infrastructure and the non-oil sector, particularly agriculture, should lead to a period of true, long-term economic revival.