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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: 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] ($m.) 0 500 500