Lagos — The International Monetary Fund (IMF) yesterday harped on the need for Nigeria to develop a clear framework for dealing with bank failures while forecasting a recovery in the country's economic growth next year.

It, however, said the near-term outlook of the economy is "challenging" and highly dependent on global oil prices.

The Executive Board of the Fund made these known in a statement, after concluding the Article IV consultation with Nigeria.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities.

The directors welcomed the improvements that are already taking place in Nigeria's financial sector, including steps to improve the credibility of information on bank balance sheets and to establish a macro prudential unit within the Central Bank of Nigeria (CBN).

They, however, asked Nigeria to strengthen cross-border supervisory arrangements in view of the rapid expansion of Nigerian banks across borders and emphasised the urgency of implementing the framework for risk-based and consolidated supervision.

They welcomed the measures taken to identify and resolve problems in bank balance sheets.

"While the system as a whole has significant capital, individual banks that pursued high-risk strategies and allegedly violated governance and prudential regulations during the recent period of rapid credit growth are vulnerable. Directors urged the authorities to press ahead with their efforts to address governance problems and resolve the intervened banks," the IMF said.

The Fund urged the authorities to implement a clearly articulated monetary policy framework focused on price stability. This would anchor inflation expectations and establish credibility, it said, adding that effective communication of the framework would be critical.

The directors also welcomed the plans to move forward cautiously with the adoption of an inflation-targeting framework, with due attention to the necessary institutional underpinnings for such a regime.

Inflation has since moderated, declining from a peak of 15.1 per cent in December 2008 to 11 per cent in August 2009.

They supported the increased flexibility of the exchange rate in recent months, saying it would support the implementation of monetary policy focused on price stability. They noted the staff's assessment that the level of the naira is consistent with external stability.

The naira has lost more than a fifth of its value against the dollar since last November when the banking watchdog let the currency depreciate rather than use foreign reserves to defend it after a slump in the oil price. Crude accounts for about 90 per cent of export revenue.

Meanwhile, the naira closed at the inter-bank market yesterday in Lagos at N151.60 per dollar, while it exchanged at N149.14 at the official market - also known as the Wholesale Dutch Auction System (WDAS). At the black market, it traded at N154 per dollar.

The Fund projected that growth of the Nigerian economy this year will slow sharply, to 2.9 per cent from 6.0 per cent in 2008, before picking up pace to 5.0 per cent in 2010 and 5.2 per cent in 2011.

"The substantial cushion of oil savings and foreign reserves built up when oil prices were surging, together with bank consolidation and recapitalisation has enabled policymakers to manage the crisis fallout from a position of strength," the IMF said.

Nigeria's economy has been hard hit by the global financial crisis and a fall in oil prices. A collapse in private capital flows has hit Nigerian banks especially hard, after foreign equity investors withdrew from the market and local banks subsequently increased their foreign currency positions.

Nigeria's banking industry is currently undergoing a reform programme that has necessitated the removal of eight bank chief executives along with their executive directors and the injection of N620 billion into these institutions by the banking watchdog. The apex banks' audits found lax governance had left the banks so weakly capitalised and they posed a systemic risk.

The Fund also welcomed the proposed overhaul of the framework for the oil and gas sector, noting its critical importance from a macroeconomic perspective.

IMF said it supported the authorities' goals of improving governance, enhancing transparency and creating an efficient fiscal regime that remains attractive to investors. Achieving these improvements will require further detailed quantitative analysis and careful design of transitional arrangements, it said.

"In parallel with energy reform, Directors welcomed the authorities' emphasis on structural reforms aimed at diversifying the economy and strengthening infrastructure," it added.

The next Article IV consultation with Nigeria will be held on the standard 12-month cycle.