Letter of Intent, April 21, 2020
Ms. Kristalina Georgieva
International Monetary Fund (IMF)
Washington, D.C. 20431
Dear Ms. Georgieva,
1. The global humanitarian and economic crisis caused by the COVID-19 pandemic is having a severe impact on Nigeria. In addition to the high human toll from daily increases in COVID-19 cases, the economic cost is high. Containment policies to limit the propagation of the outbreak—including to restrict movement and encourage social distance—and a sharp fall in oil prices are causing a dramatic fall in economic activity. Our preliminary assessment suggests a contraction in real GDP of 3.4 percent this year, a 6.5 percentage points drop relative to our previous estimate. Given the uncertainty as to the depth and duration of this crisis, this estimate comes with downside risks.
2. Our external position has already come under strong pressure. The current account deficit is projected to be about 3.3 percent of GDP, despite some import compression, as oil exports drop. At the same time, remittances and capital inflows are expected to weaken substantially, leading to pressure on our international reserves, which have already declined. To mitigate the balance-of payment pressures, we adjusted the official exchange rate from N305/$ to N360/$ and recently converged the Central Bank of Nigeria (CBN)’s various foreign exchange (FX) windows to the Investors and Exporters (I&E) windows rate, which will be allowed to move with market forces, as observed with the recent depreciation in response to capital outflows. This step also allowed us to close the gap between the CBN’s minimum and maximum exchange rates from 20 to 5 percent—a major step toward exchange rate unification. We are committed to maintaining this more unified and flexible exchange rate regime, which will operate in market-determined manner and be allowed to respond to shocks, with the CBN only intervening to smooth large FX fluctuations. While greater FX flexibility will help mitigate balance-of-payment pressures, an external financing gap of US$14 billion will remain.
3. Unsurprisingly, the COVID-19 crisis will also severely impact the budget. Lower growth and the sharp decline in oil prices are affecting tax revenues, which are projected to fall short of our target by about 3 percent of GDP. The estimated cost of our pandemic emergency response plan, including additional health and social spending and fiscal stimulus targeted at the most affected sectors, is at least US$1.4 billion (0.3 percent of GDP) in 2020. Together, these two factors will increase the overall deficit by about 2 percent of GDP in 2020, despite expenditure reprioritization efforts. We estimate that the Government of Nigeria will require an additional US$11 billion (3 percent of GDP) in 2020 to close the fiscal financing gap resulting from the shock.
4. To address the immediate external financing needs, the Government of Nigeria requests the maximum amount of IMF emergency financing available to Nigeria under the Rapid Financing Instrument (RFI), or SDR 2,454.5 million (about US$3,398 million), corresponding to 100 percent of our quota. This loan will help remedy the immediate liquidity needs arising from the twin shocks facing us. We are confident that IMF involvement in the international effort to assist Nigeria in dealing with the global pandemic will play a catalytic role in securing additional budget support from our development partners. We are actively seeking this additional support, beyond the US$3.6 billion already committed this year by the World Bank, AfDB, IsDB, and Afreximbank.
5. The RFI purchases will be instrumental to help fill the projected fiscal financing and balanceof-payments gap in 2020. The RFI purchases will be on-lent by the central bank to the Treasury. To this end, we will sign a Memorandum of Understanding (MoU) between the central bank and the government, to specify the conditions of this operation, following IMF’s policy and guidance.
6. In line with fiscal responses underway globally, we plan to partially accommodate the fiscal impact of the COVID-19 crisis in 2020. In lockstep, we will also grant banks the leeway to restructure loans for the most-affected but fundamentally sound borrowers in order to accommodate the cash squeeze facing the private sector. However, we will ensure that such actions are done in a time bound and transparent fashion and without compromising regulatory or accounting standards.
7. The government set up an Economic Sustainability Committee chaired by Vice President Professor Yemi Osinbajo to devise strategies to keep the economy working and ensure jobs are not only retained but that more are generated. The Presidential Economic Advisory Council (PEAC) is also working on policies to ensure macroeconomic stability and poverty reduction. Going beyond this year, the government of Nigeria is fully committed to pursuing policies consistent with macroeconomic stability and good governance:
• Fiscal policy: First and foremost, we will revert to our government’s planned medium-term fiscal consolidation path—which includes increasing revenue to 15 percent of GDP through further VAT reforms, rise in excises, and removal of tax exemptions— once the crisis passes. The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not reemerge. In line with the Fiscal Responsibility Act, this will allow us to reduce the Federal Government deficit to under 3 percent of GDP and eliminate recourse to central bank financing by 2025.
• Financing of the deficit: In addition to the external borrowing sought, we are also increasing our domestic borrowing limits in the supplementary budget so that we can make use of our favorable low domestic yields, particularly since the results of the last domestic bond auction show strong demand. The existing stock of overdrafts held at the CBN will also be securitized.
• Monetary and exchange rate Policy. As outlined in our home-grown Economic Recovery and Growth Plan, we are also strengthening monetary and exchange rate policies with a view to move towards full exchange rate unification and greater exchange rate flexibility, which would help preserve foreign exchange reserves and avoid economic dislocation.
• Power sector reforms. We are also advancing in our power sector reforms—with technical assistance and financial support from the World Bank—including through capping electricity tariff shortfalls this year to N380 billion and moving to full cost-reflective tariffs in 2021.
8. Our anti-corruption efforts will continue unabated. We will strengthen the role of the Federal Audit Board in combating corruption and are committed to strengthening the asset declaration framework and fully implementing the risk-based approach to AML/CFT supervision while ensuring the transparency of beneficial ownership of legal persons. We fully recognize the importance of ensuring that financial assistance received is used for intended purposes. To that end, we will (i) create specific budget lines to facilitate the tracking and reporting of emergency response expenditures and report funds released and expenditures incurred monthly on the transparency portal (http://opentreasury.gov.ng/); (ii) publish procurement plans, procurement notices for all the emergency response activities—including the name of awarded companies and of beneficial owners—on the Bureau of Public procurement website; and (iii) publish no later than three to six months after the end of the fiscal year the report of an independent audit into the emergency response expenditures and related procurement process, which will be conducted by the Auditor General of the Federation—who will be provided the resources necessary and will consult with
external/third party auditors.
9. In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund. To this end, we have authorized IMF staff to hold discussions with external auditors and provide IMF staff access to the CBN’s most recently completed external audit reports. We do not intend to introduce measures or policies that would exacerbate the current balance-of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement.
10. We are determined to meet the immense challenge the Covid-19 pandemic is facing us with. Support from the international community will be critical, and we look forward to an early approval of financial assistance by the IMF—which will help our effort to keep the Nigerian economy on a strong path and sustain our fight against poverty. Beyond this much needed immediate financial assistance, we reaffirm our willingness to remain engaged with the IMF, to benefit from its policy advice and its technical assistance. We authorize the IMF to publish this letter and the staff report for the request for purchases under the RFI.
Zainab Shamsuna Ahmed Godwin Emefiele
Minister of Finance, Budget, and National Governor of Central Bank of Nigeria
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