Country Report

Nigeria at a glance: 2005-06

OVERVIEW Faced with militant ethnic and religious groups fighting for self-determination and strong trade union opposition to the government!s proposed economic reforms, the president, , has a daunting task to unify this divided society and build public confidence in its fledgling democracy. In addition, although the president!s party, the People!s Democratic Party, has overwhelming control at all tiers of government, powerful vested interests are likely to continue to hamper the government!s ability to implement the far- reaching reforms needed to achieve sustained economic growth. To date, the government!s reform efforts have been helped by high world oil prices and increased oil production. This boosted real GDP growth in 2003-04, and the Economist Intelligence Unit expects growth to remain reasonably high, at 3.2% in 2005 and 3.5% in 2006. However, the lack of growth outside the oil sector means that the impact in terms of creating jobs and improving standards of living will be limited, particularly as rising domestic fuel prices and loose monetary policy mean that inflation is expected to remain in double digits throughout the forecast period.

Key changes from last month Political outlook • There has been no change to our political outlook. Economic policy outlook • Mr Obasanjo has presented the annual budget for 2005. As in 2004, this is based on a cautious oil price forecast of US$27/barrel. Although the government plans to increase spending, notably on infrastructure, with oil prices remaining high we still expect the government to be able to make payments into the fiscal stabilisation account and to run a modest deficit of 1.8% of GDP in 2005, little changed from the 1.6% of GDP estimate for 2004. Economic forecast • We have revised up our oil price forecast for 2005, with Brent crude now expected to average US$37.5/b, before falling back to US$29/b in 2006. As a result, we now expect Nigeria to run a current-account surplus equivalent to 6.4% of GDP in 2005. With export earnings falling back in 2006 but imports remaining high, the current account is expected to move sharply into a deficit of 4.6% of GDP in 2006. November 2004

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Contents

Nigeria

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

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

13 The political scene

22 Economic policy

26 The domestic economy 26 Economic trends 27 Oil and gas 29 Manufacturing 30 Financial and other services 31 Infrastructure

32 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 23 Federal government finances 26 Inflation 27 Naira exchange rates 33 Balance of payments 34 External debt 35 Foreign direct investment inflows into Nigeria

List of figures 12 Gross domestic product 12 Consumer price inflation 18 Domestic petrol prices 27 Oil production and OPEC quota

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Nigeria November 2004 Summary

Outlook for 2005-06 Faced with militant ethnic and religious groups fighting for self-determination and strong trade union opposition to the government!s proposed economic reforms, the president, Olusegun Obasanjo, has a daunting task to unify this divided society and build public confidence in its fledgling democracy. In addition, although the president!s party, the People!s Democratic Party, has overwhelming control at all tiers of government, powerful vested interests are likely to continue to hamper the government!s ability to implement the far- reaching reforms needed to achieve sustained economic growth. To date, the government!s reform efforts have been helped by high world oil prices and increased oil production, which have boosted real GDP growth. However, high inflation and lack of growth outside the oil sector mean that the impact in terms of creating jobs and improving standards of living will be limited

The political scene The government has agreed a ceasefire deal with two Ijaw militia groups to end gang warfare over access to oil resources in the volatile Niger Delta region. A government report has claimed that nearly 54,000 people have died in ethno-religious clashes in in less than three years. The Senate has passed a controversial bill to democratise the labour movement, which unions say is designed to emasculate them. Nigeria has been named the third most corrupt of 145 countries surveyed in Transparency International!s 2004 report. Nigeria missed the September deadline to hand over the Bakassi Peninsula to Cameroon. Subsequent talks to fix a new date have been deadlocked.

Economic policy Mr Obasanjo has presented a prudent 2005 budget proposal to the National Assembly. The IMF has praised the government!s home-grown economic strategy (NEEDS), but called for acceleration of outstanding structural reforms. Mr Obasanjo has outlined plans to relax Nigeria!s restrictive tariff system.

The domestic economy Nigeria!s OPEC oil-production quota has been raised from 2.142m barrels/day to 2.224m b/d, but the government has been lobbying for an even bigger allocation. The government has announced a new oil-licensing round for early 2005. The government has announced that the controversial multi-billion dollar Ajaokuta steel complex has produced coil wire for the first time. The government has launched a second attempt to sell a 51% stake of the state telecommunications company, Nitel, following the earlier botched privatisation.

Foreign trade and payments New IMF data estimate that Nigeria ran a current-account deficit of 2.7% of GDP in 2003, a sharp reduction compared with 2002, owing to rising oil exports. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: November 5th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report November 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 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 for four-year terms

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

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

State government State governors and state houses of assembly

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

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

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

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

Central Bank governor Charles Soludo

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Economic structure

Annual indicators 2000a 2001a 2002a 2003b 2004b GDP at market prices (N bn) 4,279 4,747 5,250 6,663 8,639 GDP (US$ bn) 42.1 42.7 43.5 51.6 64.9 Real GDP growth (%) 5.3 4.6 3.7 10.2c 4.4 Consumer price inflation (av; %) 7.0 18.1 13.6 14.0 16.5 Population (m) 123.3b 126.6b 129.9b 133.2 136.5 Exports of goods fob (US$ m) 23,761 19,598 17,672 27,416 38,126 Imports of goods fob (US$ m) -10,553 -11,482 -13,342 -16,885 -16,855 Current-account balance (US$ m) 4,694 1,256 -5,108 -1,558 9,506 Foreign-exchange reserves excl gold (US$ m) 9,911 10,457 7,331 7,128a 14,630 Total external debt (US$ bn) 31.4 31.0 30.5 31.3 32.2 Debt-service ratio, paid (%) 6.8 11.1 6.9 7.5 2.6 Exchange rate (av) N:US$ 101.70 111.23 120.58 129.22a 133.14 a Actual. b Economist Intelligence Unit estimates. c Official estimate.

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

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

Main destinations of exports 2003b % of total Main origins of imports 2002b % of total US 40.2 China 13.6 Brazil 8.3 UK 9.3 Spain 5.3 France 8.0 France 5.0 US 7.8 a Central Bank of Nigeria data. b Derived from partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Output Industrial production index (2000=100) 105.9 101.7 102.0 103.3 103.4 n/a n/a n/a Industrial production index (% change, year on year) 4.0 0.5 0.7 1.2 -2.4 n/a n/a n/a Prices Consumer prices (% change, year on year)a 12.9 10.5 10.1 9.9 14.0 17.8 19.7 n/a Petroleum spot price (Bonny Light 37°; US$/barrel) 26.9 31.8 26.5 28.7 29.7 32.3 36.0 42.1 Financial indicators Exchange rate N:US$ (av) 126.3 128.0 127.2 127.7 134.0 134.4 132.4 132.3 Exchange rate N:US$ (end-period) 126.4 126.9 127.4 127.9 136.5 133.4 132.3 132.4 Discount rate (end-period) 16.5 16.5 16.5 15.0 15.0 15.0 15.0 15.0 M1 (end-period; N bn) 946.25 1,121.55 1,319.73 1,264.03 1,225.56 1,201.54 1,214.84 n/a M1 (% change, year on year) 15.9 34.2 51.3 35.4 29.5 7.1 -7.9 n/a M2 (end-period; N bn) 1,599.49 1,918.93 2,124.33 1,981.07 1,985.19 2,121.28 2,127.20 n/a M2 (% change, year on year) 21.6 34.8 41.4 23.4 24.1 10.5 0.1 n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 12,138 13,531 14,566 16,379 20,129 22,896 28,887 22,740 Stockmarket index (% change, year on year) 10.7 18.9 17.1 38.7 65.8 69.2 98.3 38.8 Sectoral trends Crude oil production (m barrels/day)b 2.01 2.13 2.03 2.17 2.28 2.33 2.33 2.43 Crude oil production (% change, year on year) -4.7 11.5 6.3 10.2 13.4 9.4 14.8 12.0 Foreign trade (US$ m) Exports fob 4,405 5,202 4,376 4,905 5,455 6,589 7,805 8,165 Petroleum 4,336 5,195 4,314 4,730 5,358 6,026 6,809 7,477 Imports cif -1,924 -2,949 -2,673 -2,648 -2,584 -3,091 -2,478 -5,250 Trade balance 2,481 2,253 1,703 2,257 2,871 3,498 5,327 2,915 Foreign reserves (US$ m) Reserves excl gold (end-period) 7,331 7,864 7,352 6,793 7,128 9,303 11,118 12,928 a The 12-month moving average for March, June, September and December. The Central Bank of Nigeria uses this rate as its official measure of inflation. b Excluding condensates. Sources: Central Bank of Nigeria; IMF, International Financial Statistics; Direction of Trade Statistics; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence; Standard & Poor's, Emerging Stock Markets Review.

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Outlook for 2005-06

Political outlook

Domestic politics Although on the surface the forecast period will be one of apparent political stability"with the president, Olusegun Obasanjo, and his People!s Democratic Party (PDP) retaining a firm grip on power"there is unlikely to be any end to the politically motivated violence and unrelenting sectarian unrest that continues to create a climate of tension and uncertainty. This, coupled with powerful vested interests that are strongly opposed to change, means that, despite the commitment of the president and senior members of his administration to economic and political reform, the task of pushing through much-needed changes and tackling endemic corruption will remain extremely difficult, particularly in 2006, as elections loom in early 2007. Meanwhile, the government will continue to be side-tracked by many of the ongoing problems facing the country. Of these, perhaps the most pressing is the need to reduce the outbreaks of ethnic and religious violence that have occurred since the return to civilian rule in 1999. Mr Obasanjo!s decision in May to declare a state of emergency and assume control of Plateau State, after hundreds of people were killed in ethno-religious riots in central and northern Nigeria, has revealed his readiness to act firmly to end mass violence. However, the move also carries a risk, as it sets a precedent. If a similar approach were adopted against a more politically independent state or one controlled by the opposition, for example, this could exacerbate the conflict, as happened in the early 1960s, when emergency powers were first used in Nigeria and ultimately led to civil war. Moreover, using the military to help to restore order can be problematic: although it has proved generally effective, in some cases it has led to an escalation of violence. Even with a firm response to the problem by the government, outbreaks of ethnic and religious violence look set to persist during the forecast period"driven by the potent mix of communal tensions, religious intolerance and political disillusionment that exists in Nigeria"and will continue to undermine the authority of an already weak state. Outbreaks of religious and ethnic violence will be a particular problem in the north of the country, where 12 states have declared sharia (Islamic law); in the middle belt, with its complicated mix of ethnic and religious groups; and in the oil-producing states in the Niger Delta. At present, the most pressing problem is in the unruly Delta states, where the federal government is likely to continue to use military force to impose law and order. However, the government will need to take care that any military-led clampdown against the criminal gangs who are exploiting ethnic tensions in the region as a cover for their nefarious activities in the oil sector does not aggravate the situation by further alienating local communities. In addition, conflict over religious issues in the north will resurface from time to time, occasionally in a militant form, such as that of the self-styled "Taliban" Islamic movement, which has attacked various official buildings, most recently a number of police stations in in September.

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Given the current political dominance of the PDP, it is unclear where the main opposition to its rule will come from, bar factional in-fighting within the party. This could easily come to the surface as a result of the decision by the president and the new administration to tackle corruption in the last six months. The problem for the administration is that, even if popular with the public, a major campaign to reduce official corruption is liable to stir up discontent among the powerful vested interests that benefit from the anarchic system of government and could lead to a backlash in a country where behind-the-scenes manip- ulation is sometimes the root cause of outbreaks of ethnic and religious unrest. Although the opposition was severely weakened by its poor performance in the 2003 elections, it is in the process of slowly regrouping for the more significant 2007 polls, in which Mr Obasanjo is constitutionally unable to stand. In the interim, the main form of opposition to the government is likely to come from the trade union movement, which is opposed to many of the reforms being proposed by the government"notably deregulation of domestic fuel prices"and looks set to oppose government legislation that would undermine its funding and decentralise the labour movement. With neither side seeming willing to compromise, the Economist Intelligence Unit expects strike action, which has picked up pace in 2004, to continue into 2005. There is also the possibility that it could occasionally turn violent. Political speculation will continue to centre around who will be the main challengers in the 2007 presidential polls. The current favourites are Atiku Abubakar, the current vice-president; Ibrahim Babangida, a former military ruler (1985-93) and still a very powerful behind-the-scenes political force; and Muhammadu Buhari, a former military ruler (1983-85) who challenged Mr Obasanjo in the April 2003 contest. It is clear, however, that Mr Obasanjo is unwilling to support any of these candidates, and there has been growing political speculation that he may seek to change the constitution to allow himself to stand again or use his emergency powers to extend his mandate. Certainly, a deterioration in security, in an already volatile country, of sufficient concern to justify the president suspending the constitution or to encourage the military to act cannot be ruled out altogether. Meanwhile, the political temperature will rise sharply in the second half of 2006.

International relations For the remainder of his term in office, Mr Obasanjo is likely to remain deeply involved in foreign-policy matters, particularly as he has now assumed the presidency of the African Union for a year, even though most Nigerians would prefer him to focus on domestic issues. As well as attempting to promote the New Partnership for Africa!s Development, he will seek to be an influential voice in efforts to settle disputes in Liberia and other parts of West Africa, and further afield, in places such as Zimbabwe and Sudan. However, he has failed to convince as a mediator and will struggle on issues such as Zimbabwe, where he must try to reconcile Western interests with those of the leaders of several African countries. Despite agreeing to hand over the Bakassi Peninsula to Cameroon in September 2004, following UN-sponsored bilateral discussions, the deadline for the transfer has been missed, with a key problem being that the Nigerian majority on the peninsula have continued to stress that they do not want to become part of Cameroon. The eventual withdrawal of Nigeria

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should, nonetheless, bring to an end the long-running border dispute, even if it drags on for a prolonged period.

Economic policy outlook

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

Fiscal policy Provisional data presented in the 2005 budget lead us to estimate that the government has held back growth in expenditure in 2004 against a background of rapidly rising revenue. As a result, we expect that it will run a modest budget deficit of only 1.6% of GDP. It has also been able to make some savings of the windfall oil revenue in its fiscal stabilisation account in 2004, which it will carry over to be spent in subsequent years, notably in 2006-07 when the elections are approaching and oil prices are forecast to fall back. With oil prices expected to remain high in 2005, we expect that, as was the case in 2005, revenue will exceed the government!s estimates (the 2005 budget is based on a forecast oil price of only US$27/barrel). It should therefore be able to push ahead with spending, notably on infrastructure. This means that it will be able to run a similar-sized deficit in 2006, at a forecast 1.8% of GDP, and still make savings into the fiscal stabilisation account. Although we forecast that oil prices will fall back in 2006, the fall in revenue will be partially offset as the government starts drawing down its funds in the fiscal stabilisation account. Moreover, with elections approaching, the government will continue to boost spending, notably in infrastructure, and may succumb to increasing civil service wages. As a result, the deficit is forecast to rise to an estimated 3.3% of GDP in 2006. The government is expected to be able to finance a deficit of this size through domestic borrowing and will

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continue to try to issue more long-term bonds in particular to push the development of a domestic capital market.

Monetary policy Charles Soludo, the governor of the Central Bank of Nigeria (CBN, the Central Bank), has already shown his desire to push ahead with economic reform by announcing in late June that the CBN will seek to raise the minimum capital requirement for commercial banks to N25bn (US$187m)"from N2bn"by the end of December 2005. However, the reform is likely to result in a major political battle that could distract him from other reforms. Meanwhile, monetary policy will continue to be guided by the CBN!s two-year framework outlined in its monetary, credit, foreign-trade and exchange-policy guidelines, released in January 2004. However, while this commits it to using open-market operations and changes in the minimum rediscount rate to determine interest rates, as well as to the continued use of the Dutch auction system to determine the value of the naira, the CBN will remain under considerable political pressure to intervene in both markets. In particular, the CBN is unlikely to be able to resist political pressure to keep interest rates low to boost non-oil economic activity, even though money supply growth is likely to remain high. Consequently, it will struggle to reduce inflation to single digits over the forecast period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.0 4.2 4.1 OECD 2.1 3.6 2.7 2.5 EU25 1.1 2.4 2.5 2.3 Exchange rates ¥:US$ 115.9 109.0 107.5 106.0 US$:€ 1.132 1.227 1.270 1.298 SDR:US$ 0.714 0.680 0.671 0.662 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.38 US$ 3-month commercial paper rate 1.10 1.40 3.00 4.94 Commodity prices Oil (Brent; US$/b) 28.8 39.3 37.5 29.0 Gold (US$/troy oz) 362.8 421.3 375.0 337.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 8.6 -4.2 0.9 Industrial raw materials (% change in US$ terms) 12.8 20.2 -0.3 -4.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Following the rapid economic recovery currently under way in 2004, we expect global economic growth to slow in the coming years, but to remain robust and broad based, at 4.2% in 2005 and 4.1% in 2006. Owing to strong demand from Asia, an ongoing risk premium built into the price and low stocks in the US, global oil prices have remained high in 2004. However, our forecasts still indicate that there is not a fundamental shortage of supply. This, coupled with

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slowing growth, means that we expect the oil price to fall back from an average US$39.3/b in 2004 to US$37.5/b in 2005 and US$29/b in 2006.

Economic growth Trends in real GDP growth will continue to depend heavily on developments in the energy sector. With oil and gas production having expanded strongly in 2003-04, coupled with strong agricultural growth, real GDP grew by an estimated 10.2% in 2003 and has remained high in 2004, at 4.4%. However, slower growth in the energy sector in 2005-06, means that we expect real GDP growth to moderate to 3.2% in 2005 and 3.5% in 2006. It is unlikely to fall further owing to reasonably strong growth in both the agriculture and services sectors, and the government!s ongoing planned increase in spending on infrastructure, notably in the run-up to the elections in 2006. This means that private consumption should remain relatively strong over the forecast period.

Inflation Although the 12-month moving average inflation rate (the measure preferred by the CBN) has moderated from a peak of 19.7%, reached in June 2004, to 18.9% in August, the increases in domestic fuel prices in September mean that inflation will remain high for the rest of 2004"we estimate that it will average 16.5%. We expect that the price rises will work their way through the economy only by late 2005. Even then, despite reasonable harvests, the government will struggle to push down inflation, as spending remains high, particularly in the second half of 2006, in the run-up to the elections, and monetary policy remains quite loose, given the pressure on the CBN not to raise interest rates. As a result, inflation is unlikely to fall to single digits for any prolonged period of time, al- though this may be achieved in early 2006. We therefore forecast that inflation will average 11.4% in 2005 and remain at a similar level, of 10.3%, in 2006.

Exchange rates With oil prices forecast to remain high in 2005, the CBN looks able to continue to intervene in the currency market to support the value of the naira. Coupled with the ongoing weakness of the US dollar on global currency markets, we expect the naira to remain relatively stable, averaging N136.8:US$1 for the year, only marginally down on the N133.1:US$1 that we estimate that it will average against the dollar in 2004. However, towards the end of 2005 and into 2006, with demand for imports and foreign currency remaining high, oil prices starting to slip back and increasing political uncertainty as the elections ap- proach, the naira will come under growing pressure. The extent to which it falls in 2006 will depend on the willingness of the CBN to run down its foreign- exchange reserves in order to support the currency, given that building these up has been one of the few positive achievements of the civilian government to date. Faced with these pressures, the CBN is likely to allow a modest depreciation of the naira; we forecast that it will average N150.1:US$1 in 2006.

External sector Nigeria traditionally runs a trade surplus, which is offset by a deficit on the services account, with trends in these two volatile components driving changes in the overall current account. Despite the substantial pick-up in imports and services debits in recent years, with oil prices forecast to average over US$35/b in 2004-05 against the background of a fairly high level of production, a relatively stable naira and reasonable real GDP growth, we expect import growth to remain strong over the period. With oil prices remaining high in

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2005, this means that the current-account surplus is forecast to fall from an estimated 14.6% of GDP in 2004 to 6.4% in 2005. With further import growth in 2006, but with export earnings set to fall back substantially owing to lower oil prices, despite rising production we expect the current account to move into a deficit of 4.6% of GDP in 2006. Throughout the forecast period the services and income debits will remain high owing to the ongoing development of the country!s offshore oil industry and associated profit remittances by multi- national oil companies. By contrast, the current-transfers account will remain in surplus owing to large inflows of private transfers from the Nigerian diaspora.

Forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growth 10.2c 4.4 3.2 3.5 Industrial production growth 0.0 2.4 0.7 2.0 Gross agricultural production growth 6.5 5.5 4.5 3.5 Consumer price inflation (av) 14.0 16.5 11.4 10.3 Consumer price inflation (year-end) 23.8 10.7 10.3 12.0 Lending rate 20.7d 19.1 17.4 17.3 Government balance (% of GDP) -3.0 -1.6 -1.8 -3.3 Exports of goods fob (US$ bn) 27.4 38.1 33.6 26.8 Imports of goods fob (US$ bn) 16.9 16.9 17.2 17.6 Current-account balance (US$ bn) -1.6 9.5 4.6 -3.1 Current-account balance (% of GDP) -3.0 14.6 6.4 -4.6 External debt (year-end; US$ bn) 31.3 32.2 32.7 32.3 Exchange rate N:US$ (av) 129.2d 133.1 136.8 150.1 Exchange rate N:¥100 (av) 111.49d 122.20 127.21 141.59 Exchange rate N:€ (year-end) 172.2d 162.6 181.3 196.8 Exchange rate N:SDR (year-end) 202.8d 193.7 209.7 232.3 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official estimate. d Actual.

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

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

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The political scene

Nigerians mark independence In a speech broadcast nationwide marking Nigeria!s 44th independence anniversary amid uncertainties anniversary on October 1st, the president, Olusegun Obasanjo, was somewhat upbeat about the future of the country, arguing that, despite the internal problems being experienced, Nigeria had been "spared some of the horrendous experiences and attendant agonies that have plagued some nations""an obvious reference to developments in other West African states, notably Côte d!Ivoire. He also claimed that the country was steadily recovering from its "past errors and transgressions", had acquired a new status in the international community, and that the government had achieved unprecedented growth in industry and agriculture, coupled with improvements in the telecom- munications, power and energy sectors. He also urged Nigerians to be patient with his administration!s reform agenda and to have faith in its commitment to their interests. Unfortunately for the government, there is little sign that most Nigerians have seen real evidence of progress in a nation that continues to be plagued by poverty and despair and that now faces probably the greatest threat to its unity since the 1967-70 civil war. Many would share the bleak assessment of the country!s Catholic bishops, who issued a communiqué at the end of their annual conference in mid-September that highlighted their concerns that, after five years of crisis-laden democracy following 15 years of debilitating military rule, social fragility and a general state of insecurity meant that ordinary Nigerians had become deeply cynical and disillusioned with the government.

Government and Niger Delta Perhaps the most difficult political task facing the president is that of dealing militia groups agree a ceasefire with the different forces challenging the authority of the government and fuelling what many political analysts see as a crisis of legitimacy in Sub- Saharan Africa!s most populous nation. In this regard, one of the main concerns has been the growing boldness of ethnic militia groups in the oil-producing Niger Delta that claim to be fighting for political autonomy and a larger slice of oil revenue for their people, especially those from the Ijaw ethnic group, the largest tribe in the region. This has led to a surge of fighting between security forces and militias in the Port Harcourt area for the last few months, which in late September eventually led one of the groups, the Niger Delta People!s Volunteer Force (NDPVF), to issue an ultimatum to oil companies to close down their operations within three days or face attacks on their personnel as part of a new full-scale offensive dubbed "Operation Locust Feast". Although the government has often referred to the NDPVF leader, Moujahid Dokubo-Asari, as a gangster fighting for control of smuggling routes used by oil thieves (he has publicly admitted tapping crude oil from pipelines to finance his operations), after months of escalating fighting the ultimatum acted as a trigger for world oil prices to rise to over US$50/barrel. With this, in turn, focusing international media attention on the problems of the Niger Delta, the government was pushed into inviting the NDVPF and its rival pro-government militia force, the Niger Delta Vigilantes, to the capital, Abuja. In three days of

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talks, the government appeared to be making some headway in reaching a solution, and on October 1st struck a ceasefire deal with the two militia. However, it remains unclear what concessions the rebels have squeezed from the government, except vague promises to address their political demands. In late October the head of the government!s disarmament committee, the governor, Peter Odili, said in a statement that the militia groups had begun surrendering weapons. This was partially confirmed by Mr Dokubo- Asari, who told the press that his group had surrendered 196 assault rifles and two machine guns in return for cash payments. However, he did not disclose how much the NDPVF had received or provide an indication of whether this was a significant proportion of the group!s weapons arsenal.

Gang warfare in Port Harcourt Ano ther factor fo rci ng the gove rnme nt to reach so me s or t of agree ment with is increasingly violent the militia groups was the growing violent fighting in the region. In the weeks leading up to the NDPVF ultimatum, government troops were engaged in a major offensive against militia groups in the Niger Delta, which was launched after escalating militia violence spilled into Port Harcourt city. The deployment of the military"first to halt the incursions into Port Harcourt and then to pursue the gunmen into their hideouts in the creeks"was in turn in response to increasingly violent clashes between the various gangs and militia groups involved in oil theft. One of the most violent attacks was on August 19th, when at least five people were killed and over 30 houses razed when a gang attacked the Njemanze waterfront community near Port Harcourt. Two weeks later, on August 31st, a gang of youths with machine-guns opened fire on a crowded bar in Port Harcourt, killing some 18 people. Most political analysts doubt whether the truce between the government and the militias/gangs can hold for long, since the issues involved in the multiple conflicts in the Niger Delta are complex and hard to reconcile. Although it is difficult to identify a general political position amongst the various militia, a common political ideal behind many of them is to obtain autonomy for the Niger Delta and control of its vast oil wealth. They aim to force the government to convene a Sovereign National Conference to enable Nigeria!s diverse ethnic groups to thrash out a formula to reconstitute the nation (August 2004, The political scene).

The government is opposed to In contrast, the government is fundamentally opposed to demands for self- demands for self-determination determination, as are the resource-poor northern states, which probably stand to lose most (in terms of economics) from Nigeria!s potential disintegration. The government believes that the Niger Delta has already been granted significant concessions, especially the 13% oil derivation payments made to the oil- producing states. The problem for it, however, is that much of the special allocations made since 2000 to develop the poverty-stricken delta have not got through to the communities because of mismanagement and corruption (May 2004, The political scene). In his October 1st independence anniversary speech, Mr Obasanjo acknowledged that little impact had been made on the lives and living standards of the ordinary people of the Niger Delta, and appealed to underperforming elected officials in the region to become more responsible in addressing the needs of their people.

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The unrest in Rivers State, as in other parts of the Niger Delta, is also partially rooted in local struggles for political power between politicians from the main political parties, especially the ruling PDP, which controls the region. Many of the militiamen involved in the violence were originally recruited, armed and funded by local politicians to fight their turf battles during last year!s disputed elections, but since then the politicians have effectively lost control of their private armies after the gangs sought promised pay-offs from those whom they helped to put in power. In response to the escalation in gang warfare, Mr Odili sacked his cabinet in early September in what was described as a purge of public figures linked to the criminal gangs.

Official estimates claim 54,000 Although the violence in the Niger Delta has the greatest potential impact on people have died in Plateau Nigeria!s oil-fuelled economy, far more people have been killed in recent years in ethno-religious clashes in central Nigeria. On October 7th a government report claimed that nearly 54,000 people had died in ethno-religious clashes in Plateau State in less than three years. The Committee on Rehabilitation and Reconciliation of Internally Displaced People said that 53,787 people had been killed in the state between September 7th 2001 and May 18th 2004, when the federal government declared a state of emergency after a massacre left hundreds dead in Yelwa town (August 2004, The political scene). These figures were far higher than previous estimates of the human costs of the conflict that pitted local Christian farmers against settler Muslim herdsmen. A spokesman for the committee said that the new figures were based on interviews with famili es affe cte d by the clashe s. Given that the authorities are usually reticent about disclosing casualty figures from communal clashes, or tend to understate them for fear of further inflaming the situation, the committee!s report is disturbing. When estimates of death tolls from ethnic, religious and political violence in other parts of Nigeria, including the Niger Delta and the northern states of Kaduna and Kano, are added to the Plateau State total, the national death toll from internal conflicts since the restoration of democracy in 1999 is well over 60,000, making Nigeria one of the most conflict-laden countries in the world. Meanwhile, in order to try to find a long term solution to the crisis, on October 12th Mr Obasanjo sent a bill to the National Assembly to set up a Reconciliation Commission to seek a lasting solution to the crisis in Plateau State. The commission will also determine the extent of human rights violations in the state and whether these were the product of deliberate state policy or of the action of state organs and officials.

Advisory body calls for action The Nigerian establishment is clearly worried by the increasing challenges to against ethnic militants Nigeria!s unity from ethnic nationalist groups seeking the country!s break-up or its fundamental restructuring. On September 28th the National Council of State, Nigeria!s highest advisory body, urged Mr Obasanjo to use all legitimate means to crush groups threatening the unity and security of the country. The council includes current and former heads of state, all 36 state governors and the leaders of two chambers of parliament. Although the mandate given to Mr Obasanjo was largely in response to the immediate the crisis in the Niger Delta, the council was also concerned about separatist movements in other

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parts of the country. For instance, on August 26th one such organisation, the Movement for the Actualisation of the Sovereign State of Biafra (MASSOB), virtually shut down business activities across south-eastern Nigeria as the population responded positively to its call to "sit at home" to mark "Biafran Day". The group is fighting for the resuscitation of the defunct state of Biafra, the declaration of which in 1967 plunged Nigeria into a bloody civil war.

Security forces clash with On September 26th security forces killed about 27 Islamic militants in Borno Taliban-style Islamic militants State, in north-eastern Nigeria, in a shootout with a group inspired by Afghanistan!s Taliban movement. Nigerian television said that the security forces moved against the group after it launched a series of attacks on police stations in two towns in the east of the state, close to the Cameroonian border. In a subsequent clash, members of the group, known as the Al Sunna wal Jamma (Followers of the Prophet) sect, killed three policemen and took 12 others hostage when they ambushed a 60-strong police patrol in Kala-Balge town, near Lake Chad, on October 8th. The sect was formed by university and polytechnic students in the capital, Maiduguri, about three years ago, and first took up arms in December 2003 when it launched attacks in (February 2004, The political scene). Sharia is often in limbo

Although Al Sunna wal Jamma, a Taliban-style group, appears to be small and lacking in popular support, the Nigerian authorities are nevertheless nervous about the growth of radical Islamic fundamentalist groups in this multi-faith nation marked by growing ethnic and religious intolerance. Several thousand people have died in sporadic outbreaks of Christian-Muslim fighting following the adoption of Sharia (Islamic law) by a dozen state governments in the predominantly Muslim north since 2000 (August 2000, The political scene). As with many other issues of social contention in Nigeria, the row over Sharia is linked to the struggle for political power. As the New York-based Human Rights Watch (HRW) concluded in a 111-page report entitled 'Political Shari'a?': Human Rights and Islamic Law in Northern Nigeria, released in mid-September, although the introduction of Sharia was politically motivated"it was introduced by state governors seeking to boost their popularity"the initial enthusiasm for Sharia among the political elite has waned as domestic and international concerns over its harsh punishments, including stoning to death for adultery, amputation of a limb for theft and public flogging for premarital sex, have increased.

This has meant that state governors have become hesitant to carry out death sentences and amputations ordered by Sharia courts, but have not been prepared to openly oppose such punishments, leaving those convicted in a state of uncertainty, according to HRW. Islamic courts have imposed at least ten death sentences, mostly for adultery, but there has been one execution"for murder. HRW also claims that many Muslims who initially supported Sharia have become disillusioned with the manner of its implementation, seeing the exercise as more political than real, but are fearful of being labelled "anti-Islamic" if they publicly speak out. Geopolitical zones lay claim to Although the next presidential elections are still more than two years away, the 2007 presidency politicians have already began playing the ethnic card to position themselves

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for the 2007 contest. In late August leading politicians from the South-South geopolitical zone, comprising mainly the oil-producing Niger Delta states, met in Abuja to declare their readiness to nominate Mr Obasanjo!s successor. Politicians who attended the South-South Consultative Assembly contended that it is the turn of their zone to rule, as it is the only area that has so far not produced a head of state. Meanwhile, Igbo-speaking politicians from the South- East zone have also laid claim to the presidency, arguing that their region has suffered from political marginalisation since the civil war and has only held the top job briefly, despite being the home of Nigeria!s third largest ethnic group. Mr Obasanjo is from the south-west region, and political analysts broadly agree that there is little chance of the presidency remaining in the south after 2007, since there was an unwritten agreement within the caucus of the ruling PDP in 1998 by which northern politicians conceded the presidential ticket to the south on the understanding that it would be held by the north in 2007. The northern political establishment has clearly signalled its intent to recapture power, with the main contenders for the PDP 2007 presidential ticket being the vice- president, Atiku Abubakar, from the north-east and a former military ruler, Ibrahim Babangida, from the north-west. In mid-September the Northern Senators! Forum announced in a communiqué at the end of a three-day retreat in Sokoto that those outside the north expressing interest in the presidency in 2007 would have to "wait for their turn". The meeting, attended by no fewer than 45 of the 58 senators from the north, as well other prominent northern political figures, including three former heads of state, resolved to stand by the principle of rotation of the presidency between the north and the south. The meeting also declared that any changes in the 1999 constitution as a result of planned revisions should not affect the tenure of the current incumbent. This declaration apparently reflected their concern over media speculation that Mr Obasanjo plans to seek a third term in office under a new constitution stipulating a single five-year term for the president. However, in a national television interview in August Mr Obasanjo denied having a succession plan and criticised early campaigns by would-be presidential contenders as diversionary. He later told the US Cable News Network (CNN) that his prime interest is to return to his farm at the end of his tenure in 2007. Despite the denials, speculation remains rife about the president!s intentions, leading his justice minister, Akinlolu Olujimi, to explain in September that the ongoing amendments to the 1999 constitution were not meant to pave the way for Mr Obasanjo to retain power. However, given the history of past leaders trying to cling on to power, some Nigerians may remain cynical about the intentions of their rulers.

Power struggles leave Meanwhile, Nigeria!s two main opposition parties"the All Nigerian People!s opposition parties in disarray Party (ANPP) and the Alliance for Democracy (AD)"have become bogged down in internal wrangling, raising concerns that the lack of official opposition is undermining the practice of democracy and eroding public confidence in the system. The wrangling within the ANPP, the largest opposition party, came to a head in September, when the party!s chairman, Don Etiebet, suspended the governor of , Attahiru Bafarawa, for alleged anti-party activities, and was then himself removed as chairman by one of the factions in the

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embattled party. At the root of the split is a row over which presidential aspirant the party should support in the 2007 election. The AD, which lost most of its control of Mr Obasanjo!s home south-west region in last year!s elections, is similarly split by a power tussle, with each of its two factions claiming to be the authentic party. Although all the disputes are likely to be resolved ultimately, the wrangling will leave the parties weakened and in a weaker state to take on the PDP at the next elections.

The Senate passes law to On September 9th the Senate passed the controversial bill that the president democratise labour movement had proposed to democratise the labour movement. The Trade Union Amendment Bill includes the following provisions: • to end the monopoly of the Nigerian Labour Congress (NLC) as Nigeria!s only central labour organisation; • to make contribution of trade union dues voluntary rather than mandatory; and • to make union membership voluntary. The bill also outlaws strikes in essential services such as aviation, health and education. Strikes in other sectors are to be limited to wage disputes and may only be carried out by unions representing workers in the activities concerned. Government officials say that the law is necessary to promote the democratisation of the labour movement and bring Nigeria!s labour law into line with International Labour Organisation guidelines. However, union leaders have vowed to resist the legislation, arguing that it is intended to emasculate their movement, which has been a thorn in the side of the government. The NLC president, Adams Oshiomhole, told an NLC rally in Abuja on August 24th that the labour movement would organise "the mother of all strikes" if both houses of the National Assembly passed the labour law. Mr Oshiomhole said that the government had decided to destroy the labour movement because the unions have consistently fought its decisions to raise domestic fuel prices.

Domestic petrol prices Naira per litre

60

50

40

30

20

10

0 1998 99 2000 01 02 03 04

Sources: Central Bank of Nigeria; Nigerian National Petroleum Corporation; press reports.

Since Mr Obasanjo came to power in 1999, the NLC has called six general strikes in response to increases in fuel prices. On three occasions the

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administration was subsequently forced to reduce the newly introduced price levels. In its latest action the NLC led a four-day nationwide strike to protest against a 25% rise in fuel prices (taking petrol from about N42/litre to around N53/litre) introduced on September 23rd. The NLC went ahead with the strike despite a Federal High Court ruling that it had no statutory powers to call workers out on strike collectively. The NLC said that it would resume the strike if the government did not restore the former fuel prices. The government, meanwhile, has grown increasingly frustrated by the way that the NLC has used the sensitive issue of fuel pricing to marshal popular opposition to block govern-ment policy and raise doubts about Nigeria!s capacity to endure tough but necessary reforms, despite the ruling PDP!s overwhelming majorities in the National Assembly.

There seem to be no moves to In the apparent absence of a middle ground for compromise, the NLC!s compromise challenge to Mr Obasanjo!s authority has developed into a political struggle whose outcome is difficult to predict, with both sides apparently convinced of the righteousness of their respective positions. Government officials say that the administration needs time and support to implement structural adjustment reforms to turn the economy around, including eliminating domestic fuel subsidies amounting to US$1bn a year that could be more wisely spent on social sectors and improving Nigeria!s decrepit infrastructure. Price deregulation is also necessary to privatise Nigeria!s four underperforming state-owned refineries and encourage private investment in the building of new plants. However, the unions counter with the argument that liberalisation invariably increases living costs, which further burden Nigeria!s impoverished people. This view has resonance in a country where 70% of the population survives on less than US$1 per day. The final problem is that, although its case is sound in terms of the macroeconomic arguments, the government has done little to address a fundamental problem: that most ordinary Nigerians do not believe it when it says that money saved from removing fuel subsidies will be spent on education, health and infrastructure.

The battle looks set to The NLC raised the stakes in its confrontation with the government and continue announced that it would embark on an indefinite strike from November 16th, warning that it would also target oil production. Mr Oshiomhole told reporters on November 1st that the planned action had become necessary because Mr Obasanjo was stubbornly refusing to discuss the issue of fuel-pricing. On the same day, in a swift response to the strike plan, the Anglo-Dutch oil company, Shell, filed a suit at the Federal High Court in Lagos seeking an injunction to prevent Nigeria!s two oil unions from joining the strike. However, the judge refused the request and adjourned the case until November 18th. The NLC condemned Shell for taking legal action, accusing the company of siding with the government. In an attempt to placate the unions, the government introduced measures to cushion the impact of the increased fuel costs. An emergency meeting of the National Economic Council on October 29th approved the spending of N11.1bn (US$83.5m) as loans to transport operators and reduced duties on buses. However, the unions dismissed the measures, insisting that only lower fuel prices would end their protests.

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Nigeria denounces corruption Much to the government!s chagrin, Nigeria has once again been ranked near ranking the bottom of the annual Corruption Perceptions Index published by Transparency International (TI), a Berlin-based corruption-monitoring non- governmental organisation (November 2003, The political scene). In the latest report, Nigeria was named the third most corrupt of 145 countries surveyed, after Haiti and Bangladesh. Nigerian government officials criticised the TI survey, saying that it was limited in coverage and failed to take account of recent changes in the country. In a strongly worded statement on October 20th, the information ministry said that the index was "fundamentally flawed". Citing a recent study into the working of the TI index, the statement said that the group used only a limited sample of countries and a small number of respondents to make its judgements. In a similar vein, the finance minister, Ngozi Okonjo-Iweala, told the BBC that TI!s methodology was too backward- looking, was "not particularly helpful" and that the organisation failed to take into account the administration!s ongoing efforts to fight corruption. Measuring corruption is not a precise science

The Nigerian government!s complaints about the country!s rankings by Transparency International (TI) are not without merit in some cases. Although TI tries to be rigorous in its methodology, it only measures "perceptions" of corruption. Moreover, the index is not good at capturing the situation in poor corrupt countries, where, although there may not have been much improvement to date, the government is taking steps to address the issue. There is also the problem that not every country is ranked, and many of those not included are likely to be very poor and corrupt. If they were included, Nigeria!s corruption record would not look as poor as it does at present.

On the other hand, it is hard not to accept TI!s results when Nigeria scores poorly in most international probity indexes. For instance, the World Economic Forum!s Africa Competitiveness Report 2004 ranked Nigeria 24th out of 25 countries in its public institutions index, reflecting concerns about corruption. Perhaps even more significantly, a survey conducted by the UN Economic Commission for Africa, published in October, showed that only 25% of people polled in Nigeria trusted their authorities, compared with 75% in Ghana.

Another major problem is that, despite the government!s claim that it is starting to fight corruption, it has not yet made any important prosecutions, particularly of major figures. In his 2005 budget address, the president, Olusegun Obasanjo, highlighted that the Independent Corrupt Practices and Other Related Offences Commission now has over 62 cases under prosecution. However, critics state that, until some of these cases reach their conclusion, it is far too early to say whether the government is really serious in its fight against corruption. The fight against corruption is A major problem in the fight against corruption is that much of the problematic at state level misappropriation of public funds occurs at the state tier of government, beyond the control of the federal authorities. State governors enjoy constitutional immunity from prosecution while in office. An illustration of the problems caused by this occurred in late September, when the federal government indicted the suspended governor of Plateau State, Joshua Dariye, for breaching

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the asset declaration law. However, the governor, under suspicion of corruption, was able to obtain a court injunction against being tried by the Code of Conduct Tribunal on the grounds of immunity (Mr Dariye is due to return to office on November 18th, when his suspension expires). The government, meanwhile, is considering amending Nigeria!s constitution to remove the immunity clause, although this could face considerable opposition in the National Assembly.

Nigeria misses the deadline to Nigeria failed to hand over the oil-rich Bakassi Peninsula to Cameroon on the withdraw from Bakassi September 15th deadline agreed by the joint commission set up by the UN to implement a 2002 International Court of Justice ruling on their common border. Two days before the deadline UN and Nigerian officials announced separately that the withdrawal of Nigerian troops from Bakassi would be delayed, citing "technical difficulties". Chukwuemeka Chikelu, Nigeria!s infor- mation minister, later told reporters that Nigeria was not responsible for the delay, and explained that the postponement was due to the Nigeria-Cameroon Mixed Commission not having finished its work. However, a meeting of the commission in late October to set a new handover date ended in deadlock. A UN statement after the talks in Abuja said that the matter was being referred back to the two countries! presidents and the UN secretary-general. Meanwhile, it remains unclear as to what the sticking points are. The head of the Nigerian delegation on the commission, Bola Ajibola, told a news agency that the handover would take place, but that it could take time to resolve the issues. However, some observers believe that the Nigerian government is dragging its feet because of fierce opposition to the transfer of sovereignty from Nigerian residents in Bakassi and Nigerian lawmakers at home. In early September the House of Representatives adopted a motion in Abuja urging the federal government not to give up Bakassi, and called for a UN-supervised plebiscite in the area. Essien Ayi, a member of the National Assembly from Bakassi, who proposed the motion, said that the residents of Bakassi did not want to be Cameroonian and would resist any attempts to incorporate them into Cameroon. He also contended that it would be unconstitutional for the Nigerian government to cede any part of Nigeria without amending the constitution and that the earlier transfer of 33 villages along the northern land boundary to Cameroon in line with the ruling by the International Court of Justice was unconstitutional. A government campaign to improve Nigeria's image

The government has recently launched an international public relations campaign to try to turn around Nigeria!s poor image at home and abroad. The president, Olusegun Obasanjo, launched the national image project in July, saying that there was a need to showcase the best of Nigeria in order to inspire its people. A total of N600m (US$4.5m) was earmarked in the 2004 budget for the project, which involves both the private and the public sectors. The information minister, Chukwuemeka Chikelu, said that the campaign would draw on the media, public relations practitioners and advertising agencies to combat certain activities such as the notorious "Advance Fee" frauds (also know as 419 scams) that have adversely impacted on Nigeria!s image abroad, as well as to project the positive aspects of the

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nation. One of the more visible aspects of the campaign has been an increase in surveys on Nigeria in major international publications such as the Financial Times and Le Monde.

However, with so much bad news coming out of Nigeria and some of its more renowned citizens showing little confidence in its governance, Mr Obasanjo!s administration faces a daunting task to improve the nation!s image. For instance, in October a widely respected Nigerian author, Chinua Achebe, rejected the award of Commander of the Federal Republic"Nigeria!s second highest honour"criticising the running of his homeland. In his letter explaining his rejection of the honour, pub- lished in Nigerian newspapers, Mr Achebe criticised the dangerous state of affairs in Nigeria, especially in his home state of Anambra in the south-east. Mr Achebe, who now lives in the US, echoed comments made in July by another famous Nigerian writer, the Nobel laureate, Wole Soyinka, who told the Reuters news agency that his country was on the brink of a massive implosion and that the wave of mass killings in May was a precursor to its break-up. Such expressions of despondency about the situation in Nigeria probably carry more weight in shaping public perceptions of the country, at home and abroad, than the assurances of the government that progress is being made, despite the spin given by professional publicists. Economic policy

Mr Obasanjo submits 2005 In its second term in office the administration of the president, Olusegun budget to parliament Obasanjo, has shown greater commitment to economic reforms, as was clearly evident from the fact that the president!s 2005 budget proposal address to the National Assembly took place as early as October 12th. The early presentation increases the chances that the budget may be approved, for the first time under the Third Republic, in sufficient time to enable its implementation to start on time in January 2005. The budget was also notable in that it was prepared in the context of a three-year medium-term expenditure framework (2005-07), a shift away from single-year budgeting. As was the case in 2004, the 2005 budget focuses on building physical and social infrastructure and aims to follow a fiscal rule of saving excess oil revenue. Similarly, as in 2004, the budget is based on a prudent oil price"it is projected at US$27/barrel in 2005, compared with US$25/b originally proposed last year"about half the level of prevailing world oil prices in October. Crude oil production is assumed at 2.71m/day. The government estimates that this will provide federally collectible revenue in 2005 of N3.62trn (US$27.2bn), of which N2.9trn is oil revenue, N563bn (US$4.2bn) is from non-oil taxes and N100bn is from independent income. Federal retained revenue is estimated at N1.3trn.

The government will stick to The improvement in economic policy is also visible in the fact that, whereas in fiscal rule the past Nigerian governments have tended to spend oil windfall revenue as it is received"and have subsequently faced financial difficulties when oil prices have dropped"the Obasanjo administration has begun to apply a fiscal rule of saving excess revenue, a policy that has long been recommended by the IMF. According to the president, as at end-September 2004, savings in the excess crude account amounted to N432bn and are projected to reach N609bn by the end of the year, of which the federal government!s share will be N316bn.

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Mr Obasanjo said that half of total excess income will continue to be saved for future use and the other half would be used for additional expenditure in 2005. The federal government!s share will be channelled into infrastructure and security, including N18bn for power, N29bn for works (roads) and N20bn for defence. However, with oil prices likely to remain high in 2005, the government is likely to build up additional funds to carry over into 2006-07, when they will be needed to maintain expenditure at a crucial political time when the oil price is starting to fall back.

Federal government finances (N m) 2001 2002 2003 Total federal government retained revenue 796,976.7 716,754.2 1,023,241.2 Total expenditure 1,018,025.6 1,018,155.8 1,225,965.9 Recurrent expenditure 579,329.1 696,777.7 984,277.6 Personnel costs 285,118.4 369,181.7 304,069.2 Overhead costs 117,985.9 109,111.6 146,420.9 Capital expenditure (& net lending) 438,696.5 321,378.1 241,688.3 Overall deficit -221,048.9 -301,401.6 -202,724.7

Source: Central Bank of Nigeria, Annual Report and Statement of Accounts.

Expenditure should increase In terms of expenditure, federal recurrent expenditure is projected at N651bn, modestly capital at N530bn, domestic debt servicing at N190bn, external debt servicing at N170bn and statutory transfers at N76bn. Mr Obasanjo explained that recurrent expenditure remains high largely because of the inclusion of salaries and allowances for newly recruited police officers and the anticipated redundancy payments resulting from the implementation of civil service reform. Strengthening Nigeria!s poorly equipped and undermanned police force is potentially important, given that high crime rates in cities are among the main complaints of businesses in the country. The budget provision for redundancy payments in the civil service suggests that the administration aims to implement the downsizing of bloated government departments. Mr Obasanjo said that a 70% increase in allocation for pensions, from N70bn in 2004 to N119bn, was the result of the new contributory pensions and mandatory life insurance scheme, which is costing the federal government N44bn. Total capital spending is estimated at 51% higher than the N350bn budgeted in 2004, largely reflecting the N50bn earmarked for settling debts with local contractors.

A modest deficit for 2005 With the new commitment to saving oil windfalls, the government hopes to stick to its aggregate expenditure ceiling of N1.62trn, resulting in a deficit of N314bn, or 2.9% of GDP. However, with oil prices at a much higher level than the government is predicting, this could well prove an overestimate. It also means that even if the government does not earn its forecast N154bn from privatisation, the sale of government property in the capital, Abuja, and recovered looted funds, it will have little difficulty in financing any deficit. The president made it clear that the government aims to continue to raise long-term funds from the capital market to fund the deficit, a policy that it has already embarked on. In late 2003 the government issued its first fixed- and floating- rate long-term bonds (November 2003, The domestic economy: Financial

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markets) and hopes to continue the process in order to boost the development of local capital markets.

The IMF praises the govern- In its Nigeria Article IV Consultation Staff Report, published in August, the IMF!s ment's new reform agenda Executive Board welcomed recent improvements in economic policy, in particular the government!s "home-grown" National Economic Empowerment and Development Strategy (NEEDS). The Fund feels that the programme is broadly consistent with the recommendations of previous Article IV consultations and makes a clear break with past policies. However, the Fund still has major reservations about current economic policy. IMF officials believe that the government needs to do much more to improve macroeconomic conditions, in particular to further rein-in spending, and accelerate structural reforms including privatisation. The Fund also feels that, given the limited political and popular support for reform in the country, the government should focus its immediate efforts on a few reforms that will produce tangible results that can be used to garner public support for reform. The IMF also remains concerned about the high rate of inflation, and its managing director, Rodrigo de Rato, pointed out to business leaders in Abuja during a visit in August that inflation and future shocks on the oil market could undermine the modest successes of the administration. The Article IV report notes that in order to reduce inflation the Central Bank of Nigeria (CBN, the Central Bank) should allow interest rates to rise, absorb excess liquidity through market-determined instruments, and allow greater exchange-rate flexibility. Looking further ahead, it advised that the Central Bank!s independence needs to be strengthened and the soundness and stability of the banking system enhanced.

The IMF agrees to monitor Following a request by the government, the IMF has agreed to monitor the Nigerian reforms implementation of NEEDS. As part of this, the IMF will make quarterly visits to Nigeria and provide semi-annual information reports to its board. However, this is short of a formal programme with conditionalities, which Nigeria needs to convince its creditors that the country is seriously pursuing tough reforms and thereby deserves substantial debt relief. However, it seems that the IMF and the Nigerian government have come to an understanding to de-emphasise their engagement in binding arrangements, given the record of collapses of previous such agreements. IMF officials also seem to be more aware of the risks posed to the successful implementation of NEEDS as a result of Nigeria!s complex political environment and the general hostility towards economic liberalisation.

Concerns expressed over Although the federal government!s fiscal management has improved profligate state governments significantly, the same cannot be said of sub-federal levels of government, which receive about half of all revenue. According to the IMF, the fiscal tightening achieved by the federal government in 2003 was more than offset by higher spending of the oil windfall by state and local governments. Although at the federal level the deficit in non-oil primary balance has improved, at state and local-government levels it has deteriorated since mid-2002. The IMF expressed disappointment that the consolidated non-oil fiscal deficit is

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expected to rise significantly, saying that this highlights the need for the central government to convince the states to adhere to prudent fiscal rules, and urged the speedy enactment of the fiscal responsibility bill, which sets out rules to encourage fiscal prudence and accountability at all tiers of government. With most of Nigeria!s state governors conscious of their political independence, it is unclear how far the proposed legislation will strengthen the ability of the central government to check overspending by profligate states, especially given the rules on fiscal allocation set by the constitution.

Tough finance minister The precariousness of Nigeria!s reform effort is perhaps indicated by the receives death threats unpopularity of the finance minister, Ngozi Okonjo-Iweala, a former World Bank official who is spearheading efforts to stamp out official corruption and end Nigeria!s fiscal anarchy. In September the minister alleged that she had received death threats and that other members of the presidential economic team had been viciously maligned on account of the administration!s economic reforms. An anonymous group sent a petition to the National Assembly accusing the minister, the head of the due process office, Obey Ezekwesili, and the minister for the Federal Capital Territory, Nasir el-Rufia, of corruption. Ms Okonjo-Iweala said that the charges were part of a "systemic attack" against members of the economic team, and insisted that this would not deter them from their work. Nevertheless, the dirty tricks campaign to undermine the economic team may intensify as Nigeria moves closer to the 2007 general elections and pressure mounts on politicians to spend. It is unclear whether the technocrats leading the government!s reform have the political experience to handle such an onslaught.

Privatisation programme The extent to which political opposition can delay and undermine well- hampered by vested interests thought-out and well-intentioned reforms is clear in the privatisation of the mammoth state-run National Electric Power Authority (Nepa). This has been stalled by the delay in the enactment of the power sector reform bill, which is passing through the National Assembly for a second time. The legislation is supposed to pave the way for the unbundling of Nepa into various power, generation, transmission and distribution units for privatisation, and for the setting-up of a regulatory commission for the electricity market. Without the legislation, much-needed private investment in the sector is unlikely to materialise, despite indications of interest by some companies in building power plants, particularly for the utilisation of Nigeria!s abundant natural gas supplies. Nonetheless, the Bureau of Public Enterprises has made some progress in offloading smaller and less sensitive state enterprises. In his October budget speech, Mr Obasanjo announced that a total of N4.8bn had been realised so far this year from the sale of government shares in six companies, including Delta Steel and Peugeot Automobile of Nigeria.

Government promises to relax In his 2005 budget speech Mr Obasanjo acknowledged that his administration!s trade restrictions tariff policy was one of the areas of reform in which it has made least progress. He said that the government intended to outline a new policy that would take effect by mid-2005. As part of this, the government aims to harmonise Nigeria!s tariffs with the tariff regime of the Economic Community of West African States, which consist of four bands: 0% for necessities; 5% for primary products;

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15% for intermediate goods; and 20% for finished products. According to the IMF, in 2003 Nigeria had 20 tariff bands rising to a top rate of 150% for various beverages. This means that the country!s average tariff is over 30%, a rate achieved by a select group of only ten other countries in the IMF. All products except banned items (such as millet and sorghum or bulk vegetable-oil imports) will be phased in to this regime from end-June 2005, although there may be some finished goods that attract additional tariffs in order to protect selected sectors where the country has a potential comparative advantage, according to the president. Mr Obasanjo said that banned products would be phased in to the new tariff system starting in January 2007. Furthermore, the practice of granting waivers and exceptions would be stopped from June 2005, since everyone will face the same low tariff regime. According to the president, with the reform, Nigeria!s unweighted average tariff will fall to around 18%.

The domestic economy

Economic trends

Inflation rates remain in The concerns of the IMF about the country!s high rate of inflation continued to double digit be highlighted in the consumer price data provided by the Federal Office of Statistics (FOS). According to the FOS, the 12-month average inflation rate, the measure preferred by the Central Bank of Nigeria (CBN, the Central Bank) rose from 15% in January to 19.7% in June, and has only slowed slightly in recent months, to 19.1% in July and 18.9% in August. The CBN noted in its August Monthly Report that the slowdown was the result of falling food prices due to the good harvest. However, most economists expect that September!s 25% jump in domestic petroleum-product prices will raise transport and production costs and consequently push prices of consumer goods up. Earlier fuel price rises in October 2003, and briefly in May 2004, were partly responsible for the ongoing rise in inflation in the first half of 2004.

Inflation (%) 2003 2004 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 12-month moving averagea 9.9 10.8 12.8 14.0 15.0 16.5 17.8 18.6 19.4 19.7 19.1 18.9 a The 12-month moving average is the measure of inflation preferred by the Central Bank of Nigeria. Source: Central Bank of Nigeria, Economic Report (monthly).

The naira remains stable Despite heavy demand for hard currency at the bi-weekly Dutch Auction System (DAS), caused by the increase in imports and government spending, with oil prices remaining high the value of the naira has remained relatively stable on the DAS, hovering around N132.9:US$1 since July. The availability of foreign exchange on the official markets has also had a major impact on the parallel exchange rate, with the premium compared with the official exchange rate narrowing substantially in 2004, according to rates published by Afrinvest, an independent investment banking firm based in London. The parallel rate

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has strengthened from over N150:US$1 in late 2003, to trade in a band between N136:US$1 and N138:US$1 since around July. Assuming that these trends remain broadly unchanged in the final few months of the year, this will reduce the average differential with the official exchange rate to only 3.5%, compared with the high of nearly 20% in 2001.

Naira exchange rates (N:US$ unless otherwise indicated) 2000 2001 2002 2003 2004a Official rate 101.7 111.2 120.6 129.2 133.1 Parallel rate 111.1b 133.0b 136.9b 141.4b 137.8c Difference (%) 9.2 19.6 13.5 9.4 3.5 a Economist Intelligence Unit estimates. b Central Bank of Nigeria data. c Afrinvest and Economist Intelligence Unit estimates. Source: Central Bank of Nigeria; IMF; Afrinvest ; Economist Intelligence Unit.

Oil and gas

Nigeria lobbies for increased On September 15th OPEC ministers agreed to increase the cartel!s production OPEC quota ceiling by 1m barrels/day to 27m b/d from November 1st 2004 as part of its efforts to reduce historically high world prices to more sustainable levels. Nigeria!s production quota was raised from 2.142m b/d to 2.224m b/d. This was the fourth OPEC ceiling upward adjustment since April 1st, when Nigeria!s limit was 1.936m b/d. However, the 15% increase in the quota is unlikely to bring Nigerian production in line with its quota. As with most OPEC members, Nigeria has been producing close to its sustainable capacity in 2004, and in the process consistently breached its output quota. According to International Energy Agency data, Nigeria!s oil output rose from 2.4m b/d in August to 2.45m b/d in September, close to its sustainable capacity of 2.5m b/d.

Oil production and OPEC quota ’000 b/d

2,500

2,250

2,000

1,750

1,500 Jan Feb Mar Apr May Jun Jul Aug Sep 2004

Sources: Economist Intelligence Unit; OPEC; International Energy Associaton.

If its three-year medium-term expenditure framework (MTEF) for 2005-07 is a realistic guide, the government intends to further boost its oil production in coming years. On August 11th the finance minister, Ngozi Okonjo-Iweala, stated that under the MTEF the government plans to budget between 2.6m b/d and 2.7m b/d for oil production in the three years. To accommodate this, the

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government has requested that OPEC increase Nigeria!s quota to about 2.6m b/d in 2005, 2.67m b/d in 2006 and 2.7m b/d in 2007. Government officials make the case that Nigeria!s current OPEC quota does not adequately reflect the size of the country!s reserves and of its impoverished population (May 2004, The domestic economy: Oil and gas). Major oil multinationals operating in Nigeria say that they can increase output to 2.6m b/d virtually immediately if OPEC raises the country!s production ceiling. Benjamin Ogunjana, the deputy director of the Department of Petroleum Resources, told an oil and gas conference in Cape Town, South Africa, in October that Nigeria has production capacity of around 2.8m b/d and that it was only the delay of the 250,000 b/d Bonga deepwater oil project operated by the Anglo-Dutch company, Shell, that had prevented the country from hitting 3m b/d this year. The Bonga field is now expected to start production by mid-2005.

Another oil-licensing round is In August the government announced that it would hold a new oil-licensing announced for early 2005 round in early 2005 for the rights to explore deepwater blocks in the Gulf of Guinea. At an oil conference in Norway in September, , the petroleum adviser to the president, said that 27 blocks would be made available, averaging 2,400 sq km in size and ranging in depth from 2,000 metres to 3,000 metres. The licences were expected to be distributed in 2004, but were delayed owing to the reorganisation of the state-owned Nigeria National Petroleum Corporation (NNPC). The new licensing round is expected to follow the successful 2001 auctions in attracting new foreign investment needed for the government to achieve its targets to boost oil production to 4m b/d by 2010. There is likely to be a scramble for the deepwater blocks, which are far away from the security problems encountered in the volatile Niger Delta. In an indication of this, Shell!s business director for Africa, Demola Adeyemi-Bero, told the Reuters news agency in Cape Town on October 7th that his company would aggressively bid for the new Nigerian concessions, targeting about 50% of the tenders planned, particularly those with large gas reserves. Shell currently accounts for about 40% of Nigeria!s oil output, but the company suffered a setback earlier this year when it adjusted its proven reserves in Nigeria downwards by some 1.3bn barrels (February 2004, The domestic economy: Oil and gas).

The government proposes an The government has proposed US$4.23bn for cash calls to Nigeria!s six oil joint increase in cash call vote ventures in 2005, up from US$3.2bn approved in the 2004 budget (May 2004, The domestic economy: Oil and gas). Ms Okonjo-Iweala said in early August that the government aims to invest US$4bn in operating and investment costs in the oil fields in 2006-07. This commitment to boosting the funding of the oil sector may reassure those in the industry who doubt whether Nigeria will commit its share of the US$7bn a year that the NNPC says that the joint ventures will require to meet the government!s oil output targets. However, the budget proposal of the president, Olusegun Obasanjo, still has to be approved by a parliament that is sceptical of the oil multinationals! demands for increased funding. In its 2004 budget the NNPC called for US$4.9bn, but the sum was initially cut by the finance ministry to US$3.8bn, and then again by parliament to US$3.2bn. For 2005, the finance minister seems to have approved all that the NNPC requested.

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Shell rejects a compensation On August 24th the Senate passed a resolution ordering Shell to pay US$1.5bn order from the Senate in compensation for environmental damage caused in some local communities during nearly 50 years of exploration in the Niger Delta. The resolution followed a petition filed in December 2000 by the Ijaw aborigines of accusing Shell Petroleum Development Corp (SPDC) of inflicting health hazards, economic hardship, injury and death on the people as a result of numerous oil spillages at its facilities in the state since the company commenced operation in 1956. The Senate said that SPDC must pay US$1bn immediately and the remaining US$500m in equal instalments over five years. Shell officials said that the company was not formally notified of the Senate decision, which they dismissed as lacking legal basis. SPDC operates in the Delta through a joint venture in which it owns 30%, the NNPC 55%, France!s Total 10% and Agip, a unit of Italy!s ENI, 5%. The Ijaw petition was originally presented to the House of Representatives in 2003 and reviewed by an independent legal advisory panel set up by the lower house. A Shell official in London noted that the resolution eventually passed on the matter by the lower house did not endorse the panel!s recommendation to pay US$1.5bn compensation. Communities in the Niger Delta have often accused foreign oil companies, especially Shell (being the largest operator) of environmental pollution that destroys the livelihoods of people in the swampy region. However, the oil operators say that spills are often caused by saboteurs trying to steal oil for sale.

Manufacturing

Nigeria is a tough place to do Several recent international economic reports have rated Nigeria as one of the business most difficult countries in the world in which to do business, which suggests that the government!s reforms have had more success at the macroeconomic level than in improving the climate in which firms operate. According to the World Bank!s Doing Business in 2005, published in September and covering 145 countries, Nigeria has the least efficient system for registering property, requiring 21 procedures and 274 days, at a cost of 27.2% of the property value; and the eighth slowest procedure for enforcing contracts, requiring 23 procedures and 730 days, at a cost of 37.2% of the debt. However, on a more positive note, starting a new business in Nigeria is not exceptionally cumbersome compared with many other developing nations, although it still requires ten procedures, 44 days and a cost equivalent to 95.2% of the country!s income per head, more than enough to put many small entrepreneurs in the informal sector off legally registering their businesses. The negative findings in this report are similar to those in a number of others, which all add up to a fairly damning indictment of the business climate in the country, notably the following: • the World Bank!s World Development Report 2005 said that the problem of business losses due to inefficient electricity supplies is especially severe in Nigeria and cites a survey that showed that small firms lost 24% of their output to outages, medium firms 14% and large firms 17%;

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• the UN Economic Commission for Africa!s Economic Report on Africa 2004 ranks Nigeria 28th out of 30 African countries in its Infrastructure Index; and • the World Trade Organisation!s World Trade Report 2004 ranks Nigeria as one of the five least efficient countries for clearing goods through customs, with 18 days required at border for customs clearance"this of course excludes the cost and effort of dealing with the various corrupt practices that shippers encounter.

Ajaokuta Steel Company The government announced on October 25th that the Ajaokuta Steel Company begins production of coil wire had produced coil wire for the first time, marking an important step in the restoration of the firm under new management. A statement from the Ministry of Power and Steel said that this was the result of trial runs at the complex!s 130,000-tonne "wire rod mill" facility. On August 18th the federal government signed an agreement with Global Infrastructure Holding Ltd, an affiliate of the Indian steel giant, Ispat, to rehabilitate and operate the 1.3m-tonne/year Ajaokuta complex. This came a day after the federal government broke off a ten-year, US$3.6bn complete-operate-transfer agreement with Solgas Energy Ltd after the US-based company was unable to raise the required funds. Nigeria has sunk almost US$5bn into the construction of the Ajaokuta complex, which was launched in 1979 as the centrepiece of a steel industry that would form the basis of the country!s industrialisation. However, the Soviet-designed plant, built against the advice of the World Bank, has been 98% completed since the early 1990s, without producing any commercial steel. It is not clear how much money Ispat is prepared to invest in Ajaokuta. The power and steel minister, Liyel Imoke, said in late September that the plant would require US$240m to start full operation.

Financial and other services

New capital requirement The announcement by the Central Bank in July that it would raise the prompts consolidation minimum capital requirement for all banks to N25bn (US$187m), from N2bn, by banks appears to be having the desired effect (August 2004, Economic policy). It has set off a wave of consolidation in the banking industry as many banks start complex mergers in a bid to meet the December 31st 2005 deadline for compliance with the new capital base. By the end of October at least five separate memoranda of understanding had been signed by banks planning to merge: • Prudent Bank, Magnum Trust Bank, EIB International Bank, Trust Bank of Africa and NBM Bank are proposing to create Sterling Bank PLC; • Allstates Trust Bank, Gulf Bank, Hallmark Bank, Lion Bank and Universal Trust Bank are proposing to create First Consolidated Bank; • Intercontinental Bank, Equity Bank, Gateway Bank and Global Bank are proposing to create the International Bank Group; • First Atlantic, Bank, Guardian Express Bank, Manny Bank and Assurance Bank are proposing to create the Astra Bank Group; and

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• Wema Bank, Fountain Trust Bank and Lead Bank are in talks to merge but have yet to agree a name. Some of the larger and more dynamic banks are expected to raise the required capital by offering new shares to prospective investors, and a few will do so by simply buying up some of the existing smaller banks. Despite the announce- ments of mergers, Central Bank officials are still unclear how many banks will eventually emerge from the rationalisation process. Mr Obasanjo was reported as saying in a lecture in Washington DC in September that he expected that by the end of the reform there would be no more than a dozen banks in Nigeria, down from the current 89. However, the CBN said that the president expressed a personal opinion, as the banking reform does not stipulate the number of banks that may operate.

Nigerian shares fall from After climbing to an all-time high in the first half of 2004, the Nigerian Stock record heights Exchange (NSE) all-share index lost some of its gains in the second half of the year. The index dropped from its peak of 30,703.5 on June 18th to 22,700.7 on October 4th, before recovering in late October and into November to trade at over 23,700. The 26% drop was attributed by traders to a number of reasons, including tightening liquidity, an increase in interest rates that made the money market more attractive to investors and profit-taking. Despite the reversal of what has been the remarkable growth of the stock market since 1999, when the index ended the year at 5,266.4 (August 2004, The domestic economy: Financial markets), the market has the potential for recovery. Blue-chip companies are still highly profitable and the proposed wave of banking mergers and share issues, along with the long-promised Initial Public Offer of shares in the state telecom- munications company, Nitel, could provide an important boost to the market.

Infrastructure

Nigeria calls for expressions of Another attempt is being made to privatise Nitel following the botched sale in interest in a 51% stake in Nitel December 2002, when the preferred bidder, Investment International (London), a little-known Nigerian consortium, failed to pay the bid price of US$1.1bn (August 2002, The domestic economy: Infrastructure). The National Council on Privatisation initially advertised an invitation to strategic investors to express interest in acquiring a 51% stake in Nitel, with the deadline for submission given as November 5th 2004. The deadline, rather worryingly, has now been extended to January 28th 2005. This may mean that the respondents to date have not been the proven international telecommunications operators with sufficient funds to develop Nitel that the government had hoped to attract as the strategic investor. Since March 2003 Nitel has been managed by a Dutch telecommunications company, Pentascope, under a three-year management contract.

Virgin Nigeria is named as the On September 28th the federal government signed a memorandum of mutual new national flag carrier understanding with Virgin Atlantic Airways to float a wholly privately owned airline, to be known as Virgin Nigeria. Virgin Atlantic will hold 49% of the initial US$50m equity as the core investor/technical partner, with the remaining 51% held by Nigerian shareholders. Nigeria!s aviation minister, ,

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signed a letter of indemnity that is intended to safeguard the investments of Virgin Atlantic and the Nigerian institutional investors and ordinary shareholders. The indemnity is apparently to protect investors against possible litigation by creditors of the liquidated, debt-ridden, state-owned Nigeria Airways. The birth of Virgin Nigeria brought to an end the long search for a new national flag carrier to replace Nigeria Airways, and involved the dropping of South African Airways as the strategic investor/technical partner for the proposed Nigerian Eagle Airline (August 2004, The domestic economy: Infrastructure). Although the government was eager for Virgin Atlantic to start operating on October 1st 2004, the Virgin Atlantic boss, Richard Branson, told reporters in the capital, Abuja, after signing the agreement, that the new airline would start operating in early 2005, after the necessary approvals and authorisations had been obtained. The manner in which the government has pushed the creation of Virgin Nigeria has been criticised by many aviation officials and experts for lack of transparency. For example, the National Aviation Safety Initiative, in a petition to the National Assembly, raised concerns about the anonymity of the Nigerian institutional investors who will hold the 51% stake in the airline which will later be sold to the public. Some critics also questioned the criteria used in choosing Virgin Atlantic and why the name Virgin Nigeria had been adopted, which suggests that the airline is just another subsidiary in the empire of Mr Branson!s Virgin Group rather than a Nigerian entity. They believe that the 49% equity granted Virgin was too high, compared with only 30% offered to South African Airways, and that, since Virgin already operates in Nigeria, the new airline was unlikely to result in a significant expansion of the country!s aviation industry.

Foreign trade and payments

Nigeria's current account New IMF balance-of-payments data show that after falling into a large deficit in deficit narrowed in 2003 2002, estimated by the Fund at 11.1% of GDP, the current-account deficit nar- rowed sharply in 2003, to only 2.7% of GDP, owing to a sharp rise in the trade balance. This was due to the rapid increase in exports, compared with lower, although rapid, growth in imports in 2003. The increase in exports and imports, coupled with the rapid pick-up in real GDP growth in 2003, also led to a sharp rise in the services deficit, according to the IMF data. In addition, the high price of oil led to a sharp increase in the income deficit, as oil company profit remittances also picked up sharply. The deficits on the services and income accounts were partially offset by the surplus on the current-transfers account, as the level of remittances by Nigeria!s large diaspora continued to pick up. The IMF current-account data continues to differ hugely, however, from that published by the Central Bank of Nigeria (CBN, the Central Bank; August 2004, Foreign trade and payments) highlighting how difficult it can be to try to form an accurate opinion on developments in the Nigerian economy. As in recent years, the main difference has been in imports, which the IMF estimates were US$16,885m in 2003, and which the CBN estimates were only US$13,747m. The services and income deficits are also substantially higher in the IMF data, to the

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extent that the CBN estimates that the country ran a current-account surplus in 2002 and 2003.

Balance of payments (US$ m) 1999 2000 2001 2002 2003 Trade balance 2,802 13,208 8,116 4,331 10,531 Exports 12,907 23,761 19,598 17,672 27,416 Oil & gas 12,178 23,093 18,927 16,935 26,607 Imports -10,105 -10,553 -11,482 -13,342 -16,885 Services balance -3,440 -6,308 -4,258 -6,401 -8,844 Income balance -3,729 -3,774 -3,880 -4,436 -5,302 Current transfers balance 1,231 1,568 1,278 1,399 1,657 Current account balance -3,137 4,694 1,255 -5,107 -1,559a as a % of GDP -8.4 10.3 2.6 -11.1 -2.7 Capital account balance -1,405 -610 -239 782 1,916 Errors and omissions 91 -1,847 -1,114 -177 -1,963 Overall balance -4,091a 2,238 -98 -4,503 -1,606 a Does not sum in source. Source: IMF, Nigeria: Selected Issues and Statistical Appendix, August 2004.

The prospects for this data discrepancy being rectified in the near future seem slim, with the CBN and the IMF import data having in fact diverged sub- stantially in recent years. However, from a macroeconomic perspective, the IMF data seem far more plausible and the trade data is more reconcilable with data provided by Nigeria!s main trading partners through the Direction of Trade Statistics. These data also highlight the extent to which China has emerged as an important trading partner for Nigeria in recent years. In 1999 Chinese imports into Nigeria were worth only US$436m, but they had risen to US$1,011m in 2001 and US$1,966m in 2003, making it the largest importer into Nigeria, well ahead of the more traditional sources of imports, such as the UK, worth US$1,351m; France, worth US$1,157m; and the US, worth US$1,132m. There has also been substantial growth in Korean and Brazilian imports.

The government says Nigeria's In his October 13th budget address the president, Olusegun Obasanjo, external debt is unsustainable announced that Nigeria!s external debt had risen to US$34bn, from US$32.9bn at the end of December 2003, and said that the country needed a sustainable solution to its external debt burden. Mr Obasanjo explained that the US$1.1bn increase was the result of adverse movements of the dollar vis-à-vis European currencies and the accumulation of arrears, owed mainly to the Paris Club. It is not clear, however, how reliable this explanation is. Only interest arrears should be added to the stock, and these were much less than US$1bn. Moreover, according to World Bank data, in 2002 86% of Nigeria!s external debt stock was already in US dollars (a shift made as part of the 2000 rescheduling deal), which severely limits the impact of the weak dollar on the debt stock, although this has become a major issue for many Sub-Saharan African countries that have a much higher proportion of euro-denominated external debt.

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External debt (US$ m) 1999 2000 2001 2002 2003 External debt stock Multilateral 3,665 3,342 3,037 2,961 3,042 World Bank 2,340 2,149 1,958 1,951 1,988 Bilateral 21,243 23,296 23,211 25,384 27,373 Paris Club 21,219 23,272 23,199 25,381 27,371 Arrears n/a 0 368 2,415 3,474 Commercial 3,809 3,596 3,438 2,649 2,403 Par bonds 2,043 2,043 2,043 1,442 1,442 Promissory notes 1,667 1,446 1,292 1,153 911 Total 28,717 30,234 29,686 30,993 32,818 External debt service Total due 4,140 3,434 3,248 2,931 2,987 Debt service paid 1,715 1,714 2,127 1,031 1,809 Accumulation of arrears 2,425 -20,381 375 1,900 1,177

Sources: Central Bank of Nigeria; Debt Management Office.

Despite the high oil price that we expect in 2005, arrears are set to increase, as the government has earmarked only US$1bn for payments to the Paris Club in 2005, compared with scheduled payments due of around US$3bn. The govern- ment has announced that it will be seeking an understanding with the members of the Paris Club that this level of payment is acceptable and that it is based on Nigeria!s need to spend on infrastructure and to meet the Millennium Development Goals. The extent to which creditors will view this favourably is unclear. Many major creditors continue to feel that the government should have made more effort to service its debts, given the windfall oil earnings of the last few years. Moreover, many continue to be frustrated by erratic payments, arguing that they would rather have regular smaller payments than periodic large ones. Meanwhile, the minister of finance, Ngozi Okonjo-Iweala, has announced that she will be addressing a special session of the Paris Club to present Nigeria!s case for debt relief, at the invitation of its chairman, Jean-Pierre Jouyet. The case to be made to the Paris Club will be based on new data from the Debt Management Office in its 2003 Annual Report. In the report it argues that Nigeria!s external debt burden is clearly unsustainable, noting that the debt to export ratio was over 176.9% and the debt service due to export ratio was estimated at 19.41% in 2003. It concludes that "these ratios represent a standard case of debt overhang and classify Nigeria as a severely indebted poor country". This is certainly the position taken by other Nigerian officials, who have also kept up their high-profile demands for some sort of debt relief. At the Nigeria- US Investment Conference held in the capital, Abuja, in September, Mr Obasanjo accused the US of a discriminatory policy in granting debt relief to debtor countries, contrasting Washington!s readiness to extend special debt dispensation to Russia and Iraq, both major oil producers, with its reluctance to treat Nigeria in the same manner. The president explained that his country was not asking for simple debt write-off, but debt relief tied to development projects jointly managed by the government, creditor nations and appropriate international development agencies.

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FDI inflows remain strong New data from the World Investment Report 2004 of the UN Conference on Trade and Development show that foreign direct investment (FDI) inflows into Nigeria remained high in 2003, at US$1.2bn. However, the much slower pace of development of the offshore oil industry, due in part to the country!s OPEC oil production quota, means that FDI inflows are less than into Angola in recent years, although they remain well above those into South Africa. However, the flows are still predominately into the energy sector and until they are attracted into a much wider range of economic activities they will have little impact for the average Nigerian. Nevertheless, the administration remains hopeful that Nigeria!s large population and its reform efforts will boost FDI into the non-oil sector.

Foreign direct investment inflows into Nigeria (US$ m) 1999 2000 2001 2002 2003 Total FDI into Sub-Saharan Africa 8,558 5,810 14,126 8,149 9,250 Angola 2,471 879 2,146 1,643 1,415 Nigeria 1,005 930 1,104 1,281 1,200 South Africa 1,502 888 6,789 757 762

Source: UN Conference on Trade and Development, World Investment Report 2004.

The president claimed in October that provisional estimates indicated that close to US$1bn in new investment had entered the non-oil sectors, mainly the food, beverages, leather goods, power generation, personal care and pharmaceutical sectors. This level of investment indicates that inward FDI for Nigeria will increase sharply in 2004 compared with previous years. In particular, there are signs of increased investment from Asian companies. For example, in September the government and a Chinese firm, ZTE Corporation, signed a memorandum of understanding valued at US$100m reflecting the company!s intent to invest in telecommunications projects.

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