Country Report

Nigeria at a glance: 2005-06

OVERVIEW The president, , and his team face a daunting task in their efforts to push through long-term, sustainable economic reforms in the coming two years. However, the recent crackdown on high-level corruption seems to point to the president!s determination to use his final years in power to shake up Nigeria!s political system and this should help the reform process. Given the background of ethnic and religious divisions, widespread poverty, and powerful groups with vested interests in maintaining the current status quo, there is a risk that the reform drive, if not properly managed, could destabilise the country. Strong growth in the oil and agricultural sectors will ensure that real GDP growth remains reasonably high, at about 4%, in 2005 and 2006, but the real challenge will be improving performance in the non-oil sector, which will be a crucial part of any real attempt to reduce poverty in the country.

Key changes from last month Political outlook • There have been no major changes to the Economist Intelligence Unit!s political outlook. Economic policy outlook • There have been no major changes to our economic policy outlook. Economic forecast • New external debt data for 2003 show that the proportion of Nigeria!s debt denominated in euros was much higher than previously estimated. Owing to the weakness of the US dollar against the euro since 2003, this has pushed up Nigeria!s debt stock substantially, to US$35bn at the end of 2003. Despite limited new lending, mainly from multilateral lenders, we estimate that further currency revaluations and the addition of interest arrears to the short-term debt stock will push total external debt up to US$39.5bn by the end of 2006. • We have revised our oil price forecast upwards to an average of US$46/barrel in 2005, falling back to US$40/b in 2005. As a result, we now expect that Nigeria will run a current-account surplus of 6.9% of GDP in 2005, falling to 2.3% of GDP in 2006 as export earnings fall back and imports continue to grow. Foreign-exchange reserves should also continue to be built up in 2005, to reach US$25.6bn, or nearly nine months of import cover. May 2005

The Economist Intelligence Unit 15 Regent St, SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2005 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-4204

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Nigeria 1

Contents

Nigeria

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 9 Economic policy outlook 10 Economic forecast

13 The political scene

21 Economic policy

25 The domestic economy 25 Economic trends 26 Oil and gas 30 Manufacturing 31 Financial and other services 32 Infrastructure

34 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 21 Government revenue 26 Inflation 27 Nigerian National Petroleum Corporation joint ventures 28 Oil-sector investment and profit repatriation 29 Government payments to Nigeria’s oil producing joint-venture companies 34 Foreign-exchange reserves 35 External debt stock

List of figures

13 Gross domestic product 13 Consumer price inflation 21 Budget benchmark oil price 32 Performance of the NSE

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Nigeria 3

Nigeria May 2005 Summary

Outlook for 2005-06 The president, Olusegun Obasanjo, and his team face a daunting task in their efforts to push through long-term, sustainable economic reforms in the coming two years. However, the recent crackdown on high-level corruption seems to point to the president!s determination to use his final years in power to shake up Nigeria!s political system, which should help the reform process. Given the background of ethnic and religious divisions, widespread poverty, and powerful groups with vested interests in maintaining the current status quo, there is a risk that the reform drive, if not properly managed, could destabilise the country. Strong growth in oil and agriculture will ensure that real GDP growth remains reasonably high, at about 4%, in 2005 and 2006, but the real challenge will be improving performance in the non-oil sector, which will be a crucial part of any real attempt to reduce poverty in the country.

The political scene Two cabinet ministers, the president of the Senate and six other legislators, as well as the former head of the police force, have been charged in a major crackdown on corruption. The state-organised National Political Reform Conference has met to discuss possible constitutional reform, but has already been beset by a number of controversies. Tensions in Delta region have remained high in the wake of a new army crackdown.

Economic policy After much delay, the 2005 budget has finally been signed by the president. The government has raised domestic fuel prices without precipitating a nationwide strike; this may have been because of the new labour law which outlaws sympathy strikes. Although a new privatisation programme has been published, further delays are highly likely.

The domestic economy The confusion over the real GDP growth rate in 2004 has continued. The House of Representatives has been considering a proposal to raise the tax rate on profits from deepwater offshore oilfields from 50% to 85%. The Central Bank of Nigeria has announced plans to write-off 80% of the debts owed to it by banks. The long-awaited Power Sector Reform Bill, needed for the privatisation of the energy sector, has finally been enacted

Foreign trade and payments Because revenue has been boosted by high oil prices, the Central Bank has continued to build up foreign-exchange reserves; they reached US$21.5bn in March 2005. Senior Nigerian politicians have stepped up their campaign for external debt relief, while the threat of a potential default has increased.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 13th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Nigeria

Political structure

Official name Federal Republic of Nigeria

Form of state Federal republic, comprising 36 states and the Federal Capital Territory (FCT, )

Legal system Based on English common law

National legislature National Assembly, comprising the 109-seat Senate and the 360-seat House of Representatives; both are elected by universal suffrage for four-year terms

National elections Most recent legislative election, April 12th 2003, most recent presidential election, April 19th 2003; Olusegun Obasanjo was re-elected to the presidency, while his party, the PDP, won a majority of seats in both houses of the National Assembly; he was sworn in on May 29th 2003; next national elections scheduled for 2007

Head of state President, elected by universal suffrage to serve a four-year term

State government State governors and state houses of assembly

National government The Federal Executive Council, which is chaired by the president; appointed June 30th 1999

Main political parties People!s Democratic Party (PDP); All Nigeria People!s Party (ANPP); Alliance for Democracy (AD); All Progressive Grand Alliance (APGA); National Democratic Party (NDP); United Nigeria People!s Party (UNPP); 30 political parties are currently registered

President & commander-in-chief of the armed forces Olusegun Obasanjo Vice-president

Key ministers Agriculture Adumu Bello Commerce Communications Defence Education Vacan t Environment Federal capital territory Nasir El-Rufai Finance Ngozi Okonjo-Iweala Foreign affairs Health Industry Mogaji Mohammed Information Internal affairs Justice & attorney-general of the federation Akinlolu Olujinmi Labour & productivity Hassan Lawal Police affairs Power & steel Solid minerals Mangu Odion Ugbesa Transport Abiye Sekibo Wa t e r re s o u rce s Mukhtar Shagari Works Adeseye Ogunlewe

Central Bank governor Charles Soludo

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 5

Economic structure

Annual indicators 2000a 2001a 2002a 2003b 2004b GDP at market prices (N bn) 4,279 4,747 5,250 6,776 8,659 GDP (US$ bn) 42.1 42.7 43.5 52.4 65.2 Real GDP growth (%) 5.3 4.6 3.7 10.2c 5.1 Consumer price inflation (av; %) 7.0 18.1 13.6 14.0a 15.0a Population (m) 123.3b 126.6b 129.9b 133.2 136.5 Exports of goods fob (US$ m) 23,761 19,598 17,672 27,321 34,598 Imports of goods fob (US$ m) -10,553 -11,482 -13,347 -16,885 -17,695 Current-account balance (US$ m) 4,694 1,256 -5,115 -1,610 2,947 Foreign-exchange reserves excl gold (US$ m) 9,911 10,457 7,331 7,128a 16,956a Total external debt (US$ bn) 31.4 31.0 30.5 35.0a 37.4 Debt-service ratio, paid (%) 6.7 11.1 6.8 5.1 3.4 Exchange rate (av) N:US$ 101.70 111.23 120.58 129.22a 132.89a a Actual. b Economist Intelligence Unit estimates. c Official estimate.

Origins of gross domestic product 2003a % of total Components of gross domestic product 2003a % of total Agriculture (excl livestock) 31.3 Private consumption 67.6 Livestock 3.3 Government consumption 6.2 Crude petroleum & gas 33.4 Gross fixed capital formation 13.6 Manufacturing 4.4 Exports of goods & services 33.2 Wholesale & retail trade 12.7 Imports of goods & services -20.6 Finance & insurance 5.3

Principal exports 2003a US$ m Principal imports 2003a US$ m Oil 19,937 Manufactured goods 4,344 Gas 1,667 Machinery & transport 3,602 Chemicals 3,237 Food & live animals 1,750

Main destinations of exports 2003b % of total Main origins of imports 2003b % of total US 40.2 China 13.6 Brazil 8.3 UK 9.3 Spain 5.3 France 8.0 France 5.0 US 7.8 a Central Bank of Nigeria data. b Derived from partners' trade returns; subject to a wide margin of error.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 6 Nigeria

Quarterly indicators 2003 2004 2005 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Output Industrial production index (2000=100) 102.0 103.3 103.4 n/a n/a n/a n/a n/a Industrial production index (% change, year on year) 0.7 1.2 -2.4 n/a n/a n/a n/a n/a Prices Consumer prices (% change, year on year)a 10.1 9.9 14.0 17.8 19.7 18.9 15.0 n/a Petroleum spot price (Bonny Light 37°; US$/barrel) 26.5 28.7 29.7 32.3 36.0 42.1 43.8 47.9 Financial indicators Exchange rate N:US$ (av) 127.2 127.7 134.0 134.4 132.4 132.3 132.4 132.4 Exchange rate N:US$ (end-period) 127.4 127.9 136.5 133.4 132.3 132.4 132.4 132.4 Discount rate (end-period) 16.5 15.0 15.0 15.0 15.0 15.0 15.0 13.0 M1 (end-period; N bn) 1,319.73 1,264.03 1,225.56 1,201.54 1,214.84 1,262.91 n/a n/a M1 (% change, year on year) 51.3 35.4 29.5 7.1 -7.9 -0.1 n/a n/a M2 (end-period; N bn) 2,124.33 1,981.07 1,985.19 2,121.28 2,127.20 2,156.84 n/a n/a M2 (% change, year on year) 41.4 23.4 24.1 10.5 0.1 8.9 n/a n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 14,566 16,379 20,129 22,896 28,887 22,740 23,845 20,682 Stockmarket index (% change, year on year) 17.1 38.7 65.8 69.2 98.3 38.8 18.5 -9.7 Sectoral trends Crude oil production (m barrels/day)b 2.03 2.17 2.28 2.33 2.33 2.35 2.32 2.36 Crude oil production (% change, year on year) 6.3 10.2 13.4 9.4 14.8 8.3 1.8 1.3 Foreign trade (US$ m) Exports fob 4,376 4,905 5,455 6,589 7,805 8,165 8,589 n/a Petroleum 4,314 4,730 5,358 6,026 6,809 7,626 7,968 n/a Imports cif -2,673 -2,648 -2,584 -3,091 -2,478 -5,250 -3,346 n/a Trade balance 1,703 2,257 2,871 3,498 5,327 2,915 5,243 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 7,352 6,793 7,128 9,303 11,118 12,873 16,956 21,810 a The 12-month moving average for March, June, September and December. The Central Bank of Nigeria uses this rate as its official measure of inflation. b Excluding condensates. Sources: Central Bank of Nigeria; IMF, International Financial Statistics; Direction of Trade Statistics; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence; Standard & Poor's, Emerging Stock Markets Review.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 7

Outlook for 2005-06

Political outlook

Domestic politics On the surface, the forecast period will be characterised by apparent political stability, with the president, Olusegun Obasanjo, and his People’s Democratic Party (PDP) retaining a firm grip on power. However, internal squabbling within the PDP, against a background of considerable public disenchantment with those holding office and a lack of visible improvement in living standards, will make the job of consolidating democracy in Africa’s most populous country difficult. Although the government does have a window of opportunity in which to push ahead with its ambitious programme of political and economic reforms"Mr Obasanjo also has a sense of his place in history that makes him keen to push through change"the window is little more than twelve months and a lot needs to be achieved before the prospects of pushing even minor changes through the National Assembly become limited as campaigning for the elections, scheduled to be held in early 2007, picks up. Although the administration is hoping that a national political conference to discuss possible constitutional reform will unify a divided nation, the summit is unlikely to mend the faultlines that undermine national unity. The conference, which was hastily organised to start in late February, is scheduled to last for three months. However, given that the 400 attendees have largely been nominated by the presidency and state governments, and as such are dominated by the PDP, the conference is unlikely to propose major change and may simply be used as a platform for grandstanding by the various geopolitical groups laying claim to the presidency. The government’s critics are planning a rival conference later in the year.

Outbreaks of unrest Sporadic outbreaks of religious and ethnic violence will continue to surface during the forecast period. These are driven by a potent mix of community tension, religious intolerance, unrelenting mass poverty and political disillusion- ment. Two major areas of tension will remain: in Nigeria’s middle belt, between the predominantly Muslim north, where 12 states have declared Sharia (Islamic law), and the mainly Christian and more Westernised south; and in the crucial oil-producing Niger Delta states, where discontented communities and gangster-like militias have been fighting the federal government and each other for control of oil wealth. The government is likely to continue to use military force to restore law and order, but needs to be careful that heavy-handed tactics do not aggravate potentially explosive situations and give credence to charges of dictatorship levied against the president by civil liberties groups. Ongoing unrest in various states could also widen rifts within the PDP. The recent political battles within Plateau and Anambra states have highlighted the apparent inability of the authorities to check wayward elected officials, a problem exacerbated by the impunity of state governors under the constitution. Despite starting to prosecute several high-profile ministers and legislators and the former police chief in early 2005 on corruption charges, continuing such a

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 8 Nigeria

high-profile anti-corruption campaign carries risks for the administration. Even if popular with the public"although enthusiasm would fade if the trials were to drag on inconclusively"the moves could be interpreted by Mr Obasanjo’s opponents as being politically motivated, leading to a major political backlash. Given the disarray in the main opposition parties, which like the PDP are crippled by internal divisions, the main resistance to government policies is likely to continue to come from the trade union movement, led by the umbrella body, the Nigerian Labour Congress (NLC). The NLC will continue to rally public opposition to further government attempts to deregulate domestic fuel prices, although a new labour law constrains its ability to organise crippling national strikes, as it has done quite successfully in recent years.

Election watch The 2007 national elections are already an underlying factor in the internal squabbling of the main parties, and are likely to become the central focus of politics from early 2006. The current front-runners to stand as candidates to contest the polls are Atiku Abubakar, the current vice-president; Ibrahim Babangida, a former military ruler (1985-93) and still a very powerful behind- the-scenes political force; and Muhammadu Buhari, a former military ruler (1983-85) who challenged Mr Obasanjo in the April 2003 contest. Given the overwhelming dominance of the PDP at all tiers of government, it would seem likely that the party will remain the most formidable political force in the forthcoming elections, but much will depend on whether it can contain the leadership battles between factions backing powerful would-be presidential candidates without falling apart. Media speculation that Mr Obasanjo may seek to alter the constitution to enable him to stand again will continue to be stoked by opposition groups unconvinced by the president’s public assertions that he is looking forward to returning to his farm in 2007. Although the Economist Intelligence Unit cannot altogether rule out the possibility (if, for example, there were a deterioration in security of sufficient seriousness to justify the president suspending the constitution and ruling by decree), it is unlikely that Mr Obasanjo could, even if he so desired, bring about a change in the constitution to allow him to retain power, given the immense political influence of those waiting in the wings to take over.

International relations Mr Obasanjo is likely to remain deeply involved in foreign-policy matters, even though most Nigerians would prefer him to focus on domestic issues. As well as attempting to promote the New Partnership for Africa’s Development (Nepad), he will seek to be an influential voice in efforts to settle disputes in Liberia and other parts of West Africa, such as Côte d’Ivoire and Togo, as well as further afield, in such countries as Zimbabwe and Sudan. However, Mr Obasanjo has failed to convince as a mediator. Nigeria has already missed the September 2004 deadline to hand over the Bakassi Peninsula to Cameroon, as agreed in UN-sponsored bilateral discussions. The major problem at present is that the Nigerian majority on the peninsula has continued to stress that it does not want to become part of Cameroon. The eventual withdrawal of Nigeria should, nonetheless, bring the long-running border dispute to an end, even if it drags on for a prolonged period.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 9

Economic policy outlook

Policy trends In an effort to achieve an economic legacy during his final term in office, Mr Obasanjo has put together a reform-oriented economic team, headed by the finance minister, Ngozi Okonjo-Iweala. The main thrust of economic policy has been outlined in the National Economic Empowerment and Development Strategy (NEEDS), which is set to run until 2007. This seeks to reduce the government’s involvement in the economy, through privatisation, deregulation and liberalisation, and should help to encourage investment in agriculture, manufacturing, solid minerals and tourism. In particular, reform of the electricity sector to ensure a more reliable supply will be considered a key benchmark in measuring progress. Although NEEDS looks promising on paper, poor policy implementation will continue to be one of the government’s biggest weaknesses, particularly given the range of political vested interests in the country. Moreover, with the reform effort having only really picked up in late 2004, the administration now only has until early 2006 to push through change before political tension between the executive and the legislature starts to reappear in the run-up to the 2007 elections. The reform effort is also likely to be undermined by a weak civil service and overlaps between local, state and federal government. Given poor public perceptions of the Bretton Woods institutions, we do not expect the government to reach a formal deal with the IMF over the forecast period, al- though the Fund has agreed to help to monitor the government’s reform efforts.

Fiscal policy Provisional data indicate that the government has held back growth in expenditure in 2004 against a background of rapidly rising revenue and, as a result, we expect that it ran a modest budget deficit of only 1.6% of GDP. It has also saved some its windfall oil revenue in 2004, which it has placed in its fiscal stabilisation account and will carry over to be spent in subsequent years, notably in 2006-07, when the elections are approaching and oil prices are forecast to fall back. With oil prices remaining high in 2005, we expect that, as was the case in 2004, revenue will exceed the government’s estimates (the 2005 budget is now based on a forecast oil price of only US$30/barrel). The govern- ment should therefore be able to push ahead with spending, notably on infrastructure. This means that it will be able to run a similar-sized deficit to that of 2004 in 2005, at a forecast 1.8% of GDP, and still make substantial contributions into the fiscal stabilisation account. Although oil prices are forecast to fall back in 2006, the fall in revenue will be partially offset as the government starts drawing down its funds in the fiscal stabilisation account. With elections approaching, the government will continue to boost spending, notably on infrastructure, and may succumb to increasing civil-service wages. As a result, the fiscal deficit is forecast to rise to 2.8% of GDP in 2006. The government should be able to finance a deficit of this size through domestic borrowing, and it will try to issue more long-term bonds in order to encourage the development of a domestic capital market.

Monetary policy The governor of the Central Bank of Nigeria (CBN), Charles Soludo, has already shown his desire to push ahead with economic reform by announcing in June

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 10 Nigeria

2004 that the CBN will raise the minimum capital requirement for commercial banks to N25bn (US$188m)"from N2bn"by the end of December 2005. This seems to be driving a wave of proposed mergers in the banking sector"the number of banks likely to emerge is unclear, but it could be as few as 20, compared with the current 89. In addition, in early 2005 the CBN announced a number of important changes to monetary policy. First, although it will continue to use the Dutch auction system to determine the value of the naira, it will seek to keep it trading within a 3% band. The CBN argues that this will help to improve confidence in the naira, but it is also an attempt to limit appreciation of the currency: upward pressure on the currency was notable in 2004 owing to high oil prices, a trend likely to be maintained in 2005. However, should oil prices fall back sharply, the CBN’s ability to defend such a tight band will be tested, unless it is willing to run down its foreign-exchange reserves. Second, the CBN has committed itself to a more interventionist interest-rate policy. Having left its minimum rediscount rate unchanged since August 2003, at 15%, it lowered it to 13% from February 1st 2005 and is committed to reviewing the rate on a quarterly basis depending on trends in the seasonally adjusted inflation rate. However, the main problem of recent years will remain unchanged, and is that the CBN will be under considerable political pressure to keep interest rates low in order to boost non-oil economic activity (also a commitment of the NEEDS policy), while wanting to maintain downward pressure on the inflation rate. Consequently, it will struggle to reduce inflation to single digits over the forecast period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.1 4.2 3.9 OECD 2.0 3.3 2.4 2.3 EU25 1.1 2.4 1.9 2.1 Exchange rates ¥:US$ 115.9 108.1 102.7 93.8 US$:€ 1.132 1.244 1.350 1.400 SDR:US$ 0.714 0.675 0.646 0.628 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.34 US$ 3-month commercial paper rate 1.10 1.48 3.31 4.38 Commodity prices Oil (Brent; US$/b) 28.8 38.5 46.0 40.0 Gold (US$/troy oz) 363.3 409.5 435.0 402.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.1 -6.5 -1.4 Industrial raw materials (% change in US$ terms) 13.0 21.0 3.5 -6.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Following the rapid economic recovery currently under way in 2004, we expect global economic growth to slow over the forecast period, although it will

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 11

remain robust and broad-based, at 4.2% in 2005 and 3.9% in 2006. Owing to strong demand from Asia, an ongoing risk premium built into the price and low stocks in the US, global oil prices have remained high in early 2005 and we expect them to average US$46/barrel for the year. Although the price should fall back marginally in 2006, to average US$40/b, as the global economy slows, the fallback will be limited by ongoing concerns over spare global capacity. In addition to the ongoing risks of possible supply disruptions due to geopolitical or other reasons, oil markets will remain nervous, with speculators likely to continue to bet on higher prices.

Economic growth We expect that real GDP growth will remain robust over the outlook period, and high by historical standards, at 4.5% in both 2005 and 2006. This will be driven by strong growth in agriculture and services and increased government spending on infrastructure, against a background of steady rises in oil and gas production. However, the slow progress with economic reform and privatisation will continue to hold back growth, as will the weakness of the country!s infrastructure and the low productivity of the labour force. In particular, these factors will serve as a major constraint to growth in the manufacturing sector. Moreover, although growth is expected to be robust, given that it is heavily dependent on growth in the oil and gas sector, which has few linkages with the rest of the economy and tends not to create significant employment, the impact on reducing poverty is unlikely to be as great as the headline figures would indicate.

Inflation Nigeria’s inflation rate has been on a downward trend for the last nine months. From a recent peak of 19.7% in June 2004, the 12-month moving average inflation rate (the measure preferred by the CBN) had fallen to just 12.9% by February 2005. Although this downward tend is likely to continue in early 2005, particularly if a reasonable harvest continues to ensure moderate food price increases, the government will struggle to push inflation into single digits for a prolonged period, although this may be achieved for short periods. This is because the increase in domestic fuel prices in 2004 has not fully worked its way through the economy, and because further increases were made in early 2005. In addition, with government spending set to remain high, particularly in the second half of 2006 in the run-up to the elections, monetary policy quite loose, given the pressure on the CBN not to raise interest rates, and a possible increase in value-added tax, inflation is likely to remain in double digits. We forecast that inflation will average 11.1% in 2005 and 10.3% in 2006.

Exchange rates With oil prices forecast to remain high in 2005, the CBN will continue to intervene in the market to keep the naira within its 3% band. Because of this, and coupled with the ongoing weakness of the US dollar on global currency markets, we expect the naira to remain relatively stable, averaging N133.1:US$1 for the year, which is only a marginal fall on the N132.9:US$1 average in 2004. However, the naira will come under growing pressure in the second half of 2006 as demand for imports and foreign currency remains high, oil prices start to slip back, and political uncertainty increases as the elections approach. The extent to which the naira falls in 2006 will depend on the CBN’s willingness to run down its foreign-exchange reserves in order to support the currency within

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 12 Nigeria

the band, given that building these reserves up has been one of the few positive achievements of the civilian government to date. Faced with these pressures, the CBN is likely to allow a modest depreciation of the naira to the lower end of the band; we forecast that it will average N137.1:US$1 in 2006.

External sector Nigeria traditionally runs a trade surplus, which is offset by a deficit on the services account, with trends in these two volatile components driving changes in the overall current account. In contrast, the current transfers account should remain steadily in surplus throughout 2005-06, owing to large inflows of private transfers from the Nigerian diaspora. With the oil price having averaged nearly US$40/b in 2004, we estimate that Nigeria ran a current-account surplus equivalent to 4.5% of GDP in 2004, despite a considerable pick-up in imports and services debits. This trend should be maintained in 2005, with the high oil price and rising production ensuring that export earnings continue to rise, pushing the current-account surplus up to 6.9% of GDP. Although export earnings will fall back moderately in 2006, as the oil price falls back, and imports and services debits will continue to grow, export earnings will remain historically high and the current-account surplus is forecast to remain in surplus, at 2.3% of GDP.

Forecast summary (% unless otherwise indicated) 2003a 2004b 2005c 2006c Real GDP growth 10.2d 5.1 4.5 4.5 Industrial production growth 0.0 2.7 1.7 2.5 Gross agricultural production growth 6.5b 6.5 6.0 5.0 Consumer price inflation (av) 14.0 15.0a 11.1 10.3 Consumer price inflation (year-end) 23.8 10.0a 10.2 12.0 Commercial lending rate 20.7 19.2a 16.1 16.3 Government balance (% of GDP) -3.0b -1.6 -1.8 -2.8 Exports of goods fob (US$ bn) 27.3b 34.6 42.4 39.8 Imports of goods fob (US$ bn) 16.9b 17.7 21.1 22.0 Current-account balance (US$ bn) -1.6b 2.9 5.6 1.9 Current-account balance (% of GDP) -3.1b 4.5 6.9 2.3 External debt (year-end; US$ bn) 35.0 37.4 39.2 39.5 Exchange rate N:US$ (av) 129.2 132.9a 133.1 137.1 Exchange rate N:¥100 (av) 111.49 122.90a 129.69 146.22 Exchange rate N:€ (year-end) 172.2 179.2a 179.7 191.9 Exchange rate N:SDR (year-end) 202.8 205.5a 203.4 219.3 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Official estimate.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 13

Gross domestic product Consumer price inflation % change, year on year av; %

Nigeria Sub-Saharan Africa Nigeria Sub-Saharan Africa 12 20 18 10 16 8 14 6 12 10 4 8 2 6 0 4 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000

The political scene

The government launches a Within a space of two short weeks in late March and early April the Nigerian crackdown on corruption public witnessed the downfall of two government ministers, the Senate president and six other legislators, as well as the nation!s chief of police, in separate, corruption-related incidents. The downfall of so many high-ranking officials in such a short space of time and in a series of extraordinary scandals has shaken Nigeria!s political system, but has arguably boosted the much criticised anti-corruption programme of the president, Olusegun Obasanjo. The first hint of the crackdown came in a nationwide broadcast on March 22nd, in which Mr Obasanjo sacked his education minister, , for allegedly bribing the Senate president, , and six other members of parliament (MPs) to ease the passage of an inflated education budget. Details of the N55m (US$415,000) bribe, using public money, were contained in a report that the president received on March 19th from the Economic and Financial Crimes Commission (EFCC), which was investigating allegations that government ministers had been bribing legislators to win approval for their budgets. Other officials indicted by the report included the acting permanent secretary and five directors of the Ministry of Education, as well as the vice-chancellor of the Federal University of Technology, although they are unlikely to be prosecuted at this stage.

Sacked minister claims bribe On April 5th Mr Wabara resigned as Senate president, telling colleagues that he payment was lobbying was voluntarily stepping down to preserve the sanctity of the office. However, one week later, he was arraigned before the Abuja High Court on fraud charges along with five other MPs and the former education minister. All denied the charges and were bailed to appear for trial on May 16th. Despite their pleas of innocence, evidence given by Mr Osuji and Mr Wabara at the public hearing of the Senate Committee on Ethics, Code of Conduct and Public Petitions suggests that the two men were at least culpable of engaging in dubious backroom activities. Mr Osuji told the committee on April 11th that he arranged for N55m of Ministry of Education funds to be paid to lawmakers in charge of reviewing his budget, but claimed that it was not a bribe. He said that it was "a welfare

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 14 Nigeria

package", or in effect constituted political lobbying, and as such was not wrong. Mr Osuji claimed that he was stunned when the former Senate president asked him to raise the money within 24 hours and give it to the relevant parliamentary committees if he was serious about having his 2005 budget passed. Apparently indignant at his sacking, Mr Osuji has taken the government to court, claiming that his dismissal on television, without redress, infringed his human rights. The evident inability of such a high-ranking government official to grasp the impropriety of using public funds, even if only to “lobby” other state officials to do their jobs, is worrying. Meanwhile, in his testimony before the Senate committee, Mr Wabara acknowledged that he had facilitated a meeting between Mr Osuji and a group of legislators to smooth the passage of the education bill, but denied that money had changed hands. However, one of the senators indicted in the scandal, Chris Adighije, admitted to the committee that he and the others had indeed taken the bribe, and the meeting at which the bribe was demanded from Mr Osuji took place in Mr Wabara’s residence. Mr Adighije publicly apologised for his role in the sordid affair and was not among those charged with corruption on April 12th.

President lambasts corrupt Mr Obasanjo!s public broadcast left Nigerians in little doubt about the all- lawmakers pervasive nature of corruption within the National Assembly. Mr Obasanjo explained that an intelligence report he received in February stated that some ministers had disregarded his instruction that ministries, departments and parastatals should not bribe, or give inducements, to legislators for approval or enhancement of budget proposals. This suggests that the practice of bribing lawmakers was not new and that other ministers besides Mr Osuji had made such illicit payments. One possible example came after the 2003 elections, when the minister for the Federal Capital Territory, Nasir El-Rufai, publicly accused the deputy Senate president and the deputy leader of the Senate of demanding a N54m (US$410,000) bribe to confirm his nomination (November 2003, The political scene). In March Mr Obasanjo recalled the trouble he had had getting parliament!s approval for a bill to set up an anti-corruption agency, claiming that members of the National Assembly had feared that if they passed the bill the way it was, they would all end up in prison. Moreover, Mr Obasanjo said that allegations against other ministers and departments that may have committed such offences would continue to be investigated, which suggests that more cabinet heads may roll in the crackdown on corruption.

Senate chooses new president Following Mr Wabara!s resignation, was elected unopposed as the new president of the Senate. Mr Nnamani, from Enugu State in south- eastern Nigeria, became the fifth Senate president since the restoration of civilian rule in 1999. At least three of his predecessors left office after facing corruption charges. However, political analysts have also pointed out that the frequent changes of leadership in the Senate have also been partially the result of presidential meddling in the process of selecting Senate presidents, which has undermined their authority from the start.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 15

Housing minister sacked over Less than two weeks after sacking his education minister, on April 5th sale of government properties Mr Obasanjo fired the housing and urban development minister, Mobolaji Osomo, for allegedly selling choice government houses to senior figures in the government, the military and from across public life. In a letter written to Mrs Osomo, Mr Obasanjo expressed “displeasure” at the manner in which 207 properties in Lagos were being sold and ordered the cancellation of the planned sales. The president said that he had been alerted to the wrongdoing by an anonymous letter, which informed him that 207 people had been “allocated or offered land or property for sale surreptitiously#some without payment”. Mr Obasanjo said he was personally embarrassed that most members of his wife!s family were on the list, which was published by newspapers and read like a who!s who of Nigerian public life. The properties being sold were made available under the government!s policy to monetise the benefits given to civil servants, which aims to allow for greater transparency and reduced costs to the government. They were all located in the exclusive Ikoyi district of Lagos at prices ranging from about US$250,000 to US$5m. Although the press subsequently debated whether the prices paid for the houses reflected market values, this missed the real point, namely that so many state officials supposedly on meagre salaries could afford to buy them. Several senior officials who appeared on the list but had turned down the offer were understandably quick to publicly disassociate themselves from the sale. These included the vice-president, Atiku Abubakar, the governor of the Central Bank of Nigeria, Charles Soludo, and the finance minister, Ngozi Okonjo-Iweala. As a further part of the programme of reform, on March 2nd the cabinet also approved the sale of 30,000 residential federal housing units in the capital, Abuja. This is to start from April 2005 and is expected to be completed within 12 months and generate about N300bn (US$2.4bn). The Lagos scandal has, however, raised concerns about the government!s capacity to dispose of state properties in a transparent manner.

Ex-chief of police is charged On April 4th the disgraced former head of the police force, Tafa Balogun, was with embezzlement charged at the Abuja High Court with 70 counts of fraud, money-laundering and theft, involving some N13bn (US$98m), allegedly committed during his three-year tenure as the inspector-general of police. He was forced to retire in January after the EFCC revealed that it was investigating large sums of money held by him in a series of Lagos bank accounts (February 2003, The political scene). Mr Balogun was arrested on March 29th and questioned by the EFCC. Appearing in court handcuffed, the former police chief pleaded not guilty to all the charges. Some commentators had criticised the government for not taking action sooner against Mr Balogun, a former ally of the president, but the EFCC explained that the delay had arisen because it was completing its investigation. Nevertheless, some critics still believe that the government was compelled to prosecute Mr Balogun to demonstrate even-handedness in its new crackdown on corruption.

Mixed public response to anti- There has generally been a mixed response from the public and politicians to graft moves the government!s high-profile offensive against corruption. Many critics of the administration say that it has been selective in its purge, targeting expendable

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 16 Nigeria

politicians or political rivals. Many MPs, bruised by the president!s very public castigation of the legislature, say that his offensive is crude, divisive and has undermined the credibility of not only the National Assembly, but the entire political system. Concern has also been expressed that the recent anti- corruption moves are designed to please foreign creditors whom Mr Obasanjo has publicly admitted will not consider debt relief for Nigeria as long as its political system is compromised by endemic corruption. The Lagos-based Civil Liberties Organisation (CLO), for example, described Mr Obasanjo!s anti- corruption moves as an image-cleaning gambit aimed at portraying his government as transparent and accountable, and at boosting his popularity among Nigerians, as well as pleasing the country!s international creditors. Critics such as the CLO have also pointed out that, despite the many anti- corruption organs set up since 1999 and several prosecutions, not a single high- profile official has, so far, been jailed. Supporters of the current administration see the recent moves against high- ranking officials as a genuine new policy initiative, which signals Mr Obasanjo’s determination to clean up the system during his remaining two years in power. Moreover, in a deft political move that has won some additional support, in April the president urged Nigerians to publish details of any corruption allegations they had against him and his family. This not only displayed his confidence in his own integrity, but also sent out a challenge to other contenders for power who would be more vulnerable under public scrutiny. In particular, the two men most likely to succeed Mr Obasanjo as president"the current vice-president, Atiku Abubakar, and former military ruler, Ibrahim Babangida"are not expected to view corruption with as much disdain as the present incumbent. Mr Obasanjo’s supporters also dismiss charges that his purges have been politically motivated, pointing out that the president!s allies have been targeted, and, perhaps more importantly, that in a country where high-level corruption is as widespread as in Nigeria, any anti-graft offensive must be pragmatic and selective if the whole system is not to collapse. Many anti-poverty and civil liberties groups that are normally critical of Mr Obasanjo have praised his recent anti-corruption offensive and called for further action. The Nigeria Labour Congress (NLC) said in a statement that the handling of the “bribes-for-budget” scandal showed the type of decisiveness that Nigerians had always expected and demanded from government, in contrast to their past disappointment at the government!s aloofness in the face of serious corruption allegations against senior officials. The president of the Academic Staff Union of Universities (ASUU), Abdullahi Sule-Kano, told reporters that the government was now taking the fight against corruption seriously, and regretted its previous neglect of his union!s complaints about high-level corruption in the education sector. The National Association of Nigerian Students staged a protest at the National Assembly in solidarity with Mr Obasanjo!s anti-corruption drive and called for more heads to roll.

National conference grapples How to effectively combat corruption in an endemically corrupt nation like with the nation's problems Nigeria has been one of the questions that has concerned participants in the state-sponsored National Political Reform Conference that began in Abuja on

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 17

February 21st (February 2005, The political scene). Some 400 handpicked delegates have been attending the three months of talks in Abuja and grappling with the key issues affecting Nigeria with a view to reaching a consensus and making recommendations that would form the basis for constitutional reform. The flawed 1999 constitution, which was drawn up under military rule, is seen by many Nigerians as inappropriate for dealing with the complexities of what is a multi-ethnic and multi-faith society. Among the other major issues being addressed by the conference are revenue-sharing between the different tiers of government and between rival geo-political regions; devolution of power; and the streamlining of the federation. On February 27th Mr Obasanjo commented in a television chat show that he would like the conference to come up with recommendations on amendments to the 1999 constitution that would strengthen transparency and improve governance.

The conference attracts That the arrangement and conduct of the conference have generated criticism controversy is not surprising, given the difficulty of reaching consensus in a land with such complex and divergent interests. One of the main sources of concern has been the cost of holding the conference. The National Assembly refused to authorise the N932m (US$7m) needed to pay for it, forcing the president to dip into a contingency fund. Each delegate is reportedly being paid a daily allowance of N20,000 (US$151), a significant sum in a nation where 70% of the population is living on less than US$1 a day. Criticism has also been raised as to the point of holding the conference at all. Many MPs, as well as ordinary Nigerians, believe that it is a futile exercise since whatever is recommended will still have to be debated and agreed upon by the National Assembly"thus they argue that it would make more sense simply for the legislature to try and find solutions to the thorny issues bothering the country. Some opposition groups denounced the conference as being too hastily organised and falling short of the truly representative “sovereign national conference” that they have been demanding for years (August 2004, The political scene). Their vision is of a gathering of elected representatives of Nigeria!s various ethnic and religious groups undertaking a root-and-branch dissection of the political system. This would include considering the option of ending the Republic as currently constituted, and concluding a legally binding constitution, something which, unsurprisingly, Mr Obasanjo and most mainstream Nigerian politicians would not support, fearing that it would lead to the dismembering of the nation. However, this has not deterred opponents of the government who, through the Pro-National Sovereign Conference Organisation (PRONACO), are planning a parallel conference to be held in Lagos in June.

Muslim north protests at The huge divisions within the country and the difficulties of bridging them under-representation were also clear from a row over the religious composition of those attending the conference, which threatened to scuttle the talks. In early March a high- powered delegation of 40 Muslim leaders led by the Sultan of Sokoto, Muhammadu Maccido, visited Mr Obasanjo to ask him to reconstitute the conference to reflect the nation!s religious composition. According to newspaper reports, the delegation from the Nigeria Supreme Council of Islamic

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 18 Nigeria

Affairs (NSCIA) protested that although Muslims constitute 65% of the population, their representation in the conference is 160 against 233 Christians. Mr Obasanjo, a southern Christian, turned down the NSCIA!s request, saying that religion was not a factor in arranging the conference. Subsequently, a Muslim group, the Supreme Council for Sharia in Nigeria, called for a Muslim boycott of the conference. Despite ongoing grumbling among Muslim delegates, especially those from the dozen northern states practising the controversial Sharia legal code, there has been no walkout. Nevertheless, there is much discontent among Muslim politicians and activists who argue that Muslims have been marginalised under Mr Obasanjo!s rule. They point out that Christians now dominate the top ranks of the military, the diplomatic service, the civil service and the government. Christians, mainly from the south, dismiss such concerns, saying that northerners have been in power for most of the years since independence and pointing out that 12 of the past 15 Nigerian rulers have come from the north. One of the effects of the geo-ethnic shift in power relations is that whereas in the past northern Muslim leaders were generally opposed to proposals for looser federation, in fear of being deprived of access to Nigeria!s oil wealth, some Islamic fundamentalists are now pushing for a national conference to restructure Nigeria so as to give individual states more scope to implement Sharia law. For Christians and moderate Muslims, the prospect of further Islamisation in the north is daunting. Apart from anything else, it would deepen the cultural divide between the north and south and heighten religious tensions that have already fuelled numerous ethno-religious clashes since 1999, in which several thousand people have died, especially in the middle-belt region.

Muslim and Christian groups The exact population divide between Christians and Muslims in Nigeria threaten census boycott remains a controversial question. It had been hoped in some quarters that the matter would be resolved by holding an accurate national population census. But this now seems unlikely, as the National Population Commission (NPC) has announced that questions on religion will be excluded from the questionnaire. Following this announcement, leaders of both religions threatened to boycott the 2005 census. The threats were made by the Christian Association of Nigeria and the Supreme Council of Sharia in Nigeria. In March the NPC said that the government was sticking to its decision to remove questions on ethnicity and religion from the census forms, warning that the inclusion of such sensitive questions could threaten national peace. NPC officials explained that as each religious and ethnic group would want numerical superiority in a country where numbers count in terms of sharing revenue and power, it is safer not to tempt people to explore ways to rig the census. The threat of the boycott, however, should not be overstated, since the number of people registered in each state and geo-political zone is important in terms of allocating central government resources, which should encourage participation.

Oil producing states demand a Another ongoing source of tension in the country, the Niger Delta issue, has bigger cut of oil wealth also moved back into the spotlight in recent months, partly as a result of the national conference at which representatives from the Niger Delta have made

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 19

high-profile demands for greater regional autonomy and local ownership of oil resources. A delegate from Bayelsa State, Oronto Douglas, said that the Delta region wants all of Nigeria!s regions to have 100% control over their natural resources and, in turn, to pay taxes and royalties to the central government. Delta politicians and activists are looking for their region to be able to retain a significantly higher percentage of Nigeria!s oil revenue than the 13% derivation payment stipulated in the 1999 constitution. Tonye Long John, a member of the House of Representatives, says that the ratio should return to the 50% formula contained in the 1963 constitution. However, such a radical restructuring of Nigeria!s fiscal federalism is unlikely to go down well with politicians from parts of the country that are relatively poor in natural resources.

The army is accused of Oil continues to be a cause of resentment and conflict in Delta region, where rampaging an oil town rival groups fight each other and the security forces over oil resources. In the latest outbreak of violence, at least 30 people were killed by government troops during a raid on the remote town of Odioma, in Bayelsa State, on February 19th, carried out as part of investigations into an oil dispute between two communities. Local residents accused the army of burning the majority of houses in the town. The military launched the attack in response to the killing of 12 people earlier in the month in a boat ambush by militiamen embroiled in a bitter dispute between Odioma and Obioku communities over an adjoining oil-rich portion of land. The army denied killing anyone, but claimed that troops came under fire as they approached Odioma in pursuit of the culprits of the boat attack. On February 27th the governor of Bayelsa State, Diepreye Alamieyeseigha, who deployed the troops, announced plans to set up a judicial inquiry into the February 19th raid. Tension between rival communities laying claim to oil, land and associated benefits, such as jobs and welfare projects, is common in the Niger Delta, where hundreds of people have died in inter- and intra-communal violence in recent years. Maintaining law and order in the swampland of the Niger Delta is a daunting challenge for the authorities, as substantial increases in federal funding for development projects in the region during the past four years appear not to have significantly raised the living standards of ordinary people, or altered their feelings of marginalisation and neglect. This situation is further complicated by local and regional politicians who use the genuine grievances of the people as an opportunity to seek personal power and gain access to oil wealth (August 2004, The political scene). Many of the gangs operating in the Niger Delta are also increasingly well armed, prompting official concerns about the proliferation of illegal arms in the country. In late March the minister of defence, Rabiu Kwakwanso, said that arms proliferation remained a contributory factor to the recurring incidents of ethnic and communal clashes in the country. He spoke in Abuja at a ceremony marking the destruction of 695 assorted arms and rounds of small ammunition held by the National Committee on the Destruction of Illegal Arms and Ammunition, which was set up by Mr Obasanjo in March 2004.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 20 Nigeria

The proliferation of arms is a The illicit build-up of arms and recruitment of thugs by politicians are likely to growing problem increase as the 2007 elections move closer, especially as the polls are likely to be hotly contested. Concern about the risk of impending political violence led the deputy governor of , Benjamin Elue, to warn in early March that some politicians in his oil-producing state were already stockpiling arms and recruiting youths for use as militia to intimidate their opponents in the 2007 elections. Mr Elue told a meeting of the ruling People!s Democratic Party (PDP) in Asaba that politicians were drawing on the large reservoir of unemployed youths in the region to form militias to be used to retain and acquire power. Similar accusations are likely to mount in the coming two years as the political temperature rises.

More sporadic outbreaks of Besides politically motivated conflicts, the authorities have also had to deal communal violence occur with sporadic outbreaks of communal violence, often triggered by competition for land and scarce resources. Recent incidents of violence include the following. • The death of more than 50 people in mid-April in 10 days of fighting between the Ukelle community in Cross River State and their neighbours, the Izzi people in Ebonyi State. The police were able to restore peace by late April as the governors of the states and traditional leaders met to try to end the dispute over the ownership of land. • The slaying of 14 people by ethnic Fulani herdsmen, who attacked two ethnic Tiv villages in Benue State, central Nigeria, in April. The herdsmen from neighbouring Taraba State, armed with guns and machetes, stormed the remote farming villages, indiscriminately killing people and burning houses, according to the speaker of the Benue State House of Assembly, Mzenda Iho. Tension between the two ethnic groups had been high since the arrest in March of two Fulani men accused of raping a Tiv girl, said Mr Iho. • In late February at least 13 people died in renewed clashes between Fulani herdsmen and farmers in two areas of Jigawa State in northern Nigeria, the state police commissioner, Saleh Abubakar Ningi, told reporters. He blamed the clashes on Fulani nomads from neighbouring Niger.

Charles Taylor's exile in Nigeria has come under renewed pressure to surrender former Liberian Nigeria remains controversial president, Charles Taylor, to the UN-backed court for crimes in Sierra Leone. On February 24th the European Parliament passed a resolution calling on Nigeria to hand Mr Taylor over to the Special Court to answer war crime charges stemming from his role in backing rebels in Sierra Leone who committed atrocities during that country!s civil war in 1991-2002. Mr Taylor has been living in comfortable exile in Nigeria!s south-eastern town of Calabar since he was forced out of power in August 2003. Despite an international warrant for Mr Taylor !s arrest, Abuja has refused to surrender him, saying that the decision to grant the former warlord asylum was part of the deal to restore peace in war- torn Liberia, although the president has conceded that he would consider handing him over if an elected Liberian parliament demanded it. However, the European Parliament claims that under his current status Mr Taylor remains a threat to international peace and security, noting that under the Geneva

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 21

Convention war criminals may not be granted refugee status. The issue was also a key aspect of the discussions during Mr Obsanjo’s meeting with the US president, George Bush, in Washington in early May. The US in general seems more supportive of the dilemma facing Mr Obasanjo, as it was instrumental in encouraging the Nigerian government to provide exile to Mr Taylor in order to broker the wider political settlement in Sierra Leone.

Economic policy

The president signs the The president, Olusegun Obasanjo, signed the 2005 Appropriation Bill into law delayed 2005 budget on April 12th, more than three months after the start of the budget year. Although the president described its enactment as a milestone in the history of Budget benchmark oil price Nigerian budgets, this can only be seen as a somewhat generous verdict. The US$/barrel delay in passing the budget, something that has dogged almost every budget

35 since the return to civilian rule in 1999, once again highlighted some of the

30 political problems hampering policy-making. As with previous budgets, the passage of the spending plans that the president submitted to the National 25 Assembly in early October (November 2004, Economic policy) was delayed, 20 owing to confusion and political horse-trading between the administration and 15 legislature. 10 The initial delay was due to differences between the executive and legislative 5 arms of government over the assumed benchmark price of oil, a crucial 0 2001 02 03 04 indicator given that petroleum accounts for around 80% of government Sources: Economist Intelligence Unit; revenue. The members of the National Assembly angered the president by budget speeches. sharply raising the price on which the budget is based from US$27/barrel to US$30/b in late 2004, apparently to make more funds available for spending in their constituencies. However, by the time that Mr Obasanjo had accepted the new price in January (February 2005, Economic policy), the budget was being stalled by other complications. In particular, it seems that differences in the oil- revenue data used by the National Assembly and those provided by the state- run Nigerian National Petroleum Corporation (NNPC) were the cause of the hold-up: whereas the National Assembly applied an across-the-board figure to all the projected oil production for 2005, based on the 57% federal government equity stakes in the joint ventures; the NNPC!s figures reflected a more complex situation in which the government!s share is dependent on the commercial terms of different petroleum arrangements.

Government revenue (N bn unless otherwise indicated) 1999 2000 2001 2002 2003 Oil revenue 724.4 1,591.7 1,707.6 1,230.9 2,074.3 (% of total revenue) 76.3 83.5 76.5 71.1 80.6 Non-oil revenue 224.8 314.5 524.0 501.0 500.8 (% of total revenue) 23.7 16.5 23.5 28.9 19.4 Federally collected revenue 949.2 1,906.2 2,231.6 1,731.9 2,575.1

Source: Central Bank of Nigeria.

Even once these differences had been resolved, the political bickering over the budget dragged on for months. When, in March, the National Assembly finally

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 22 Nigeria

passed the budget, the president initially refused to sign it, instead calling on the National Assembly to review the document following the “bribes-for- budget” scandal. Mr Obasanjo did, however, subsequently relinquish and sign the document, largely because it seemed to have become apparent to him that legislators would not review the document following the fallout from the president!s corruption accusations against some of them. He did, however, subsequently warn that even though the version of the budget passed by the National Assembly proposed expenditure 7% higher than the N1.65trn (US$12.5bn) he initially proposed, spending plans could be curtailed because of the delay in passing the budget. This position was also adopted by the finance minister, Ngozi Okonjo-Iweala, when she said that no more that N1.7bn would be spent. The statements created an uproar in the Senate, with members claiming that the administration was unilaterally cutting the budget without seeking the consent of the legislative, although there is a major difference between not meeting spending targets, as the president seems to have suggested, as opposed to formally cutting expenditure plans.

Tax re fo rm move s up th e One issue that has long frustrated investors and businessmen in Nigeria is the policy agenda complicated tax structure. Although tax rates in the country are not all that high by international standards, multiple taxes have to be paid to the different tiers of government and state agents demanding payments put endless pressure on businesses. To help resolve the problem, the government plans to enact a comprehensive tax reform aimed at eliminating multiple taxation and fiscal harassment as well as improving collection. Mr Obasanjo sent nine tax reform bills to the National Assembly in mid-April, including the Personal Income Act, which proposes lower tax rates for low-income earners and sets a maximum rate of 30% for people on annual incomes above N3m (US$22,640).

The IMF supports Nigeria's An IMF team was recently in Nigeria as part of its ongoing agreement to reform efforts informally monitor progress with the implementation of the country!s home- grown medium-term reform programme, the National Economic Empowerment and Development Strategy (NEEDS; November 2004, Economic policy). The mission commended policy performance in 2004 and observed that the authorities! macroeconomic policy framework for 2005, which builds on the unprecedented achievements of 2004, is consistent with continued macroeconomic stability. Nevertheless, it also highlighted the threat that the government!s expansionary budget for 2005 poses to prudent economic management, although it noted that the administration does recognise this and has resolved to try and ensure that fiscal policy is consistent with the objectives of maintaining macroeconomic stability in 2005. The Fund is also keen to see the full passage and adoption of the fiscal responsibility bill, which, by legally forcing the government to save windfall oil revenue, should help to ensure prudent medium-term fiscal policies (February 2005, Economic policy). Future visits are likely to focus on whether the proposed spending increases in 2005 are being managed carefully enough, and whether the looser fiscal policy is being appropriately offset by a tighter monetary policy.

Unions condemn fuel price Another issue highlighted by the IMF is the fact that, to date, the administration hikes has been more successful in maintaining macroeconomic stability than in

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 23

implementing long overdue structural reforms. The difficulty of implementing structural reforms has been most clearly exemplified in recent years by the ongoing battle to raise domestic fuel prices (August 2004, Economic policy), although finally there do seem to be some signs of progress. The government!s decision to raise domestic fuel prices on April 4th"raising the price of petrol from N48/litre to N50/litre"was greeted with the usual condemnations by the umbrella Nigeria Labour Congress (NLC). However, unlike on previous occasions, the NLC did not call a national strike in a knee-jerk reaction. The NLC!s president, Adams Oshiomhole, told reporters that the price adjustments could ruin Nigeria!s economy, which is, in effect, being driven on private diesel- generated power, owing to the virtual collapse of electricity supplies from the state-run energy utility, the National Electric Power Authority (NEPA). Mr Oshiomhole feared that with many distressed companies already folding up, making thousands of workers redundant, the increase in fuel costs could worsen the situation and put more pressure on the poor. Business groups, including the Manufacturers! Association of Nigeria (MAN), share the concerns of the labour force and have urged the government to maintain fuel subsidies.

New labour law curbs union The NLC!s restraint in embarking on strike action against the latest fuel price power rise was partly the result of the newly enacted Trade Unions (Amendment) Act, which curbs union power. The new law, signed by Mr Obasanjo on March 30th, outlaws political or sympathy strikes, makes union membership voluntary, and gives unions the right to form into federations outside the NLC, thereby ending the monopoly of the umbrella union body. By setting out stringent conditions that trade unions must meet before calling a strike, the new law should restrain them from organising crippling general strikes, as happened three times last year in protest at fuel price rises. The NLC has vowed to fight the legislation using constitutional means, including challenging the law on the grounds that it breaks various International Labour Organisation (ILO) conventions; although some labour leaders have threatened to defy the law and organise anti-government strikes if necessary. The administration insists that the new law is in line with ILO conventions and does not prevent workers with genuine labour-related grievances from striking. However, the real issue in contention between the state and the NLC is the role that the latter has assumed as the main opposition to the government in the absence of effective opposition from the mainstream political parties, while the administration is understandably frustrated by the NLC’s opposition to key aspects of its economic reform programme.

New privatisation timetable is Another major concern of the IMF has been the slow pace of privatisation in announced for 2005 Nigeria: it commented specifically on the limited number of sales made in 2004. In order to try and speed up the process, in April the Bureau of Public Enterprises (BPE), the official privatisation agency, announced plans to sell more than a dozen public enterprises by the end of 2005, the latest of many revised timetables for Nigeria!s slow-moving divestiture programme. Concerns up for sale this year include the six generating companies that will come into being from the unbundled NEPA, Port Harcourt Refinery, oil-service firms, oil palm companies, paper mills and aviation firms. The BPE!s director-general, Irene Chigbue, told a news conference on April 13th that it would also be evaluating

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 24 Nigeria

22 firms and consortia that have expressed an interest in buying a 51% stake in Nigeria Telecommunications (Nitel), with a view to completing the sale by September 2005. Analysts expect the shares to fetch substantially less than the US$1.3bn offered by the preferred bidder in the 2001 sale, which collapsed after the buyer failed to pay the purchase price (May 2002, Economic policy). Nigeria!s privatisation programme, launched amid great expectations in 1999, has not lived up to its promises to raise large amounts of revenue for state coffers or invigorate moribund state enterprises. Revenue from privatisation has been only N18,103.6m (US$178m) in 2000 and N19,697.8m in 2002, representing an insignificant amount of the total. The scheme has suffered numerous delays, partly because of the difficulties of finding buyers for some of the listed concerns, which has led the government to opt for liquidation in some cases. For example, on April 4th, the National Council on Privatisation (NCP), which is overseeing the divestiture scheme, directed that Nigeria!s three moribund steel-rolling mills in Osogbo, Jos and Katsina be liquidated.

Privatisation is controversial Moreover, when sales have gone ahead, they have often been controversial. For with many in the political elite example, although the NCP agreed to sell the idle Delta Steel Company to India!s Global Infrastructure Holding Limited (GIHL) some commentators have questioned the transparency of the deal, under which GIHL, a unit of the giant Ispat Industries, is reported to have obtained the 80% stake in the 1.8m-tonne plant for US$30m. Critics have pointed out this is a fraction of the amount that Nigeria spent on the company, and, more worrying, comes after the Indian firm also won a ten-year contract to manage and rehabilitate the Ajaokuta Steel Complex in August (November 2004, Manufacturing). It also gained a ten-year concession to operate the National Iron Ore Mining Company, which supplies iron ore to the two steelworks. Government officials have justified the sales and the present structure of the industry by arguing that the steel companies were initially set up with the intention that they would be part of an integrated industry, so it is appropriate that a single firm should now operate all of them.

Parliament seeks control over Another major constraint on Nigeria!s privatisation programme is the National the privatisation exercise Assembly, many of whose nationalist-minded members are not keen on the disposing of state assets, especially to foreigners. In mid-March, Mr Obasanjo refused to sign the Privatisation Amendment Bill passed by the National Assembly, which would give it greater control over the privatisation programme. Returning the bill, the president told the Assembly that its amendments would scare away investors and undermine the sell-off programme. Among the objectionable provisions was the requirement for the NCP to present a list of enterprises to be privatised to the National Assembly each year. Another provision would require the National Assembly to pass a law for each enterprise to be privatised, in effect giving parliament a veto over privatisation transactions. This would scare away investors because of the inherent risk that it poses, Mr Obasanjo explained in a letter to the president of the Senate, concluding that the proposed law would "spell doom for the entire privatisation exercise as no investor will be ready to invest in any enterprise".

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 25

The domestic economy

Economic trends

More confusion arises over According to Nigeria!s Federal Office of Statistics, real GDP grew by an GDP growth data estimated 6% in 2004, with non-oil GDP expanding by 7.4%. This follows the very rapid 10.7% growth in 2003, and is considerably higher than the 3.5% growth estimate by the IMF, but closer to the 5.5% estimate by the Central Bank of Nigeria (CBN) and the 4.1% estimate in the World Bank!s World Development Indicators. Ode Ojowu, chief economic adviser to the president, Olusegun Obasanjo, criticised the IMF for its low growth estimate, saying that it does not reflect the data the government provided to the Fund, while noting that the difference was difficult to understand given that the Fund has no independent source of data gathering in Nigeria. Despite concern over its 2004 growth estimates (February 2005, The domestic economy: Economic trends), the IMF is optimistic about Nigeria!s prospects. In its latest World Economic Outlook report, released in April, Nigeria!s real GDP growth is forecast to rise to 7.4% in 2005 before slipping to 5.8% in 2006, although the forecast growth rate for 2005 is based on a major offshore oilfield and two new liquefaction trains coming on stream. However, start-up of Shell!s deepwater Bongo field, the big oil project expected this year, has been delayed from mid-year to October, and, as such, will have less impact on economic growth in 2005 than the IMF expects.

Nigeria is close to full oil With the Bongo oilfield not coming on stream until October, the ability for oil production capacity production to be pushed up substantially in 2005 would seem limited. According to the International Energy Agency (IEA), Nigeria has been pumping oil at close to its sustainable production capacity, and thus lacks spare capacity to boost output significantly in the short term. Besides its upbeat forecast for developments in Nigeria!s oil sector, the IMF also envisages improvements in the performance of the country!s non-oil sector. In an IMF statement issued on March 29th at the conclusion of the 2005 Article IV consultation, Nigeria!s non- oil sector was projected to grow by 5% in 2005. Given Nigeria!s extremely weak statistical database and the fact that most non-oil economic activities occur in the unofficial sector, measuring the performance of the economy accurately is clearly difficult. Nevertheless, most economists do at least seem to agree that economic growth under the civilian government has been reasonably robust, averaging at least 4.8% between 2000 and 2004, compared with 2.8% during the last five years of military rule.

Inflation edges downwards According to the CBN, the 12-month moving average inflation rate has continued its downward trend since August 2004, falling to 12.9% in February 2005 from 14% in January. The February rate is the lowest achieved since October 2003. However, the year-on-year rate rose to 10.6% in February from 9.8% in January, suggesting that inflation may be about to start to rise again, or at least that the slowdown in the rate since mid-2004 has now started to end. Although the recent downward trend reflects the stable exchange range, the

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 26 Nigeria

relative stability of domestic fuel prices and the good performance of the agricultural sector, the recent loosening of monetary policy (February 2005, Economic policy), as well as the passage of an expansionary budget and the rise in petroleum product prices in April, are all likely to result in increased inflationary pressures in the economy in the next few months and make it difficult for the government to achieve its target of single-digit inflation by the end of 2005.

Inflation (%) 2004 2005 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 12-month moving averagea 17.8 18.6 19.4 19.7 19.1 19.1 18.9 17.1 16.1 15.0 14.0 12.9 a The 12-month moving average is the measure of inflation preferred by the Central Bank of Nigeria. Source: Central Bank of Nigeria, Economic Report (monthly).

Oil and gas

Oil production targets seem Nigeria’s oil industry is entering an interesting phase in terms of striking the increasingly unlikely to be met right balance between the risks and rewards of developing new oilfields. At a recent conference organised by the CWC Group in Abuja, Funsho Kupolokun, the group managing director of the state oil company, the Nigerian National Petroleum Corporation (NNPC), said that the current aim was to boost production to 4.5m barrels/day in five years time, compared with the previous target of 4m b/d. While even this latter target seemed ambitious, the new one is all the more so, especially as the current wave of exploration in the ultra- deepwater acreage awarded in 2000 has so far been far less promising than in those blocks awarded in the 1990s. Of the new discoveries, Shell’s Bonga field and Exxon’s Ehra field should both come on stream in 2006, followed by Total’s Akpo and ChevronTexaco’s Agbami fields in 2008. In the meantime, according to IEA data, Nigeria!s oil output (excluding condensate) rose from 2.28m b/d in January to 2.39m b/d in February, leaving just 0.01m b/d spare capacity. At present, Nigeria probably has the least spare capacity out of the 11 other OPEC members, although Mr Kupolokun has indicated that a combination of re-opening shut fields and the addition of some small fields by minors such as Addax and Eni could bring the country!s capacity up to 2.85m b/d, including condensate.

Lawmakers seek changes to Reforms being considered by the National Assembly to boost the government!s Nigeria's oil tax regime fiscal take from production-sharing contracts (PSCs) have caused quite a stir among multinational oil companies operating in Nigeria and are unlikely to support the ambitious increase in oil production targeted by the government. The House of Representatives! oil committee has proposed changing Nigeria!s petroleum law to increase corporation tax rates on profits from deepwater offshore fields from 50% to 85%, the same rate as applied to shallow water projects. The change could affect both existing and future contracts between the government and oil firms. Oil majors have condemned the plan, which they claim creates both uncertainty and a credibility gap for the government in setting future terms for investment. Shell, which is the biggest operator in

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 27

Nigeria and is in the final stages of building the Bonga deepwater field, has been most appalled by the proposal. Chima Ibeneche, managing director of Shell Nigeria Exploration and Production Company, said that such changes would not only amount to the government reneging on existing agreements and eroding trust, but also render new projects unsustainable and liable to termination. Trying to alleviate the concerns of the oil companies, Mr Obasanjo!s adviser on petroleum and energy, , has indicated that the administration will try to persuade the legislature to apply any changes in the tax rate only to new contracts. However, it is unclear whether the president would block the bill if it were to pass through the National Assembly with retroactive provisions. Even if he did, the legislature could over-rule him with a two-thirds majority.

Nigerian National Petroleum Corporation joint ventures Operator NNPC Other partners' Production capacity share (%) share (%) share (%) ('000 barrels/day) Shell 30 55 Agip 5 & Total 10 1,280 ExxonMobil 40 60 600 Chevron Texacoa 40 60 450 Agip 20 60 Conoco Phillips 20 130 Total 40 60 120 Chevron Texacoa 40 60 70 Addax 40 60 20 Agip 100 10 NNPC 100 30 Pan Africa 40 60 20 Others 20 Total (incl condensates) 2,750 a Prior to the merger of Chevron and Texaco, these were their separate joint ventures. Source: Petroleum Economist and companies.

New deepwater concessions Besides the possible change in the tax regime, the government has said that the now liable to royalty payment 12 deepwater blocks among the 61 new oil exploration licences to be put on offer this year will be subject to an 8% royalty rate. Up to now, fields being developed in depths of over 1,000 metres have been exempt from royalty payments. In addition, only 85% of development costs can qualify as cost oil, compared with previous conditions that allowed companies to recover 100% of their costs before sharing revenue with the government. Oil companies say that the changes would make it difficult to recoup the investment in building major offshore facilities, which can cost billions of dollars. However, Nigerian oil officials and lawmakers say that the changes are necessary to enable Nigeria to benefit from new deepwater oil projects, rather than having to wait several years, especially at a time when the scope for expanding output from onshore production is limited. For many members of the National Assembly, the motive for changing the laws on oil contracts is a firm belief that foreign oil companies have been exploiting existing laws to the detriment of the government. However, unlike the administration, few are aware of the competitive nature of the global oil industry. In contrast, Nigerian oil officials are aware that Africa!s biggest oil producer must compete for foreign investment with other revenue-hungry West

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 28 Nigeria

African oil nations. Urging caution in any amendments to Nigeria!s oil tax regime, Mr Obasanjo!s adviser, Mr Daukoru, warned lawmakers that if investment conditions in the sector are made unattractive, investors will go elsewhere; which, in this case, will not be too far away, given the other opportunities provided in the Gulf of Guinea by Angola, Gabon, Equatorial Guinea and Cameroon. In particular, he identified Angola as a major alternative investment destination, although in the last six months nationalist pressures to demand greater revenue from oil companies have been steadily mounting in Luanda.

Oil-sector investment and profit repatriation (US$ m) 2002 2003 2004a 2005b FDI into oil sector 1,362 2,185 3,103 2,148 Profit remittancesc 4,434 5,856 8,115 8,853 a Projection for FDI is by the IMF and is significantly above data from other sources. b Forecast. c Calculated as foreign partner's exports, less tax and royalties on petroleum profits, minus foreign partner's share of operating costs. Sources: Nigerian government; IMF.

Nigeria expects high returns Nigerian officials also realise that since world demand for oil is expected to from sale of new oil licences remain strong in the foreseeable future, there is no shortage of companies seeking to tap available oil resources, even when these are located in relatively unfriendly environments. The IEA recently estimated that oil companies were under-investing in new oil and gas production capacity by as much as 20%, largely because of their lack of access to many Middle Eastern OPEC countries, which ensures that interest in the Gulf of Guinea will remain high. Certainly, Nigerian officials appear confident that this year!s new licensing round will be successful. Mr Daukoru told Reuters on April 3rd that the offer could attract bids worth about US$1.2bn, based on the 12 offshore blocks attracting bids totalling US$960m, while the shallow and onshore blocks are expected to generate US$240m. However, there is unlikely to be much interest in the 39 concessions located in the Anambra, Benue and Chad basins, where commercial quantities of oil have so far not been found despite past exploration attempts. Some investors may be wary of buying the six Niger Delta onshore concessions, given the region!s record of political unrest. There are also six shallow offshore licences on offer in the Niger Delta, some of which were put on tender in 2000 but failed to find buyers.

The government tries to boost Nigerian politicians and officials have, in recent years, become more local upstream participation nationalistic in their dealings with the oil industry, pushing for concrete measures to enable Nigerians to assume greater control over the foreign- dominated upstream sector and trying to compel oil corporations to play a broader role in the development of the economy. This thinking underlines an amendment to the Petroleum Act currently under consideration in the National Assembly, which would require oil producers in Nigeria to refine an increasing proportion of their output locally, reaching 100% within ten years. In March Mr Kupolokun told a petroleum conference in Lagos that oil companies have been directed to assemble all their offshore platform facilities in Nigeria by May 2006, in order that indigenous contractors may benefit from the oil industry.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 29

In another move to boost local participation in the oil sector, the government has indicated that 10% equity will be reserved for local companies in the 2005 licensing round in order to boost the capacity of indigenous oil companies. Although working with junior Nigerian partners should pose little problem to the oil majors, most would prefer not to be compelled to carry local companies who are unlikely to be in a position to add much to their operations in terms of technical expertise. Some investors are concerned that although local companies may have the finances to pay their initial bid, they will not be able to meet the cash calls to develop the fields owing to the long period under which money will not flow in from the venture and the high demand for finance in the development stages of offshore oil projects. Thus international investors fear that they will compelled to carry the weight of the local companies. Drilling a wildcat well in ultra-deep water can cost up to US$70m according to some estimates.

NigeriaNigeria's faces oil a output shortfall close in oil to The problem of raising sufficient cash to meet ongoing investment industry capacityfunding commitments in the oil industry is still a problem for the government, although in recent years the high oil price has eased the problem of funding its equity cash-call obligations in the various joint ventures with foreign multinationals, which average 57% (August 2004, The domestic economy: Oil and gas). The government!s 2005 budget earmarks US$4.2bn for cash call payments, about US$1bn less than the amount that oil companies said was required. Mr Kupolokun said in March that the joint-venture partners had been asked to come up with alternative funding schemes to cover the shortfall.

Government payments to Nigeria’s oil producing joint-venture companies (N m unless otherwise indicated) 1999 2000 2001 2002 2003a JVC cash callsb 183,362 267,736 391,680 347,084 451,683 JVC cash calls (% of total government expenditure)c 16.4 15.7 15.6 14.9 15.8 a Estimate. b The picture is further complicated as these figures are different from those quoted by the Central Bank of Nigeria (CBN) in its budget data. In particular, in 2002 the CBN has cash call payments at only N67,059m, although in other years its estimates are closer to our sources. c Cash call payments to joint-venture companies (JVCs) are called a first-line deduction, or are made from total revenue before it is allocated to the federal or state governments. Sources: Ministry of Finance; IMF.

However, the joint venture partners want the government to find a more permanent solution to its funding predicament, especially as the industry also faces the challenge of raising US$12.8bn over the next five years in order to meet government production targets, as pointed out by John Chaplin" chairman of the Oil Producers! Trade Section of the Lagos Chamber of Commerce and Industry, and managing director of Mobil Producing Nigeria. Of this amount, US$4.4bn is to be spent on joint venture projects, while US$8.4bn is to be allocated to projects financed solely by the oil companies. It was largely to avoid its funding problem that the government opted for production-sharing contracts for offshore fields, which do not require state contributions to development costs, but compensate investors for assuming all the risk by means of higher returns.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 30 Nigeria

Shell joins a project for The number of projects being planned to exploit Nigeria!s abundant natural gas another LNG project reserves and end gas flaring by 2008 has increased by one. Shell, already the operator of the ambitious Nigeria LNG (NLNG) plant in Bonny Island, has signed an agreement with ChevronTexaco, the British Gas Group and the NNPC to conduct a feasibility study for another LNG project"to be called the OKLNG and located in Olokola in south-west Nigeria. The US$6bn project will have an initial capacity of some 11m tonnes/year (t/y) and planned capacity of 33m t/y from four production lines. Two lines will be owned by Shell and the NNPC and the others by BG, Texaco and the NNPC. Construction work is expected to begin in 2006 for completion in 2009. Meanwhile, the NLNG plant is due to start up its fourth and fifth trains by mid-2005, bringing its total capacity to 1.1trn cu feet/year. Work has begun on a sixth train, which is expected to enter service in 2007 and boost the plant!s capacity to 22m t/y of LNG and 4.6m t/y of LPG. The other proposed projects are the Brass River project, which is being proposed by a consortium comprising Chevron Texaco, Eni and ConocoPhilips, and another Exxon Mobil project, which would be close to the existing NLNG plant on Bonny Island (February 2005, The domestic economy: Oil and gas).

Manufacturing

Cheap imports are a major Despite the pick-up in economic growth in recent years, the Manufacturers! source of concern Association of Nigeria (MAN) has continued to highlight how difficult it is for most of its member companies to keep operating in the country given the myriad problems they face, particularly the country’s dreadful infrastructure. In March, MAN declared that 30% of manufacturing firms in the country are comatose, 60% are ailing and only 10% are in a healthy condition. It has also stepped up its campaign against the problem of cheap imports, claiming that many of its members are suffering adversely from globalisation. Despite the government!s wide-ranging import bans, local markets remain inundated with cheap foreign goods, especially from China, undermining local demand for products made in Nigeria. The problem is compounded by the fact that Nigeria’s import bans have been imposed somewhat haphazardly. As a result, some of the bans undermine industry, as many firms in Nigeria are dependent on imported inputs, even if they help other producers. On March 23rd import bans on dozens of items, including industrial raw materials and textile products, were lifted. The minister of state for finance, , said that the step was taken to enable manufacturers to re-start production. She explained that prohibitions on basic raw materials that are not produced locally or that are made in insufficient quantities locally had been lifted. Such raw materials now attract 20% duty. Finished products not produced locally, including nylon textiles and mosquito nets, have also been removed from the ban list. However, dozens of items remain prohibited.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 31

Financial and other services

Central Bank to cancel debts On April 12th the Central Bank announced plans to write off 80% of the debts owed to it by banks owed to it by ailing commercial banks, in a move to make the banks more attractive to investors in the ongoing consolidation of Nigeria!s financial sector. According to the CBN, 11 banks owe it a total of N75bn. The cancellation offer, however, would be subject to two criteria: that the banks recover all loans contracted by their owners or directors and inject capital to bring their institutions in line with the minimum capital requirements. Both conditions have to be met within two months. The outstanding balance of 20% would then be converted to a long-term loan for a maximum of seven years at 3% interest and subject to a two-year repayment moratorium. The CBN was also keen to stress that the move was a one-off concession that will not be granted again, adding that the relief will not adversely affect the CBN!s 2005 accounts since substantial loan loss provisions have been made in its books. The CBN has also justified the move on the grounds that by saving the banks from collapse, it should make them more attractive to investors, which is preferable to liquidation, as this would entail uninsured deposits of N91.1bn being lost by depositors. At present, troubled banks are being overlooked by healthier ones in merger and acquisition talks ahead of the December 2005 deadline given to Nigeria!s 89 banks to raise their capital from N2bn to N25bn.

The CBN wants to quicken the On March 30th the CBN issued revised guidelines for banks planning mergers, pace of banking consolidation stipulating that the deals should be concluded, or have obtained final approval, by October, a move designed to encourage banks to hasten their pace of consolidation. Banks also have to submit a monthly report on their consolidation activities. The CBN governor, Charles Soludo, also noted that 16 banks out of the 89 in the country were already sure to meet the new capital requirement, compared with only two banks when the measure was first announced in early July. He also told a banking conference in Abuja that the CBN was encouraged by the new funds flowing into the banking sector from abroad as a result of the consolidation exercise. Mr Soludo expects that by the end of the consolidation exercise, Nigeria will have more than 25 strong and reliable banks. The process of consolidation has not been without incident, however. In an effort to boost their capital base, some banks have used dubious methods to raise extra funds. In March the CBN instructed four banks to return about N50bn (US$377m) to investors who had subscribed to their Initial Public Offerings (IPO) following the discovery of fraud and money-laundering. The intervention followed a CBN investigation started in January into allegations that some banks were engaged in illegal practices in carrying out IPOs, including using depositors! funds to buy the shares. The authorities have also warned banks against making grossly exaggerated claims of returns to attract investors. However, the potential benefits of consolidation are also becoming clear, as some of Nigeria!s leading banks are likely to become significantly bigger and more competitive. On April 19th Union Bank, the nation!s second most profitable bank, signed a preliminary agreement with Gulf Bank, Broad Bank, Universal Trust bank and Union Merchant Bank to buy the four smaller

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 32 Nigeria

banks. This deal follows the January announcement by United Bank of Africa and Standard Trust Bank of their merger plan, which would potentially create the largest bank in West Africa (February 2005, The domestic economy, Financial and other services).

Stock prices continue to slip The Nigerian Stock Exchange all-share index has edged downwards this year after its outstanding performance in 2004. The NSE is normally bullish in the Performance of the NSE first quarter of the year, but it fell below 21,000 for a couple of days in mid- % change in NSE all share index April, down from 23,844.45 at the end of 2004, and after having reached an all- Jan-March 15 record high of 30,703.46 in mid-2004, although it has since recovered marginally. The NSE!s director-general, Ndi Okereke-Onyiuke, maintains that the 10 decline in share prices is temporary and partly the result of stock switching. In 5 particular, the downturn seems to be the result of a switch in activity from the secondary market to the primary market, owing mainly to the IPOs of various 0 commercial banks trying to raise their capital base. Market analysts have also -5 pointed out that that investors are adopting a “wait and see” approach to the

-10 market following its recent falls before they start to buy again.

-15 The number of new listings on the NSE so far in 2005 has certainly been 2002 03 04 05 impressive: during the first three-and-a-half months of this year, 17 companies Source: First Securities Discount House. have raised an estimated N217bn (US$1.6bn) from the capital market, whereas for the whole of 2004 N227.38bn was raised by 32 firms. This wave of listings has been led by the launching of IPOs by more than a dozen banks since last year, and more banks are expected to go to the market before the CBN!s deadline. In addition, Nigeria!s privatisation agency, the Bureau of Public Enterprises (BPE), has announced that it plans to launch IPOs for 15 public enterprises, including Nitel and 11 oil-service companies, between April 2005 and the first quarter of 2006. Dismissing concerns that Nigeria!s stockmarket cannot absorb the large number of shares freed up by the privatisation programme, the head of the BPE, Irene Chigbue, maintained that the experience with the current bank IPOs showed that the necessary funds were available in the domestic market. This view was also supported by the speed with which Nigerian institutional investors snapped up the 51% equity stake (worth US$26m) in Nigeria!s new national airline, Virgin Nigeria Airlines. The private placement in early March was oversubscribed by 200%. The remaining 49% equity share is held by Virgin Atlantic Airways, which will run the new airline, which is due to begin services later this year (November 2004, The domestic economy: Infrastructure).

Infrastructure

Power sector reform legislation In March Mr Obasanjo signed the long-awaited Power Sector Reform Bill into is finally enacted law, enabling private-sector participation in Nigeria!s electricity industry. The legislation provides for the unbundling of the state-run energy utility, the National Electric Power Authority (NEPA), into six generating companies and a transmission company. There will also be 11 distribution firms, while the development of a competitive electricity market and the determination of tariffs will be helped by the creation of the Nigerian Electricity Regulatory Commission. On April 13th the BPE renamed NEPA the Power Holding

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 33

Company of Nigeria (PHCN), and it will be its job to manage the authority!s assets prior to its sale. Many Nigerians will find it difficult to adjust to the new name after decades of poking fun at the diabolic performance of the authority; one take on its acronym has been “Never Expect Power Anytime”. Regardless of what name is decided upon, it will still take a huge effort to improve electricity supplies. According to NEPA!s weekly system status summary, generation for the week ending March 19th was only 2,672.5 mw. Actual generating capacity during the week reached a maximum of 3,991.1 mw, compared with national demand of over 6,000 mw. The chronic shortage of energy is not only a problem for household customers, it is probably also the biggest single problem for businesses in the country. In the World Bank!s latest Investment Climate Survey, 97% of firms surveyed in Nigeria identify the electricity supply as a major or very severe obstacle to business in the country, and 97% said that they shared or owned a generator.

Government investment in the Mr Obasanjo!s administration has pumped almost US$1bn into the power sector has yielded little to date sector since 1999 in an effort to stabilise supplies and boost generation to 10,000 mw by 2007. On March 23rd NEPA said that it had received N24.8bn (US$187m) towards the construction of four new power plants that are expected to generate an additional 1,230 mw of electricity when completed. A week later the cabinet approved N7.46bn for the overhaul of four out of six power units at the Egbin power station in Lagos, which on completion is expected to produce 1,320 mw. In order to attract more investment, the government has also tried to increase foreign participation in the power sector by persuading companies, especially the oil majors, to become independent power producers (IPPs) that generate electricity for sale to NEPA. It has also raised the possibility that new LNG plants may become obliged to provide power to NEPA. However, progress has been constrained, largely because of problems over pricing and the future structure of the industry after the privatisation of NEPA. In fact, progress has been so slow in the IPPs currently under construction"we estimate that five plants are being built by multinational oil companies"that in mid-March the government set a 2007 deadline for their completion. In a sign of some progress, in late March Mr Obasanjo commissioned the US$450m NNPC/Agip IPP, which should produce 330 mw, rising to 480 mw in September. Unfortunately, no sooner had the plant been inaugurated than it was closed for repairs (although these were limited). Despite the progress made in privatising the power sector, it remains doubtful whether the Nigerian private sector will, by itself, be able to come up with the large amounts of investment needed in the electricity sector, including for the expansion of supplies to the rural areas, without an appropriate price structure. In fact, until this is resolved, progress will remain slow, especially as many groups, including business associations, are still urging the government to continue to at least partially subsidise the energy sector in the short to medium term. This viewpoint was apparent at an April workshop on the new Electric Power Sector Reform Act, where MAN led the calls for the government to continue funding the power sector and encourage joint venture partners to assist in the rehabilitation of existing power stations and the building of new ones until the country attains its desired capacity.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 34 Nigeria

Nigeria signs deals with In mid-April, Nigeria!s Ministry of Communications and China!s leading Chinese telecoms firms telecommunications equipment maker, Huawei Technologies Co, signed a US$200m partnership agreement for the deployment of a wireless network across Nigeria. Under the agreement, which was signed during a visit to China by Mr Obasanjo in April, the China Development Bank will provide Nigeria with a US$200m loan for the project, while Huawei is committed to building a US$20m factory in Nigeria. In another accord signed during Mr Obasanjo!s visit, a Chinese telecoms company, ZTE, agreed to supply equipment worth US$95m to Nigeria!s Ministry of Communications. Huawei and ZTE are also amongst the foreign companies said to be interested in buying a majority stake in Nitel and its mobile phone unit, M-Tel.

Foreign trade and payments

Nigeria's external reserves Nigeria!s foreign-exchange reserves have continued to climb rapidly in 2005, climb to a record high reaching an all-time high of US$21.5bn in March 2005, according to the finance minister, Ngozi Okonjo-Iweala. At the end of February they were US$20.96bn (equivalent to 16.6 months of imports), having risen from US$19.59bn in January according to data produced by the Central Bank of Nigeria (CBN). The government has been steadily building up its reserves since 2003, owing largely to improved oil export earnings and its greater commitment to saving windfall oil revenue under its new fiscal regime. Although there has been a trend of rising reserves in a number of African countries in 2004, the rise in Nigeria’s reserves is still remarkable. According to the World Bank!s Global Development Finance 2005, Nigeria accounted for US$9.8bn of the US$19.4bn increase in reserves in Sub-Saharan Africa in 2004. Nigeria!s reserves should also be boosted following Switzerland!s decision in mid-February to return US$458m looted by the late dictator, , and stashed away in Swiss banks. The decision followed a failed legal battle by the Abacha family to prevent the money from being handed over to Nigeria. Switzerland had already returned about US$216m of US$730m that had been frozen in accounts linked to General Abacha and his associates. Abuja believes that General Abacha embezzled about US$2.2bn during his rule from 1993 until his death in 1998. The real question concerning foreign-exchange reserves is the extent to which the government will come under pressure to spend in the run-up to the 2007 elections. As long as the oil price remains high, it should be able to increase spending using oil windfall earnings, without having to dip into its reserves.

Foreign-exchange reserves (US$ m) 2000 2001 2002 2003 2004 Sub-Saharan Africa (SSA) 34.2 34.5 34.8 39.0 58.4 Nigeria 9.9 10.5 7.3 7.1 16.9 Nigeria as a % of total SSA 28.9 30.4 21.0 18.2 28.9

Sources: World Bank; Central Bank of Nigeria.

Nigerian lawmakers protest at Despite the strengthening of Nigeria!s external position and its build-up of country's debt burden foreign reserves, the government continues to argue that Nigeria is too poor to meet its external debt obligations (February 2005, Foreign trade and payments).

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Nigeria 35

To press its demand for debt relief, the House of Representatives passed a resolution on March 8th calling on the president, Olusegun Obasanjo, to stop servicing the country!s US$33bn debt, owed mainly to the Paris Club of government creditors. Supporting the motion, the deputy speaker, Austin Opara, claimed that the government could no longer service its debts to the detriment of the people!s welfare. He bemoaned the fact that the nation has been weighed down by a debt burden for the past 25 years and that, despite the government!s economic reform efforts since 1999, creditors have refused to grant relief. Mr Opara contrasted this attitude to their preparedness to write off the bulk of Iraq!s debts as an indication of the double standards applied by Western governments. Despite the protest, the National Assembly passed the 2005 budget, which includes US$1.3bn requested by Mr Obasanjo for foreign debt servicing. However, in April, a group of senators embarked on a four- country tour to press creditor nations to write off Nigeria!s debts. Speaking in London, the delegation warned that Nigeria is heading towards an Argentinean- style debt default unless creditors accept a deal and the fact that without a resolution of the problem, public unrest in Nigeria over the issue will escalate.

External debt stock (US$ m) 1999 2000 2001 2002 2003 Total external debt stock 29,128 31,355 31,042 30,476 34,963 Short term debt 6,520 1,120 1,643 2,270 3,400 Interest arrears 5,684 44 415 1,475 2,658 Principal arrears 12,903 117 116 957 1,360 Disbursements 175 153 67 81 181 Total debt service paid 1,603 1,845 2,543 1,490 1,636

Source: World Bank, Global Development Finance, 2005.

However, foreign governments and creditor institutions have so far not been convinced by Nigeria!s case for debt relief, especially given the recent increase in its windfall oil earnings. In late March the IMF said that Nigeria!s foreign debt was sustainable given current high oil prices. In its statement, the Fund!s staff mission visiting Nigeria said that its sensitivity analysis showed that the country!s debt only becomes unsustainable if oil prices drop to around US$21/barrel and urged Abuja to regularise relations with external creditors. Nigerian economic officials responded to the IMF’s claims by arguing that it would be much wiser for the government to use its current oil windfall for much needed investment in infrastructure development and poverty reduction, as well to save for the future after oil prices drop, rather than debt servicing. They also point out that even with world oil prices recently at a record high, Nigeria!s oil revenue remains paltry when considered in relation to its high population, amounting to less than US$200 per head for one of the world!s poorest nations.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005