Document of

The World Bank

Report No: ICR00001753

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IDA-46440)

ON A

CREDIT

IN THE AMOUNT OF SDR323 MILLION

(US$ 500 MILLION EQUIVALENT)

TO THE

FEDERAL REPUBLIC OF NIGERIA

FOR A

DEVELOPMENT POLICY CREDIT

February 28, 2011

Finance and Private Sector Development

Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 19, 2010)

Currency Unit = Nigerian Naira (NGN)

NGN 1.00 = US$ 0.0066

US$ 1.00 = NGN 152.2070

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ABBREVIATIONS

AML/CTF Anti-Money Laundering/Combating of Terrorist Financing

ATRRS Accounting Transactional Recording and Reporting System

BPP Bureau of Public Procurement

CAC Company Affairs Commission

CBN Central Bank of Nigeria

CDD Community Driven Development

CPIA Country Policy and Institutional Assessment

CPS Country Partnership Strategy

CRMS Credit Risk Management System

CSCS Central Securities and Clearing Systems

CSOs Civil Society Organizations

DMO Debt Management Office

DPC Development Policy Credit

ECA Excess Crude Oil Account e-FASS Enhanced Financial Analysis and Surveillance System

EFCC Economic and Financial Crimes Commission

EIA Environmental Impact Assessment

FDI Foreign Direct Investment

FIRS Federal Inland Revenue Service

FIRST Financial Sector Reform and Strengthening

FGN Federal Government of Nigeria

FPD Finance and Private Sector

FRA Fiscal Responsibility Act

FSS2020 Financial Sector Strategy 2020

GDP Gross Domestic Product

GIFMIS Government Integrated Financial Management Information System

GTZ Gesellschaft fur Teknische Zusammenarbejde

IDA International Development Association

IFRS International Financial Reporting Standards

IFC International Finance Corporation

IMF International Monetary Fund

IPO Initial Public Offering

IPSAS International Public Sector Accounting Standard

M & E Monitoring and Evaluation

MDAs Ministries, Departments and Agencies

MDG Millennium Development Goals

MFB Microfinance Bank

NACRDB National Agricultural and Co-operative Development Bank

NAICOM National Insurance Commission

NASB Nigerian Accounting Standards Board

NDIC Nigerian Deposit Insurance Corporation

NEEDS Nigeria Economic Empowerment and Development Strategy

NEITI Nigeria Extractive Industries Transparency Initiative

NLSS Nigeria Living Standards Survey

NSE Nigerian Stock Exchange

PEMFAR Public Expenditure Management and Financial Accountability Review

PENCOM National Pension Commission

PFM Public Financial Management

PPP Public Private Partnerships

PREM Poverty Reduction and Economic Management

PSI - Policy Support Instrument

RTGS Real-Time Gross Settlement

SAS Nigerian Accounting Standards

SEC Securities and Exchange Commission

SMEs Small and Medium Enterprises

TSA Treasury Single Account

VFM Value For Money

Vice President Obiageli K. Ezekwesili

Country Director Onno Ruhl

Sector Director Marilou Uy / Marcelo Giugale

Sector Manager Paul Noumba Um / Jan Walliser

Task Team Leader Michael Fuchs / Volker Treichel

ICR Team Leader Ismail Radwan

ICR Team Members Gloria Joseph-Raji, Pierre Strauss,

FEDERAL REPUBLIC OF NIGERIA

Development Policy Credit

CONTENTS

Data Sheet

A. Basic Information

B. Key Dates

C. Ratings Summary

D. Sector and Theme Codes

E. Bank Staff

F. Results Framework Analysis

G. Ratings of Program Performance in ISRs

H. Restructuring

1. Program Context, Development Objectives and Design ............................................ 1

2. Key Factors Affecting Implementation and Outcomes .............................................. 9

3. Assessment of Outcomes .......................................................................................... 15

4. Assessment of Risk to Development Outcome ......................................................... 36

5. Assessment of Bank and Borrower Performance ..................................................... 38

6. Lessons Learned........................................................................................................ 43

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 44

Annex 1. Bank Lending and Implementation Support/Supervision Processes ............. 45

Annex 2. Nigeria Country at a Glance .......................................................................... 46

Annex 3. Stakeholder Workshop Report and Results ................................................... 47

Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 48

Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 49

Annex 6. List of Supporting Documents ...................................................................... 50

MAP…………………………………………………………………………………...53

i

A. Basic Information

Country: Nigeria Program Name:

Financial Sector and Public Financial Management Development Policy Credit

Program ID: P117088 L/C/TF Number(s): IDA-46440

ICR Date: 02/28/2011 ICR Type: Core ICR

Lending Instrument: DPL Borrower: THE FEDERAL REPUBLIC OF NIGERIA

Original Total Commitment:

XDR 323.0M Disbursed Amount: XDR 323.0M

Revised Amount: XDR 323.0M

Implementing Agencies: Federal Ministry of Finance

Central Bank of Nigeria

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 05/15/2009 Effectiveness: 01/06/2010

Appraisal: 06/08/2009 Restructuring(s):

Approval: 07/28/2009 Mid-term Review:

Closing: 06/30/2010 06/30/2010

C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Highly Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Satisfactory

ii

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments (if any)

Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes Original Actual

Sector Code (as % of total Bank financing)

Banking 30 30

General finance sector 20 20

General public administration sector 50 50

Theme Code (as % of total Bank financing)

Debt management and fiscal sustainability 20 20

Macroeconomic management 30 30

Other financial and private sector development 30 30

Regulation and competition policy 20 20

E. Bank Staff Positions At ICR At Approval

Vice President: Obiageli Katryn Ezekwesili Obiageli Katryn Ezekwesili

Country Director: Onno Ruhl Onno Ruhl

Sector Manager: Paul Noumba Um Iradj A. Alikhani

Program Team Leader: Michael J. Fuchs Michael J. Fuchs

ICR Team Leader: Ismail Radwan

ICR Primary Author: Ismail Radwan

F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) In responding to the on-going global financial crisis the credit is intended to provide budgetary support to the Federal Government of Nigeria to offset the fiscal impact of the crisis and support the Government in maintaining its current economic reform path in the

iii

financial sector, fiscal policy, management and governance. The three program objectives are: (i) maintaining confidence and stability in the Financial System; (ii) strengthening the Banking System; and (iii) supporting the objectives of the 2009 budget focused on raising Government investment spending to accelerate non-oil growth. Revised Program Development Objectives (if any, as approved by original approving authority)

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Measures to stabilize the banking system

Value (quantitative or Qualitative)

Extended Discount Window (EDW) in place & heavy borrowing from banks at around N480bn/day; Liquidity ratio req. at 25%; Reserve req. at 1%; Monetary policy rate at 6%.

Banking system liquidity restored; borrowing at EDW below N200bn/day; parallel US$/N rate within 10% of interbank rate;reduces Liquidity Ratio to 25%, Reserve Ratio to1%, MPR to 8%.

The extended discount window was shut down. The parallel exchange market has disappeared.

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

100% achieved.

Indicator 2 : Strengthening the banking system.

Value (quantitative or Qualitative)

Timetable on IFRS adoption (by Jan 2012) & common financial year-end for banks; plan to introduce consolidated risk-based supervision; resident inspectors placed.

Banking system more sound & transaprent.CAR above 15% through 2009; improved reporting/accounting encourages investment in bank debt.

A timetable to implement IFRS by 2012 has been adopted. Capital adequacy was 16.8 by end 2009.

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

100% achieved.

iv

Indicator 3 : Federal Government expenditure in % of non-oil GDP.

Value (quantitative or Qualitative)

FGN expenditure in 2006, 2007 & 2008 was 14.4, 17.8 & 17.3% of non-oil GDP respectively.

FGN expenditure in 2010 is within range of 14-18% of non-oil GDP.

In 2009 Federal Government Expenditure was 19.8% (of non-oil GDP) and a further 4.3% was sourced from the ECA.

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

100% achieved.

Indicator 4 : Execution rate of federal capital budget

Value (quantitative or Qualitative)

FGN capital budget execution rate was 50.7% in 2008.

Capital budget implementation moves to above 60% in 2010.

Capital budget execution in 2009 was 72%

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

100% achieved.

Indicator 5 : Number of FGN MDAs producing their month-end financial statements within 7 days using ATRRS.

Value (quantitative or Qualitative)

15% of FGN MDAs producing month-end financial statements within 7 days using ATRRS in 2008.

Over 75% of of FGN MDAs produce month-end financial statements within 7 days using ATRRS.

67% of FGN MDAs produced month-end financial statements within 7 days at the completion of the implementation period.

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

By December 2010, 77% of MDAs are producing financial statements within 7 days.

Indicator 6 : Number of national government contracts using national standard bidding documents. Number of FGN contract awards above N75ml that are published.

Value (quantitative or Qualitative)

45% of FGN government contracts using national standard bidding documents and 90% of FGN contract awards above N75ml published in 2008.

Public procurement act & implementation regulations consistent with international best practice, operational & public. Contract awards published in national procurement

65% of FGN contracts are using national standard bidding documents. And 100% of FGN contract awards above N75 million are published.

v

Journal & BPP website.

Date achieved 08/30/2008 06/30/2010 06/30/2010 Comments (incl. % achievement)

100% achieved.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : There are no intermediate indicators for this DPL - it will close on June 30, 2010

Value (quantitative or Qualitative)

none none

Date achieved 03/24/2010 06/30/2010 Comments (incl. % achievement)

G. Ratings of Program Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 12/31/2009 Satisfactory Satisfactory 0.00 2 03/27/2010 Satisfactory Satisfactory 507.52

H. Restructuring (if any) Not Applicable

1

1. Program Context, Development Objectives and Design

1.1 Context at Appraisal

Nigeria’s macroeconomic context in late 2008 / early 2009

1. Nigeria is Africa’s most populous nation, the world’s 8th

largest oil-producer, but

remains one of the poorest nations in the world (140th

in terms of GDP per capita).

2. Nigeria’s economy grew rapidly over the past decade. Nigeria returned to

democratic governance in 1999, after 16 years of military rule, and has enjoyed a decade

of relative peace and prosperity since then. The strong economic performance was driven

primarily by non-oil growth which reached an annual growth rate of 9 percent. Greater

attention was also paid to improving the investment climate, strengthening governance

and boosting investments in privatized sectors such as telecoms. Combined, these

measures attracted increasing capital inflows (including remittances and foreign direct

investment), and stimulated domestic demand.

3. Prudent economic management enabled the acceleration of non-oil growth.

The management of oil revenues was enhanced with the introduction of an oil-price

based fiscal rule, for government expenditure, in 2004. Under the rule, government

adopted a conservative oil reference price and saved surplus oil revenues in the Excess

Crude Account (ECA). Nigeria’s economic profile was also greatly improved by its

successful efforts to secure the largest debt write-off in the history of the Paris Club

reducing its external debt from US$33 billion in 2003 to just US$3.5 billion in 2006.

4. Over the years, Nigeria’s government has been committed to improved

macroeconomic policies and better governance. Recent progress is reflected in a

sharply improved rating on the World Bank's Country Policy and Institutional

Assessment (CPIA) which rose from 2.8 in 2006 to 3.4 in 2010. In the area of public

financial management, the Fiscal Responsibility Act (FRA) and new Procurement Law

were enacted in 2007 at the Federal level and similar laws are being adopted by all the

states. The Accounting Transactional Recording and Reporting System (ATRRS), and a

computerized Federal payroll management system were launched. Preparation of the

Government Integrated Financial Management Information System (GIFMIS) had gained

pace and an E-payment system introduced in 2008 promised to increase transparency and

accountability further. To improve governance of the oil and gas sector, Nigeria adopted

and is implementing the Extractive Industries Transparency Initiative (NEITI).

5. Financial sector reforms have also contributed to improved economic

performance. Major reform of the financial sector started in 2004 with a 13-point

reform agenda issued and implemented by the Central Bank of Nigeria (CBN). Among

important reforms undertaken in the financial sector were the complete overhaul of the

Nigerian pension system (initiated in 2004) and the establishment of the debt

management office responsible for developing the market for government securities. The

recent development of a roadmap to implement the Financial System Strategy 2020

2

(FSS2020) contributed significantly to reform and strengthening of the non-bank

financial sector. Parallel initiatives were also undertaken to increase transparency and

reduce corruption through the establishment of the Economic and Financial Crimes

Commission (EFCC).

6. A high degree of oil dependence makes Nigeria vulnerable to swings in

commodity prices. Oil accounts for more than 95 percent of export earnings, 85 percent

of government revenues and about 20 percent of GDP. Although sectors other than oil

have accounted for the largest share of economic growth, these sectors (trade, agriculture,

and telecommunications) have also expanded from rapid growth in domestic demand that

can be at least indirectly associated with oil-related inflows.

7. During 2007-2008, risks in the banking sector escalated in the context of an

asset price bubble. During 2004-2006, the Central Bank of Nigeria (CBN) dramatically

raised the minimum capital requirements for a universal banking license from N2.5 to

N25 billion. Small banks exited the market, others merged and all the survivors looked

to raise capital on the stock market. In an effort to attain – and in many cases exceed –

the CBN’s new higher minimum capital requirement bank managers, exploited the lax

regulatory climate and provided margin loans to their customers, allowing them to

purchase bank shares on credit. Many customers used the margin loans to adopt highly

leveraged positions.

8. By the beginning of 2008, the Nigerian stock market had become hugely

overvalued, with a price earnings ratio of 57 (4th

highest in the world), and more than 70

percent of the stock market capitalization was accounted for by banks that had used

margin loans to artificially inflate their share prices. This exposed the domestic banking

sector directly to risks from the corresponding asset price bubble. As stock prices fell

rapidly, customers defaulted on the margin loans which came to account for a large part

of the banks’ non-performing loan (NPL) portfolio. The extent of this exposure was not

known in Nigeria until the Central Bank carried out special inspections in the second half

of 2009 as the banks had systematically concealed their losses.. These special

inspections also revealed that banks had sizeable non-performing loan exposures inter

alia to the downstream oil sector. As a result of the special inspections reported NPLs

rose from less than 5% in 2008 to close to 60% by end 2009.

Impact of the Global Financial Crisis

9. Given the country’s high oil dependence, the global financial crisis, and

associated collapse of commodity prices, presented a major threat to hard won

economic and political stability in Nigeria. The sharp and rapid decline of oil prices

from almost 150 to under 40 dollars a barrel delivered a huge negative shock to the

balance of payments and budgetary position of the country, wiping out surpluses and

creating sizeable deficits. Federal budgetary revenues in 2009 declined by 48 percent

relative to 2008, while gross foreign reserves fell from US$ 60 to 43 billion between June

2008 and June 2009. The deterioration in the balance of payment position reflected not

3

only the direct impact on the current account from lower oil prices, but significant capital

outflows. Capital flows plus errors and omissions in the 2009 Nigeria balance of

payments amounted to a deficit of US$ 22 billion.

10. The external shock was also projected to result in a rapid slow-down of the

non-oil economy and put pressures on the exchange rate. Non-oil growth, which had

reached a range of 8-9 percent was expected to slow down to 3-4 percent in 2009-10,

with adverse consequences for the real economy and employment. In line with the

declining foreign exchange earnings and weakening confidence, the naira entered a

period of sharp depreciation in late 2008 and early 2009, as a result of which the Central

bank resorted to temporary foreign exchange restrictions, generating a substantial wedge

between official and parallel exchange rates. 1

11. A collapse in asset prices left a number of large commercial banks illiquid

and insolvent. Stock market collapses in the world’s financial centers started in May

2008. Developing country stock markets almost immediately flowed suit with the

Morgan Stanley Capital International Market Index falling by 23 percent within a week.

The sharp decline in asset prices in Nigeria made the above-mentioned margin loans non-

performing. These loans had constituted the majority of the massive credit expansion in

the years directly preceding the crisis. Nigeria thereby faced a potential full scale

financial crisis in additional to the enormous balance of payment and budgetary

challenges brought on by the fall in oil prices.

12. Pessimistic predictions from many experts on the extent and duration of the

global economic crisis implied especially high risks and uncertainty for Nigeria.

While Nigeria had succeeded in strengthening its fiscal situation and in building up its

international reserves position as a buffer in the oil boom years, these resources were

limited and could not cope with exceptionally low oil prices over a number of years.

Government’s response to the crisis

13. In response to the economic downturn the Federal Government of Nigeria

(FGN) and the CBN took immediate and proactive actions including; establishing a

Presidential Committee to coordinate FGN’s anti-crisis program; measures to stabilize

the banking system and restore confidence; fiscal adjustments and the design of programs

to offset the impact on the poor; and, administrative reforms designed to improve revenue

collection and the quality and transparency of Government expenditures. Government

also stayed the course on macroeconomic stability measures (including the oil-price

based fiscal rule, targeting growth bottlenecks, containing recurrent costs and wages,

reducing subsidies, and prudent borrowing). All were important to build the confidence

1 The exchange restrictions were eventually removed as part of the policy dialogue under

the DPC.

4

of domestic and international investors in the Government’s ability to maintain stability

and mitigate the crisis.

14. The accumulated Excess Crude Account (ECA) proved to be an important

buffer for meeting the challenges brought on by the global economic crisis. The

ECA, which had accumulated US$ 19 billion in 2008, provided the Government with

some fiscal space, at least in the short term, for preventing a collapse in non-oil growth or

financial markets. Despite the collapse in revenues, federal government spending was

actually increased in 2009 (11.6 percent of GDP) relative to 2008 (11.3 percent). State

revenues were also augmented by measured distributions from the ECA. In addition, the

federal government moved to adjust the composition of spending by capping recurrent

spending and accelerating capital expenditure so as to use the fiscal stimulus for growth-

enhancing investments.

15. High uncertainty about the extent and duration of the global crisis, limited

ECA resources, and unfavorable conditions on international markets made policy-

based IDA borrowing a very attractive option for Nigeria in mid-2009. IDA support

offered support for both better macroeconomic management of the crisis, and for

sustaining or accelerating reforms in the financial sector and of public financial

management.

16. In particular, Government considered the following options:

ECA withdrawals. In light of widespread negative expectations about the world

economy in mid-2009, there was broad consensus that withdrawals from the

ECA needed to be conservative as to preserve additional fiscal buffers should the

crisis be protracted. The need to share ECA withdrawals across all tiers of

government also limited the federal government’s control over the use of the

ECA money once released. In addition, ECA withdrawals were exacerbating

exchange rate pressures as the bulk of ECA resources were held in foreign

exchange.

Domestic financing. Government also was interested to limit its domestic

borrowing so as not to further crowd out private credit.

Accessing foreign capital markets. An initially considered launch of a Eurobond,

which would have accessed foreign savings and avoided exchange pressures and

crowding out, was abandoned due to the unacceptably high borrowing costs in

international capital markets that prevailed at the time.

17. In this constrained context, an IDA Development Policy Credit was very

attractive for Nigeria. It had the added bonus of providing access to World Bank

expertise on policy matters and signaled broad endorsement of the Government’s overall

reform program at a time of generally low investor confidence and considerable political

pressure on the consensus to maintain sound macro policies.

5

Bank analytic work and policy dialogue preceding the crisis

18. The Bank’s response to the Government’s request for support was enabled by

longstanding analytic and project engagement in Nigeria on the financial sector and

public financial management.

19. An FSAP was completed in Nigeria as early as 2002. This was followed by work

in 2005/6 advising on the CBN’s bank consolidation program. Starting in 2006, the Bank

fielded a number of missions in support of Nigeria’s Financial System Strategy 2020

(FSS2020), a broad financial sector reform program led by the CBN. Meanwhile the

Bank’s Economic Reform and Governance Project (ERGP) supported public sector

management reforms since 2005. Subsequently a number of sectoral experts visited

Nigeria completing diagnostic reports on subjects relevant to the DPC including; the

banking sector, capital market development, financial reporting standards, improved

public financial management (including a Public Expenditure Management and Financial

Accountability Review (PEMFAR) report), debt markets and debt management

improvements, review of the capital budget implementation as well as public expenditure

reviews and public expenditure and financial accountability assessments (PEFA).

20. As the global financial crisis deepened in late 2007 and early 2008 the Bank team

became increasingly concerned about imbalances in the Nigerian financial sector. In an

Aide-Memoire dated February 2008 the Bank team highlighted the high concentration of

bank shares on the Nigerian Stock Exchange, poor governance practices at both the NSE

and SEC as well as weaknesses in Nigerian accounting standards and banking

supervision (see Box 1 for an excerpt from the aide-memoire). In subsequent aide-

memoires the Bank team continued to stress the measures that were needed to maintain

the stability of the banking system. In particular the Bank urged the authorities to

undertake a “health check” (special audits to be undertaken according to international

financial reporting standards) of the banking system so as to be able to gauge better the

eventual impact of issues arising from weaknesses in Nigerian reporting and supervisory

practices.

Within this context, the DPC provided an excellent platform to maintain government’s

focus on a program of important, strategic and structural reform elements that had

emerged from solid analysis. The comprehensive base of analytical work and the

accompanying dialogue supporting the process of achieving consensus on key elements

of the DPC program. As a result, the Government and the Bank were able to agree

quickly on the prior actions and indicative outcome indicators for the DPC and the

relevant government authorities quickly moved to implement them.

6

Timeline : Nigeria and the Global Financial Crisis

0

20

40

60

80

100

120

140Ja

n-0

5

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

CBN launches FSS2020(World Bank supports)

Crude oil (monthly price US$ per barrel)

CBN banking consolidation underway

ERGP starts Implementation

FMOF makes official request for DPC

DPC approved

Global Stock Market Collapse

Low Point Global Stock

MarketNSE Collapse starts

Exchange reserves peak at US$62 bn

IMF dire predictions for 2009

CBN intervenes inSelected banks

AMCON launched

CBN completes banking sector

consolidation

7

Box 1: Exert from Bank Aide-Memoire, FSS2020 Diagnostic Mission February 28th

2008.

Concerns about Asset Overvaluation. The mission discussed the current high levels of asset prices,

particularly on the stock exchange but also on the housing market with senior staff at the CBN, FMOF and

PenCom. The Governor, although not convinced that Nigerian P/E ratios are out of line, was keenly

interested in an analysis of the current situation. Factors driving asset prices in Nigeria include: (a)

increasing appetite for new investments arising from fully-funded contributory pension schemes

(implementation of reforms enacted in 2004); (b) repatriation of investment funds and increased foreign

investor appetite for 'Nigeria risk'; (c) the hike in minimum capitalization of banks (2006) and insurance

companies (2007) and the accompanying consolidation process; (d) continuing issuer appetite for IPOs

(mostly by banks); and (e) large appetite for equity investment by local retail investors.

The mission has requested the data required to undertake a flow of funds analysis so as to better identify the

factors behind the possible asset price bubble. However, a cursory comparison of P/E ratios, see attached

figure, demonstrates that asset prices are considerably out of line. P/E ratios on the Nigerian Stock

Exchange have recently increased considerably, particularly in the banking sector, while the returns on bank

assets and equity have fallen following the increase in bank capitalization. This raises concerns as to

whether earning prospects in the banking sector will be able to sustain such elevated P/E ratios.

The mission drew attention to the considerable risks to the confidence in the Nigerian financial system and --

by association -- to implementation of FSS 2020 which would arise in the event of any dramatic fall in

confidence and asset values. To avert such risks the mission recommended that the authorities: (a) closely

monitor banks’ investment in equities both on their own balance sheet and on those of their subsidiaries; (b)

introduce consolidated banking supervision (thereby providing a more accurate assessment of banks'

exposure to the equity market through their as yet unconsolidated brokering subsidiaries) ; (c) reduce fees on

listing and transactions of securities, thereby working towards increasing the supply of investment assets,

and (d) review the governance structure of the Nigerian Stock Exchange.

0

5

10

15

20

25

30

35

40

45

50

55

60

Slo

venia

Cro

ati

a

Isra

el

Bulg

ari

a

Lit

huania

Rom

ania

Czech R

epublic

Ukra

ine

Turk

ey

Russia

Pola

nd

Hungary

Slo

vak R

epublic

Latv

ia

Esto

nia

Chile

Colo

mbia

Peru

Ecuador

Mexic

o

Tri

n. &

Tobago

Bra

zil

Arg

enti

na

Jam

aic

a

Vie

tnam

Chin

a

Indonesia

Bangla

desh

India

Taiw

an,

Chi

na

Mala

ysia

Philip

pin

es

Pakis

tan

Kore

a

Sri

Lanka

Thailand

Saudi Ara

bia

Kuw

ait

Moro

cco

Egypt

Jord

an

Lebanon

Om

an

Qata

r

Bahra

in

Tunis

ia

U.A

.E.

Zim

babw

e

Nig

eri

a

Cote

d'Ivoir

e

Bots

wana

Kenya

Mauri

tius

Nam

ibia

South

Afr

ica

Ghana

P/

E R

ati

o

Emerging Equity Market P/E Ratios as of 1/2008

Source: Emerging Market Database (EMDB) - S&P/IFCG

8

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)

21. The original program development objectives reproduced below are found on

page vii of the program appraisal document (IDA Report No:49162-NG):

“In responding to the on-going global financial crisis the credit was intended to provide

budgetary support to the Federal Government of Nigeria to offset the fiscal impact of the

crisis and support the Government in maintaining its current economic reform path in the

financial sector, fiscal policy, public financial management and governance. The three

program development objectives were: (i) maintaining confidence and stability in the

Financial System; (ii) strengthening the Banking System; and (iii) supporting the

objectives of the 2009 budget, focused on raising Government investment spending to

accelerate non-oil growth”.

1.3 Original Policy Areas Supported by the Program

22. The DPC responded to the Government’s need to finance the 2009 deficit in the

context of the on-going financial crisis. It supported government’s economic reform path

in the financial sector, public financial management and governance areas. More

specifically it supported the following policy areas outlined in

23. Table 1 (derived from the table on page vii of the project document,).

Table 1: Policy areas, key outcomes and indicators Policy area Outcomes Indicators Achievements

(a) Maintaining confidence and stability of the banking system

1 Measures to stabilize the banking system

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).

Achieved: the extended window was shut down in

2010.

Achieved: The exchange

rate discrepancy disappeared and the parallel market has

closed.

2 Strengthening the

banking system

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 to new

sources of credit information).

Achieved: Capital adequacy remained at 16.8 percent.

Achieved: IFRS adopted by

2012. Bank equities have risen by close to 50 percent

from their 2009 lows.

Achieved: The CBN has

licensed 3 credit bureaus that

are now fully functional.

(b) Sustaining growth through sound macroeconomic policies and budget priorities

3 Supporting

macroeconomic stability and non oil

growth through sound

fiscal policies

Sustaining growth is

assured through sound macroeconomic policies

and targeted budget

priorities.

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).

Achieved: Federal Government expenditure

was 24 percent when

disbursements from the ECA are included.

4 Adjusting expenditure priorities to economic

Sustaining growth is assured through targeted

Execution rate of the federal capital budget (in percent of

Achieved: The execution rate of the federal capital

9

challenges budget priorities and

sound macroeconomic policies.

the 2009 budget as finally

approved by the National Assembly) rises from 53.9

percent in 2008 to more than

60 percent in 2009.

budget reached 71.8 percent

in 2009.

5 Raising non-oil revenue

The federal government captures the fiscal

benefits from the current

non-oil growth driven by diversification of the

economy.

Non-oil revenue collected at the federal level (as percentage

of non-oil GDP) increases from 8.6% in 2008 to 9% in 2009.

Achieved: Non-oil revenue rose to 9.8 percent in 2009.

6 Enhancing transparency and

accountability for use

of public funds through effective

oversight arrangement

The accountability and transparency of MDA

are enhanced.

Month-end financial statements produced by 75 percent of

federal government MDAs

within 7 days. (Baseline: formerly no automated

statements).

Achieved late: Starting from zero, 67 percent of

MDAs were producing their

month end statements within 7 days by the end of the

implementation period and

78 percent were doing so by December 2010.

7 Enhancing

accountability, effectiveness and

value for money in

public procurement

The accountability and

effectiveness of public procurement are

enhanced.

65% of Federal Government contracts using national

standard bidding documents.

95% of Federal Government contract awards above NGN 75

million are published.

Achieved: As of June 2010 65 percent of Federal

Government contracts were

using NSBD and 100 percent of contract awards

above NGN 75 million were

published.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance (supported by a table derived from a policy matrix)

24. The tables below which are derived from the original program document policy

matrix summarize the prior actions (conditions) completed by government ahead of the

credit approval. The original table can be found on page 61 in Annex 2: Financial Sector

and Public Financial Management Policy Matrix.

10

Tranche # Amount Expected

Release Date

Actual Release

Date

Release

Tranche 1 USD 500

million

October 2009 January 6 2010 Regular

Tranche 1

List conditions from Legal Agreement/ Program Document Status The Program Document listed the following prior actions which had to be taken

before the board approval :

Pillar I: Maintaining confidence and stability in the financial system

A. Measures to stabilize the banking system:

1. CBN takes action to ensure the liquidity of the banking system by: (a)

providing a new extended window facility and expanding the range of

acceptable collateral for borrowing; (b) reducing the liquidity ratio

requirement from 40% to 25%; (c) reducing the reserve requirement

from 4% to 1%; and, (d) reducing the monetary policy rate from 9.75%

to 8%;

B. Strengthening the banking system

2. CBN adopts a timetable for: (a) banks to implement IFRS-based

regulatory reporting as of December 31, 2010; and (b) all banks to

implement a January 1 to December 31 financial year;

3. CBN adopts a program for introduction of consolidated risk-based

banking supervision; and

4. CBN places resident inspectors in all banks.

Pillar II: Sustaining growth through sound macroeconomic policies and

budget priorities.

A. Supporting macroeconomic stability and non-oil growth through sound

fiscal policies. The Recipient has:

5. Enacted [its 2009] budget using a conservative oil price of US$ 45 per

barrel;

6. Continued to implement a policy under which the Excess Crude

Account is credited with excess oil revenue (after compensating for

shortfalls in revenue);

B. Adjusting expenditure priorities to economic challenges

7. Enacted its 2009 budget containing recurrent spending to N1.6273

trillion (61.4 percent) and increasing capital spending to N1.0223

trillion (38.6 percent) of the its budget (excluding statutory transfers

and debt service);

8. Released capital expenditure of N187 billion to MDAs by January 31,

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

11

2009;

9. Adopted a framework for strategic interventions to address supply

constraints and unemployment in the context of the global economic

crisis;

C. Raising non oil revenue

There were no agreed prior actions for this policy area.

D. Enhancing transparency and accountability for use of public funds through

effective oversight arrangements.

10. Implemented the interim Accounting Transaction Recording and

Reporting System;

11. Adopted the Cash Management Policy;

E. Enhancing Accountability, Effectiveness and value for money in Public

Procurement.

12. Enacted and made operational the Public Procurement Act and

implementation regulations consistent with international best practices,

and made the regulations available to the public; and

13. Published on a bi-monthly basis public procurement contract awards in

the National Procurement Journal and on the BPP website.

Section D of the legal agreement stipulates that the recipient shall also conduct

an independent audit :

The Recipient shall:

1. Have the account and the recording of the amounts of the Financing

into the Recipient’s budget management system [referred to in Part C of

this Section] audited by independent auditors acceptable to the

Association, in accordance with consistently applied auditing standards

acceptable to the Association;

2. Furnish to the Association as soon as available, but in any case not later

than four months after the date of the Association’s request for such

audit, a certified copy of the report of such audit, of such scope and in

such detail as the Association shall reasonably request; and

3. Furnish to the Association such other information concerning the said

account and recording of the amounts of the Financing into the budget

management system, and their audit, as the Association shall

reasonably request.

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

Completed

12

2.2 Major Factors Affecting Implementation:

25. Two major factors impacted the implementation of the DPC:

Banking sector crisis management and

The changing political context.

Banking sector crisis management

26. Signs of looming imbalances in the banking sector had been identified by the

Bank team as early as February 2008 and discussed in confidence with the authorities and

later with the Bank’s Board. However, the exact vulnerability of the banking system was

unknown at the time of credit approval as the management of CBN prior to June 2009 did

not wish to engage in special inspections recommended by the Bank team since 2008. In

the absence of a firm idea of the size of the problems in the banking sector, the agenda

supported by the credit focused at the time of approval on a medium-term reform agenda

so as to further enhance transparency of the banking system and create better systems and

foundations for supervision over time, keeping in mind the possibility that a banking

crisis might emerge. The appointment of a new governor in June 2009 with an activist

stance and clear mandate for reform then allowed an implementation of aggressive short-

term measures to identify looming problems and tackle any potential crisis before it could

set in.

27. Shortly after Governor Sanusi was appointed he led the CBN in a program of

special inspections of Nigerian banks in July and August 2009, effectively following the

Bank’s recommendation made a year earlier. The first phase of the inspections program

identified five banks with severe capital deficiencies and liquidity problems. A second

round of audits identified a further four banks that also had solvency problems. The

special inspections confirmed that all nine had misrepresented their financial situation in

reports to the CBN by concealing and systematically under-provisioning large volumes of

nonperforming and classified loans.

28. Based on the findings of the special inspections, the CBN intervened in the

distressed banks by: (i) removing the executive directors and the managing director of

each bank and replacing them with individuals selected by the CBN; and, (ii) injecting

financial support in the form of subordinated debt in the order of US$4 billion

(approximately 2 percent of GDP). The speed and efficacy of these measures averted a

run on the banks and successfully bolstered confidence in the banking system.

29. The emerging findings of the special inspection program did not divert the

attention from the longer-term reform agenda. However, they added short-term

responsibilities to the CBN in addition to the longer-term objectives and indicators

targeted in the credit. Without the determined, and successful, resolution of the short-

term measures, in dialogue with the Bank’s team, the longer-term objectives of the Credit

would have been in jeopardy. The findings of the special inspections changed the context

13

of the dialogue and supervision by the Bank’s financial sector team. However, the team

continued to support the medium-term initiatives to strengthen accounting, supervision

and reporting as these were vital to prevent a future repeat of the crisis.

The changing political context

30. Shortly after the DPC was approved, President Yar’adua’s health began to

weaken culminating in his being hospitalized while on a pilgrimage to Saudi Arabia in

November 2009. A dangerous political vacuum emerged that was not filled for several

months until Vice-President Jonathan took over as acting President and was subsequently

sworn in after the President’s death on May 5th

2010. The period between August 2009

and May 2010 thus marked an intense hiatus in Nigerian politics. In addition, the need for

President Jonathan to consolidate power and his subsequent decision to run for a full-

term of office also changed the political dynamics and weakened the resolve to maintain

substantial fiscal buffers. The changing political context had two consequences:

The ratification of the DPC by the national assembly became politicized and was

subject to major delay. This was the first policy-based operation in almost thirty

years, and many Nigerians remembered the austerity measures that accompanied

the structural adjustment programs in the 1970s. Many were also skeptical of

government borrowing abroad for budgetary expenditure, fearing that the

resources would have limited development results. These sentiments resulted in

the need for a lengthy process of consensus building with the members of the

national assembly following credit approval.

The resolve to limit withdrawals from the ECA to times of crisis and maintain a

conservative budget position during a period of higher oil prices weakened.

During 2010, as part of President Jonathan’s power consolidation and in the

context of continuing high federal expenditure, the remaining balance of the ECA

was distributed to states and the ECA was depleted by end-2010. These

developments are already being reversed with more than US$ 5 billion

accumulated in the ECA and a conservative oil price budgeted for 2011. In

addition, the government has established a new Sovereign Wealth Fund that

would be more strongly protected from ad hoc withdrawals through a stronger

legal foundation.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization:

31. The FMOF was tasked with leading M & E on the public financial management

aspects of the credit such as the budget implementation and spending. M & E on the

major financial sector reforms supported by the DPC were overseen by the Central Bank

of Nigeria as the CBN is responsible for setting the parameters for liquidity, financial

reporting standards and supervisory practices such as risk-based supervision and

consolidated financial reporting. An assessment of this process is provided in section 3.

14

32. Design: Monitoring the DPC was made easier by the existence of the solid and

robust M&E framework and results matrix that accompanied the operation. The results

framework had been discussed broadly at both the political and technical levels of

government and was fully accepted by government. The matrix included specific and

quantifiable targets to which all stakeholders had committed (see above). The

macroeconomic targets included items fully within the control of the Federal Government

such as government expenditure, execution of the capital budget, the use of standard

bidding contracts and the production of financial statements. Measures to stabilize the

banking system focused on normalizing the functioning of the foreign exchange rate and

interbank money market, maintaining capital adequacy in the banks and improving

transparency in financial reporting.

33. Implementation: Monitoring the DPC program took the form of continuous

dialogue with Government counterparts to assess progress and address eventual

bottlenecks. Given the presence of task team members in the field, monitoring was done

on a relatively continuous basis. It was supported by complementary investment projects

such as the Economic Reform and Governance Project (ERGP) and ongoing technical

assistance to the financial sector. The Bank team monitored progress against the

baselines agreed during the preparation of the credit. (The results are reported in section

3.2). Collaboration with other donors also helped to underpin the policy dialogue and

build broader support for Government’s program.

34. Utilization: By its nature a DPC provides budget support to the ministry of

finance. Therefore the proceeds of the credit cannot be tracked. However, in requesting

the budgetary support, government indicated to the Bank that the additional resources

would be used to finance “shovel-ready” infrastructure projects. Government’s intention

was to boost consumption in a counter-cyclical manner, create temporary employment

and reduce the infrastructure deficit.

2.4 Expected Next Phase/Follow-up Operation (if any):

35. The Federal level DPC was a one-off budgetary support operation that was

provided to Nigeria within the context of the global financial crisis. It provided

government with support to maintain momentum on financial sector and public

management reforms. It also provided government with additional financing to protect

and supporting spending on infrastructure and vulnerable groups whose livelihoods

would have otherwise been jeopardized. A follow-on tranche was not expected.

36. At the time of the DPC preparation, Government expressed interest in a

complementary technical assistance operation to facilitate implementation of the broader

financial sector reform agenda that the DPC supported. Discussions quickly crystallized

into a potential technical assistance project that could support Nigeria’s reforms to

strengthen the key financial sector regulatory agencies through FSS2020. The Bank team

used its convening power to bring other donor agencies including DFID, GTZ, AfDB and

the IMF together around a common platform. The package of technical assistance that is

financed by grants and highly concessional credits would be attractive to government.

15

The Bank and other donor teams stand ready to provide such assistance through a project

vehicle.

37. The technical work on the financial sector has been summarized in the Bank’s

flagship publication “Achieving FSS2020: Making Finance Work for Nigeria”. The

follow-on dialogue on the non-oil growth pillar is embodied in the Bank’s recent

publication, “Putting Nigeria to Work” and the proposed Growth and Employment

Project (GEMS) which will be presented to the Bank’s Board on March 17, 2011.

38. The federal policy platform has also established new interest in developing state-

level DPOs so as to accelerate reform processes in Nigeria’s states. The acceptability of

policy dialogue with the federal government has raised the profile of the instrument, and

overcome some of the skepticism of the “structural adjustment” era. The first sub-

national DPO (for Lagos State) is slated for Board consideration on March 17, 2011.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

(to current country and global priorities, and Bank assistance strategy)

39. The reforms supported by the DPC were relevant to Nigeria’s development

challenges and closely linked to the country assistance strategy.

Relevance to current country and global priorities

40. Challenges to Nigerian development priorities: The DPC was designed to

mitigate the impact of the international financial crisis on Nigeria’s fiscal and financial

sectors. As described above, Nigeria's economy was affected by the global financial

crisis primarily through falling commodity prices, reduced net capital inflows (in

particular foreign direct investment (FDI) and remittances), and the drying up of trade

finance and international lines of credit. The fall in oil prices from a peak of $147/bbl in

July 2008 to around $40/bbl a year later presented macroeconomic challenges for Nigeria

as Federal Government revenues declined by 48 percent in a single year.

41. Although oil revenues were managed carefully and government built reserves in

the ECA during 2008, falling oil prices, production problems, and the deteriorating fiscal

outlook reduced international confidence and triggered a reduction in Nigeria's sovereign

credit rating outlook in 2009.

42. The large portfolio outflows beginning in early 2008 triggered a decline in the

stock market which further accelerated in the wake of the crisis. The smaller oil revenue

inflows, weakening confidence, and lower net capital inflows put increasing pressure on

the Naira. In combination, these factors led to liquidity pressures within the banking

system in late 2008 and the first months of 2009.

16

43. Concerns about the banking system started to be voiced with the slowdown in

growth and falling stock market prices. Unsustainable credit growth in 2007 and 2008

(see Figure 1) presented a challenge to the banks in managing their credit risks and to the

authorities in ensuring adequate reporting

and disclosure by the banks. Many observers

were concerned about the financial sector.

On May 18th

2008, in a review of Nigeria’s

banking system, JP Morgan noted, “Growth

has moved ahead of the risk capabilities of

both banks and the regulator”.

44. Addressing the causes of the problem

in the financial sector: The issues of

confidence and stability in Nigeria’s financial

system resulted from;

(i) Weak risk management controls

and poor supervision in

conjunction with rapid expansion

of the banks’ lending portfolios

following the introduction of the

new high level minimum capital

in July 2006.

(ii) Deteriorating asset quality due to

margin lending (lending to finance purchase of bank shares), a concentration

of lending in the downstream oil and gas sector (that became non-performing

following the fall in oil prices), and insider lending.

(iii) Poor accounting and disclosure practices, lack of consolidated reporting and

use of different financial year-end dates across the sector.

45. In response, the CBN introduced interest rate controls (requiring banks to cap

their interest rates on deposits) and restrictions on foreign exchange. Interest rate

controls were designed to prevent price competition for scarce deposits while foreign

exchange controls artificially propped up the Naira. Both measures would have been

extremely damaging to the real sector in the long term and their removal was supported

by DPC indicators.

46. Reform solutions for the financial sector contained in the DPC: As the data

reported by the banks to the CBN were unreliable (see box 1 above), it was not possible

to ascertain the true size of the problem in the commercial banking sector. As a result the

Bank team recommended a program of special inspections followed by measures

required to strengthen governance in the sector. As the authorities were fearful that

including the special program of inspections in the policy matrix might trigger a panic,

the Bank team decided to focus the DPC reform program on required, medium-term

0%

20%

40%

60%

80%

100%

120%

140%

2006

2007

2008

2009

2010

Growth in (nominal) credit to the private sector (y/y)

Nigeria

South

AfricaKenya

Figure 1: Growth in Credit 2006-2010

17

policy actions related to bank accounting, reporting and supervision whilst pursuing the

dialogue on the special inspections program in parallel and out of the lime light.

47. The operation brought a coherence and focus to this broader objective by

prioritizing a number of key strategic indicators (see below) that were vital to improving

the stability and strength of the banking system such as adopting international financial

reporting standards and moving towards consolidated risk-based supervision. It also

offered a platform for dialogue from which to persuade the authorities to remove

restrictions to access the foreign exchange market. The latter began to be phased out at

the time of the approval of the DPC, and then were completely phased out after its

approval.

48. Mitigating the macroeconomic impact of oil price decline: In terms of

macroeconomic stability and budget priorities, the DPC supported the government by

providing external financial resources and through concrete policy measures to improve

budgeting and public financial management. Despite the sharp decline in oil revenues,

government decided to maintain expenditures to boost counter-cyclical demand resulting

in a widening fiscal deficit that, if funded domestically, threatened to crowd out lending

to the private sector (see Figure 2).

49. Faced with this situation, the DPC focused on the most important aspects of

public financial management and budget execution, ensuring that Government raised

sufficient revenues (non oil

revenues were raised from 8.6%

of non-oil GDP to 9.8 percent),

limited recurrent spending but

increased execution of the capital

budget (from 53.9 percent in 2008

to 71.8 percent in 2009), and

advanced the reform agenda for

more transparent systems of

financial management and

procurement (all Federal

Government contracts above N75

million are published). In the

event, the fiscal stimulus,

combined with import substitution

brought on from a 20 percent

depreciation of the Naira,

maintained demand for domestic

goods and services at a level that

allowed Nigeria to avoid the sharp

growth declines or recessions that

hit a number of other oil-

dependent countries in 2009.

Government also released several

Figure 2: Fiscal expansion: real sector threat

1753.25

2169.63

2320.31

3228.031,669

2,343

2,625

3,557

258

544 490

883

0

500

1000

1500

2000

2500

3000

3500

4000

2006 2007 2008 Prel. 2009

Domestic Debt Outstanding

Federal Government Expenditure

Non- oil revenue

Oil Revenue

18

tranches from the ECA throughout 2009 to support counter-cyclical spending and GDP

expanded by an estimated 7 percent during the year.

50. The DPC provided a strong platform of dialogue on macroeconomic policies in a

context in which the IMF dialogue was largely absent. The authorities regarded the DPC

as being a useful tool that would provide some discipline and support for macroeconomic

stability and reform policies that had become unpopular at the time of the global financial

crisis. The DPC provided a platform for dialogue to voice – with the necessary discretion

– concerns on key policies necessary to sustain macroeconomic sustainability while

promoting non-oil growth. The DPC offered financing necessary to sustain budget

implementation while lessening the impact of crowding out on domestic investment.

Relevance to the Bank’s Assistance Strategy

Table 2 : Country Assistance Strategy and DPC Objectives

The Bank’s Assistance Strategy DPC Objectives

(i) Improving governance;

(ii) Maintaining non-oil growth; and

(iii) Promoting human development.

(i) Maintaining confidence and stability

of the financial system;

(ii) Strengthening the banking system;

and

(iii) Supporting Government’s budget

objectives focused on raising

investment spending to accelerate

non-oil growth.

51. The Bank’s assistance strategy in Nigeria is contained in the Country Partnership

Strategy II which covers FY10-13. To achieve better governance, the CPS focuses on

how the Bank Group and partners can help the government strengthen its own systems

over the long term - going beyond fiduciary controls over donor funds, given that donors

provide a very small share of Nigeria’s public resources. (Nigeria received US$2.042

billion in aid in 2008 equivalent to 1.3 percent of GDP). Governance is both a core and a

cross-cutting theme of CPS II.

The DPC specifically supported the first two priorities of the CPS. It supported improved

governance in public financial management and strengthening the banking sector through

strengthened financial reporting and banking supervision. It supported non-oil growth by

promoting capital spending and helping avoid crowding out of the private sector by

excessive domestic borrowing.

52. The CPS explicitly seeks to provide support to the government to deal with the

impact of the global financial crisis (CPS II p2). Within the governance theme the CPS

highlighted the following areas (CPS p20) that are all highly relevant to the DPC: (i)

transparency and accountability in the use of resources; (ii) governance reforms in high

priority sectors to promote diversification and non-oil growth; and (iii) capacity

development in the public sector.

19

53. The CPS highlighted governance to promote more effective use of public

resources. It called for the following support in the key sectors supported by the DPC

(CPS Box 7 p22):

Federal level: In the area of public financial management, a Fiscal Responsibility

law and new procurement law were passed in 2007 at the federal level and

similar laws are being adopted in all states. The Accounting Transactional

Recording and Reporting System was rolled out, and a computerized federal

payroll management system was launched. Preparations for the adoption of the

Government Integrated Financial Management Information System are being

made and an E-payment system introduced in 2008 promises to increase

transparency and accountability further.

Financial Sector: A Banking sector review recommended that Nigeria adopt

International Financial Reporting Standards to improve accounting and auditing

standards. The Bank also recommended that Nigeria move to a consolidated

financial year end which would improve transparency and accountability and the

Central Bank of Nigeria (CBN) announced in April 2009 that it would do so.

54. The two areas, Federal level public financial management and financial sector,

outlined in the CPS and reproduced above formed the heart of the DPC reform program.

55. In summary:

The key structural measures included in the Bank’s policy matrix both in regard

to the budget and public financial management objectives and the financial sector

were relevant to Nigeria’s needs, given the situation of fiscal crisis and the

banking sector weaknesses at the time the DPC was approved by the Board.

The DPC proposed solutions to focus on improved public financial management

and prudent macroeconomic policy as well as improving financial sector

accounting, supervision and reporting. All were relevant to Nigeria’s development

challenges.

The DPC was well aligned to the first two pillars of the CPS II focused on

improving governance and maintaining non-oil growth. It also supported the

strategy’s specific objective of providing support to Nigeria to weather the

international financial crisis.

The DPC policy matrix built very squarely on CPS II priorities for improved

public financial management at the Federal level including improved procurement,

automated reporting and better transparency and accountability. Similarly in the

financial sector the DPC supported a move to IFRS, a consolidated financial year-

end as well as improved transparency and accountability. All initiatives that were

already explicitly included in the CPS.

20

Most importantly the response to the Government’s request for DPC support

helped galvanize Government commitment to a number of key policies the

reversal of which would have posed major risks to Nigeria’s development path.

Continued exchange rate restrictions, a full blown banking crisis in the absence of

the intervention following the special inspection program, weakening

commitment to improved transparency, and lower growth as a consequence of

falling capital spending would have made for a powerful combined threat to the

CPS’s core objectives.

3.2 Achievement of Program Development Objectives

(including brief discussion of causal linkages between policy actions supported by operations and

outcomes)

56. The overall achievement of the DPC Program Development Objectives was

satisfactory.

57. Key outcomes of the supported program were captured in the original policy

matrix contained in Annex 2 of the program document and reproduced in Table 2 below.2

These outcomes were intended to measure progress against a longer-term reform agenda

in the areas of financial sector oversight and public financial management.

58. All the prior actions were met before Board presentation. All the targeted

outcomes have now been achieved, although the requirement to have month-end financial

statements produced by 75% of MDAs was not achieved by the end of the

implementation period (see below).

59. The section of achievements of the PDO follows the policy matrix. It presents: (i)

the policy area, (ii) the December 2009 outcome, (iii) the target indicator and (iv)

whether it was achieved. Each table is followed by a broader discussion that explains

how these achievements were secured, the context around them and provides additional,

supporting information on indicators that were not selected as DPC outcomes but are

nonetheless important in judging progress towards the stated DPC objectives.

2 For ease of reference, the entire Policy Matrix has been reproduced (unedited).

21

Table 2 : Financial Sector and Public Financial Management Policy Matrix

Policy area Prior Actions taken before Board

Approval

Outcomes Indicative Medium-Term Follow On

2008/09 December 2009 2009/10

PILLAR I: MAINTAINING CONFIDENCE AND STABILITY IN THE FINANCIAL SYSTEM

A. Measures to

stabilize the

banking system

CBN takes action to ensure the liquidity

of the banking system by: (a) providing

a new extended window facility and

expanding the range of acceptable

collateral for borrowing; (b) reducing

the liquidity ratio requirement from

40% to 25%; (c) reducing the reserve

requirement from 4% to 1%; and (d)

reducing the monetary policy rate from

9.75% to 8%.

DMO adopts a comprehensive three-year

action plan aimed at enhancing efficiency

and liquidity in government debt market.

NDIC makes available liquidity facilities

for banks with full regulatory compliance.

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).

Regulatory liquidity requirements adjusted

in line with stabilization of system

liquidity.

Interbank foreign exchange market reopens.

CBN temporary guidance on interest rates

withdrawn.

Consolidate debt portfolio management

strategies aiming at benchmark building

with the combined use of (i) re-opening

procedures; (ii) buybacks and exchanges;

(iii) earmarking benchmark issues for

PDMMs. Issue repos, securities lending and

short selling regulations.

Harmonize C&S platforms for T-Bills and

T-Bonds

B. Strengthening

the banking

system

CBN adopts a timetable for banks to

submit IFRS-based regulatory reports

as of December 31st, 2010.

CBN initiates the procurement process for

a consulting firm to provide support for

the IFRS transition.

CBN adopts a timetable for all banks to

implement a 1st January – 31

st

December financial year.

CBN adopts of a program for

introduction of consolidated risk-based

banking supervision.

CBN places resident inspectors in all banks.

CBN implements the electronic financial

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).

Analysis conducted to assess the impact of

IFRS transition on the banking system.

NASB issues IFRS-compliant SAS for

banks.

IFRS training and transition assistance

program implemented.

Amend banking regulations, reporting

requirements, and supervisory procedures

to conform to International Financial

Reporting Standards

CBN adopts a framework for risk-based

supervision.

Issue tender for development of a

computerized movable collateral registry.

22

Policy area Prior Actions taken before Board

Approval

Outcomes Indicative Medium-Term Follow On

2008/09 December 2009 2009/10

analysis and surveillance system (eFASS)

program to improve statutory compliance

and anti-money laundering programs.

CBN regulations on private credit registries

implemented.

First licenses for private credit registries

issued.

PILLAR II: SUSTAINING GROWTH THROUGH SOUND MACROECONOMIC POLICIES AND BUDGET PRIORITIES

A. Supporting

macroeconomic

stability and

non-oil growth

through sound

fiscal policies

Enact a budget using a conservative oil

price of US$ 45 per barrel

Continue to implement a policy under

which the Excess Crude Account is

credited with excess oil revenue after

compensating for shortfalls in revenue

Compose the Fiscal Responsibility

Commission to monitor and ensure the

provisions of the Fiscal Responsibility

Act, 2007

Federal government expenditure in

2009 remain within a range of 23-25

percent of non-oil GDP (21.2 in 2008,

25.4 in 2007, 21.4 in 2006)

The government maintains the oil-price

based fiscal rule

Fiscal Responsibility Commission issue

report to the National Assembly including

all cases of contravention investigated

during the year

B. Adjusting

expenditure

priorities to

economic

challenges

Enact its 2009 budget containing

recurrent spending to N1.6273 trillion

(61.4 percent) and increasing capital

spending to N1.0223 trillion (38.6

percent) of its budget (excluding

statutory transfer and debt service)3

Release capital expenditure of N187

billion to MDAs by January 2009.

Appoint a Presidential Steering Committee

on the Global Economic Crisis to manage

Execution rate of the federal capital

budget (in percent of the 2009 budget)

rises from [53.6] percent in 2008 to

more than [60] percent in 2009

The Government continues to implement

Medium Term Sector Strategies for key

sectors to form the basis for budgeting and

investment planning

3 In 2008 (after the budget was amended late in the year), figures were 62.8 for recurrent spending and 37.2 for capital spending. Because of the late enactment

of additional capital spending in a supplement in November, execution rates of the additional allocations were generally low.

23

Policy area Prior Actions taken before Board

Approval

Outcomes Indicative Medium-Term Follow On

2008/09 December 2009 2009/10

the government’s crisis response

[Approve strategic interventions to

address supply constraints and

unemployment in the context of the

global economic meltdown]

C. Raising non-

oil revenue Initiate audit of processes in revenue

collecting agencies

Create customs reform committee

Non-oil revenue collected at the federal level 4 (as percentage of non-oil GDP) increases

from 8.6% in 2008 to 9% in 2009

Complete audits of revenue collecting agencies

and begin implementation of

recommendations.

D. Enhancing

transparency

and

accountability

for use of public

funds through

effective

oversight

arrangements

Implement interim Accounting

Transaction Recording and Reporting

System (ATRRS)

Adopt Cash Management Policy

Month-end financial statements

produced by 75 percent of federal

government MDA’s within 7 days.

(Baseline: formerly no automated

statements)

Implement the Government Integrated

Financial Management Information System

(GIFMIS) in the Office of the Accountant

General and Budget Office of the

Federation

Publish in-year budget outturn reports

within 30 days of end of each quarter (FRA

50)

Performance/Value for Money (VFM) audit

conducted for key priority MDAs

Minister of Finance to publish within 30

days of enactment of the Appropriation Act

a disbursement schedule in line with

Annual Cash Plan prepared by the

Accountant General (FRA 25-27)

E. Enhancing

Accountability,

Effectiveness

and value for

money in Public

Public Procurement Act and

Implementation Regulations consistent with

international best practices, operational and

made available to the public

Contract awards published in National

65% of Federal Government contracts

using national standard bidding

documents.

95% of Federal Government contract

awards above N 75 million are

Continue ensuring that Public

Procurement Act and Implementation

Regulations are fully implemented and

applied by MDAs.

4 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).

24

Policy area Prior Actions taken before Board

Approval

Outcomes Indicative Medium-Term Follow On

2008/09 December 2009 2009/10

Procurement Procurement Journal (bi-monthly) and BPP

website. published.

25

Pillar I Maintaining confidence and stability in the financial system

Policy Area Outcome Target Achieved (Yes) A. Measures to

stabilize the

banking

system

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 N480 bn/day to

below N200 bn / day;

parallel market USD

exchange rate falls

within 10 percent of the

interbank rate.

The extended discount

window has been

closed.

Exchange rate controls

have been removed and

the parallel market has

disappeared.

60. The DPC measures to stabilize the banking system contributed to

maintaining confidence in and the stability of the financial system. Prior to the crisis,

the CBN provided banks with liquidity

support through the extended discount

window5

. Due to the turbulence in the

banking sector and the perceived risk of

lending to other banks, interbank rates spiked

in 2009 (see Figure 3). Once the special audit

program revealed that banks had serious

liquidity problems, the CBN guaranteed all

bank deposits on the inter-bank market. The

CBN also stepped in to provide direct

liquidity to the banking system in the form of

convertible loans to the nine troubled banks.

Once the liquidity had been fully restored,

the CBN closed the extended window facility.

These measures paved the way for

normalization of the interbank market (see

Figure 3).

61. Similarly in early 2009, the CBN

restricted bank’s access to foreign exchange

and a sizeable spread between the official

and parallel market rates emerged peaking at

about 25 percent in mid 2009. When CBN removed the temporary restrictions on the

foreign exchange market and reintroduced the Wholesale Dutch Auction System in July

2009 the parallel market exchange rate fell quickly to within 2% of the interbank rate and

then disappeared completely.

5 A discount window is the process by which a central bank provides credit to financial institutions. The

window helps reduce liquidity problems for banks and helps maintain the stability of financial markets.

Figure 3

0

5

10

15

20

25

2007 2008 2009 2010

26

Policy Area Outcome Target Achieved (Yes) B. Strengthening

the banking

system

The banking system becomes

more sound and transparent.

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

Capital adequacy ratios

remain above 15

percent through 2009.

Capital Adequacy Ratio

was 16.8 at end 2009.

62. The banking system becomes more sound and transparent. Among the key

outcome indicators was that the capital adequacy ratio would remain above 15 percent

and that improved reporting and accounting would encourage investment in bank debt

and equity, allowing better pricing for debt issuances by banks on the international

markets. Table 3 below indicates that by end 2009 the CAR remained above 15 percent

as targeted.

Table 3: Capital Adequacy

Year Regulatory Total

Capital Ratio

Regulatory Tier 1

Ratio

Total Equity / Total

Assets

2005 28.34 27.61 18.15

2006 26.50 25.50 16.24

2007 23.71 22.44 13.44

2008 28.32 27.25 19.23

2009 23.64 23.46 16.80 Source: Fitch Ratings 2010.

63. Following the intervention by the CBN, the Nigerian banking sector is now

bifurcated. The CBN focused emergency stabilization efforts on the intervened banks

which are no longer formally part of the operative banking system. The CBN is

reportedly actively looking for new investors for the intervened banks and encouraging

the better placed Nigerian banks to take-over their troubled counterparts. The remainder

of the banks are making progress in improving risk management, accounting and

disclosure as well as cleaning up their loan portfolios.

64. The banking sector was further strengthened by a number of CBN led

reforms highlighted in the policy matrix. Following the approval of the DPC, the CBN

started on a program of reform measures designed to make the banking system more

sound and transparent including:

Adopting a timetable to move to IFRS: This was important due to the weaknesses

inherent in Nigerian Accounting Standards. The decision to adopt IFRS took

place following intense debate about whether to adopt or adapt IFRS. Some

stakeholders pushed for a version of IFRS adapted to the Nigerian situation and

initially this view gained traction. However, a workshop convened by the Bank

27

and chaired by the Nigerian Accounting Standards Board resulted in a decision to

adopt IFRS by 2012. When fully implemented the introduction of IFRS is likely

to provide a considerable boost to confidence – especially among foreign

investors – as to the seriousness of the Nigerian reform process. The move to

IFRS was given further impetus on July 28th

2010 when the Federal Executive

Council approved January 1, 2012 as the effective date for convergence of

Nigerian accounting standards with IFRS. The Council directed the Nigerian

Accounting Standards Board (NASB), under the supervision of the Federal

Ministry of Commerce and Industry to take further necessary actions to

implement the Council’s decision. A program of training on IFRS has been

developed under the auspices of FSS2020 involving the NASB, CBN, SEC and

other relevant entities.

Strengthening consolidated risk-based banking supervision: As of end 2010, the

CBN introduced a single year end for all financial institutions. This effectively

ended the practice of cross transfers between wholly-owned subsidiaries to

artificially bolster balance sheets. The CBN has also mandated consolidated

supervision by end of 2011 to end the practice of off-balance sheet financing for

questionable transactions.

65. Following the CBN program of special inspections, it became apparent that much

of the margin lending was financed through wholly-owned brokerages and finance

houses and included in the “other” category of banks portfolios. As Figure 4 below

indicates, the CBN’s policy intervention is starting to have an impact in terms of

redirecting bank credit from margin loans to the real sector.

Figure 4: Squeezing margin loans out of the system

-15% -10% -5% 0% 5%

Solid Minerals

Finance & Insurance

Transport & Communications

Real Estate & Construction

Public Utilities

Agriculture

Government

Exports

Others

Manufacturing

Commerce

Source: CBN 2010

28

66. The IMF reports that “Substantial progress is being made in strengthening

banking supervision. The on-site examinations are under way for all non-intervened

banks. Lax enforcement was one of the key factors in the banking crisis, so it will be

important to rigorously follow up with any corrective measures that may be necessary.

The CBN has already started implementation of risk-based supervision on a pilot basis,

and full implementation will enhance the CBN’s capacity for early-detection of stress.”6

The Nigerian authorities also established an Asset Management Company to remove

toxic assets from the bank’s balance sheets (see Box 2).

Pillar II Sustaining growth through sound macroeconomic policies and budget

priorities

Policy Area Outcome Target Achieved (Yes) A. Supporting

macro-

economic

stability and

non-oil

growth

through sound

fiscal policies

Federal government

expenditure remains within set

range

Federal Government

expenditure in 2009

remains within a range

of 23-25 percent of

non-oil GDP.

19.8% from budget +

4.3% from ECA =

24.1 percent.

6 IMF Staff Report for the 2010 Article IV consultations. (Washington, D.C. February 2011.)

Box 2: AMCON: Asset Management Company of Nigeria

Nigeria has established AMCON to remove toxic assets from the banking system and

recapitalize the insolvent banks. Although the need for an AMC was not foreseen at the

time of DPC preparation, it was clear by the end of 2009 that such a vehicle could play a

useful role in removing toxic assets from the system. The CBN moved very quickly to

create AMCON. The AMCON Act was signed on July 26th

, 2010. Through this process

the CBN seeks to provide capital assistance to banks so as: (a) to stabilize the banking

system by recapitalizing and changing the governance of distressed institutions; (b) to

improve the governance of the sector by securing the recapitalization of distressed banks

by reputable strategic investors; and, (c) to provide some compensation to small

investors who had purchased the distressed bank shares at inflated prices. The bank

restructuring process being led by the CBN and AMCON is still under way (the first

asset purchases were completed in January 2011) and is expected to contribute to

significant progress in achieving these objectives.

29

67. Despite lower oil revenues in 2009, the federal government preserved

expenditure at a level to support critical investments and raised non-oil revenue. In

the aftermath of the crisis, the Nigerian government managed to maintain budgeted

expenditures at 19.8 per cent of non-oil GDP. This was less than the range of 23-25

percent that was targeted in the policy matrix. However, additional expenditures were

made from the excess crude account that when added to the budget expenditure put

spending in the middle of the targeted range.

68. Releases from the excess crude account (ECA) helped support infrastructure

and counter-cyclical spending. In January 2009 the ECA had a balance of $19 billion.

In February the Federation Account Allocation Committee recommended the sharing of

$2 billion with the states. In April, the National Economic Council (NEC) approved $5.3

billion to fund the President’s power intervention. Between June and August 2009,

another $3 billion was shared with state governments. Towards the end of 2009, Federal

Government injected $2 billion into the economy as an economic stimulus. The US$12.3

billion released from the ECA amounts to an additional 4.3 percent of non-oil GDP.

Policy Area Outcome Target Achieved (Yes) B. Adjusting

expenditure

priorities to

economic

challenges

Execution rate of the Federal

capital budget rises.

Above 60 percent 72 percent

69. Nigeria’s capital budget has traditionally been under-spent. This is a contributing

factor to the lack of public infrastructure and poor maintenance of public facilities. It

also leads for calls to extend the budget year (which follows the calendar year) into

March or April of the following year which in turn makes planning, budgeting and annual

comparisons difficult to follow.

70. In 2009, government took key steps to improve the execution rate of the capital

budget including enacting a budget that curtailed recurrent expenditure to N1.6 trillion

(61.4 percent) and increased capital spending to N1.0 trillion (38.6 percent of the budget).

In addition the FMOF released N187 billion to the executing agencies in January 2009.

In comparison, FMOF releases through end January 2008 had been zero.

71. The implementation of these strategies contributed to improved budgeting and

investment planning and the execution rate of the federal capital budget (in percent of

final approved capital budget) increased from 53.9 per cent in 2008 to 71.8 per cent in

2009, easily exceeding the minimum 60 percent rate targeted by the operation.

30

Policy Area Outcome Target Achieved (Yes) C. Raising non-

oil revenue7

Non-oil revenue collected at the

Federal level (as percentage of

non-oil GDP) increases.

An increase from 8.6%

in 2008 to 9% in 2009

9.8 percent

72. Non-oil revenue includes import and excise duties, corporate tax, value added tax

and Federal Government independent revenue. By implementing various tax

administration reform measures, the government increased non-oil revenue collection in

percent of non-oil GDP from 8.6 per cent in 2008 to 9.8 percent in 2009 (as against a

target of 9 percent).

Policy Area Outcome Target Achieved (Yes /Late) D. Enhancing

transparency

and

accountability

for use of

public funds

through

effective

oversight

arrangements

Month end financial statements

produced by Federal

Government MDAs within 7

days. (Baseline: formerly no

automated statements).

75 percent 67% June 2010

77% December 2010

Achieved now but not

achieved during

implementation

73. Nigeria also made good progresses in the area of accountability and

effectiveness of the use of public funds. The continuous effort to automate the treasury

function yielded good results as there was an increase in the percentage of federal MDAs

producing their month-end financial statements (with ATRRS) within 7 days from 50%

in 2009 to 67% as at June 2010. The original target of 75 percent was met later in 2010.

This is the only indicator that was not met within the implementation period of the

project (i.e. up to June 30th

2010).

Policy Area Outcome Target Achieved (Yes) E. Enhancing

Accountability,

Effectiveness

and value for

money in Public

Procurement

Federal Government

contracts use national

standard bidding documents

and contract awards

published.

65 % of FG contracts

using national standard

bidding documents

95% FG contract

awards above N75

million are published.

65%

100%

74. As of June 2010, over 65 per cent of government contracts were completed using

national standard bidding documents and all Federal Government contract awards above

N 75 million were published (original target 95 percent).

7 Note: There was no prior action attached to this outcome. It is reported on for comprehensiveness.

31

75. The Budget Office contributes to enhance the transparency of the budget

implementation by publishing quarterly budget outturn reports on its website. These

reports describe the extent to which the revenue and expenditure targets in the budget

were met during each quarter. In the procurement area, progress has been made by the

Bureau of Public Procurement (BPP) which continues to ensure that MDAs operate

within the requirements of the Public Procurement Act.

76. The Federal Government also sought to implement the Government Integrated

Financial Management Information System (GIFMIS) in the Office of the Accountant-

General and Budget Office of the Federation and has made good progress in this regard: a

GIFMIS project manager has been appointed and the procurement of GIFMIS software

and hardware has reached advanced stages. 8

3.4 Justification of Overall Outcome Rating

(combining relevance, achievement of PDOs)

Rating: Satisfactory.

77. Given the national development challenges that Nigeria was facing at the time

that the DPC was processed, the design objectives and indicators were highly relevant

(see above). The operation targeted nine strategic indicators to act as proxies for a

broader program of improved macroeconomic management and a more stable and

resilient financial sector. All nine indicators were met or surpassed although one was not

met within the project implementation period. The Nigerian authorities took quick steps

to resolve uncertainties on the interbank market and effectively ended the parallel

exchange rate regime. Intervening in the distressed banks also engendered greater

confidence among the general public and successfully avoided a run on the banks. The

healthy banks continue to make progress on the reform agenda supported by the DPC

while CBN has tailored emergency support to banks in distress.

78. With the adoption of the oil-price based fiscal rule and conservative oil reference

prices, the Federal government managed to maintain expenditure at a level commensurate

with macroeconomic and fiscal sustainability, thus avoiding the previous boom-and–bust

cycle. Government has also consistently signaled its intentions in this area with

conservative estimates of the future oil price upon which the budgets are constructed. The

DPC cemented this progress as government enacted the 2009 budget using a reference oil

price of $45 per barrel (the actual average price in 2009 proved to be US$54 per barrel).

The government released $12.3 billion from the ECA in 2009 which was consistent with

a policy of counter-cyclical spending in a downturn.

79. Finally government has also made serious progress in increasing the transparency

of the public financial management process. Starting from a situation in which no

automated month-end financial statements were produced, 67 percent of Government

8 As of December 2010, the Bank team commented on the Bid Evaluation Report (BER) and the Office of the

Accountant General of the Federation (OAGF) is now completing its due diligence of the proposed contractor.

32

MDAs were producing statements using ATRRS by the end of the implementation

period. The original target of 75 percent was met later in 2010 and presents a tremendous

improvement and a willingness to embrace new working practices. Government is now

pushing ahead with GIFMIS, value for money audits and additional transparency

measures. The DPC supported these efforts, focused government’s attention and helped

to highlight these outcomes to a sometimes skeptical international community.

80. It is too early to tell whether these largely technocratic and technology related

reforms will actually be translated into improved accounting, budgeting and procurement.

However, it is clear that without these measures the task of increasing transparency,

accountability and evaluation of government processes would have been very difficult.

The ERGP task team continues to provide support to FGN on these issues going forward.

3.5 Overarching Themes, Other Outcomes and Impacts

(if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development

81. The poverty impacts of reform of the financial and macroeconomic sectors cannot

be understated. The Nigerian oil sector accounts for about 20 percent of GDP, 85 percent

of consolidated government revenue and 95 percent of foreign exchange earnings.

Within this context, the management and distribution of oil revenues and ultimately

diversification from oil will have a tremendous impact on development outcomes. Donor

resources account for less than 2 percent of government’s total budget and therefore

ensuring that Nigeria’s own resources are prudently and transparently managed is critical

to poverty reduction.

82. However the sheer scale of the banking sector also illustrates why banking sector

reform is crucial to development outcomes. Banks account for 91 percent of the Nigerian

financial sector (see Figure 5) and

successfully resolving these issues would

have significant poverty impacts by

reducing the contingent liabilities to the

state as well as being able to provide

increased credit to the private sector which

would help fund employment creation

through business expansion.

83. The CBN moved quickly to

implement a series of reform measures that

had been recommended by the Bank team

throughout 2008 and early 2009. They

implemented the measures included in the

DPC policy matrix and even went beyond

them in certain areas. The latest initiative in

the banking sector resolution is the creation

of AMCON which is expected to remove

toxic assets from the banks’ balance sheets allowing them to restart lending. (see Box 2).

Domestic banks

87%

Pensions

4%

Mortgage companies

2%

Foreign banks

4%

Insurance

1%

Other non bank

2%

Figure 5: Structure of Nigerian

Financial Sector

33

84. On December 3rd 2010 AMCON announced that it would issue a series of

government guaranteed bond issues worth a total of N2.34 trillion (US$16.8 billion). To

put this in perspective Nigeria’s total outstanding domestic debt in 2010 (the vast

majority of government’s debt is domestically held) is N4.56 trillion ($28 billion as of

September 2010) or 14 percent of GDP. It is clear that issuing such a huge amount of

extra debt is likely to further crowd out the private sector and could have a serious impact

on domestic interest rates and growth. The authorities’ rapid and focused response to the

banking sector issues has served to contain the impact of the crisis. Nonetheless, these

numbers indicate the importance and potential development impact that addressing

structural reforms can have on financial sector stability and national development

outcomes. Once implemented, the medium-term structural reforms relating to bank

reporting and supervision supported by the DPC will considerably reduce the likelihood

of the recurrence of similar malpractice in the banking system.

(b) Institutional Change/Strengthening

(particularly with reference to impacts on longer-term capacity and institutional development)

85. In addition to the large number of institutional improvements highlighted above

(section 3.3) there were also other issues that were included in the policy matrix as

indicative measures for the medium and longer term. Many of these have also been

implemented including the following:

The CBN has adopted a framework for risk-based supervision. This transition has

now started with banks submitting their risk management frameworks to the CBN

and the CBN undertaking training for all its bank supervisors.

The CBN established a risk management department in March 2010 and has

proceeded to develop capital adequacy and enterprise risk assessment process

guidelines, based on ICAAP (UK) and COSOS (US) frameworks for the financial

industry.

A pilot risk-based examination of banks was conducted and completed in the first

quarter 2010. Implementation of risk-based supervision on a consolidated basis

for all banks started in 2011.

CBN has also issued a tender for the development of a computerized movable

collateral registry. CBN has also issued the first three licenses to private credit

registries that are now fully operational.

New prudential guidelines were issued in May 2010. The guidelines are aimed at

promoting a sound system and account for evolving practices in the financial

system. The guidelines serve as minimum requirements and banks are

encouraged to adopt more stringent measures. The key revisions and additions

were (i) revised loan provisioning, limits on credit risk and credit disclosure

practices, and (ii) rules to entrench corporate governance in the banking system

with maximum tenures of executive and non-executive officers stipulated.

34

The financial stability committee (FSC) has been strengthened and closer

collaboration between the FSC and monetary policy committee (MPC) has been

mandated. The FSC will focus on maintaining systemic stability and signs of

distress while analyzing credit and financial asset movements.

86. The Nigerian authorities are also focused on a number of future institutional

strengthening initiatives that have been designed and will be implemented in the near

term including;

Harmonizing the supervision process to ensure a comprehensive financial system

regulatory framework. Introducing a multi-regulator task force to integrate

process reforms across the regulators.

Establishing a consumer protection department to restore consumer confidence in

the industry. The authorities foresee the development of the department into a

fully fledged Financial Ombudsman Service within a 3-5 year period.

The CBN will prohibit banks from using depositors’ funds for private equity or

venture capital investment through some version of the Volcker rule or Glass-

Stegal.

87. Notably, as targeted by the DPC, the government continued to implement the oil-

price based fiscal rule for the 2011 budget. A Fiscal Responsibility Commission

mandated by the Fiscal Responsibility Law of 2007, was inaugurated by the Presidency

in September 2009. The Commission has the mandate to ensure prudent management of

the nation’s resources as well as the mandate to secure greater accountability and

transparency in fiscal operations within the Medium Term Fiscal Policy Framework.

88. The execution rate of the capital budget reached 75 percent for the 2009 budget

(inclusive of the extension of the 2009 budget through the first quarter 2010). Medium-

Term Sector Strategies for key sectors have been further refined in 2010 and have been

used as a basis for prioritization of budget allocations. Procurement reforms also

proceeded according to written agreements with standard bidding documents increasingly

being used and contract awards published.

(c) Other Unintended Outcomes and Impacts (positive or negative, if any)

89. The DPC provided Nigeria with US$500 million in budgetary support at a time

when the international capital markets were inaccessible. The Bank’s ability to move

quickly and decisively greatly enhanced the Bank’s image and standing with the Nigerian

authorities. It successfully strengthened the Bank’s profile as a trusted partner in the

development process and brought a new found credibility, not just for policy advice but

also for budget support. The FMOF increasingly sought the Bank’s advice on a number

of financial sectors issues including the establishment of the asset management company,

the resolution of the credit squeeze, employment creation programs and credit guarantee

schemes.

35

90. This was the time that the Bank had offered budget support to the Nigerian

government in almost thirty years. Providing budgetary support at such a time also

effectively signaled the Bank’s confidence in Nigeria’s financial management which in

turn helped the country to secure a solid sovereign debt rating, an important step on the

road to middle income status.

91. The Bank’s budget support operation also provided other donors with the

confidence to prepare their own operations. In October 2009, the African Development

Bank approved US$157m in its first ever budget support operation for Nigeria.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

(optional for Core ICR, required for ILI, details in annexes)

92. A multi-stakeholder workshop was organized on November 23, 2010 at the World

Bank offices in Abuja. The stakeholder group included representatives from Federal

Ministry of Finance, Central Bank, Securities and Exchange Commission, Nigeria

Accounting Standards Board, National Pension Commission, Debt Management Office,

Office of the Account General of the Federation, and the Office of the Auditor General of

the Federation.

93. The discussion was divided into three parts: (i) Introduction and Context, (ii)

Macroeconomic Management Pillar, (iii) Financial Sector Stability and strengthening

Pillar.

The key findings were :

Some participants were unfamiliar with the budget support instrument and most

were generally skeptical of the Nigerian Government’s ability to effectively and

efficiently program their budgetary resources. Many of the participants preferred

World Bank investment and project finance over budgetary support.

Since by its nature budgetary support is fungible and untied it is impossible to

track such expenditure. Participants felt that this undermined the Government’s

and World Bank’s ability to monitor the impact of the expenditure.

Participants agreed that almost all of the outcome goals for the DPC were

achieved during the implementation period of the credit. They felt that the

government had moved well beyond the key indicators and in most areas had also

achieved many of the indicative follow-on topics. Therefore there was broad

consensus on the idea that Government was strongly committed to the reform

program. However, the participants still felt that since the finances from the

credit could not be tracked directly to support these policy changes, the results

could not be fully attributed to the credit.

36

4. Assessment of Risk to Development Outcome Rating: The overall risk is Substantial.

94. This overall rating is based on an assessment of the following sub-risks to the

project that the project document identified and which remain relevant:

95. Governance risk (Substantial): Nigeria is often characterized as a country that

faces governance challenges. It occupied the last position in Transparency International’s

(TI) global rankings in 2000. The years of military dictatorship served to cement this

image. However, during the last decade of civilian rule the country has made great

strides in improving governance. There is a strong consensus for private sector led

growth and the need for stable macroeconomic conditions. Many of the actions identified

in the policy matrix focused on strengthening the transparency and accountability of the

financial sector and public financial management in Nigeria. Nigeria has seen its TI

ranking rise gradually from 142 in 2005 to 134 in 2010.

96. In dealing with the banking crisis the central bank took a courageous stand against

powerful vested interests and the CBN governor was able to rely on the continued

support of two Presidents in this effort. Powerful commercial bank managers have been

removed from their posts and others have been imprisoned. These results have been

sustained in the face of significant political and legal challenges. This bodes well for the

future but at least for now the governance risks continues to be substantial.

97. Political Support (Substantial): The implementation of any economic reform will

require a measure of political capital. Taking tough decisions is never easy and doing so

within the context of a severe economic downturn and the run-up to an election will

present even greater challenges. However, the President and his economic team have

fully supported the financial sector reforms, supporting the expeditious passage of

legislation required to create and fund AMCON.

98. Political support for fiscal prudence waned in 2010 as government spending

continued to increase beyond the end of the crisis. However, having depleted the ECA

towards the end of 2010, a significant balance of US$5bn has now been accumulated.

Once the April 2011 elections are over, momentum should build for the continued

implementation of improved public financial management. The Governor of the CBN a

key leader of the reform program is expected to continue in his role for at least another

three years allowing him to provide considerable further impetus behind the post-crisis

structural reforms of the financial sector.

99. Economic Risks (Moderate): A large buffer of international reserves and low debt

helped mitigate the impact of the global crisis on Nigeria. Oil revenues rebounded faster

than expected as did oil production. Government boosted its spending during the down

turn and growth did not fall to the levels forecasted by the IMF for 2009. However, the

37

continued high level of spending in 2010 depleted the ECA and threatened fiscal stability.

Without a fiscal cushion Nigeria has become more vulnerable to exogenous shocks. 9

100. Going forward, the main economic risks stem from a possible collapse in the price

of oil. Although it is impossible to accurately forecast future oil prices it does seem that

the global financial crisis is over and that a gradual improvement in the global economy

will start to take hold from 2011 onwards. The oil price closed out 2010 at around

US$90 per barrel. The authorities have now moved to replace the excess crude account

with a sovereign wealth fund (which addresses the legal and institutional weaknesses of

the ECA) focused on providing resources for future generations. Nigeria’s domestic and

external borrowings are at still at manageable levels (16 percent total debt to GDP). The

exchange rate has stabilized following the removal of temporary restrictions and

Nigeria’s reserves are expected to start rising again following the elections (April 2011).

101. Monetary and exchange rate policy is focused on reducing inflation and

maintaining a stable exchange rate. The IMF has recently called for greater flexibility in

the exchange rate and lauded the recent increase in policy rates as a step in the right

direction.10

Nigeria’s US$500 million Eurobond offer, launched in January 2011 was

heavily oversubscribed – a single of international investor confidence. Therefore we

conclude that there are fewer economic risks to the sustainability of the reform program.

102. Financial Sector Risks (Moderate): To a large extent the biggest potential

financial sector risk at the time of DPC approval was the possibility of a full blown

banking sector crisis. The task team had difficulty ascertaining the risk exposure of the

banking system due to weak accounting and reporting. While a collapse of the banking

sector was averted due to swift action by the CBN, the crisis has now come to pass. Far

from derailing the reform program it is actually providing a “burning platform” that is

galvanizing support from the political classes as well as the general public. As the

banking sector crisis unfolded it underscored the need for improved financial sector

governance, banking supervision, accounting and oversight practices as well as a

mechanism for removing toxic assets from the banking system.

103. Security risks (High): Nigeria’s post-colonial history is marked by constant

resorts to violence by separatist and militant groups. There is always the risk of

deterioration in the security situation. During 2010 militant activities in the Niger Delta

have flared up on several occasions, opportunistic bombings and religiously inspired

violence have also taken their toll. So far the government remains committed to

resolving these issues and has not allowed the law and order situation to shift its focus

from the economic agenda.

9 IMF was forecasting 2.5% growth for 2009. The actual figure was 6.5% which was nonetheless a significant drop

from the near double digit rates enjoyed in 2007 and 2008.

10 IMF: Staff Report for the 2010 Article IV consultation, Washington D.C. February 2011

38

5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase)

Rating: Satisfactory

104. This operation was built on a large body of high quality diagnostic work on the

financial sector as well as an ongoing engagement on fiscal policy and public financial

management. The team worked quickly and diligently to prepare the project within four

months from request to Board approval taking advantage of the Bank’s fast track facility

to provide Nigeria with timely funds.

105. Prior to DPC preparation, the Bank team produced a number of diagnostic pieces

in the context of support to the Nigerian Financial System Strategy 2020 which drew

attention to the looming imbalances in the Nigerian financial system. A report on the

stock market dated January 2008 highlighted the Nigerian stock exchange as having the

fourth highest price-earnings ratio of any exchange in the world and being more than

double the emerging market average. The Bank’s concerns over overvalued asset prices

were presented to Government in February 2008 before the crash.

Figure 6: Nigeria’s Overvalued Stock Market 2008

106. The stock market collapse was a trigger for the banking system crisis, as margin

loans provided to bank customers went into default. Within this context, the team

recommended a number of reform priorities including;

39

“To monitor banks’ investment in equities both on their own balance sheets and

those of their subsidiaries” and

“To introduce consolidated banking supervision”.

107. Another report presented to the CBN later in 2008 addressed potential banking

sector reforms. 11

The report highlighted the “potential for major banking problems in the

future if the system is not subjected to effective prudential regulation and supervision in

the short term”. The report pinpointed the weaknesses in the banking sector stemming

from a concentrated and weakening asset base as well as a lack of transparency. In

addition to the diagnostic report, the Bank also recommended a program of technical

assistance to improve banking supervision and a program designed to move Nigerian

banks towards international financial reporting standards.12

This technical assistance

proposal called for a special inspections program very similar to the special audits

eventually conducted by the CBN about a year later in August to October, 2009.

108. On the IFRS agenda, the Bank team encountered resistance from the accounting

profession and other stakeholders. The Bank team convened and hosted a workshop on

these issues that was chaired by the Nigerian Accounting Standards Board (NASB) and

included participants from all the relevant financial sector regulatory bodies, including

the CBN and the FMOF. At the meeting the Bank invited accountants from PWC

Mozambique to present their experience of implementing IFRS. The agreements reached

at that meeting led to a consensus on the need to adopt IFRS.

109. In further discussions with the authorities the Bank team continued to highlight

deficiencies in bank accounting, reporting and disclosure and – in recognition of the

seriousness of the situation – the Bank continued to emphasize the importance of

undertaking a thorough “health-check” of the banking system according to international

best practices. The Bank team emphasized that this course of action would have multiple

benefits:

Providing the banking system with technical support from experts versed in best-

practice banking supervision;

Providing a comprehensive assessment of risk exposure in the Nigerian banking

sector;

Advising on how best to respond to the potential risks arising from the

international financial crisis; and

Strengthening the capacity of the banking supervisors in using IFRS and

supplying them with hands-on training in risk-based supervision.

11 Nigerian banking system: A summary diagnostic. World Bank December 2008.

12 Meeting the regulatory and supervisory challenges of a world class banking system, World Bank January 2009.

40

110. The Bank recommended this special program of audits plus capacity building as it

would allow the regulators to meet the challenges posed by the strong asset growth and

increasing complexity of the banking system. This approach had been used successfully

in a number of countries with rapidly evolving financial sectors and that the team offered

to share considerable accumulated knowledge and experience on the matter with the

Nigerian authorities.

111. The DPC could not track results for all the items of the reform program. Instead

it targeted a small number of the most relevant indicators to restore liquidity and stability

to the system. On the macroeconomic side, some of the selected indicators tracked

existing government priorities, such as those around budget execution. However, others

tracked more controversial topics, such as removing exchange rate controls and

improving the transparency of public procurement. The operation supported the dialogue

around these issues and as a result there is now broad consensus on them.

(b) Quality of Supervision (including M&E arrangements)

Rating: Satisfactory

112. The supervision (and design) performance represented a strong partnership

between the PREM and FPD teams. The operation also benefitted from a strong Abuja-

based supervisory presence along with an active day-to-day dialogue with the key

counterparts at the FMOF and CBN. The implementation status report was completed

thoroughly with all the required data on the key implementation indicators. The ISR

highlights the areas where the original targets were not being reached as well as

adjustments to the original baselines. For instance government expenditure figures were

recalculated during the project implementation. A supplemental budget was also

approved in 2009 thereby altering the capital execution rates.

(c) Justification of Rating for Overall Bank Performance

Rating: Satisfactory

113. The Nigeria DPC came at a time when government’s short term spending

priorities were jeopardized by the impact of the global financial crisis, the fall in the oil

price and pressure on the exchange rate. Despite years of solid macroeconomic

stewardship and the debt write-down, the situation threatened the country’s

macroeconomic balance.

114. The DPC addressed the major structural reform elements required to clean up the

financial sector and maintain sound macroeconomic policies and budgetary priorities.

Almost all of the priority outcome indicators were quickly achieved building on the prior

actions that were met before Board approval. The priority actions proved important to

maintain government focus on its reform program and the government continues to make

progress in all areas despite a hiatus caused by a change in Presidents and increasing

policy uncertainty in the run up to the upcoming election.

41

115. Finally the DPC was put together very quickly with only a matter of months

elapsing from the time that an official request was received in March to Board approval

in July 2009. The fact that the task team was able to move so rapidly demonstrates the

solid analytical basis that had been established in the areas of macroeconomic

management and on the financial sector in the years preceding the crisis as well as strong

support from the country management.

5.2 Borrower Performance

(a) Government Performance Rating: Satisfactory

116. A large part of the success of the program can be attributed to the Government’s

high level commitment to see it succeed. During the preparation process, the Federal

Minister of Finance personally led the process and garnered the support of other

stakeholders for a comprehensive set of key reform measures and their associated

indicators and prior actions. The Government also designated key counterparts for the

overall program providing a clear line of day-to-day communication with Bank staff.

This was important in the context of a fast tracked operation. This greatly facilitated

communication and monitoring of progress by the task team during supervision as well as

preparation. The lead Government counterparts in the CBN and FMOF and the

Minister’s advisers took the lead in identifying bottlenecks and following up with the

respective units to ensure that the prior actions were being met.

(b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory

117. In addition to the role of the Federal Ministry of Finance, the CBN played a lead

role in implementing the financial sector reforms. Prior to the DPC program, the CBN

had been reluctant to accept the Bank’s advice as there were no overt signs of a crisis at

the time. While many observers realized there might be problems in the banking sector

none had guessed its size. The concerns of the authorities were, understandably, that any

moves towards assessing/auditing the banks so as to reveal their situation according to

international financial reporting standards might trigger just the kind of event that the

authorities were seeking to avoid. Understandably, these concerns impacted the design of

the actions which the Bank was able to include in the results matrix of the DPC.

118. Following the abatement of the international crisis and the appointment of a new

Governor at the Central Bank in June 2009 the CBN’s willingness to address the situation

of the banks changed dramatically. The new Governor has personally adopted and led

the reform agenda. The new Governor communicated the reform agenda in the domestic

and international media and expressed strong appreciation of the vocal support received

from both Bank staff and management. Government used its own resources to recruit the

necessary consultants, lawyers and financial advisers to implement the reform program.

The Bank’s support proved important to rally support in the donor community and

42

provide impartial analysis to the private sector, especially international rating agencies

and commercial banks interested in investing in the sector.

119. Responding to repeated recourse by certain banks to liquidity provided through a

special discount window, Governor Sanusi initially authorized special audits of 10 (of

24) Nigerian banks. Subsequently a second round of audits of the remaining banks was

undertaken. The results of these audits were announced in two batches in August and

October, 2009, and it transpired that 9 of the 24 banks had liquidity difficulties and 8 of

them suffered from capital shortfalls and possible insolvency. The immediate liquidity

requirements of the banks amounted to some NGN 600 billion (equivalent to $4 billion).

120. The ultimate size of the bank bail-out is still unclear, as the troubled banks still

remain under central bank stewardship. The authorities have also established an Asset

Management Corporation of Nigeria (AMCON) to resolve the situation of the troubled

banks. Concerted efforts to strengthen bank supervision supported by the IMF and the

Bank are also underway.

121. The measures to strengthen and stabilize the banking system first proposed by the

Bank and later adopted by the Nigerian authorities represent deep-seated structural

reforms to the accounting, reporting and disclosure practices of the banks, and to

institutional strengthening of the supervisory and resolution processes. In an

environment hitherto renowned for its corruption and weak governance these results

provide the basis for a turn-around not only in terms of bank solvency, but much more

importantly in the practices exercised by banking supervisors, in sanctioning bank

managers and their boards for malpractice, in encouraging banks to develop and deepen

the financial system rather than relying on earnings for short-term speculation, and in

setting up a robust resolution framework. The excellent performance of the CBN was

widely recognized and in January 2011, Governor Sanusi was named Central Bank

Governor of the Year by “The Banker” (a publication of the Financial Times of London).

(c) Justification of Rating for Overall Borrower Performance

Rating: Satisfactory

122. The satisfactory rating reflects a combination of the highly satisfactory

performance of the major implementing agency and a satisfactory performance from the

remainder of the Government. As a result of strong Government commitment the

program was delivered on a timely basis. There were no serious slippages despite a

broader context of tremendous uncertainties associated in a change of administration. In

most cases the Government has exceeded the minimum requirements agreed to in the

program document. Although the proceeds of the project took several months to

disburse, the reform program went ahead regardless (see section 2.2). During this period,

members from the executive branch negotiated with legislators to build consensus and

support for the operation, eventually passing resolutions to adopt the program. They also

liaised with the Federal Executive Council several times to secure the Government

approvals required to process the DPC. Later this ongoing liaison would result in the

quick passage of the AMCON Act that would allow the banking sector resolution to

make rapid progress.

43

6. Lessons Learned

(both operation-specific and of wide general application)

123. Ownership is key to success: Key to the DPL’s success is the fact that the

request for DPC support was initiated by the Government without any prodding by the

Bank. This was made easier by the fact that the Minister of Finance had prior experience

in both the World Bank and the Nigerian Debt Management Office. As a technical

specialist he could advise and guide other key stakeholders within Government on the

pros and cons of borrowing from IDA as opposed to borrowing from the international

capital markets and he understood the potential value of the DPC instrument both as a

benchmark for international support as well as a tool to galvanize the policy stance in

Government. The strong Government leadership and buy-in to the program at the time it

was being prepared was key to its success.

124. Strong analytical foundations are required for a successful operation: The

Bank’s high quality analytical work and numerous dissemination events helped to build

the Bank’s credibility in the financial sector, strengthen the relationship with the CBN

and provided a road map for reform of the banking sector and improvements in public

financial management. When the request for a DPC came the Bank was able to respond

extremely quickly because of its long standing engagement on the financial sector and

macro-economy. Allowing Bank teams more time to maintain a high quality sector

dialogue in key sectors over time will ensure that when the reform windows open the

Bank is well placed to support government priorities.

125. The importance of communicating the reform program: The DPC

components focused on financial sector reform could not have been implemented without

the reformist Governor of the CBN and the Federal Minister of Finance. These key

reform champions communicated their own reform program without much visible

support from the World Bank. During this period the Bank deliberately remained silent

on key reforms, and prepared and approved its budget support operation without fanfare.

Bank staff provided support to the CBN and FMOF initiatives when asked. Having all

the reform messages come from respected Nigerian leadership rather than from Bank

staff was vital for the success of the program in the complex Nigerian political economy

context.

126. Decentralization of a task team can lead to better collaboration: The DPC

focused on two sectors macroeconomics and financial sector led by PREM and FPD

respectively. There was close collaboration throughout between the teams both in Abuja

and Washington. Each team had a lead specialist based in the field. In addition, most of

the team members were also based in the field office and therefore were able to cultivate

close working relationships with government counterparts. This facilitated dialogue,

especially as the breadth and depth of the engagement grew. Having the task members

based in one place helped to develop a sense of teamwork and also allowed the team to

have day-to-day discussions with government counterparts.

44

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/Implementing agencies

127. Although the Federal Ministry of Finance was requested to officially comment on

the draft ICR it declined to do so. However, representatives of the FMOF attended the

stakeholder consultation session and their views are reflected above in section 3.6.

(b) Co-financiers N/A

(c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)

N/A

45

Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/

Specialty

Lending

Michael J. Fuchs Adviser AFTFE TTL

Volker Treichel Lead Economist AFTP3 Co-TTL

Ismail Radwan Lead PSD Specialist AFTFW

Jan Walliser Sector Manager AFTP3

Bayo Awosemusi Lead Procurement Specialist AFTPC

Hawa Cisse Wague Senior Economist AFTP4

Gloria Aitalohi Joseph-Raji Economist AFTP3

Antonio C. David Economist AFTFE

Giulia Pellegrini Junior Professional Associate AFTFE

T. Mpoy-Kamulayi Lead Counsel LEGEM

Andrew Lovegrove Consultant ECSPF

Rona P. Cook Program Assistant AFTFE

Yeshareg Dagne Program Assistant AFTFE

Mark Zeydler-Zborowski Consultant AFTHE

Irene F. Chacon Operations Analyst AFTFW

Supervision

Michael J. Fuchs Adviser AFTFE TTL

Volker Treichel Lead Economist AFTP3 Co-TTL

Ismail Radwan Lead Private Sector Development AFTFW

Winston Percy Onipede Cole Senior FM Specialist AFTFM

Manush A. Hristov Senior Counsel LEGAF

Gloria A. Joseph-Raji Economist AFTP3

Mary Asanato-Adiwu Senior Procurement Specialist AFTPC

Irene F. Chacon Operations Analyst AFTFW

Pierre Strauss Economist AFTP3

Giulia Pellegrini Junior Professional Associate AFTFE

(b) Staff Time and Cost

Stage

Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD (including travel and

consultant costs)

Lending

Total: 25.89 157,416

Supervision

Total: 13.32 124,712

ICR 14

Total: 4.03 23,546

46

Annex 2. Nigeria: Country at a Glance

Nigeria at a glance 2/25/10

Sub- Lower

Key D evelo pment Indicato rs Saharan middle

Nigeria Africa income

(2008)

Population, mid-year (millions) 151.3 818 3,702

Surface area (thousand sq. km) 924 24,242 32,309

Population growth (%) 2.3 2.5 1.2

Urban population (% of to tal population) 48 36 41

GNI (Atlas method, US$ billions) 177.4 885 7,692

GNI per capita (Atlas method, US$) 1,170 1,082 2,078

GNI per capita (PPP, international $) 1,940 1,991 4,592

GDP growth (%) 6.0 5.0 7.6

GDP per capita growth (%) 3.7 2.5 6.3

(mo st recent est imate, 2003–2008)

Poverty headcount ratio at $1.25 a day (PPP, %) 64 51 ..

Poverty headcount ratio at $2.00 a day (PPP, %) 84 73 ..

Life expectancy at birth (years) 47 52 68

Infant mortality (per 1,000 live births) 97 89 46

Child malnutrition (% of children under 5) 27 27 26

Adult literacy, male (% of ages 15 and o lder) 80 71 88

Adult literacy, female (% of ages 15 and o lder) 64 54 77

Gross primary enro llment, male (% of age group) 104 103 112

Gross primary enro llment, female (% of age group) 89 93 106

Access to an improved water source (% of population) 47 58 86

Access to improved sanitation facilities (% of population) 30 31 52

N et A id F lo ws 1980 1990 2000 2008 a

(US$ millions)

Net ODA and official aid 34 255 174 2,042

Top 3 donors (in 2007):

Netherlands 3 4 0 344

Austria 0 1 2 321

United Kingdom 5 25 23 286

Aid (% of GNI) 0.1 1.0 0.4 1.3

Aid per capita (US$) 0 3 1 14

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) 10.0 7.4 6.9 11.6

GDP implicit deflator (annual % change) 12.4 7.2 38.2 11.0

Exchange rate (annual average, local per US$) 0.8 9.2 101.7 118.5

Terms of trade index (2000 = 100) 165 87 100 214

1980–90 1990–2000 2000–08

Population, mid-year (millions) 71.1 94.5 124.8 151.3 2.8 2.8 2.4

GDP (US$ millions) 64,202 28,472 45,984 207,118 1.6 2.5 6.6

Agriculture .. .. 48.6 32.7 .. .. 7.0

Industry .. .. 30.5 40.7 .. .. 3.8

M anufacturing .. .. 3.4 2.6 .. .. ..

Services .. .. 20.9 26.6 .. .. 14.4

Household final consumption expenditure .. .. .. .. .. .. ..

General gov't final consumption expenditure .. .. .. .. .. .. ..

Gross capital formation .. .. .. .. .. .. ..

Exports o f goods and services 29.4 43.4 54.0 41.6 .. .. ..

Imports o f goods and services 19.2 28.8 32.0 24.7 .. .. ..

Gross savings .. .. .. ..

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available.

a. A id data are for 2007.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0

50

100

150

200

250

1990 1995 2000 2007

Nigeria Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

-4

0

4

8

12

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

47

Annex 3. Stakeholder Workshop Report and Results

48

Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR

The Federal Government of Nigeria was invited to provide their own assessment of the

operation and also to comment on the draft ICR but declined to do so.

49

Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders

N/A

50

Annex 6. List of Supporting Documents

128. The operation supported the implementation of reforms in the financial sector,

fiscal policy and management, and improvements to governance. Support for these

actions is based on a range of economic and sector work on the Nigerian macroeconomic

and financial sector that were concluded in 2008, including:

Financial Sector Development

Banking Sector Diagnostic: This report focuses on how the banking sector can be

a major driver in achieving the FSS2020 vision once it addresses the risks of the

sector, e.g. strengthening bank risk management capacity and banking supervision,

transition from Nigerian accounting standards to International Financial Reporting

Standards (IFRS) and diversify lending exposures away from volatile industries

like the oil sector.

Housing Finance: This report address the issue of what can be done to close the

current housing gap, estimated at more than 17 million units. The report

recommends improving the time and cost of property registration, reforming the

primary mortgage institutions and the National Housing Trust Fund. The report

brings together some of the policy lessons learnt in the creation of mortgage

liquidity facilities around the world and presents this as a possible contribution

towards development of the mortgage market.

Social Housing: The focus of this report is primarily on the options available for

those further down the income distribution to finance their housing needs. It also

looks to cover other aspects of housing finance, such as access issues and the

availability of funding for construction of housing. The report is targeted at policy

makers both in the financial and housing spheres to consider a more broad-based

approach to housing policy than just relying on the private sector to develop

housing which will be paid for through mortgages. It suggests the need to develop

the Real Estate Investment Trust (REIT) framework, create a national framework

for housing PPPs, clarify the micro-finance rules for housing products and

withdraw the proposed VAT increase on housing.

Pensions Industry Assessment: This report presents the background of the 2004

pension reform which was designed and implemented to: (i) improve the fiscal

sustainability and welfare adequacy of the pension system and (ii) create a well-

regulated, prudently operating industry. The report presents recommendations to

address flaws within the current pensions’ framework. It concludes by explaining

that the continued success of the pension industry depends on developments in

capital markets, public debt management policies, the insurance industry, and

interagency cooperation – issues central to the FSS2020 agenda.

51

Insurance Industry Assessment: This report highlights the fact that the Nigerian

insurance market is grossly underdeveloped and consumers are underinsured to a

significant degree. The report suggests enforcing compulsory insurance policies

and cracking down on fake companies as ways to quickly grow the industry. In

the medium term, Nigeria will need to overhaul the accounting and regulatory

framework for the industry, invest in improved IT systems and mount a public

awareness campaign.

Access to Finance: This report identifies key issues for microfinance, branchless

banking and SME finance. There are encouraging signs that access to finance is

poised for growth, but the sector faces regulatory issues. Improved information,

the promotion of credit registries, adopting a leasing law and operationalizing a

moveable asset register are recommended as ways of growing access to finance in

Nigeria.

Capital Markets: The report highlights the sizeable growth experienced in the

capital market due to structural changes in the financial system. The report

suggests that high cost elements might be preventing more companies from

getting listed on the NSE and impeding the development of an issuer market. Also,

the limited supply of financial instruments restricts investors to follow near

identical investment strategies with little opportunity for diversification. The

report concludes with recommendations to address these challenges.

Debt Markets and Debt Management: This report highlights recent improvements

in government debt management capacity and remaining areas for improvement,

particularly in the areas of strategy development, cash flow forecasting, cash

balance management and developing the secondary market.

Report on Observance of Standards and Codes for Credit Rights: The report

found that although the Insolvency and Creditor Rights regime of Nigeria is

strong in certain aspects it remains in urgent need of reform. The report concludes

that the principal legislation that drives the legal framework for insolvency and

creditor rights in Nigeria, the Companies and Allied matters Act and the

Bankruptcy Act, are both antiquated and do not incorporate the features of

modern international best practices of insolvency.

Nigeria Investment Climate Assessment 2008: The ICA 2008 was based on a

survey of 2,300 enterprises based in Nigeria. It concluded that Nigerian firms are

unproductive largely due to a lack of electricity, good roads and access to

affordable finance. Each year 16 percent of sales in Nigeria are lost as a result of

poor infrastructure, crime and corruption. Deepening the financial sector would

serve to boost the productivity and performance of Nigerian businesses.

Doing Business in Nigeria 2009: This is part of an annual series of reports that

compares more than 180 countries around the world in terms of the ease of doing

business. The report finds that Nigeria is ranked 118th

- a position that has

52

remained fairly static over the last few years. Nigeria ranks particularly poorly on

registering property, dealing with licenses, trading across borders and paying

taxes. However, the country fairs relatively well in employing workers and

protecting investors.

FSS2020 Change Management and Implementation Plan: The objective of this

report was to evaluate current/proposed change management approaches for the

implementation of the FSS2020 vision. The report reviewed the current change

architecture for transitioning the FSS2020 vision and provided recommendations

to strengthen it. The report concluded by suggesting that for the FSS2020 vision

to be successfully implemented, there needs to be a two-pronged change

management approach working concurrently to engage in changing a large

complex system and develop institutional capacity.

Public Financial Management

Public Expenditure Management and Financial Accountability Review

(PEMFAR): This report conducted in 2006 proposes actions to promote a sound

Public Financial Management Environment. The PEMFAR report provides the

analytical underpinnings for Government’s ongoing efforts to address the

weaknesses in Public Expenditure Management. The report noted that while

advances were made in macroeconomic and debt management, budget

formulation, accounting, and procurement reform less progress was made with

respect to capacity building, including in the Budget Office, and in such areas of

financial accountability as reporting, monitoring, and disclosure.

Debt Markets and Debt Management: This report highlights recent improvements

in government debt management capacity and remaining areas for improvement.

Review of capital budget implementation: A recent review of obstacles to the

faster execution of the capital budget resulted in a number of measures being

adopted by the government, including the early release of the capital vote and the

swift approval of the 2009 budget as well as the introduction of a template for

MDA’s to monitor and evaluate the implementation of capital projects. A

summary of the recommendations is in Annex 3.

Nigeria’s Growth Strategy

Employment and Growth Study: Targeted interventions to remove binding

constraints in employment-intensive value chains, in particular in the physical

infrastructure area, were identified as a key strategy to enhance the employment-

intensity of growth in a recent study by the Bank on employment and growth. The

study found that notwithstanding high, sustained growth in the non-oil economy

since 2001, the share of the population outside the labor force had not declined

and that youth unemployment was on the rise.

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U d i H i l l sU d i H i l l s

Ma

nd

ar

a

M

t s.

Goth

M

ts.

BORNOBORNOYOBEYOBE

ENUGUENUGU

AN

AM

BRAA

NA

MBRA

ABIAABIAIMOIMO

AKWA-AKWA-IBOMIBOM

CROSSCROSSRIVERRIVER

RIVERSRIVERS

D E L T AD E L T A

B A U C H IB A U C H I

J I G A W AJ I G A W A

KANOKANO

K A T S I N AK A T S I N A

S O K O T OS O K O T O

KEBBIKEBBI

N I G E RN I G E R

K A D U N AK A D U N A

FEDERALFEDERALCAPITALCAPITAL

TERRITORYTERRITORY

P L A T E A UP L A T E A U

T A R A B AT A R A B AB E N U EB E N U E

K O G IK O G I

OYOOYO

O G U NO G U N

LAGOSLAGOS

OSUNOSUNO N D OO N D O

E D OE D O

AD

AM

AW

A

AD

AM

AW

A

K W A R AK W A R A

ZAMFARAZAMFARA

EKIT IEKIT I

EBONYIEBONYI

BAYELSABAYELSA

NASARAWANASARAWA

GOMBEGOMBE

Benue

Niger

Nig

er

Sokoto

Yobbe

Rimma

Niger

Kaduna

Bung

a

Jamm

aarii

Hadejia

Gongola

Be

nue

Yobe

Komad

ugu Gana

Taraba

WarriWarri

BaroBaro

KontagoraKontagora

IllelaIllela

KauraKauraNamodaNamoda

ZariaZaria

BiuBiu

BaliBaliWukariWukari

ShendamShendam

NguruNguru OamasakOamasak

PokiskumPokiskum

WawaWawa

AbaAba

SapeteSapete

UyoUyo

JosJos

AwkaAwka

YolaYola

GombeGombe

KanoKano

AsabaAsaba

YenogoaYenogoa

EnuguEnugu

AkureAkure

MinnaMinna

DutseDutse

OwerriOwerri

IbadanIbadan

IlorinIlorin

BauchiBauchiKadunaKaduna

SokotoSokoto

GusauGusau

LokojaLokojaAdo-EkitiAdo-Ekiti

CalabarCalabar

AbakalikiAbakaliki

UmuahiaUmuahia

MakurdiMakurdiOshogboOshogbo

JalingoJalingo

KatsinaKatsina

AbeokutaAbeokuta

DamaturuDamaturuMaiduguriMaiduguri

BeninBeninCityCity

BirninBirninKebbiKebbi

PortPortHarcourtHarcourt

LafiaLafia

ABUJAABUJA

N I G E RN I G E R

N I G E RN I G E R

C A M E R O O NC A M E R O O N

B E N I NB E N I N

C H A DC H A D

To To KandiKandi

To To KandiKandi

To To BoriBori

To To LoméLomé

To To DoulaDoula

To TahouaTo Tahoua To AgadezTo Agadez To NguigmiTo Nguigmi

1963 Level

1973 Level

2001 Level

BORNOYOBE

ENUGU

AN

AM

BRA

ABIAIMO

AKWA-IBOM

CROSSRIVER

RIVERS

D E L T A

B A U C H I

J I G A W A

KANO

K A T S I N A

S O K O T O

KEBBI

N I G E R

K A D U N A

FEDERALCAPITAL

TERRITORY

P L A T E A U

T A R A B AB E N U E

K O G I

OYO

O G U N

LAGOS

OSUNO N D O

E D O

AD

AM

AW

A

K W A R A

ZAMFARA

EKIT I

EBONYI

BAYELSA

NASARAWA

GOMBE

Warri

Baro

Kontagora

Illela

KauraNamoda

Zaria

Biu

BaliWukari

Shendam

Nguru Oamasak

Pokiskum

Wawa

Aba

Sapete

Uyo

Jos

Awka

Yola

Gombe

Kano

Asaba

Yenogoa

Lagos

Enugu

Akure

Minna

Dutse

Owerri

Ibadan

Ilorin

BauchiKaduna

Sokoto

Gusau

LokojaAdo-Ekiti

Calabar

Abakaliki

Umuahia

MakurdiOshogbo

Jalingo

Katsina

Abeokuta

DamaturuMaiduguri

BeninCity

BirninKebbi

PortHarcourt

Lafia

ABUJA

N I G E R

N I G E R

C A M E R O O N

Bioko I.(EQ. GUINEA)

B E N I N

C H A D

Benue

Niger

Nig

er

Sokoto

Yobe

Rima

Niger

Kaduna

Bung

a

Jam

aari

Hadejia

Gongola

Be

nue

Yobe

Komad

ugu Gana

Taraba

Gulf of Guinea

KainjiReservoir

Lake Chad

To Kandi

To Kandi

To Bori

To Lomé

To Doula

To Tahoua To Agadez To Nguigmi

B a u c h iP l a t e a u

S a h e l

J os P

l at e

au

U d i H i l l s

Ma

nd

ar

a

M

t s.

Ni g e r D e l t a

Goth

M

ts.

Chappal Waddi(2,419 m )

10°E 15°E

5°E 10°E

10°N10°N

5°N5°N

NIGERIA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33458

SEPTEMBER 2004

N IGERIASELECTED CITIES AND TOWNS

STATE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES