This special edition of the Economic Report on Nigeria aims at serving a dual purpose. First, it serves as an instrument for engaging the new Administration of the Federal Government on the policy imperatives for sustainably transforming the Nigerian economy. Hence, key focus areas for policy imperatives for the Administration are outlined. Second, it aims to review the current challenges facing the economy and provide a menu of policy options on possible way forward.

Global developments resulting in the precipitous fall in oil prices is impinging greatly on Nigeria’s key macroeconomic variables. The economy is now on a slow track for the first half 2015 with around 3.14% real GDP growth and 4% projection for the year. Inflation is trending upwards, inching towards double digit as end of the year approaches. Throughout the first half of 2015, economic management has rested largely on the use of monetary policy with limited room for fiscal policy as a result of the change in government and delay in appointing Ministers. The country’s external position continues to weaken with foreign reserves falling precipitously from US$40.7 billion at end-September 2014 through US$34.5 billion at the beginning of 2015 to US$29 billion by June 30.

Tackling the current macroeconomic challenges facing the economy has seen the monetary authorities adopting both policy and administrative interventions in the money and exchange rate markets. The perceived capital control led to the removal of the country’s Bond from the JP Morgan’s Government Bond Index-Emerging Markets. A possible outcome of the delisting is withdrawal of foreign investors from the market and consequently capital outflows. It is expected, however, that the affirmation of the country’s credit rating by S&P at ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings with stable outlook may moderate investor confidence and reduce potential capital outflows.

Nigeria has attempted several tax reforms over the years that have gained momentum with the recent fiscal consolidation policy of the Federal Government. The poor tax compliance and in particular relatively small share of VAT in total fiscal revenue of around 7.2% on average between 2011 to 2014 remains a concern. Tapping fully into this high potential revenue source would require deepening domestic resource mobilization through tax compliance and broadening tax base, among other actions.

Given that proposed policy priorities for the new Government is one of the objectives of this report, the following priority areas are identified: macroeconomic stabilization; effective governance and public financial management; security and job creation; infrastructure development; and social sector and safety nets interventions. Specifically, the available options for improved policy space for economic growth and better social outcomes should be deeply explored. A choice will have to be made between social infrastructure investments and direct household empowerment in strengthening social safety nets. The fiscal revenue pressures facing the country should necessitate exploring public-private partnership (PPP) strategy for infrastructure provisioning. Three key options for creating fiscal space are available. They include: enhanced domestic resource mobilization through improved tax administration including broadening of the tax base; improved public financial management through reallocation of resources saved from low priority spending; and external financing.

As a way forward, the following recommendations are proposed:

• increased domestic financial resource mobilization to create additional fiscal space for social protection interventions;

• accelerate finalization of the NNPC’s proposed framework for determining open market price for petroleum products for the purpose of plugging fiscal leakages emanating from the petrol subsidy;

• effectively deploy the additional fiscal revenues from increased domestic resource mobilization and savings from plugging fiscal revenue loopholes into social protection policies that would strengthen the social contract between government and the people;

• the current monetary stance of the monetary authorities should be maintained but re-examined with a view to softening the stance once key macroeconomic variables stabilize;

• and deepen and consolidate infrastructure development reform, especially in power and transport sectors.