Public Information Notice No. 01/2

Public Information Notice: IMF Concludes Article IV Consultation with Niger

January 12, 2001

On December 14, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Niger.¹

Background

Niger is a large, landlocked country of 10½ million inhabitants and 1.3 million square kilometers. The country, which is situated predominantly in the Sahara Desert, is surrounded by seven countries, and is subject to increasing desertification. It is one of the poorest countries in the world, and ranks 173^rd out of 174 countries listed in the 2000 human development index of the United Nations Development Program (UNDP).

Niger's economic performance was broadly satisfactory under a reform program implemented by the authorities during the period 1996-98. However, political events in April 1999 resulted in a nine-month interruption of the track record achieved previously, a freezing of nearly all nonproject external financing, and delays in structural reforms. The financial situation of Niger deteriorated significantly in 1999: the basic fiscal deficit (on a commitment basis and excluding grants) widened to 5½ percent of GDP in 1999 from 3 percent of GDP in 1998 and large external and domestic payments arrears (including seven months of civil service salaries) were accumulated. In addition to a deterioration of public finances, real economic growth was negative in 1999 and the external position remained weak because of the freeze on external nonproject assistance.

Since the beginning of 2000, Niger's new democratically elected authorities have achieved significant progress in restoring macroeconomic stability. The new government has started building a strong track record of economic and financial policies, in particular through the implementation of measures to restore budgetary transparency and good governance, as well as a renewed momentum of structural reforms. The new government has tightened the fiscal policy stance by introducing a strict cash management system to limit spending to available resources and thereby prevent an accumulation of domestic payments arrears. The authorities have also established expenditure priorities and have been successful in ensuring the regular payment of salaries and some external debt service. Inflation should be contained at about 3 percent, notwithstanding a large increase in domestic petroleum prices. The external current account deficit (excluding official transfers) is expected to exceed 10 percent of GDP, reflecting the impact of higher oil prices and the difficulties of the uranium sector, which accounts for 40 percent of total exports. Investment is projected to remain at its 1999 level of 10½ percent of GDP, mainly financed by foreign concessional financing. Niger's monetary policy, which is conducted at the regional level by the West African Economic and Monetary Union central bank, was tightened three times in 2000 to defuse the inflationary pressures fueled by an overall credit expansion in the monetary union.

In the area of structural reform, the privatization program initiated in the context of the 1996-98 program supported by resources of the IMF under the Poverty Reduction and Growth Facility (PRGF)² has been revived in the first half of 2000, with the adoption of privatization strategies for the four largest public enterprises still in the government's portfolio.

Reflecting this new policy stance, economic activity started to recover in the first half of 2000 and foreign financing has resumed.

The authorities' medium-term strategy, which is supported by the Fund's resources under the PRGF, aims at realizing an average annual rate of growth of GDP of more than 4 percent, containing inflation at 3 percent a year, and stabilizing the current account deficit (excluding official transfers) at about 10 percent of GDP. Attainment of these objectives and targets will require an expansion in gross investment of 3½ percentage points of GDP over the program period to about 14 percent of GDP by 2003. In support of these objectives, fiscal policy will aim at gradually achieving positive levels of budgetary savings to generate domestic resources for public investment, strengthening revenue performance and improving the structure of expenditure in favor of social related outlays. In addition, priority will be given to eliminating domestic and external payments arrears, improving governance and the accountability of the civil service, deepening structural reforms to improve economic efficiency through the elimination of impediments to private investment, and improving the irrigation system and promoting the development of a more diversified rural sector.

The authorities are also committed to reducing poverty. They have adopted an interim Poverty Reduction Strategy Paper (PRSP), and are in the process of broadening the participatory process with civil society, in preparation for the full-fledged PRSP, which is expected to be finalized by end-December 2001. The government has also initiated a range of field surveys to acquire better data on the poverty profile of Niger. The authorities' efforts to reduce poverty are also supported by resources for the enhanced Highly Indebted Poor Countries (HIPC) Initiative, under which Niger reached its decision point on December 20.

Executive Board Assessment

The Executive Directors welcomed the democratic elections of end-1999 following the military transition period and the political events of April 1999. Directors supported the efforts of the new authorities to resume the economic and structural reform program interrupted in 1999 and to establish a satisfactory track record of performance, including a restoration of budgetary transparency, improved governance, and a strong commitment to structural reforms.

Directors were of the view that Niger's weak past economic performance reflected several factors: vulnerability of agriculture to external shocks; a limited export base; a secular decline of the uranium sector; and a recent history of political and social instability resulting in a stop-and-go track record of policy implementation, including structural reforms.

Directors regretted that the political events of April 1999 had interrupted the broadly satisfactory track record of the program supported under the Enhanced Structural Adjustment Facility (ESAF) during the period 1996-98, with adverse economic and financial consequences.

Directors welcomed the efforts of the new authorities to improve the economic situation, resume financial relations with development partners, and maintain social and political stability. In the area of budgetary performance, Directors commended the authorities for implementing a tight cash management budget in order to keep spending within the limits of available resources and prevent further accumulation of domestic payments arrears. Directors observed that the corrective measures taken in the course of the year, including adjustment in petroleum retail prices and the adoption of a revised budget, had gone a long way toward preventing a further deterioration of the fiscal situation in 2000. Nevertheless, Directors expressed concern that the low levels of domestic savings and limited external assistance were still constraining budget execution, in particular in the social sectors. Consequently-and in view also of the very low government revenue effort-they stressed the need to consolidate the fiscal situation further, through the broadening of the tax base and a strengthening of the expenditure process, as well as an improvement in the quality and structure of expenditure.

Directors stressed the importance of close monitoring of banks' compliance with prudential regulations, particularly in light of the rapid growth in bank credit to the economy.

Directors agreed that making an effective dent in poverty would require faster economic growth and greater efficiency and effectiveness of public programs. The growth strategy should focus on unleashing the untapped potential of the rural and agricultural sector, and creating an enabling environment for private sector development. In this connection, Directors urged the authorities to pursue their efforts to strengthen good governance and to continue improving the regulatory framework. Strengthening the legal and judiciary framework, as well as the management of financial institutions, were also seen as key to improve the overall environment for private sector activities. In view of these actions, some Directors considered that increased financial assistance from the international community on highly concessional terms might be needed.

Directors welcomed the authorities' program to be supported by the resources of the Poverty Reduction and Growth Facility. They noted that the 2001 budget confirmed the authorities' determination to strengthen the fiscal situation. They welcomed the new momentum imparted to structural reforms, including the program of privatization of the four main state companies in the energy, telecommunications, and water sectors. They also encouraged the authorities to adhere closely to the timetables agreed with the World Bank for reform in these and other sectors.

The economic and financial database remains weak in Niger, especially in the areas of national accounts and balance of payments, making a timely assessment of economic policies difficult. Therefore, Directors urged the authorities to continue efforts to improve quality and timeliness, including for social data.