Nigeria Economic Update: World Bank Forecasts Rising Growth, Less Inflation, Urges Closer Federal and State Government Cooperation

May 13, 2013

Abuja, May 13, 2013 – Nigeria’s short term macroeconomic outlook looks generally strong, with the likelihood of higher growth, lower inflation, and reserve accumulation.  This will present the Government with an opportunity to make progress in key reforms and public investments associated with the Transformation Agenda for job creation, diversification, and more effective governance, says the World Bank in its new Nigeria Economic Report (NER) launched today in Abuja.

Sounding a cautionary note, however, the NER says that Nigeria’s economic growth has not automatically translated into better economic and social welfare for Nigerians.  As the NER notes, “poverty reduction and job creation have not kept pace with population growth, implying social distress for an increasing number of Nigerians.

As part of its forecast for Nigeria, the NER also suggests that Nigeria will need to build up its fiscal reserve to protect the country from oil price volatility.  It will also need to increase internally generated revenue to compensate for what will likely be declining oil revenues relative to the size of the economy.

Given that Nigerian GDP is growing much faster than oil output, and is experiencing significant inflation at a stable exchange rate, the size of Government oil revenues relative to GDP should decline even in the event that oil prices increase. This was already the case in 2012, as Government oil revenues fell from an estimated 23.6% to 19.7% of GDP. This decline may increase budgetary pressures and justifies a prudent fiscal stance.

Better coordination is needed in Federal and State policies

The Nigeria Economic Report argues that the Nigerian Federalist System has the potential to support Nigeria’s takeoff into rapid diversified growth and job creation, but the Federal and State Governments need to improve cooperation and policy coordination in a few key areas.  These key areas are (a) macroeconomic management (countercyclical fiscal policy), (b) coordinated policies to enhance market connectivity and improve public services, and (c) the realization of national standards in public financial management and disclosure.  

The NER suggests that the significant degree of autonomy and financial independence of Nigerian States can be potentially advantageous for rapid development in the country.  But this process is now hindered by too little market connectivity, weak coordination in fiscal policy, and problems in governance.  For example, the NER notes that because of problems in infrastructure, particularly transportation, as well as institutional barriers, Nigeria’s markets are quite fragmented.

Investors with the potential to set up large scale operations and create many jobs will be reluctant to do so if they cannot service a larger market. Under these conditions, a number of Nigerian States have limited opportunities to attract significant investors.

It is argued that enhanced cooperation among the Federal and State Governments can successfully address all of these issues, thereby unlocking enormous potential for growth, job creation, and improvements in the welfare of Nigerian citizens. 

For effective macroeconomic management, the key task is to establish an institutional framework that can effectively separate and buffer Government expenditures from oil prices,said John Litwack, Lead Economist, World Bank and the lead author of the report.  “International experience demonstrates that countercyclical fiscal policy is essential to conquer the “oil curse” of boom-bust cycles and slow economic development.

Conditional or matching grants are widely used in many countries for the coordination of fiscal policies and implementation of national standards. 

The expansion of federal programs involving co-financing or conditional/matching grants for States around priority infrastructure and the implementation of national standards could help solidify needed trust and cooperation between different levels of Government and bring the best of Nigeria,” said Marie Francoise Marie-Nelly, World Bank Country Director to Nigeria.

“To be successful, these programs should build on state autonomy to promote constructive competition among them. International experience suggests that the conditionality of these grants should focus on outcomes rather than processes, i.e. the resources should be managed entirely by subnational Governments under the condition that certain objectives be reached.”

The first Nigeria Economic Report, released on May 13, 2013, contains a macroeconomic overview, an analysis of Government oil revenues and their potential allocations under various oil price assumptions through 2015, and a chapter on fiscal federalist relations and Nigeria’s economic development.  Primary conclusions of the NER are summarized below.

Subsequent editions of the report will present an overview of the macroeconomic situation in the country and focus additional attention on issues deemed to have high policy relevance.    The NER may also be used to disseminate the results of recent World Bank studies that have potential relevance for Nigeria.

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