W’Bank: Nigeria needs to build reserves to mitigate oil price volatility

World Bank hq13 June 2013, Lagos – The World Bank has advised the federal government to build Nigeria’s external reserves to shield the country from the volatility of oil prices at the international market.

The bank gave the advice in its first Nigeria Economic Report, NER, May, 2013.

Besides, the Bretton Woods institution advocated a significant degree of autonomy and financial independence for states, which it said could be potentially advantageous for rapid development in the country.

Although the World Bank pointed out that in the short-term, the macro-economic outlook looked generally strong with the likelihood of higher growth, lower inflation and reserve accumulation, it stressed that apart from building up the external reserves, Nigeria would also need to increase internally generated revenue to compensate for what would likely be declining oil revenues relative to the size of the economy.

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

While suggesting significant degree of autonomy and financial independence for the states, the World Bank however pointed out that the “process is now hindered by too little market connectivity, weak coordination in fiscal policy, and problems in governance”.

The World Bank stated that the strong short-term economic outlook presented the federal government with “an opportunity to make progress in key reforms and public investments associated with the transformation agenda for job creation, diversification, and more effective governance”.

The bank however lamented that “Nigeria’s economic growth has not automatically translated into better economic and social welfare for Nigerians”.

According to the report, despite the growth in the economy, the number of Nigerians living in poverty is on the rise.
“Poverty reduction and job creation have not kept pace with population growth, implying social distress for an increasing number of Nigerians,” it said.

For example, the bank noted in the NER that because of problems of infrastructure, particularly transportation, as well as institutional barriers, Nigeria’s markets are quite fragmented.

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

The NER explained that Nigeria’s federalist system has the potential to support the country’s take-off into rapid diversified growth and job creation, but the federal and state governments needed to improve cooperation and policy coordination in a few key areas.

It listed the key areas as: macroeconomic management (countercyclical fiscal policy), coordinated policies to enhance market connectivity and improve public services, and the realisation of national standards in public financial management and disclosure.

It explained that enhanced cooperation among the federal and state governments could successfully address all of these issues, thereby unlocking enormous potential for growth, job creation and improvements in the welfare of Nigerian citizens.

Commenting, Lead Economist, World Bank and the lead author of the report, John Litwack, said: “For effective macroeconomic management, the key task is to establish an institutional framework that can effectively separate and buffer government expenditures from oil prices.

“International experience demonstrates that countercyclical fiscal policy is essential to conquer the ‘oil curse’ of boom-bust cycles and slow economic development.”

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

– This Day Newspaper

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