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PROGRAM INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB4793
Nigeria DPO
Operation Name
AFRICA
Region
Financial Sector Reform (50%), Macroeconomic Management
Sector
(50%)
P117088
Project ID
THE FEDERAL REPUBLIC OF NIGERIA
Borrower(s)
The Federal Ministry of Finance
Implementing Agency
May 22, 2009
Date PID Prepared
June 4, 2009
Estimated Date of
Appraisal Authorization
Estimated Date of Board July 7, 2009
Approval
1. Key development issues and rationale for Bank involvement
In responding to the on-going global financial crisis the proposed Development Policy Operation (DPO) is
designed to provide budgetary support to the Federal Government of Nigeria (FGN) to offset the fiscal impact of
the crisis and signal the Bank’s endorsement of the accelerated implementation of reforms in the financial sector,
fiscal policy and management, and improvements to governance which the FGN and Central Bank of Nigeria
CBN) have undertaken in response to the crisis. The operation will aim to stabilize and stimulate Nigeria’s
economy by (1) maintaining the stability and strength of the banking system and (2) supporting the objectives of
the 2009 budget focused on raising government investment spending to accelerate non-oil growth.
2. Proposed objective(s)
A new Country Partnership Strategy (CPS) will be presented to the Board together with this operation. The main
components of the proposed CPS II are driven by the Seven Point Agenda. The strategy follows the following
principles: (i) emphasis on flexibility and (ii) a strategic focus on three themes: improving governance;
maintaining non-oil growth and promoting human development. In addition to possible support in response to the
impact of the global crisis, the Partnership will focus on the three themes of (i) improving governance, (ii)
maintaining non-oil growth and (iii) promoting human development.
The proposed DPO directly addresses the agenda relating to non-oil growth by supporting the development of the
institutional, legal and regulatory framework reforms being achieved by the Nigerian authorities in deepening the
financial system, thereby increasing access to financial services and empowering individuals and households to
engage in formal economic activities, be it as users of payment services, savers or investors. The DPO also
supports reforms designed to improve delivery of public services through improved fiscal management. Reforms
in this area are instrumental in ensuring that the intended response of the Government in financing a stimulus
package for already planned infrastructure projects attains its objectives effectively.
In responding to the on-going global financial crisis the proposed credit would aim at stabilizing and stimulating
Nigeria’s economy by:
Objective 1: Maintaining Confidence and Stability in the banking system; and
Objective 2: Sustaining Growth through sound macroeconomic policies and budget priorities.
3. Preliminary description
In responding to the on-going global financial crisis the proposed credit would aim at stabilizing and stimulating
Nigeria’s economy by:
Objective 1: Maintaining Confidence and Stability in the Banking System
21. The proposed credit lends support to the CBN’s measures undertaken to ensure the stability of the banking
system by ensuring its liquidity. The PDO-supported measures are: an extended borrowing window at the CBN to
provide liquidity for up to 365 days and access to the window was eased by expanding the range of acceptable
collateral to include high quality commercial paper; a back up liquidity borrowing facility available from the
NDIC for banks in full regulatory compliance; stepped reductions of reserve requirements from 4% to 1% and
reduction of the required bank liquidity ratio from 40% to 25%; reduction of the Monetary Policy Rate from
9.75% to 8% intended to dampen the bidding up of deposit rates. The Government has also adopted a
comprehensive plan to increase the liquidity and efficiency of the government debt markets, which should result
in increased depth of the market and a greater variety of government debt products and instruments with which
participants will be able to manage their liquidity.
22. In combination, these measures have been successful in reducing liquidity stress on the system and
restoring some liquidity to the interbank market: daily borrowing from the extended window facility fell from a
peak of about NGN 480 billion in November and December 2008 to about NGN 280 billion in mid-May 2009,
and banks reported that deposit rates had begun to fall below the cap rate (15%) and that limited liquidity was
returning to the interbank market
23. Priority actions identified to occur before closing of the operation in 2010 are designed to support the
phasing out of temporary interest rate caps and the restarting of the interbank foreign exchange market. These
were implemented as anti-crisis measures, but pose an obstacle to the development of the financial markets and
banking system once the crisis has ended. The CBN has informed the Bank that it intends to phase out both
measures as soon as possible, and as the first steps in this process, in mid-May 2009 commenced expanding the
retail foreign exchange market by increasing the number of Class A foreign exchange bureaus from 10 to 60 and
increasing the frequency of retail Dutch auctions of foreign exchange from two to five times per week.
24. The proposed credit lends support to a significant acceleration of measures needed to strengthen bank
supervision and regulation and increase the transparency regarding the situation of the Nigerian banks, thereby
also enhancing the attractiveness of Nigerian banks for investors and borrowers. These measures were identified
as part of the FSS2020 medium term reform agenda and had been the subject of extensive discussions between
the Bank and the CBN and the NDIC, but had not been expected to commence implementation in the short term.
The measures include: the CBN’s announcement that banks would be required to convert to International
Financial Reporting Standards (IFRS) as of 1 January 2010; the CBN’s intention to retain a major international
accounting firm to assist it with transitioning to IFRS-based supervision; requiring all banks to adopt a common
financial year end of 31 December; placing resident bank inspectors in all banks to continuously monitor them;
adopting a program for the introduction of consolidated risk-based supervision; and, implementing the e-FASS
information system which provides real time data on banking transactions to improve the CBN’s ability to
monitor and analyze the system. These measures to improve supervision are supplemented by the issuance of
regulations covering the operation of private credit bureaus. The development of the private credit information
industry should enable banks to better manage their credit risks using higher quality and more timely information
on borrowers.
25. Priority actions identified to occur before closing of the operation in 2010 are designed to support the
implementation of the measures to improve bank supervision and banking sector transparency already announced
by the CBN. Once implemented, these measures should improve the access of Nigerian banks to international
debt and equity markets and help to restore full depositor confidence in the system. These actions include:
completion of an assessment of the financial impact of the introduction of IFRS reporting on banks; issuance by
the Nigerian Accounting Standards Board (NASB) of Nigerian accounting standards (SAS) in full compliance
with IFRS as applied to the banking sector (this will ensure that banks are not faced with additional costs as a
result of having to fulfill regulatory and legal reporting requirements using different accounting standards);
alignment of CBN and NDIC regulations and supervision with IFRS; implementation of a comprehensive training
program for CBN and NDIC supervisors to allow them to work effectively in an IFRS environment; and, adoption
of the framework for risk based supervision now under consideration by the CBN and NDIC. Further priority
actions will support the commencement of licensing of private credit bureaus and the issuance of a tender to
establish a computerized movable collateral registry. These actions are intended to support the development of an
improved flow of credit information and facilitate an increase in credit activity by improving the ability of banks
and other financial firms to secure lending.
Objective 2: Sustaining Growth through sound macroeconomic policies and budget priorities
A key pillar of the government’s response to the crisis is the reprioritization of the budget towards capital
expenditure and measures to accelerate the execution of the capital budget and enhance the quality of expenditure.
The 2009 budget approved by the National Assembly already contains current expenditure at its 2008 level,
including by limiting overhead expenditure, and increases capital expenditure by 2 percent of GDP relative to
2008. With a view to aligning expenditure in line with its strategic priorities, the Government continues to
implement Medium-Term Sector Strategies for key sectors to form the basis for budgeting and investment
planning. So as to facilitate the execution of the capital budget, the government also released in early 2009 capital
votes and conducted a workshop with key MDA’s to catalyze project planning and execution. To enhance the
quality of budget execution, the government continues to implement a range of measures in the public financial
management area, including the Accounting Transaction Recording and Reporting System (ATRRS) (which has
now been adopted by 90 MDA’s) and continued progress towards the full implementation of GIFMIS. In the
procurement area, Standard Bidding Documents are now being used by 60-65 percent of MDA’s and all federal
government contracts above a certain threshold are being published.
The Government has developed a National Strategy for Public Service Reforms: “Towards a World-Class Public
Service” which aims to rebuild the public service with emphasis on critical institutional changes, installing
management systems and restoring professionalism, merit, competence, and client focus in the medium-term (by
2011). The PFM pillar of this strategy has four key target results: (i) sustained macro-economic and fiscal
stability; (ii) strategic allocation and results-based budgeting of funds; (iii) efficient management of resources,
accounting and reporting; and (iv) integrity in the use of public funds. The operation will support the government
in achieving these objectives in the PFM area.
Expected Outcomes: The following outcomes are expected as a result of the proposed operation:
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Banking system liquidity is restored and increased confidence allows normal functioning of the interbank
markets for Naira and foreign exchange. Government debt markets function more efficiently and become
more liquid. (Use of the extended window facility declines from NGN 480 billion/day to below NGN 200
billion/day; parallel market USD exchange rate falls to within 10% of the interbank rate).
The banking system becomes more sound and transparent. (Capital adequacy ratios remain above 15
percent through 2009. Improved reporting and accounting encourages investment in bank debt & equity,
and better pricing for debt issuances by banks on international markets. Banks’ ability to manage risk
improved by access new sources of credit information).
Federal government expenditure in 2009 remains within a range of 23-25 percent of non-oil GDP (21.2 in
2008, 25.4 in 2007, 21.4 in 2006).
Execution rate of the federal capital budget (in percent of the 2009 budget as finally approved by the
National Assembly) rises from [43.9] percent in 2008 to more than [60] percent in 2009.
Non-oil revenue collected at the federal level 1 (as percentage of non-oil GDP) increases from 8.6% in
2008 to 9% in 2009.
Month-end financial statements produced by 75 percent of federal government MDA’s within 7 days.
(Baseline: formerly no automated statements).
65% of Federal Government contracts using national standard bidding documents. 95% of Federal
Government contract awards above N [ ] are published.
4. Tentative financing
1
This includes import and excises duties, companies’ income tax, value added tax, federal government independent revenue.
The total non-oil revenue collected at federal level was about N1.3trillion in 2008 (IMF estimates).
Source:
BORROWER/RECIPIENT
International Development Association (IDA)
Total
5. Contact point
Contact: Michael J. Fuchs
Title: Lead Financial Economist
Tel: (202) 458-5875
Fax: (202) 522-1198
Email: [email protected]
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500
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