Nigeria Nigeria at a Glance: 2003-04

Country Report

Nigeria Nigeria at a glance: 2003-04

OVERVIEW Although Olusegun Obasanjo secured a large majority in the presidential election in April 2003 and his People’s Democratic Party (PDP) convincingly won the National Assembly and state elections, the president faces formidable challenges in his last term in office. The most pressing of these is to pacify the opposition parties, which have disputed the legitimacy of the his and the PDP’s overwhelming election victories, and quell the worsening ethnic unrest in the country, especially the oil-rich Niger Delta. It is not clear that he has the vision or personality to address other vital matters, such as constitutional reform, the country’s religious divide and the simmering ethnic and regional tensions in the country. We expect that the government has enough commitment to economic reform to reach a new agreement with the IMF in late 2003 or 2004—especially as oil prices fall back sharply—but the implementation of reform will remain erratic. Real GDP growth is expected to be reasonably robust at 3.1% in 2003 and 3.7% in 2004, driven by developments in the oil and gas sector, particularly offshore oil production.

Key changes from last month Political outlook • The fallout from the recent elections will test Mr Obasanjo’s political skills. As the losing parties have rejected the election results and profess little faith in the ability of the judiciary to deal with their complaints, the potential for the political climate to deteriorate is high. Economic policy outlook • There is still some confusion about the 2003 budget. Although the National Assembly approved a version before the elections, it appears that the president had not signed it before the legislature went into recess. Economic forecast • We now expect the price of oil to fall back quite sharply in 2003 and into 2004, as OPEC will not curtail production. Brent crude is forecast to average only US$18.2/b in 2004. As a result, Nigeria’s current-account deficit will rise sharply from 2% of GDP in 2003 to 6.2% of GDP in 2004.

May 2003

The Economist Intelligence Unit 15 Regent St, London 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 © 2003 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 in 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

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

19 Economic policy

24 The domestic economy 24 Economic trends 25 Oil and gas 28 Manufacturing 29 Infrastructure 30 Financial and other services

31 Foreign trade and payments

List of tables 9 International assumptions summary 11 Forecast summary 12 Presidential election results, Apr 2003 14 Parliamentary and state election results, Apr-May 2003 22 Fuel subsidy costs, Jan-Jun 2002 24 Inflation 25 Money supply: CBN targets and actual growth rates 32 Foreign-exchange reserves

List of figures 12 Gross domestic product 12 Consumer price inflation 19 Nigeria’s business environment 20 Federal government revenue, expenditure and debt 26 Nigeria’s OPEC quota 31 NSE all-share index

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 . Nigeria 3

Summary May 2003

Outlook for 2003-04 Although Olusegun Obasanjo secured a large majority in the presidential election in April 2003 and his People’s Democratic Party (PDP) convincingly won the National Assembly and state elections, the president faces formidable challenges in his last term in office. The most pressing of these is to pacify the opposition parties, which have disputed the legitimacy of his and the PDP’s overwhelming election victories, and quell the worsening ethnic unrest in the country, especially the oil-rich Niger Delta. It is not clear whether he has the vision or personality to deal with other key issues, such as constitutional reform, the county’s religious divide and the simmering ethnic and regional tensions in the country. We expect that the government has enough commitment to economic reform to reach a new agreement with the IMF in late 2003 or 2004—especially as oil prices fall back sharply—but the implementation of reform will remain erratic. However, real GDP growth is expected to be reasonably robust at 3.1% in 2003 and 3.7% in 2004, driven by developments in the oil and gas sector, particular offshore oil production.

The political scene The president, Olusegun Obasanjo, easily secured re-election on April 19th. His PDP party has also secured a large majority in the National Assembly and there will now be 29 PDP state governors (Nigeria has 36 states). Most election observers had reservations about the conduct of the elections, but the trade unions and army have indicated that they will accept the results. Of particular concern, was the political violence before the elections, especially in the troubled Niger Delta. Nigeria and Cameroon have been presented with a new plan for resolving their dispute over the Bakassi peninsula.

Economic policy The president has not signed into law the budget for 2003, which was approved by the National Assembly before the elections. The government’s inability to formulate and pass a coherent budget is of concern to the IMF. The government seems to have agreed to increase federal government wages by 12.5% to avoid a nationwide strike before the elections. The National Assembly has passed a law for curbing the powers of the Independent Corrupt Practices and Other Related Offences Commission.

The domestic economy The fall in the inflation rate that occurred in 2002 seems to have bottomed out in early 2003 as food prices have started to rise. Nigeria’s oil and gas production was disrupted in March and April by political unrest in the Niger Delta. Offshore oil production from a number of fields has started. Problems in the Niger Delta have led to further electricity shortages.

Foreign trade and payments In the run-up to the elections, the president announced that he would increase the import tariffs on some consumer goods. The fall in the foreign-exchange reserves which began in mid-2002 was halted in early 2003. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 6th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Nigeria

Political structure

Official name Federal Republic of Nigeria

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

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 to serve a four-year term

National elections The legislative election was held on April 12th 2003, the presidential election on April 19th 2003. Olusegun Obasanjo was re-elected president, and his party, the PDP, won a majority of seats in both houses of the National Assembly. The president is to be sworn in on May 29th. He will then appoint a new cabinet

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 (APP); Alliance for Democracy (AD); All Progressive Grand Alliance (APGA); National Democratic Party (NDP); United Nigeria People’s Party (UNPP). There are currently 30 registered political parties in Nigeria

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

Key ministers Agriculture & rural development Adamu Bello Aviation Kema Chikwe Commerce Precious Ngelale Communications Muhammed Bello Culture & tourism Boma Bromillow Jack Defence Lieutenant-General (rtd) Theophilus Yakubu Danjuma Education Babalola Borishade Environment Mohammed Kabir Said FCT administration Mohammed Abba-Gana Finance Adamu Ciroma Foreign affairs Sule Lamido Health Alphonsus Nwosa Industries Kolawole Jamodu Information Jerry Gana Internal affairs Odion Ogbesia Justice & attorney-general of the federation Godwin Agabi Labour & productivity Musa Gwadabe Police affairs Vacan t Power & steel Aliu Modibo Rural development & water resources Muktari Shagari Solid minerals Dupe Adelaja Transport Ojo Maduekwe Works & housing Ademen Esan

Central Bank governor Joseph Sanusi

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 5

Economic structure

Annual indicators 1998a 1999a 2000b 2001b 2002b GDP at market prices (N bn) 2.8 3.2 4.2a 4.9 5.7 GDP (US$ bn) 33.2c 34.8c 41.3a 44.3 47.4 Real GDP growth (%) 1.9 1.1 3.9a 3.8d 2.7 Consumer price inflation (av; %) 10.0 6.6 6.9a 18.2a 13.6a Population (m) 116.8b 120.1b 123.3 126.6 129.9 Exports of goods fob (US$ m) 10,082b 12,971b 21,395 17,949 17,239 Imports of goods fob (US$ m) 7,383b 10,367b 11,068 12,303 12,640 Current-account balance (US$ m) -2,079b -3,319b 4,263 1,184 -1,144 Foreign-exchange reserves excl gold (US$ m) 7,101 5,450 9,911a 10,457a 7,331a Total external debt (US$ bn) 30.3 29.2 29.3 28.8 29.6 Debt-service ratio, paid (%) 10.3b 6.8b 4.2 6.0 4.4 Exchange rate (av) N:US$ 85.25 92.34 101.70a 111.23a 120.58a a Actual. b Economist Intelligence Unit estimates. c Converted at the autonomous exchange rate. d Official estimate.

Origins of gross domestic product 2001a % of total Components of gross domestic product 2001a % of total Agriculture (excl livestock) 41.1 Private consumption 59.3 Livestock 5.1 Government consumption 14.0 Crude petroleum & gas 10.6 Gross fixed capital formation 6.3 Manufacturing 6.0 Exports of goods & services 26.1 Wholesale & retail trade 11.4 Imports of goods & services -5.8 Finance & insurance 9.7

Principal exports 2001a US$ m Principal imports 2001a US$ m Oil 18,677 Manufactured goods 3,332 Non-oil 250 Machinery & transport 2,672 Chemicals 2,576 Food & live animals 1,312

Main destinations of exports 2001b % of total Main origins of imports 2001b % of total US 42.1 UK 7.8 Spain 8.8 US 7.6 India 6.8 Germany 7.0 France 5.4 France 6.0 a Central Bank of Nigeria data. b Derived from partners’ trade returns; subject to a wide margin of error.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 6 Nigeria

Quarterly indicators 2001 2002 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output Industrial production index (1995=100) 110.9 111.6 112.8 112.3 111.6 111.8 112.7 116.8 Industrial production index (% change, year on year) 4.9 5.6 -0.2 -2.9 0.6 0.2 -0.1 4.0 Prices Consumer prices (Sep 1985=100)a 3,956 4,264 4,517 4,401 4,644 4,784 4,653 4,937 Consumer prices (% change, year on year) 18.2 16.1 19.1 16.5 17.4 12.2 3.0 12.2 Petroleum spot price (Bonny Light 37°; US$/barrel) 25.8 25.4 25.4 19.4 21.3 25.0 27.2 26.9 Financial indicators Exchange rate N:US$ (av) 110.1 112.8 110.9 111.2 114.4 116.6 125.0 126.3 Exchange rate N:US$ (end-period) 110.2 111.5 110.1 113.0 115.6 119.6 125.8 126.4 Discount rate (end-period) 15.5 18.5 20.5 20.5 20.5 20.5 18.5 16.5 M1 (end-period; N bn) 772.72 751.14 773.72 816.71 835.92 872.09 933.55 1,011.79 M1 (% change, year on year) 58.4 44.5 39.1 25.7 8.2 16.1 20.7 23.9 M2 (end-period; N bn) 1,274.03 1,263.16 1,327.63 1,315.87 1,423.35 1,502.06 1,605.42 1,665.03 M2 (% change, year on year) 60.1 39.7 37.9 37.4 11.7 18.9 20.9 26.5 Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 9,160 10,937 10,274 10,963 11,376 12,441 11,812 12,138 Stockmarket index (% change, year on year) 52.7 69.1 40.8 35.2 24.2 13.7 15.0 10.7 Sectoral trends Crude oil production (m barrels/day)b 2.15 2.01 2.05 2.11 1.91 1.91 1.97 1.99 Crude oil production (% change, year on year) 10.3 0.0 0.5 -1.9 -11.2 -5.0 -3.9 -5.7 Foreign trade (US$ m) Exports fob 4,920 4,915 4,587 3,565 3,180 3,421 4,101 4,405 Petroleum 4,874 4,889 4,485 3,521 3,121 3,347 4,050 4,336 Imports cif -2,534 -2,796 -2,975 -2,605 -2,510 -1,289 -1,824 -1,924 Trade balance 2,386 2,119 1,612 960 670 2,132 2,056 2,481 Foreign reserves (US$ m) Reserves excl gold (end-period) 10,789 10,559 10,517 10,457 9,502 8,239 7,035 7,331 a Figures for March, June, September, December. The Nigerian government uses the 12-month moving average 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 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 7

Outlook for 2003-04

Political outlook

Domestic politics Although the president, Olusegun Obasanjo, and his People’s Democratic Party (PDP) secured overwhelming victories in the various elections held in April and May, the polls were clearly flawed by irregularities and fraud. However, it is apparent that Mr Obasanjo was the popular choice, and the PDP is the only party with nationwide support. Given the various disputes, the All Nigeria People’s Party (ANPP), along with other minor parties, have, not surprisingly, rejected the results. The fallout from the election will be the biggest test of Mr Obasanjo’s political skills since he returned to power as a civilian president in 1999, and Nigeria faces several months of political uncertainty. The dispute is likely to intensify, since the ANPP and other opposition parties have expressed their lack of faith in the ability of Nigeria’s judicial system to redress their complaints. The stand-off between Mr Obasanjo and the defeated ANPP presidential candidate, Muhammadu Buhari, has also deepened concern that Nigeria’s democracy is heading for collapse, as happened to its previous civilian republics following disputed elections, especially given the many faultlines that politicians bent on fomenting trouble can exploit in this impoverished and divided nation, where more than 10,000 people have died in religious, ethnic and communal violence since civilian rule was restored. However, there are important differences between the current situation and that in 1966 and 1983 when election turmoil led to military coups. Whereas past military takeovers were popular, civil organisations, including Nigeria’s powerful trade unions, have warned that they will resist any attempt to truncate the present democracy. In addition, the international community is likely to be less accepting of another period of army rule than it was previously. Moreover, Nigeria’s armed forces, still tarnished by their last spell in government, are probably less inclined to return to power. And as many of the leading figures in the PDP and ANPP are retired generals, the allegiance of the army is likely to be divided in any political showdown in the barracks. Nevertheless, although unlikely, military intervention in politics is not inconceivable in the short to medium run, especially if politicians fail to resolve the crisis and the country seems to be moving towards disintegration. If Mr Obasanjo’s administration can survive into the second half of 2003, the prospects for political stability will become brighter in 2004. Mr Obasanjo, who has considerable political skill—although he sometimes lacks tact—is expected to invite key opposition parties to join his government (the ANPP has said that it would decline such an invitation, but this mood may pass). Opting for an inclusive cabinet, in which balancing ethnic and regional concerns counts more than individual merit, may be politically expedient, but it is liable to result in the ineffective government that characterised Mr Obasanjo’s first term of office. Government may be made more ineffective by the PDP’s increased majority in the National Assembly. Although in theory the president and the PDP should be in a stronger position to tackle the pressing issues confronting the country—

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 8 Nigeria

including calls for a new constitution, a revision of the formula for sharing revenue between the competing tiers of government, and the increasingly problematic ethnic and religious divide—this will require the party to become more cohesive and disciplined than it was during the past four years when the relationship between Mr Obasanjo and the National Assembly was little better than a war of attrition. Unfortunately, the personalised nature of Nigerian politics makes this unlikely to happen and, though there may be a honeymoon period of improved relations between the executive and the legislative, this co- operation is unlikely to last long enough to allow the government to fashion a solution to these problems or to impose lasting order on the country.

International relations In his second term Mr Obasanjo is likely to remain deeply involved in foreign policy matters, even though most Nigerians would prefer him to focus on domestic issues. The controversy surrounding the legitimacy of his re-election could undermine Mr Obasanjo’s credibility abroad, especially in connection with the good governance tenets of the New Partnership for Africa’s Development. Moreover, the political crises in Zimbabwe and Côte d’Ivoire are unlikely to be resolved quickly, and the president’s involvement in attempts to resolve them will expose him to domestic political criticism. Progress is expected to slow on a more pressing issue, the sovereignty of the Bakassi peninsula. The work of the boundary commission established in November to draw the new border with Cameroon is likely to be prolonged, given Nigeria’s reluctance to cede sovereignty in accordance with the ruling of the International Court of Justice in October 2002.

Economic policy outlook

Policy trends Before the elections, the administration published a new policy blueprint, A Framework for Nigeria’s Economic Growth and Development (2003-2007). Having secured re-election it is unlikely to abandon the policy, which is similar to the its previous policy statements: it continues the practice of setting ambitious targets, including real GDP growth of at least 7% by 2007, without stating the reforms that are needed to achieve these goals. Poor policy implementation will continue to be one of the government’s biggest weaknesses, especially as the Economist Intelligence Unit expects the animosity between the executive and legislature to persist over the next few years. Poor policy implementation will be compounded a weak civil service and overlapping tiers of local, state and federal government. Consequently, we expect long delays in approving policy and even longer delays in its implementation. However, it is possible that the IMF and the new administration will agree on a basic macroeconomic reform programme in late 2003 or 2004, especially as oil prices fall back in 2004. Although implementation will be patchy, the IMF is likely to be under political pressure to maintain the agreement in order to support a re-elected civilian government in Nigeria. It is, therefore, likely to make concessions to the government on a range of required reforms and on non-compliance.

Fiscal policy After a prolonged debate in the run-up to elections, the 2003 budget was eventually ratified by the National Assembly although it has yet to be signed by

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 9

the president. Based on a forecast oil price of US$22/barrel, the budget proposes total expenditure of just under N1trn (US$7.5bn), which is very similar to that of recent years and substantially above the N765bn initially proposed by the president. However, in recent years the budget approved by the National Assembly (if passed at all) has often borne little similarity to the eventual budget outturn, because of the delay in passing the original budget, subsequent supplementary budgets and oil price volatility which has a major impact on revenue. This is likely to be the case also in 2003. For example, we forecast a higher oil price for the year and expect considerable delay in expenditure. Consequently we expect the fiscal deficit to narrow from an estimated 4.5% of GDP in 2002 to 3.3% of GDP in 2003. Although the government will try to tighten fiscal policy in 2004, as oil prices fall and in accordance with its overall policy agreement with the IMF, getting parliament to agree on expenditure cutbacks is likely to prove difficult. As a result, the budget deficit is forecast to increase very modestly to an estimated 3.5% of GDP. The government should have little problem financing deficits of 3-5% of GDP through domestic borrowing.

Monetary policy The Central Bank of Nigeria (CBN) reduced the minimum rediscount rate by 4 percentage points in the second half of 2002 to the current rate of 16.5%, in response to political pressure to boost the non-oil sectors of the economy. Although inflation fell steadily in 2002, the reduction in interest rates was probably premature, given the government’s expansionary fiscal policy and the fall in the value of the naira in the middle of 2002. This is likely to result in a rise in inflation in early 2003. Moreover, the CBN will find it difficult to raise interest rates again until well after the elections and the government is unlikely to act to control its spending until late 2003. As a result, monetary policy will not be tightened until late 2003 and in 2004—and then only marginally. As a consequence, inflation will remain in double digits throughout 2003-04. Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.1 2.9 3.1 3.9 OECD 0.8 1.8 1.7 2.5 EU 1.5 0.9 1.1 2.1 Exchange rates ¥:US$ 121.5 125.3 118.2 117.0 US$:€ 0.896 0.946 1.113 1.105 SDR:US$ 0.785 0.772 0.720 0.722 Financial indicators ¥ 2-month private bill rate 0.17 0.10 0.10 0.10 US$ 3-month commercial paper rate 3.61 1.70 1.25 2.44 Commodity prices Oil (Brent; US$/b) 24.5 25.0 24.5 18.2 Gold (US$/troy oz) 271.1 309.8 325.5 290.0 Food, feedstuffs & beverages (% change in US$ terms) -1.9 12.7 5.8 3.0 Industrial raw materials (% change in US$ terms) -9.7 2.2 11.7 3.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 10 Nigeria

The global economy is set to remain sluggish in the first half of 2003; growth will be constrained by excess capacity, high levels of personal debt, weak confidence and high world oil prices. We therefore expect world GDP growth (weighted using purchasing power parity exchange rates) to pick up only modestly, from 2.9% in 2002 to 3.1% in 2003. In 2004 a return to more normal growth rates is likely and world GDP growth is forecast at 3.9%. Having been around US$30/b in the first quarter of 2003, oil prices have slipped back quite quickly since then owing to the speed with which the US-led attack on Iraq has been completed. They are expected to continue falling as OPEC struggles to contain output against the background of a weak global demand. As a result, we forecast that the price of dated Brent Blend will average US$24.5/b in 2003 falling to US$18.2/b in 2004.

Economic growth We estimate that real GDP in 2002 grew by only 2.7%, because of the constraints imposed by the country’s OPEC oil production quota. However, as OPEC relaxed its oil production quotas significantly in January and February 2003, Nigerian oil production is set to rebound—despite the political unrest in the Delta region in March and April, which has had some impact on production. The increase in production will be accompanied by high oil prices in the first half of 2003. This will be partly offset by the fact that growth outside the oil sector is likely to be subdued in the first half of 2003, owing to the political uncertainties associated with the 2003 elections. A relatively peaceful transfer of power from one civilian government to another in 2003 would give the economy a positive boost in the second half of the year and into 2004. Nonetheless, private and government consumption and fixed investment will show only modest growth in 2003. We therefore forecast real GDP growth of 3.1% in 2003. The rate of growth will pick up to 3.7% in 2004, as the forecast increase in offshore oil production and investment in the gas sector continue apace, economic policy improves and political uncertainty subsides.

Inflation The downward trend in the inflation rate in 2002 seems to have come to a halt in early 2003: the 12-month moving average rate of inflation, the measure preferred by the CBN, rose from 12.3% in January to 12.4% in February. We expect inflation to rise farther in the first half of 2003, owing to the fall in the naira, the loosening of monetary policy in the middle of 2002 and the government’s expansionary fiscal policy. However, inflation will trend down- wards in the second half of 2003 and into 2004, as the government tightens fiscal policy and pushes ahead with some economic reforms following the elections. However, inflation will not stay in single digits for long, owing to the size of the fiscal deficit, the limited scope for raising interest rates in the face of pressure from industrialists and politicians to cut rates, and the forecast fall in the exchange rate, which will increase the cost of imports. We are therefore forecasting average annual inflation of 13.5% in 2003 and 10.6% in 2004.

Exchange rates In the first half of the year we expect the naira to remain relatively stable at just under N130:US$1, since oil prices will remain buoyant and no major policy initiatives are likely to be introduced. However, as oil prices are forecast to fall in the second half of 2003 and the government is acutely aware of the costs of defending the naira (external reserves fell sharply in 2002 when it tried to

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 11

defend the currency), and is also trying to reach some sort of policy agreement with the IMF, we expect the balance of power to turn in favour of those that are willing to allow a further depreciation of the naira. Thus we forecast that the value of the naira will begin to fall in the second half of 2003, averaging N131.4:US$1 for the year. The naira will depreciate further in 2004 to average N146.4:US$1, owing to lower oil prices, the widening of the current-account deficit and the slow strengthening of the US dollar on global markets.

External sector We estimate that Nigeria ran a current-account deficit of 2.4% of GDP in 2002, despite fairly high oil prices, owing to the constraints imposed on oil production by Nigeria’s OPEC quota and strong import growth. The deficit will narrow to 2% of GDP in 2003, as the volume of oil exports increases and prices remain high during the first half of the year. However, any further increase in the volume of oil exports will be more than offset by the fall in oil prices to below US$20/b in 2004. This will cause a sharp reduction in the trade surplus in 2004 and, as a result, the current-account deficit will widen to 6.2% of GDP. Although changes in the current account are driven mainly by the trade account, some trends in invisible trade will be discernible in 2003-04. The income and services accounts will remain firmly in deficit, the services account because of Nigeria’s heavy dependence on international services, and the income account because of profit remittances from multinational oil companies and interest charges on external debt. In contrast, current transfers will be in surplus owing to large inflows of private transfers from the Nigerian diaspora.

Forecast summary (% unless otherwise indicated) 2001a 2002a 2003b 2004b Real GDP growth 3.8c 2.7 3.1 3.7 Industrial production growth 1.7d 1.2d 1.0 2.2 Gross agricultural production growth 5.1 4.5 4.0 4.0 Consumer price inflation (av) 18.2d 13.6d 13.5 10.6 Consumer price inflation (year-end) 16.5d 12.2d 16.6 10.4 Short-term interbank rate 23.4d 24.8d 20.0 18.0 Government balance (% of GDP) -4.5 -4.5 -3.3 -3.5 Exports of goods fob (US$ bn) 17.9 17.2 18.4 15.5 Imports of goods fob (US$ bn) 12.3 12.6 12.9 12.1 Current-account balance (US$ bn) 1.2 -1.1 -1.0 -3.1 Current-account balance (% of GDP) 2.7 -2.4 -2.0 -6.2 External debt (year-end; US$ bn) 28.8 29.6 29.8 29.3 Exchange rate N:US$ (av) 111.2d 120.6d 131.4 146.4 Exchange rate N:¥100 (av) 91.53d 96.19d 111.19 125.14 Exchange rate N:€ (year-end) 99.5d 132.6d 157.0 164.3 Exchange rate N:SDR (year-end) 141.9d 171.8d 194.4 207.5 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official estimate. d Actual.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 12 Nigeria

The political scene

The first civilian-conducted Nigerians braved storms and long delays to cast their votes at many of the elections for two decades 150,000 polling stations around the country in the nation’s first civilian-run elections for two decades. The elections, for the National Assembly, state governors, the president and state legislators, were held over successive weekends in April and May. Despite violence in the run-up to the polls, the time it often took to cast one’s vote and the fact that the process had to be repeated over consecutive weekends, voter turnout was impressive. For example, in the presidential election, held on April 19th, turnout was almost 70%.

Presidential election results, Apr 2003 Candidatea Party Votes % of vote Olusegun Obasanjo PDP 24,456,140 61.94 Muhammadu Buhari ANPP 12,710,022 32.19 Odumegwu Ojukwu APGA 1,297,445 3.29 Ifeanyichukwu Nwobodo UNPP 169,609 0.43 Ganiyu Fawehinmi NCP 161,333 0.41 Sarah Jibril PAC 157,560 0.40 Ike Nwachukwu NDP 132,997 0.34 Christopher Okotie JP 119,547 0.30 Musa Balarabe PRP 100,765 0.26 a Candidates that won over 100,000 votes; there were 20 candidates in total. Source: Independent National Electoral Commission.

Mr Obasanjo is re-elected The most obvious result of the elections is that the ruling People’s Democratic Party (PDP) has increased its grip on power in both the federal government and in the states. In fact, the PDP has emerged as the only party with nationwide support, which has raised concerns that Nigeria is moving towards a single- party democracy. The PDP’s victory was most overwhelming in the presidential election which was in effect a contest between two former military rulers: the incumbent president, Olusegun Obasanjo, a 66-year-old Christian from the south; and Muhammadu Buhari, a 61-year-old Muslim from the north and member of the All Nigeria People’s Party (ANPP). In the presidential election, Mr Obasanjo took 24.5m votes, or 62% of the total number of votes cast, against

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 13

12.7m votes for his main rival, 32% of votes cast. This left the other 18 candidates sharing less than 6% of the total vote. Mr Obasanjo also met the other criterion for election—he polled not less than one-quarter of the votes in at least two- thirds of the states—which meant that a run-off vote was avoided (this had been scheduled for April 26th).

The PDP does well in the As well as Mr Obasanjo’s victory in the presidential election, the PDP also other elections performed strongly in the National Assembly and state governorship elections, held on April 12th and April 19th respectively. It almost achieved a clean sweep of votes in south and central Nigeria and performed reasonably well in the north. The ANPP, its nearest rival, won a pocket of only seven states, mainly in the north of the country. Nigeria’s third biggest party, the Alliance for Democracy (AD), which had controlled six states after the 1999 election, won only Lagos state, where the incumbent governor, Bola Tinubu, was re-elected. Although the Independent National Electoral Commission (INEC) had eventually allowed 27 new parties to be registered in December 2002 (February 2003, page 14) and all fielded candidates in the elections, none made an impression in the national and state elections: they won only a few seats in the House of Representatives.

Several prominent political Although the president and many of his key supporters were re-elected—helped figures lose out considerably by the power of incumbency and the momentum that the PDP built up during the campaign—several prominent figures in the National

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 14 Nigeria

Assembly will not return to office following the elections. Of these, the two most notable are the president of the Senate, Anyim Pius Anyim, and the speaker of the House of Representatives, Ghali Umar Na’Abba, both of whom had been at loggerheads with Mr Obasanjo, fuelling tension between the executive and legislature during the first administration. Mr Anyim did not seek re-election and Mr Na’Abba was defeated in his Kano constituency. In addition, nine of Nigeria’s 36 incumbent state governors were voted out of office, reflecting the widespread dissatisfaction with the dismal performance of many of Nigeria’s state governments.

Parliamentary and state election results, Apr-May 2003 House of Senate Representatives State governors State assembliesa People’s Democratic Party (PDP) 73 213 28 17 All Nigeria People’s Party (ANPP) 28 95 7 1 Alliance for Democracy (AD) 6 31 1 1 Others 0 7 0 0 Outstanding resultsb 2 14 0 17 a Party majority. b May 2nd. Source: Independent National Electoral Commission.

The president even wins in the The defeat of nine state governors is also due to the collapse of the Yoruba Yoruba heartland nationalist vote for the AD in five of the six south-western states it previously controlled, which was probably one of the main surprises of the election. Particularly remarkable was the solid backing for Mr Obasanjo in the region, which in 1999 rejected him: he won 99.92% of the vote in his home state of Ogun. Various explanations for the AD’s collapse have been put forward, of which the most credible include the unpopularity of its defeated state governors; pre-election intra-party squabbling; and confusion created by its formal support for Mr Obasanjo in the presidential election (the AD did not put forward a presidential candidate, instructing its supporters to vote for Mr Obasanjo, and it is thought that many of them also voted PDP in the other elections). Although defeated AD governors blamed their election defeat on foul play, their party’s national leadership was quick to accept the results and indicated that it would co-operate with the federal government. This response came as a relief to people who had feared that election disputes in the south- west—a politically volatile region, often called the wild west—would trigger the kind of mass unrest that occurred in these states following Nigeria’s two previous civilian republics, which encouraged the military to intervene to restore order.

The vote seems to be broadly Predictably, the PDP hailed April’s elections as a triumph for democracy, accepted describing the party’s success as a reflection of the electorate’s confidence in the party’s stewardship of the country. The ANPP and several other parties rejected the results, claiming that the elections were rigged in several states. “We do not consider this to be an election by any stretch of the imagination,” the ANPP said in a statement after the presidential election. At the first news conference after the presidential election, Mr Buhari said that the results represented the “rape of democracy” and were “the most rigged in history”. But he held back from calling for the immediate “mass action” he threatened after

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 15

the disputed National Assembly elections on April 12th. The ANPP and Mr Buhari demanded fresh elections in disputed areas and indicated that they would take legal and constitutional steps to redress their grievances. There is no doubt that there were many irregularities in the voting, but the more blatant vote-rigging in some parts of the country was probably due more to the over-zealousness of local supporters and incumbent governors—taking no chances with their re-election—than from orchestrated manipulation by the leadership of the parties. Election observers generally agreed that Mr Obasanjo had considerable support and would have won the election without rigging, pointing out that the number of votes he gained over his nearest rival was significantly more than were cast in the south-eastern and Niger Delta states where the worst irregularities occurred. Confirmation of this was provided by an exit poll conducted by This Day newspaper on April 19th, which put the president’s support at 55%.

The unions and army are In addition, despite the highly emotive rhetoric of many of the defeated willing to accept the result politicians, there seems little appetite outside the opposition parties to question the election results. The powerful trade union federation, the Nigeria Labour Congress (NLC), said that the presidential election results should be accepted in spite of some incidents of electoral malpractice. Presenting the report of the NLC election monitoring team, the NLC’s president, Adams Oshiomhole, said that even if 50% of the votes from states where there were glaring incidents of vote-rigging were voided, Mr Obasanjo would still have won. The NLC advised aggrieved politicians to seek redress in electoral tribunals and warned that it would resist any attempt to overturn Nigerian democracy. The military, which has ruled Nigeria for most of the years since independence owing largely to the failure of civilians to uphold democratic rule, also watched the elections closely but does not seem inclined to act. Before the vote, the chief of defence staff, Admiral Ibrahim Ogohi, warned politicians against trying to draw the military into election politics and “not to try to use the armed forces to destabilise the country”. At a press conference in Abuja he told politicians to stay clear of military barracks, stressing that the military was committed to the success of democracy.

The assessment of election The general view of the dozens of foreign and local monitoring teams that monitors is mixed observed the elections is also one of qualified acceptance. Monitors praised the conduct of the elections across much of the country, but criticised it in some areas, especially the south-east and the Niger Delta. Of the main observer teams, probably the most critical was the one from the EU. On April 22nd it stated that the presidential and gubernatorial elections were marred by serious irregularities and fraud in 13 states. It claimed that policemen had stuffed ballot boxes and that INEC officials had been seen thumb-printing ballot papers for the PDP. The US National Democratic Institute expressed similar reservations about the conduct of the presidential election, saying that it found “ballot stuffing, voter intimidation, violence and fraud” in certain constituencies, particularly in the Niger Delta and the south-east. The International Republican Institute said that there had been “outright or attempted fraud” in Cross River, Imo and Rivers states.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 16 Nigeria

In contrast, the 22-strong Commonwealth observer team gave a more positive assessment of the elections. In its report, it said that in most of Nigeria “a genuine and largely successful effort was made to enable the people to vote freely”. However, it did find that electoral procedures had broken down in some states, particularly Enugu and Rivers. African Union observers said the presidential and state governor elections were an improvement on the previous week’s National Assembly election and expressed general satisfaction with the improvement. At a news conference on April 25th, Mr Obasanjo criticised the EU observers for their damning report, saying that Europeans failed to appreciate Nigeria’s culture and environment, while praising the Commonwealth for showing its understanding. Mr Obasanjo also commended the media for its “patriotic reporting” which he said took into account Nigeria’s political culture.

Preparations for the elections The messy conduct of the elections and the considerable scope for vote-rigging was poor and fraud was not surprising, given the poor pre-election preparation by Nigeria’s underfunded electoral agency, the Independent National Electoral Commission (INEC; February 2003, page 14). This was of particular concern to some observers. Two weeks before the elections began, the US-based Carter Centre and National Democratic Institute said that crucial aspects of electoral procedure remained unresolved. In a joint pre-election assessment, the two groups expressed concern that the voters’ register was not yet ready and that there was no plan to deal with the growing wave of political violence. They also criticised the lack of a mechanism for dealing with the misuse of money in the election campaigns. The INEC itself had criticised the undemocratic behaviour of some politicians in the run-up to the elections. In late March the INEC’s chairman, Abel Guobadia, warned that unless the political violence in the country was checked, the elections might be compromised and the electoral process might collapse in an climate of fear, intimidation and harassment. Some parties had also accused their rivals of planning to rig the elections. The ANPP claimed that some parties were planning to dress some of their supporters in police and military uniforms to intimidate voters.

The run-up to the poll was The actual level of violence during the elections came as a relief to many marred by violence Nigerians, given the violence in the months leading up to them, in which dozens of people were killed. • At least seven people were killed in a clash between armed supporters of the PDP and the AD in the Oshodi area of Lagos state on March 11th. • A month earlier in Owo, Ondo state, one person was killed in a fight between supporters of the two parties after some AD members moved across to the PDP. • At least a dozen people were serious injured in a clash between rival party supporters in Ilorin, capital of Kwara state in February. • 200 houses were burnt down in two towns in Kebbi state in mid-March. Several politicians were also shot in apparently politically motivated assassinations. The most high-profile victim was Marshall Harry, an ANPP

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 17

chieftain and the co-ordinator of Mr Buhari’s presidential campaign in the Niger Delta. He was murdered by unidentified gunmen in his Abuja home on March 5th. ANPP politicians blamed the PDP and Mr Obasanjo for the killing, which heightened public anxiety over the elections. Other politicians assassinated in the build-up to the elections included an assistant to the governor of Imo state and a senatorial candidate for the ANPP in the state; a businessman ally of the governor of Ekiti state; and the PDP chairman of a local council in Gombe state. In early April a convoy, which included the vice-president, Atiku Abubakar, and the national chairman of the PDP, was shot at although no one was reported to have been injured. Renewed ethnic violence in Niger Delta

The region most affected by political violence both before and after the elections was the Niger Delta. In fact, election campaigning heightened the long-standing disputes in the troubled region, which has been one of the main areas of violence and conflict in Nigeria in the last two decades. For example, with growing political tensions, a dispute over the siting of a local council headquarters and boundaries in Warri sparked outbreaks of violence between February and late March. More than 100 people were killed and many villages destroyed in the clashes, first between the Urhobo and Itsekiri, then from March 12th between the Ijaw and Itsekiri. The violence forced oil companies to abandon some areas, resulting in a reduction in Nigeria’s crude output of up to 40%.The Ijaw and Urhobo alleged that the distribution of electoral wards in the districts around Warri favoured the Itsekiri and demanded that they be redrawn.

However, in the multi-ethnic Niger Delta it is not only rival tribes that dispute access to the region’s oil wealth. Sometimes the fighting has been between groups within the same community, as in a series of clashes in February in Ozoro, Delta state, between two gangs fighting for control of the town, especially the management of patronage from Shell. At least 25 people were killed in the fighting, which forced many people to leave their homes.

The pre-election political climate also encouraged ethnic militants in the region to intensify their struggle for a greater share of Nigeria’s oil wealth, creating a dilemma for the government in trying to restore order. On April 2nd the Ijaw Youth Council, an umbrella organisation of activist groups, threatened to blow up oil facilities unless oil companies agreed to pay the Ijaw compensation for pollution and land use. They also demanded that Mr Obasanjo sign the controversial bill ending the distinction between onshore and offshore oil in relation to the payment of the derivation entitlement to oil-producing states. Mr Obasanjo had introduced the legislation, but refused to sign the bill after the National Assembly extended the offshore area from the 200 metres in the president’s draft to 200 nautical miles. Ethnic and communal violence occurred outside the Delta region too, often fuelled by poverty-driven disputes over land but heightened by the growing political tensions in the past 12 months. More than 100 people were killed in late February in several days of fighting between two communities in Dumne a remote village in Adamawa state next to Nigeria’s border with Cameroon. According to the Red Cross, 500 people were injured and 21,000 people fled their homes in renewed fighting between nomadic Fulani herdsmen and

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 18 Nigeria

Yungar farmers. Around the same time about 25 people were killed in similar fighting between nomads and farmers in neighbouring Gombe State. At least 30 people were reported killed on March 8th in communal fighting in the Kanam district of Plateau state in central Nigeria, in what was believed to be the continuation of a feud between the Hausa-speaking Kanam people and their mainly Christian neighbours from Langtang. In recent years hundreds of people have been killed in ethnic and religious clashes in central Nigeria, as local Christian and animist farmers and Muslim nomadic farmers compete for land. Besides the loss of life, ethnic and communal conflicts in Nigeria have increased insecurity and undermined economic activity in the affected areas. The vice-president, Mr Abubakar, claimed in mid-February that over 750,000 Nigerians were displaced between 2001 and 2002 as a result of civil and communal unrest. In a statement on March 7th, the Red Cross also drew attention to the problems caused by communal strife, noting that 104,620 people were displaced following fighting in February in Adamawa and Gombe states and Warri city in Delta state, and that the people living in displacement camps across Nigeria needed emergency relief aid. During Mr Obasanjo’s first term of office, the federal government has been unable to check the spread of communal conflict, which often erupts in remote areas of the country. The impotence of the state and its undermanned and poorly equipped police force causes resentment among the victims of violence. Moreover, when the federal government has acted, it often sends in the army which quickly leads to excessive violence and added resentment (November 2002, page 16). The new government will need to act quickly, or the tensions could explode in the next few years. Government inaction forces many communities to act for themselves, which usually increases tension (August 2002, page 17). In March, for example, the Itsekiri People’s Congress held a news conference in Abuja and warned that if the federal government could not protect its people against assaults by Ijaw and Urhobo groups they would seek protection from the United Nations. A spokesman for the group claimed that the Ijaw, the largest tribe in the Niger Delta, angry at the siting of a local council headquarters in an Itsekiri part of Warri city, had destroyed over 50 Itsekiri towns and villages between 1997 and 1999 and still occupied 26 Itsekiri villages.

Nigeria and Cameroon The United Nations has presented Cameroon and Nigeria with recom- consider UN plan on Bakassi mendations for resolving their dispute over ownership of the oil-rich Bakassi peninsula (November 2002, page 17). The plan, undisclosed to the public, was given to representatives of the two countries on April 3rd at their joint commission meeting in Yaoundé. The commission was set up under UN auspices in late 2002 after Nigeria refused to accept the ruling of the International Court of Justice in October which gave Cameroon sovereignty over Bakassi. Leaders of both the Nigerian and Cameroonian delegations at the talks expressed their desire to find a peaceful resolution to the dispute, which has led to military skirmishes between the two countries in the past.

The US suspends military In March, at the height of the international row over US plans to invade Iraq, assistance the US government announced that it had suspended military aid to Nigeria because of a massacre of villagers in Benue state by Nigerian soldiers in 2001.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 19

The government in Abuja, however, said that the decision was the US administration’s way of punishing Nigeria for its opposition to the war in Iraq. Nigeria’s minister of state for foreign affairs, Dubem Onyia, summoned the US ambassador to Nigeria, Howard Jeter, to protest against the suspension. He said that Nigeria would resist any intimidation by the US over its stand on Iraq. Mr Jeter claimed that the decision to withdraw military assistance was unconnected with Nigeria’s position on Iraq, though said that the US government had been disappointed with Africa’s response to the Iraq issue. A State Department official in Washington claimed that the US action arose from a law requiring military co-operation to be suspended with armies that have committed serious human rights abuses. The popular press in Nigeria, however, is suspicious about the timing: editorials question why it took the US administration so long to respond to the Benue massacre, a revenge attack for the death of 14 troops killed in inter-ethnic fighting.

Economic policy

Economic policy features little Economic policy and the country’s overall economic performance since the in the election campaigning return to civilian rule in 1999 hardly featured in the campaigns for the April and May elections. This is partly because there is little difference in economic policy between the main political parties. Although some of the smaller parties preached radical and often impractical policies—such as returning to a fixed exchange rate—the economic policies of the main parties showed their commitment to continuing the liberalisation process began by the military, including privatisation, financial deregulation and moderate trade liberalisation. Unfor- tunately, the economic policy debate does not seem to have been able to move beyond the general recognition of the need to promote private-sector growth, restore infrastructure, reduce Nigeria’s reliance on oil sales, curb corruption, encourage foreign investment, reduce unemployment and boost consumer demand. The difficult details of how to achieve these aims were ignored. Despite all the statements in favour of economic liberalisation by the Obasanjo administration since 1999, the overwhelming perception of Nigeria among local and international economic institutions is that of a country still weighed down by an overbearing, inefficient and corrupt state, which itself is uncertain about the direction that economic policy should take. This view is reflected in the Economist Intelligence Unit’s business environment rankings. Although we forecast some improvement in Nigeria’s business environment—its score in our business rankings model improves modestly from 3.84 in the 1998-2002 period to 4.54 in 2003-07—the movement is not enough to stop the country moving down the overall global rankings from 59th place in 1998-2002 to 60th, or bottom, place in 2003-07. This is because, though Nigeria is making some progress with reform, it is slow and erratic and other countries have in place a more consistent strategy of reform. The view by the Economist Intelligence Unit seems to be supported by the Washington-based Heritage Foundation in its 2003 Index of Economic Freedom. In this, Nigeria rated on a wide variety of freedom factors, is ranked 140th out of 150 countries. In fact, Nigeria’s score and position has fallen steadily since the restoration of democracy in 1999, when it ranked 95 out of 160 countries covered that year.

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 20 Nigeria

Fiscal indiscipline remains a One of the main economic problems facing the country in recent years has problem been that of fiscal indiscipline. This was a major theme of the IMF in its latest World Economic Outlook published in April: the IMF said that macroeconomic imbalances had grown in Nigeria over the past two years to unsustainable levels, and called on the authorities to rein in public spending, especially given the volatility of the international oil market. In particular, the IMF stressed that the main challenge facing the new government following the elections would be to break with boom and bust economic policies of the past in favour of more careful management of oil revenue and to reduce public expenditure to sustainable levels over the medium term (Nigeria: Selected Issues and Statistical Appendix, published in March 2003, gives a detailed view of IMF thinking). In particular, the government needs to reform civil service pay structures and staffing levels.

Nigeria’s inability to formulate a coherent budget has continued in 2003. The budget was approved by the National Assembly on March 5th, more than three months after it was presented by the president, Olusegun Obasanjo. Such delay has become usual and reflects how Nigeria’s dysfunctional and conflict-ridden federal system has hampered economic management. The budget is substantially different from that presented by the president. In particular, it assumes an oil price of US$22/barrel: Mr Obasanjo’s budget assumed US$18/b. The budget approved by the National Assembly proposes expenditure of N976.3bn (US$7.4bn), 28% more than the N765.132 proposed by the president on November 20th. Parliament raised recurrent expenditure to N593.9bn from N508.8bn and capital spending from N256.4bn to N382.3bn. The National Assembly also approved a special provision of N703.1bn to cover payment of joint-venture cash calls of N441bn, external debt service of N252bn and transfers to the Niger Delta Development Commission of N10.1bn.

Nigeria appears to have The lawmakers said that the 28% increase in budget expenditure was due to no budget increased allocations to priority ministries that were inadequately funded, especially those handling infrastructural projects. In mid-March the chief economic adviser to the president, Magnus Kpakol, told journalists in Abuja that Mr Obasanjo had not signed the 2003 Appropriation Bill because the

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Nigeria 21

budget proposals of the executive and legislature were being harmonised. Curiously, on April 8th, Mr Kpakol told journalists that the president had still not signed the bill because he had not received details of the budget from the National Assembly. Since the National Assembly was in recess and would reconvene only briefly in May before the end of the administration, Nigeria is likely to be without a budget for at least the first half of 2003 or until a new administration and National Assembly is in place. The mess made of the budget process partly is due to the tussle between the executive and legislature, both controlled by the PDP, for control of the nation’s finances. Though the federal government has consistently presented itself as the voice of fiscal restraint in contrast to the legislature’s tendency towards profligacy, the executive has consistently exceeded its own spending projections. This is unlikely to change in 2003 given the PDP’s electoral victories.

The government averts a One of the continuing problems facing the government in its budget planning is public-sector strike the huge public-sector wages bill. In 2001, the last year for which full data are available, the cost of running the federal civil service (salaries and overheads) was N403bn (US$3.6bn), represents 73% of recurrent expenditure; the burden is even higher in many state governments, which have struggled to implement the last wage rise agreed in 2000 (May 2000, page 18). Meanwhile, the unions argue that given the country’s size and immense problems, many of its public institutions, such as the police, education and healthcare, are actually understaffed. Not surprisingly, with elections approaching the government was under pressure from the trade unions to raise public-sector pay. The administration was only able to avert a three-day nationwide pay strike scheduled to start on April 1st, after it struck a deal with the Nigeria Labour Congress (NLC), the main labour organisation. The NLC had given the federal government a 14-day ultimatum to implement a promised 12.5% pay increase or face a nationwide strike. The union suspended the strike after a meeting with Mr Obasanjo and other government officials. According to the NLC’s spokesman, Owei Lakemfa, the government agreed to the 12.5% pay rise and promised to a supplementary budget to implement it. However, the information minister, Jerry Gana, told reporters that, although the government had agreed in principle to a pay rise, the amount of increase was still to be agreed by the labour-government joint committee. Whatever was agreed, it seems unlikely that the unions will drop their demand for a substantial pay increase to raise the minimum wage from the N5,500 (US$43) per month, set in 2000. In a further twist to the plot, speaking at a May Day rally in Abuja, Mr Obasanjo told workers that although he has agreed to implement a wage increase this year, the increase will be limited to federal workers: employees of state governments, local councils and the private sector are to negotiate wage increases with their own employers. If this is the eventual outcome, then it implies an end to collective bargaining for all workers by the NLC, which the NLC is likely strongly to oppose.

Subsidies do not help the Refusing to boost state income by eliminating domestic fuel subsidies, the government’s finances administration not only deprives itself of revenue but also discourages private investment in the downstream oil sector. In mid-March the Petroleum Product Pricing Regulatory Committee, set up in January 2002 to ensure that retail

Country Report May 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 22 Nigeria

prices remain in line with international oil prices, said that it had no immediate plans to increase pump prices, apparently to ease public fears of an imminent rise in fuel prices due to a fuel shortage in the country. Petrol prices have stayed at N26 (20 US cents) per litre since January 2002, which oil-marketing firms say is too low to make importing viable. Senior officials of the Nigerian National Petroleum Corporation (NNPC) have urged the administration to end the current fuel pricing system, though deregulation would be unpopular in a country where many people, especially the middle classes, see cheap fuel as the birthright of an oil-producing nation. However, faced with fuel shortages during the election campaigning, Mr Obasanjo said in April that he would cut fuel subsidies in his second term of office. He told an NLC election debate that Nigerians should not expect to continue to pay N26 per litre for petrol, which sold in neighbouring country for more than twice that amount (a situation that has encouraged large-scale smuggling of Nigerian oil products).

Fuel subsidy costs, Jan-Jun 2002 Domestic allocation (m barrels) 79.9 Price subsidy (US$/b) Export sale price for Nigerian crude 23.1 Price charged to NNPC for domestic crude 18.0 Implicit price subsidy 5.1 Exchange-rate subsidy (N:US$) Market exchange rate 116.6 Exchange rate for domestic crude 110.0 Implicit exchange-rate subsidy 6.6 Total implicit subsidy (N bn) 57.4

Source: IMF, Selected Issues and Statistical Appendix.

The cost of subsidising domestic fuel prices

In 2001 the Nigerian National Petroleum Corporation (NNPC) allocated 389,000 barrels/day of oil to domestic use, or about 142m barrels. This was sold to itself for refining into fuel products at US$9.5/b at an exchange rate of N100:US$1, which also represents a subsidy. According to the IMF, the combination of these two factors resulted in an implicit subsidy of N250bn, or around 5.5% of GDP. In January 2002, the government raised the price of domestic crude to US$18/b and increased the exchange rate to N110:US$1. However, this still resulted in a subsidy of an estimated N57.4bn in the first six months of 2002 and more in the second half of the year as global oil prices rose. Privatisation proceeds slowly Critics of privatisation have again criticised the sale of public assets at what and controversially they claim are give-away prices. The most recent controversy was the selection of the Sino Africa Petroleum Company as the preferred bidder for a 100% stake in the National Fertiliser Company of Nigeria (Nafcon), with a bid price of US$66m, a fraction of the money Nigeria has sunk into the enterprise. Sino Africa was the only bidder left after the disqualification of another company which failed to pay a US$3m bid bond. Privatisation officials have frequently tried to explain to the public that the low value of many of the companies listed for sale is one of the consequences of years of mismanagement. They also point out that the purchaser will have to invest large sums of money to turn the company round. Sino Africa is expected to invest US$135m in Nafcon

in the first year of ownership and divest 40% of the shares after five years when the plant should have become fully operational. In his most recent public defence of the government’s privatisation policy in late March, Nasir el-Rufai, the director-general of the Bureau of Public Enterprises told the Lagos State House of Assembly that, although Nafcon was established at huge cost, the company had been wrecked and thrown into debt and bad planning. The plant, in Port Harcourt, Rivers state, produced at full capacity under the management of M W Kellogg between 1987 and 1992, but following the exit of the US technical partner production declined owing to bad management, poor maintenance of the ageing plant, inadequate supplies of raw materials and higher operational costs largely caused by a sharp increase in staff. It has been out of production since 1999. The story of many of Nigeria’s other public enterprises scheduled for privatisation are similar to Nafcon’s. Corruption and poor maintenance have over the years so devalued state enterprises that their current privatisation value bears no relation to the huge sums of money sunk into them. Perhaps the most extreme example of this, as highlighted by Mr el-Rufai, is the Ajaokuta Steel Company on which more than US$6bn was spent without the plant producing any steel: “Value is what the market is ready to pay for it. There are many companies where you find that much has been pumped in whose value has been dumped in Swiss banks”.

The National Assembly tries to Mr Obasanjo’s anti-corruption campaign suffered a setback in early March weaken anti-corruption law when the National Assembly passed a bill seeking to replace the Independent Corrupt Practices and Other Related Offences Commission (ICPC)—which was supposed to be the centrepiece of the government’s anti-corruption policy— with a less powerful body. The bill lessened the ICPC’s powers of investigation, removed its power to prosecute and altered its composition. Legislators had accused the ICPC, which is answerable to the president, of political bias and conducting a witch-hunt against Mr Obasanjo’s opponents. The ICPC denied the charge, claiming that parliament had turned against it because it had begun to investigate its senior officers, including the Senate president, Anyim Pius Anyim, and the speaker of the House of Representative, Ghali Umar Na’Abba. Critics of the National Assembly pointed to a provision in the new bill which granted immunity to the Senate president, the speaker and some other officials under investigation by ICPC as evidence that the legislators were self-serving and lacked credibility. On March 12th a federal high court ordered Mr Obasanjo not to sign the bill pending the determination of a suit brought by some legislators and concerned citizens against the National Assembly’s bill. Although the ICPC has been criticised for having failed to secure the conviction of a single high-ranking official, it has in recent months appeared to become more active (February 2003, page 24).

Acting auditor-general loses Public confidence in Mr Obasanjo’s commitment to rooting out corruption and his job after a critical report to open government have also been undermined by the dismissal of the acting auditor-general, Vincent Azie, who published a damning annual report in January (February 2003, page 23). The 300-page audit report for 2001 criticised all branches of government, including the presidency, citing instances of financial malpractice and corruption which showed how officials routinely

steal public money. The presidency described the report as rash and intended to embarrass the government. Opponents of the government said that the report and the administration’s response demonstrated the shallowness of the official campaign against corruption. The information minister, Jerry Gana, denied that Mr Azie had been sacked because of his report and said that he had simply not been reappointed following the expiry of his acting tenure. Nevertheless, senior government officials were clearly unhappy about Mr Azie’s report, which otherwise could have been treated as evidence of movement towards greater government accountability and transparency.

Government launches anti- In mid-April the government inaugurated the Economic and Financial Crimes fraud commission Commission for fighting frauds that damage the economy. The 19-member commission, headed by Nuhu Ribadu, an assistant commissioner of police, has powers to investigate and prosecute perpetrators of economic frauds, including the notorious “419” schemes in which fraudsters persuade people—mainly abroad—to part with large sums of money on promise of much greater gain from illegal transactions often related to Nigerian government agencies that turn out to be bogus. Financial fraud is one of Nigeria’s biggest non-oil sources of foreign-exchange income, but it has damaged the country’s image and scared off genuine foreign investors. “Today marks the death of 419,” the justice minister, Godwin Agabi, declared at the inauguration of the commission.

The domestic economy

Economic trends

The fall in inflation may have The steady fall in the inflation rate that occurred during 2002 may have ended bottomed out in early 2003. According to Economic Report fo r Febru ar y from the Central Bank of Nigeria (CBN), inflation rose marginally to 12.4% (12-month moving average) in February 2003 from 12.3% in January. The CBN claims that this was partly due to the reduction in food supplies which normally occurs at this time of year with the start of the planting season. However, there is little doubt that the additional spending by all tiers of government in the run-up to the elections, the political pressures on the Central Bank to keep interest rates down and the fall in the exchange rate in the middle of 2002 have also had an impact and will make it difficult for the CBN to achieve the target of single-digit inflation by the end of 2004outlined in its current monetary policy framework.

Inflation (%) 2002 2003 Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb 12-month moving average 18.8 17.9 16.8 16.4 16.2 15.5 14.8 13.6 13.2 12.9 12.3 12.4 Note. 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). The difficulty that the Central Bank will have in lowering inflation is also clear from the high growth in the money supply in 2002. In fact, since the return to civilian rule in 1999, money supply growth, whether the narrower measure of

M1, or the broader measure of M2, has not fallen below 20%, a far higher rate than in the four years before 1999. The CBN has also failed to meet any of the targets that it has set itself for money supply growth since 1999. Instead, money supply has tended to expand to accommodate expansionary fiscal policies, rather than operate in line with the CBN’s stated goal of a non-accommodating monetary policy.

Money supply: CBN targets and actual growth rates (% change, year on year) 1999 2000 2001 2002 Target Actual Target Actual Target Actual Target Actual M2 10.0 33.1 14.6 48.1 12.2 27.0 15.3 26.5 Note. The CBN’s M2 growth target for 2003 is 15%. Sources: Central Bank of Nigeria, monetary policy statements ; IMF, International Financial Statistics.

Oil and gas

Oil production is again Nigeria lost as much as 40% of its crude oil output during two weeks of ethnic affected by ethnic unrest unrest in March in the volatile oil-producing Niger Delta. Following the outbreak of fighting between Ijaw and Itsekiri over the delineation of electoral wards in Warri on March 12th, ChevronTexaco, Royal Dutch/Shell and TotalFinaElf closed their operations and evacuated staff from the affected areas. On March 26th Rilwanu Lukman, the oil and energy adviser of the president, Olusegun Obasanjo, told reporters that the disturbance caused Nigeria to lose a little over 800,000 barrels/day out of its production of some 2.2m b/d. Worst hit by the shutdown was ChevronTexaco, which was forced to evacuate staff from its 440,000-b/d Escravos export terminal on March 23rd. Shell was forced to shut down 320,000 b/d of its output in the western Niger Delta and 50,000 b/d in the east, and on March 27th the company declared a secondary fo rce majeure on Forcados loadings from March 26th until the unrest had subsided. On April 4th, a week after Ijaw militants declared a ceasefire in their feud with the Itsekiri, ChevronTexaco said that it was returning workers to Escravos and would gradually resume production to 310,000 b/d by the end of April. On the same day, Shell announced that it had resumed the production of some 18,000 b/d of Forcados oil at the estuary flowstation and planned to reopen other shut facilities. According to press reports, by April 23rd Shell had restored around 260,000 b/d of the 370,000 b/d it lost during the unrest. On April 24th ChevronTexaco announced that crude oil lifting at the Escravos terminal had resumed and that the company had lifted the force majeure it had declared on oil exports.

The loss of revenue is not as Nigeria’s loss of output came at a difficult time for the oil markets. They were great as it could have been already nervous about the impending US invasion of Iraq and the continuing strike of oil workers in Venezuela, and international crude oil prices rose to a twelve-and-a-half year high in March; the shutdowns therefore caused the Nigerian government a considerable loss of revenue. However, the financial impact for the government should not be overstated, and Nigeria’s oil revenue in March was unlikely to have been short of government’s budget estimates. This was for two reasons.

• The lost volume of sales was probably offset by the higher than expected world oil price, which averaged US$31/barrel, in the month compared with the budget reference price of US$22/b. • Nigeria’s oil production, like that of many other OPEC members, was above its OPEC quota of 2.018m b/d before the local disruption to its output. According to data from the International Energy Agency (IEA) Nigeria’s oil output, excluding condensates, rose to 2.19m b/d in February from 2.14m b/d in January and 2.04m b/d in December. Although production fell in March, according to the IEA it was still 2m b/d. There are also indications that the oil companies will try to claw back some of the lost production in the coming months, and in this they have been helped by OPEC. At their meeting in Vienna on April 24th, OPEC ministers agreed to cut actual crude oil output by 2m b/d to 25m b/d (taking out the excess production which was intended to calm the markets prior to the war in Iraq), with effect from June 1st in an effort to shore up falling world prices. Although these were over US$30/b in the first half of March, they fell below US$30/b on March 18th and by the end of April had fallen back to US$23/b. However, in the meantime, the cartel’s official quota was increased by 900,000 b/d, and Nigeria’s limit raised to 2.092m b/d, which is still below the level the country has pumped this year (to offset the loss of Iraqi output). However, the Economist Intelligence Unit still expects OPEC to have to meet again this year and lower production quotas, since it is unlikely that the current fall in oil prices will be halted by these moves. Offshore oil production begins

Although Nigeria is still officially bound by its OPEC oil-production quota, this is likely to be increasingly strained in 2003-04 as a series of offshore oilfields come on stream. This was made clear in early 2003, when oil operators increased crude production in Nigeria’s offshore area, away from the troublesome inland, though in the short to medium term most of the country’s output will still come from onshore deposits.

• On February 20th ExxonMobil announced the start of production from its offshore Yoho platform. It said that the US$1.2bn project, a joint venture with the Nigerian National Petroleum Corporation, has estimated recoverable resources of 400m barrels of oil and is expected to produce over 90,000 b/d. • In April Agip started production in its offshore Abo field, with an initial output of 10,000 b/d, expected to reach 30,000 b/d within six months. • Shell’s shallow offshore EA field, which started with limited production in mid- December, has come fully on stream with capacity of some 140,000 b/d. Shell’s massive deepwater Bongo field is scheduled to come on stream in early 2004.

With other development plans well under way, the major multinational oil companies will increase their pressure on the government over the next few years to renegotiate its OPEC quota in the light of its increased oil production capacity and reserves. To add weight to its case for a higher quota, in late March, Rilwanu Lukman, the president’s petroleum adviser, said that Nigeria’s oil reserves were expected to reach 33bn barrels by the end of 2003 and 40bn barrels by the end of the decade, from 26bn barrels in 1999. Nigeria’s production capacity has also

improved significantly under the civilian government. It is currently about 2.6m b/d, but with continued investment in the industry looks set to be close to the government’s target of 4m b/d by 2010 (from 2.2m b/d in 1999). Political unrest continues into Although the worst of the latest political violence in the Niger Delta was over April by April, the position of oil multinationals operating in the unrest-prone area remains precarious. The staff and facilities of operators remain under the threat of attack by disgruntled communities that view foreign oil companies as easy targets against which to vent their anger at their alienation and poverty. They are also prey to militants seeking to compel the federal government to give their communities a greater share of oil revenue. In April and May 2003 there have been two main incidents. • “Criminal elements” apparently threatened to blow up a storage vessel for Shell’s EA field, putting at risk production of 170,000 b/d. In an extraordinary step, Shell took out full-page advertisements in Nigerian newspapers on April 27th to warn that, though it could do little to stop the vessel being boarded at any time and set on fire, “the scale of economic, human and environmental carnage that a blow-out of the FPSO [floating, production, storage and offloading vessel] can result in is unimaginable”. A Shell spokesman later said that the company had on at least three occasions issued such a public warning to deter attack. • Four offshore rigs owned by Ocean Energy were seized by oil workers demanding better conditions. The workers took control of the rigs on April 19th, taking hostage around 170 local and 97 foreign workers. Following protracted negotiations the dispute was settled in early May (hostages rarely come to harm in such incidents).

National Assembly orders Multinational oil firms also face hostility from national legislators, who accuse Shell to pay compensation them of cheating the country and polluting its environment. In early March the House of Representatives ordered Shell to pay US$1.5bn to Ijaw inhabitants of Bayelsa in compensation for the harmful impact the firm’s oil exploration and production activities on the environment since 1956. The directive followed the recommendation of a four-man judicial committee, led by a former chief justice, set up by the house to consider a compensation petition filed against Shell by the Ijaw people in December 2000. The panel said that Shell should pay US$500m immediately and the remainder in ten equal instalments over ten years. Following press reports of the compensation award, Shell said that it was unaware of the committee’s recommendation, that the company had a good relationship with the Nigerian people and that the news was unexpected though not unsurprising. It is doubtful whether the National Assembly will try to enforce its huge compensation order, but the episode again illustrates how Nigeria’s oil industry is affected by the country’s oil-centred politics.

Nigeria and Sao Tomé invite On April 22nd, Nigeria and the island state of São Tomé and Príncipe bids for offshore oilfields announced the opening of the licensing round for nine offshore blocks in their Joint Development Zone (JDZ). According to the president’s petroleum and energy adviser, Mr Lukman, all prospective investors in the zone should pay an initial application fee of US$25,000. The nine blocks are located at the northern

fringe of the 28,000-sq-km JDZ, which was formed by the two countries after failing to agree on the demarcation of their borders in 2001. The development of the area is managed by the Joint Development Authority. Nigeria will get 60% of the revenue generated; Sao Tome will receive 40%.

Government awards licences In mid-March the government awarded licences to 31 Nigerian firms to operate for 24 marginal oilfields 24 marginal oilfields as part of a drive to boost indigenous participation in the country’s foreign-dominated upstream oil sector. Mr Lukman said at the award ceremony in Abuja that 17 of the firms were sole operators and 14 would engage in joint-ventures. The 31 successful companies—some of which are part- owned by Nigerian state governments—were selected from 71 companies that pre-qualified in June 2002 out of 150 that submitted bids. The awarded fields were among 116 marginal fields, with collective reserves of some 1.3bn barrels, acquired by the federal government from multinational firms which had not developed them because there were considered uneconomical. The award of the fields is only the start of their development. Many of the local companies have yet to obtain finance; moreover, they have to do so against the background of the recent disturbances in the Delta region and at a time of rising environmental standards.

LNG joint venture plans a sixth In late March the successful joint venture, Nigeria Liquefied Natural Gas liquefaction train Company (NLNG), announced its plans to build a sixth train for its plant on Bonny Island at a cost of US$1.25bn. NLNG’s managing director, Andrew Jamieson, said that shareholders in the company would provide half the amount; the rest would come from third parties. He said that the planned investment would raise the total amount invested in the LNG plant to US$10bn, the biggest industrial project in Africa. in November 2002 NLNG began production at its third liquefaction LNG train, raising the processing capacity of the original two-train plant from 7.15bn cu metres/year to 10.85bn cu metres/y. The company is currently building a fourth and fifth trains at a cost of US$2.1bn for an additional 10.29bn cu metres/y. NLNG is operated by Shell and comprises the NNPC (49%) Shell (25.6%), TotalFinaElf (15%) and Agip (10.4%).

Manufacturing

Capacity utilisation in Despite Nigeria’s difficult economic operating environment, industrial capacity manufacturing improves utilisation has improved under the civilian administration, according to official and private-sector figures. In April the Manufacturers’ Association of Nigeria (MAN) estimated that capacity utilisation had risen from 29.7% in 2000 to 50.2% in 2002. MAN’s director-general, Olawale Akinpelu, attributed the improvement to government policy initiatives to improve infrastructure and tariff concessions. However, Mr Akinpelu noted that much still needed to be done to tackle the problems still facing producers, which include multiple levies imposed by state and local government, smuggling and dumping of fake and substandard products, the high cost of borrowing, deficient infrastructure, especially energy, and low domestic demand. Although most private-sector organisations agree that manufacturing capacity utilisation has improved since 1999 they differ on the extent. For instance, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture said in late March

that manufacturing capacity was still below 40%. Nigerian capacity utilisation data should be viewed cautiously as they often do not take sufficient account of the deterioration of assets resulting from years of neglect and the huge investment needed to recover lost capacity.

Aluminium smelter’s equity Although the Obasanjo administration has spent millions of dollars in its is restructured efforts to reactivate ailing state industrial enterprises, most of them remain inoperative. In early April the Bureau of Public Enterprises (BPE) announced that the restructuring of the inactive 193,000-tonnes/year aluminium smelter (Alscon) had been agreed with its two foreign partners, paving the way for its privatisation. Under the new structure, the government’s equity holding in the smelter in the south-eastern town of Ikot Abasi has risen to 90% from 70%; the holding of a German-based company, Ferrostaal, has been reduced from 20% to 7.5% and that of the US’s Alcoa from 10% to 2.5%. The government plans to sell a 51% stake in the plant, which has been inoperative since 1999 owing to a lack of working capital; Nigeria has sunk about US$2.5bn in the smelter since its establishment in 1989. The BPE said that Ferrostaal, Alcoa, Russian Aluminium, Alcan of Canada, and Swiss-based Glencore International were interested in a controlling stake in the smelter.

Infrastructure

Another power supply In late March power supplies from the state-run National Electric Power shortage hits Nigeria Authority (NEPA) fell by about 50%—to as low as 1,320 mw—resulting in power cuts throughout the country. NEPA officials said that the problem was due to damage to pipelines by vandals and disruption to gas supplies caused by ethnic unrest in the Niger Delta (the company announced that gas supplies to the Egbin station had resumed on April 9th). NEPA’s normal output is 2,500-3,000 mw, significantly below national demand of around 5,500 mw. According to NEPA, the Obasanjo administration has invested more than US$165m in rehabilitating the authority’s plants but, after reaching the government’s target of generating 4,000 mw by the end of 2001, the company reverted to its more normal mediocre performance. NEPA officials say that the utility requires substantially more funding to restore dilapidated facilities and build new ones. Some of the authority’s financial problems are due to poor revenue collection, resulting in mounting debts owed it by public agencies, private companies and individuals. In late March NEPA announced that the total outstanding debt owed was N10bn (US$78.7m), 80% of it by public bodies, including nearly N2bn by the armed forces. In mid-March, NEPA said that it had began splitting its giant and unwieldy organisation into six generation firms, one transmission company and 11 distribution firms, in preparation for the privatisation of the authority (November 2002, page 32).

Nitel is handed over On March 18th Nigerian Telecommunications (Nitel) signed a management to private management contract agreement with a Dutch telecoms consultancy, Pentascope International. Under the three-year deal Pentascope is expected to modernise Nitel’s infrastructure, add 600,000 fixed lines and expand its GSM network to 1m subscribers. After decades of state control Nitel has less than 600,000 connected fixed lines and about 120,000 mobile subscribers, so achieving

Pentascope’s targets would be a major development in Nigeria’s telecommunications sector. In an attempt to catch up with MTN and Econet, Nitel has awarded contracts totalling US$145m to Ericsson, Motorola and ZTE Corporation to add a total of 1.2m GSM lines to its network. The success of the management contract with Pentascope, which followed the failed attempt to privatise Nitel in February 2002 (May 2002, page 21), may depend on how much of a free hand the government gives the new operator.

Telephone networks continue The extent to which Nitel has lost market ground to new private-sector to expand operators, especially since 2001, was shown by a recent announcement from the Nigerian Communications Commission (NCC) that foreign investment in the telecoms sector has jumped from US$50m in 1999 to US$2.1bn in 2002 and is forecast to reach US$3.8bn by the end of 2003. A large part of the new investment is related to the development of two private mobile phone operators—South Africa’s MTN and Zimbabwe’s Econet Wireless—which have caused an explosion of mobile phone use in Nigeria since August 2001. According to the NCC the number of mobile lines has reached over 1.6m and is expected to reach 3m by the end of 2003. Meanwhile, on February 17th, Nigeria’s newly appointed second national carrier, Globacom, awarded a €675m (US$745.2m) contract to a French telecoms equipment supplier, Alcatel. The contract is to supply a fixed and mobile line network which, when completed, will enable Globacom to offer advanced fixed and mobile voice and date services to over 2m subscribers to domestic and international services in 75 cities in Nigeria.

Financial and other services

Equities hit a record high Nigeria’s stockmarket has remained buoyant, despite political uncertainties in the run-up to April’s presidential elections. The Nigerian Stock Exchange (NSE) all-share index reached an all-time high of 14,417 on February 18th, up from 12,138 at the beginning of the year. The increase is partly due to the strong showing of blue chip companies, which recorded impressive results despite Nigeria’s tough economic environment. Stocks held on to most of their gains during the election campaigning, the index closing at 13,552 on April 17th. But the size and penetration of Nigeria’s stockmarket remains low compared with similar markets in Africa. The NSE has tried without much success to boost foreign portfolio investment in Nigeria. Nicholas Okoye, the NSE’s head of strategic planning, said in March that the exchange was working on a plan, including the introduction of new investment instruments, to capture 5-10% of portfolio investment coming to Africa. It also wants to persuade Nigerians living abroad with large disposable incomes to invest in their home country, hoping to generate around US$1.5bn of investment from this source over the next three years.

Foreign trade and payments

Mr Obasanjo promises further Nigerian policy on tariffs continued to come under political pressure in the run- import bans up to the 2003 elections. In general, Olusegun Obasanjo’s administration has sought to reduce tariffs on imports of raw materials and capital equipment while raising them on consumer good imports and agricultural products, both of which it argues can, and should, be produced locally (even if the products are of poor quality and high-priced). The political pressure to protect certain industries has been particularly intense with elections approaching, and it is not surprising that in early March, during a campaign visit to Ebonyi state, the president told a meeting that his administration would continue to ban the import of unessential goods, including, tooth-picks, bottled water, biscuits, spaghetti and noodles. He also promised that every six months the government would examine the situation to see whether other goods could be banned to encourage local production. The government has indicated that it will ban the cement imports from 2006 to encourage local production. In October 2002 it banned the importing of printed fabrics, and in January 2003 the importing of pre-packaged fruit juice was prohibited. Manufacturers’ groups welcome the government’s protectionist policies, saying that they are necessary since foreign imports, especially from Asia, are flooding the Nigerian market. However, as the US government notes the 2003 edition of its report, Foreign Trade Barriers, the arbitrary nature of Nigeria’s tariffs—clearly illustrated by the recent announcements—and their uneven collection makes importing difficult and expensive and is a severe constraint on commercial activities. In the view of the IMF, Nigeria’s tariffs are too high and complex by international and regional standards. For example, the simple average tariff has increased in Nigeria from 29% in 2000 to 37% in 2oo2: according to the Fund, only 11 countries of its 183 members had average tariffs over 30% in 2002. In addition, with 20 tariff bands, compared with for example four in Benin, the current tariff regime, along with the distortions caused by domestic price subsidies such as that on oil, encourages informal trade with neighbouring states. This not only encourages corruption, but being untaxed also undermines revenue and any protective gain provided by the tariff.

Foreign-exchange reserves The sharp fall in Nigeria’s foreign-exchange reserves in the second and third stabilise quarters of 2002—they fell drastically as the Central Bank of Nigeria (CBN) used them vainly trying to shore up the value of the naira—seems to have come to an end in the final quarter of 2002. With the recent oil prices, the CBN has been able to provide enough foreign exchange to the market under its new Dutch auction system (August 2002, page 22) to keep the currency stable without running down reserves. According to the most recent data in the IMF’s International Financial Statistics, Nigeria’s foreign-exchange reserves were US$7.33bn at the end of 2002, and, according to the CBN they had risen to US$7.66bn in February, a level sufficient to cover about 6.2 months of imports. Foreign-exchange reserves had peaked at US$10.72bn at the end 2001, representing one of the few positive achievements of the civilian government since 1999.

Foreign-exchange reserves (end-period) 2001 2002 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr US$ m 10,457 9,502 8,239 7,035 7,331

Source: IMF, International Financial Statistics.