Country Report

Nigeria at a glance: 2005-06

OVERVIEW The president, , and his administration face the tough task of unifying a nation divided by years of incessant ethnic-religious conflicts, rampant corruption, unrelenting poverty and political disenchantment. However, the administration has a 12-month window of opportunity to push through far-reaching reforms before campaigning for the 2007 elections paralyses the National Assembly. The success of the reform programme will depend on the president!s ability to garner political support for reforms which threaten powerful groups with vested interests in maintaining the current status quo. Meanwhile, the macroeconomic outlook for Nigeria will remain broadly positive. Thanks to rising oil production and a reasonably high oil price throughout the forecast period, the Economist Intelligence Unit is forecasting real GDP growth of around 4%. However, owing to the high price of oil, especially in 2005, high levels of government spending and relatively loose monetary policy, we expect inflation to remain in double digits throughout the outlook period.

Key changes from last month Political outlook • There has been no major change to our political outlook. Economic policy outlook • The Central Bank of Nigeria has made a number of important revisions to its monetary policy. It will now actively intervene in the market to limit fluctuations in the exchange rate within a 3% band, although it has still to announce the central rate at which the band will be set. It has also announced that it will consider changes to its key minimum discount rate on a quarterly basis, in the light of trends in seasonally adjusted inflation, having left it unchanged since August 2003. Economic forecast • Provisional current-account data for 2004 indicate that growth in imports and services and income debts has been much higher than we previously forecast. We now estimate that Nigeria ran a current-account surplus equivalent to 3.6% of GDP in 2004. This will fall to 2.3% of GDP in 2005 as import growth continues, but more moderately, before moving into a deficit of 4.7% of GDP in 2006 as export earnings fall as the price of oil falls back. February 2005

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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

19 Economic policy

23 The domestic economy 23 Economic trends 26 Oil and gas 30 Manufacturing 30 Mining 31 Financial and other services 31 Infrastructure

33 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 24 GDP growth rates 25 Nigerian inflation, 2004 25 Average value of the naira 29 Natural gas production 33 Balance of payments 35 Foreign-exchange reserves

List of figures

12 Gross domestic product 12 Consumer price inflation 23 Consumer price inflation and interest rates 26 Nigerian oil production in 2004

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Nigeria 3

Nigeria February 2005 Summary

Outlook for 2005-06 The president, Olusegun Obasanjo, and his administration face the tough task of unifying a nation divided by years of incessant ethnic-religious conflicts, rampant corruption, unrelenting poverty and political disenchantment. The administration has a 12-month window of opportunity to push through far- reaching reforms before campaigning for the 2007 elections paralyses the National Assembly. The success of the reform programme will depend on the president’s ability to garner political support for reforms which threaten powerful groups with vested interests in maintaining the status quo. Meanwhile, the macroeconomic outlook for Nigeria will remain broadly positive. Thanks to rising oil production and a reasonably high oil price throughout the forecast period, the Economist Intelligence Unit forecasts real GDP growth of around 4%.

The political scene The chairman of the ruling People’s Democratic Party, Audu Ogbeh, has resigned after disagreeing with Mr Obasanjo over his handling of the crisis in . The suspended governor of has been reinstated following the expiry of a six-month state of emergency in the state. The Court of Appeal has upheld Mr Obasanjo!s 2003 election victory, although it confirmed some allegations of ballot rigging. The government has announced plans to convene a national conference on political reform. Nigeria!s police chief has resigned amid corruption investigations.

Economic policy The government has continued its high-profile campaign aimed at highlighting the progress that it has made with economic reform. A legal challenge has been mounted to the government’s attempts to limit the distribution of oil windfall earnings to individual states. The Central Bank of Nigeria has announced a more active monetary policy; it will review interest rates quarterly and plans to limit the movement of the naira within a 3% band in 2005.

The domestic economy Estimates of real GDP growth for 2004 differ, but most acknowledge that non- oil growth has been robust. Oil production in the last few months of 2004 was affected by community unrest in the Delta region. A new gas project is being planned. The wave of bank mergers started in 2004 has continued in response to the increase in minimum capital requirements.

Foreign trade and payments Differing data on the size of Nigeria’s current-account surplus in 2004 have brought the issue of poor statistics back into the spotlight. The government has continued with its high-profile campaign for external debt relief. Owing to high oil prices, foreign-exchange reserves had risen to US$16.9bn at the end of 2004. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: February 11th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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

Political structure

Official name Federal Republic of Nigeria

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

Legal system Based on English common law

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

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

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

State government State governors and state houses of assembly

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

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

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

Key ministers Agriculture Adumu Bello Commerce Communications Defence Education 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 6,777 8,675 GDP (US$ bn) 42.1 42.7 43.5 52.4 65.3 Real GDP growth (%) 5.3 4.6 3.7 10.2c 4.5 Consumer price inflation (av; %) 7.0 18.1 13.6 14.0a 15.3 Population (m) 123.3b 126.6b 129.9b 133.2 136.5 Exports of goods fob (US$ m) 23,761 19,598 17,672 27,321 34,070 Imports of goods fob (US$ m) -10,553 -11,482 -13,347 -16,885 -17,711 Current-account balance (US$ m) 4,694 1,256 -5,115 -1,610 2,362 Foreign-exchange reserves excl gold (US$ m) 9,911 10,457 7,331 7,128a 16,905a 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 2.9 Exchange rate (av) N:US$ 101.70 111.23 120.58 129.22a 132.89a a Actual. b Economist Intelligence Unit estimates. c Official estimate.

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

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

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

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Quarterly indicators 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output Industrial production index (2000=100) 101.7 102.0 103.3 103.4 n/a n/a n/a n/a Industrial production index (% change, year on year) 0.5 0.7 1.2 -2.4 n/a n/a n/a n/a Prices Consumer prices (% change, year on year)a 10.5 10.1 9.9 14.0 17.8 19.7 18.9 15.0 Petroleum spot price (Bonny Light 37°; US$/barrel) 31.8 26.5 28.7 29.7 32.3 36.0 42.1 n/a Financial indicators Exchange rate N:US$ (av) 128.0 127.2 127.7 134.0 134.4 132.4 132.3 132.4 Exchange rate N:US$ (end-period) 126.9 127.4 127.9 136.5 133.4 132.3 132.4 132.4 Discount rate (end-period) 16.5 16.5 15.0 15.0 15.0 15.0 15.0 15.0 M1 (end-period; N bn) 1,121.55 1,319.73 1,264.03 1,225.56 1,201.54 1,214.84 1,262.91 n/a M1 (% change, year on year) 34.2 51.3 35.4 29.5 7.1 -7.9 -0.1 n/a M2 (end-period; N bn) 1,918.93 2,124.33 1,981.07 1,985.19 2,121.28 2,127.20 2,156.84 n/a M2 (% change, year on year) 34.8 41.4 23.4 24.1 10.5 0.1 8.9 n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 13,531 14,566 16,379 20,129 22,896 28,887 22,740 23,845 Stockmarket index (% change, year on year) 18.9 17.1 38.7 65.8 69.2 98.3 38.8 18.5 Sectoral trends Crude oil production (m barrels/day)b 2.13 2.03 2.17 2.28 2.33 2.33 2.35 2.33 Crude oil production (% change, year on year) 11.5 6.3 10.2 13.4 9.4 14.8 8.3 2.2 Foreign trade (US$ m) Exports fob 5,202 4,376 4,905 5,455 6,589 7,805 8,165 8,589 Petroleum 5,195 4,314 4,730 5,358 6,026 6,809 7,626 7,968 Imports cif -2,949 -2,673 -2,648 -2,584 -3,091 -2,478 -5,250 -3,346 Trade balance 2,253 1,703 2,257 2,871 3,498 5,327 2,915 5,243 Foreign reserves (US$ m) Reserves excl gold (end-period) 7,864 7,352 6,793 7,128 9,303 11,118 12,928 16,905 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 characterised by apparent political stability"with the president, Olusegun Obasanjo, and his People!s Democratic Party (PDP) retaining a firm grip on power"internal squabbling within the PDP, against the background of considerable public disenchantment with those holding office and a lack of visible improvements in living standards, will make the job of consolidating democracy in Africa!s most populous country difficult. Although the government does have a window of opportunity to push ahead with its ambitious programme of political and economic reforms"Mr Obasanjo also has a sense of his place in history that makes him keen to push through change"the window is little more than twelve months, and a lot needs to be achieved before the prospects of pushing even minor changes through the National Assembly become limited as campaigning for the elections, scheduled to be held in early 2007, picks up. Although the administration is hoping that the planned national political reform conference will unify a divided nation, the conference is unlikely to mend the faultlines that undermine national unity. Instead, the conference, which is expected to begin in the first half of 2005 and last for three months, is liable to be dominated by powerful vested interests that either oppose change, or seek reforms which are unlikely to be acceptable to the majority. The conference may be used as a platform for grandstanding by the various geo- political groups laying claim to the presidency. Meanwhile, sporadic outbreaks of religious and ethnic violence will continue to surface during the forecast period. These are driven by a potent mix of community tension, religious intolerance, unrelenting mass poverty and political disillusionment. In particular, two major areas of tension will remain: in Nigeria!s middle belt, between the predominantly Muslim north, where 12 states have declared Sharia (Islamic law), and the mainly Christian and more westernised south; and the crucial oil-producing Niger Delta states, where discontented communities and gangster-like militias have been fighting the federal government and each other for control of oil wealth. The government is likely to continue to use military force to restore law and order, but needs to be careful that heavy-handed tactics do not aggravate potentially explosive situations and give credence to charges of dictatorship levied against the president by civil liberties groups. Ongoing unrest in various states could also widen rifts within the PDP. The recent political battles within Plateau and Anambra States have highlighted the apparent inability of the authorities to check wayward elected officials, a problem exacerbated by the impunity of state governors under the constitution. Although Mr Obasanjo may encourage his anti-corruption watchdogs to move against some high-profile targets, including state governors, this carries major risks for the administration. Even though such moves would be popular with the public, they could be interpreted by Mr Obasanjo!s opponents as politically motivated and lead to a political backlash in this volatile nation.

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Given the disarray in the main opposition parties, which like the PDP are crippled by internal divisions, the main resistance to government policies is likely to continue to come from the trade union movement, led by the umbrella body, the Nigerian Labour Congress (NLC). The NLC will continue to rally popular support for national strikes in protest to the government!s attempts to deregulate domestic fuel prices, as it has done quite successfully in recent years. Conflict with the NLC will be harder to avoid if the government proceeds with legislation to undermine labour movement funding, as seems likely.

Election watch The 2007 general elections are already a key factor in the current internal squabbling of the main parties, and they are likely to become the central focus of politics from early 2006. Although all predictions should be treated with a degree of caution, the current favourites for the crucial presidential poll 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 , a former military ruler (1983-85) who challenged Mr Obasanjo in the April 2003 contest. Given the overwhelming dominance of the PDP at all tiers of government, it may look as though it will remain the most formidable political force in the forthcoming elections, but much will depend on whether the party can contain the leadership battles between the factions backing powerful would-be presidential candidates without falling apart. Media speculation that Mr Obasanjo may seek to alter the constitution to enable him to stand again will continue to be stoked by opposition groups unconvinced by Mr Obasanjo!s public assertions that he is looking forward to returning to his farm in 2007. Although the Economist Intelligence Unit cannot altogether rule out the possibility that Mr Obasanjo may try to remain in power (one possible scenario would be a deterioration in security of sufficient seriousness to justify the president suspending the constitution and ruling by decree), it is unlikely that Mr Obasanjo will be able to bring about a change in the constitution to retain power"even if he so desired"given the immense political influence of those waiting in the wings to take over.

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, such as Côte d’Ivoire and Togo, as well as 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. Although Nigeria agreed to hand over the Bakassi Peninsula to Cameroon in September 2004, following UN-sponsored bilateral discussions, the deadline for the transfer has been missed. A key problem is the fact 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 should, nonetheless, bring the long- running border dispute to an end, even if it drags on for a prolonged period.

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Economic policy outlook

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

Fiscal policy Provisional data presented in the 2005 budget lead us to estimate that the government held back growth in expenditure in 2004 against a background of rapidly rising revenue. As a result, we estimate that it ran a modest budget deficit of only 1.6% of GDP. It was also able to make some savings from windfall oil revenue in 2004, which it has placed in its fiscal stabilisation account and will carry over to be spent in subsequent years, notably in 2006- 07 when the elections are approaching and oil prices are forecast to fall back. With oil prices expected to remain high in 2005, we expect that, as was the case in 2004, revenue will exceed the government!s estimates (the 2005 budget is based on a forecast oil price of only US$30/barrel). The government should therefore be able to push ahead with spending, notably on infrastructure. This means that it will be able to run a similar-sized deficit to that of 2004 in 2005, at a forecast 2.2% 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. With elections approaching, the government will continue to boost spending, notably on infrastructure, and may succumb to pressure to increase civil-service wages. As a result, the fiscal deficit is forecast to rise to 3.2% of GDP in 2006. The government should be able to finance a deficit of this size through domestic borrowing and will try, in particular, to issue more long-term bonds in order to encourage the development of a domestic capital market.

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Monetary policy The governor of the Central Bank of Nigeria (CBN), Charles Soludo, has already shown his desire to push ahead with economic reform by announcing in 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. This does seem to be driving a wave of proposed mergers in the banking sector, although the eventual number of banks likely to emerge is unclear, although it could be as few as 20, compared to the current 89. In early 2005 the CBN also announced a number of important changes to monetary policy. The key measure is that although it will continue to use the Dutch auction system to determine the value of the naira, it will seek to keep the currency trading within a 3% band. The CBN argues that this will help to improve confidence in the currency, but it is also an attempt to limit appreciation of the naira: upward pressure on the currency was notable in 2004, owing to high oil prices, and this is a trend likely to be maintained in 2005. However, should oil prices fall back in 2006, as we forecast, the CBN’s ability to defend such a tight band will be tested, unless it is willing to run down its foreign-exchange reserves. The CBN has also committed itself to a more interventionist interest rate policy. Having left its minimum rediscount rate unchanged since August 2003 at 15%, it lowered it to 13% from January 1st 2005, and is committed to reviewing the rate on a quarterly basis depending on trends in the seasonally adjusted inflation rate. However, the main problem of recent years will remain unchanged: the CBN will remain under considerable political pressure to keep interest rates low to boost non-oil economic activity (also a commitment under the NEEDS), but it will also want to keep inflation down. Consequently, the CBN 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 3.8 5.0 4.1 4.0 OECD 2.0 3.3 2.5 2.4 EU25 1.1 2.3 2.1 2.2 Exchange rates ¥:US$ 115.9 108.1 95.5 94.0 US$:€ 1.132 1.244 1.380 1.400 SDR:US$ 0.714 0.675 0.634 0.627 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.38 US$ 3-month commercial paper rate 1.10 1.48 3.19 4.38 Commodity prices Oil (Brent; US$/b) 28.8 39.0 36.8 29.0 Gold (US$/troy oz) 363.3 412.3 435.0 396.3 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.3 -5.1 -2.7 Industrial raw materials (% change in US$ terms) 13.0 20.5 -2.1 -4.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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Following the rapid economic recovery seen in 2004, we expect global economic growth to slow in the forecast period, although it will remain robust and broad-based, at 4.1% in 2005 and 4% 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. Because of this, coupled with slowing growth, we expect oil prices to fall back from an average of US$39/b in 2004 to US$36.8/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. Oil and gas production expanded strongly in 2003-04 and because of this, coupled with strong agricultural growth, real GDP grew by an estimated 10.2% in 2003 and remained high in 2004, at 4.5%. Although we expect reasonably strong growth rates in agriculture and services to continue in 2005-06, against the background of strong investment in the offshore oil sector and increasing government spending on infrastructure, growth in oil production will slow in the outlook period compared to the higher productions levels achieved in recent years. Overall, we expect real GDP growth to moderate to around 4% in 2005-06, which is still relatively high by historical standards.

Inflation Nigeria’s inflation rate fell substantially in the second half of 2004. From a peak of 19.7% in June 2004, the 12-month moving average inflation rate (the measure preferred by the CBN) fell to only 15% by December and we estimate that the average year-on-year increase in 2004 was 15.3%. While this downward tend is likely to continue in early 2005, especially if a reasonable harvest continues to ensure moderate food price increases, the government will struggle to push inflation into single digits for a prolonged period, although this may be achieved for short periods. One problem is the fact that the increase in domestic fuel prices made in 2004 has not worked its way fully through the economy, making it possible that further price rises will be needed in 2005. In addition, government spending is set to remain high, particularly in the second half of 2006 in the run-up to the elections, and monetary policy will be quite loose, given the pressure on the CBN not to raise interest rates. Because of these factors, inflation is likely to remain in double digits in the forecast period, averaging 11.2% in 2005 and 10.8% in 2006.

Exchange rates With oil prices forecast to remain high in 2005, the CBN will continue to intervene in the market to keep the naira trading within its 3% band. Because of this, coupled with the ongoing weakness of the US dollar on global currency markets, we expect the naira to remain relatively stable, averaging N133.1:US$1 for the year, only a marginal fall on the N132.9:US$1 average in 2004. However, the naira will come under growing pressure towards the end of 2005 and into 2006 as demand for imports and foreign currency remains high, oil prices start to slip back and political uncertainty increases as the elections approach. The extent to which the naira falls in 2006 will depend on the CBN!s willingness to run down its foreign-exchange reserves in order to support the currency within the 3% band, 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 N137.1:US$1 in 2006.

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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. With the oil price having averaged nearly US$40/b in 2004, we estimate that Nigeria ran a current-account surplus equivalent to 3.6% of GDP in 2004. Although oil prices are forecast to fall back in 2005, the fall will be relatively modest and, even though imports and services debits will remain high, the current account will remain in surplus, at a forecast 2.3% of GDP in 2005. However, with export earnings set to fall back sharply in 2006 as the price of oil falls back, and given continued growth of imports (despite a modest contraction in services debits after the rapid expansion in 2003-05), we expect the current account to move into a deficit of 4.7% of GDP. The current transfers account will remain in surplus throughout 2005-06, 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 4.5 4.0 4.1 Industrial production growth 0.0d 2.1 1.4 2.1 Gross agricultural production growth 6.5 6.0 5.0 4.5 Consumer price inflation (av) 14.0d 15.3 11.2 10.8 Consumer price inflation (year-end) 23.8d 9.4 11.0 11.8 Commercial lending rate 20.7d 18.9d 16.2 16.8 Government balance (% of GDP) -3.0 -1.6 -2.2 -3.2 Exports of goods fob (US$ bn) 27.3 34.1 34.2 29.1 Imports of goods fob (US$ bn) 16.9 17.7 18.1 19.1 Current-account balance (US$ bn) -1.6 2.4 1.7 -3.6 Current-account balance (% of GDP) -3.1 3.6 2.3 -4.7 External debt (year-end; US$ bn) 31.3 32.7 33.6 33.2 Exchange rate N:US$ (av) 129.2d 132.9d 133.1 137.1 Exchange rate N:¥100 (av) 111.49d 122.90d 139.41 145.83 Exchange rate N:€ (year-end) 172.2d 175.7d 179.7 194.0 Exchange rate N:SDR (year-end) 202.8d 201.5d 204.7 221.8 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

Strains are starting to emerge Despite a brief respite following the 2003 elections, internal squabbling within within the PDP the ruling People!s Democratic Party (PDP) seems to have picked up again in recent months even though the next presidential and legislative elections are still two years away. Against a background of ongoing political violence, credible allegations of election-rigging, and the slow pace of economic reform, the president, Olusegun Obasanjo, has come under increasing criticism within the PDP for failing to come to grips with the array of problems that have dogged the Fourth Republic since the return to civilian rule in 1999, notably unhealed ethnic and religious divisions. Although there is little evidence to indicate imminent political collapse, political observers worry that the many local disputes that have engulfed the federation may worsen as the country approaches the 2007 general elections, which are already the major focus of politics in a country with a history of election mayhem and military coups.

Political thugs burn state One of the more recent hotspots is the south-eastern state of Anambra, where buildings in Anambra State in November gangs of thugs burned down several government buildings, including the governor!s office and legislature, in two days of political violence. For some reason, the police declined to intervene to stop the mayhem, which shocked many Nigerians, both inside and outside the state. Police denied local media reports that between seven and 27 people died in the riots in the state capital, Awka, and the commercial hub of Onitsha. State government officials said the arsonists were supporters of a faction of the ruling PDP led by businessman, Chris Uba, who has been locked in a battle with the state governor, Chris Ngige, which has brought government in Anambra to a near standstill (August 2003 and November 2003, The political scene). Mr Uba openly boasts that he bankrolled Mr Ngige!s election campaign in 2003 (along with those of a number of other politicians), but now accuses the governor of reneging on an agreement to give him a say in how the state is run. As a result, he has asked Mr Ngige to refund the billions of naira he spent to ensure his victory in the April 2003 poll. More disturbing"and in a move apparently aimed at embarrassing the embattled governor"Mr Uba publicly declared that he rigged the vote so that Mr Ngige would win. Mr Ngige has claimed that the arson attacks in November were politically motivated to engender the declaration of a state of emergency in Anambra, as happened in central Plateau State in May 2004 after bloody ethno-religious fighting there (August 2004, The political scene). He charged the police with conniving with the attackers, saying that they failed to heed repeated requests to protect the affected buildings, while his supporters accused Mr Obasanjo of siding with Mr Uba, whose brother is a senior presidential adviser. They also alleged that Mr Obasanjo covertly stoked the Anambra crisis by withdrawing the governor!s police protection and refusing to reinstate it, despite a court order to do so.

PDP chairman resigns after Mr Obasanjo!s handling of the problems in Anambra State also generated a row with president row with the PDP’s national leadership, which ultimately led to the resignation of the party chairman, Audu Ogbeh, on January 10th after a bitter exchange of

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letters with the president. In a letter to Mr Obasanjo on December 6th, Mr Ogbeh alleged that the head of state had been lethargic over the crisis and urged him to take action to curb the growing mayhem in Anambra. He said that inaction by the authorities to bring the perpetrators of the violence to book could embolden them and threaten the stability of not only the state, but also the nation. Warning the president that the federal government had become unpopular as a result of developments of the type seen in Anambra, Mr Ogbeh reminded Mr Obasanjo that Nigeria!s previous civilian government, in which he had served as a minister, was toppled in 1983 at a time when its public image was very poor, and expressed concern that the current government was drifting in the same direction. In a ten-page reply, dated December 10th, the president accused Mr Ogbeh of insulting him, of wishing for a coup and shirking his responsibility as party chairman to resolve the Anambra crisis. Perhaps more interestingly, Mr Obasanjo, while highlighting efforts he had made to resolve the Anambra crisis, revealed that both Mr Uba and Mr Ngige had admitted in his presence that they rigged the election to be governor of Anambra State, likening them to "two armed robbers" that conspired to "loot a house" and ended up fighting over the proceeds.

The whole event reflects badly Although Mr Obasanjo claimed that Mr Ngige’s election-rigging admission does on all parties present the party, and him as president, with a moral dilemma, it is not clear what he will do about it. In particular, a number of PDP members, opposition politicians and independent political observers have all argued that the Anambra crisis, with its revelations of influence-peddling and vote-rigging, reflects badly not only on Mr Obasanjo, but also on most civilian politicians, not least because it exposes the murky underbelly of contemporary Nigerian politics to an already cynical public. Critics of the president also believe that the manner of his response to Mr Ogbeh!s letter"and the pressure he brought on Mr Ogbeh to resign"is typical of his high-handedness and aversion to criticism. Many Nigerians across the political spectrum share Mr Ogbeh!s concerns about the erosion of political order in Nigeria and the possibility that the military could be tempted to intervene in politics if current trends continue, although at present it seems to lack the appetite for a political comeback.

The state of emergency in On November 18th the state of emergency in Plateau State"which was Plateau is lifted imposed in May to quell ethno-religious riots in which hundreds of people were killed"was lifted (August 2004, The political scene). This allowed the suspended state governor, Joshua Dariye, to resume office. A federal government statement on November 17th said that it had decided not to extend the emergency order beyond six months, although the administration was aware of "grave allegations of wrong-doing" against Mr Dariye, which were being investigated by the Nigerian and British police. At the time of imposing the state of emergency, Mr Obasanjo accused Mr Dariye, a fellow member of the PDP, of doing nothing to quell the violence between Christians and Muslims in Plateau, which also spread to the northern state of Kano. In September, during his suspension, Mr Dariye was also briefly detained in London, on suspicion of money-laundering. Large amounts of cash were found

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in his London home as well as evidence that he operated several UK bank accounts, but he has been released on bail. Under Nigeria!s constitution, state governors enjoy immunity from prosecution and may only be removed from office through impeachment. In an attempt to persuade Plateau!s legislature to probe the governor, the federal justice minister, Akinlolu Olujinmi, wrote to the Plateau House of Assembly on November 17th, detailing the corruption allegations against Mr Dariye, but the state lawmakers have shown little indication of preparedness to impeach the governor. They see the charges as politically motivated and accuse Mr Obasanjo of unduly picking on the governor. Moreover, despite facing serious corruption charges, Mr Dariye received a hero!s welcome when he returned to office on November 18th, which indicates that he still enjoys significant public support, at least among Christians. Nevertheless, the Economic and Financial Commission (EFC) dragged Mr Dariye to a federal high court in Kaduna, along with seven present and former executives of All State Trust Bank, to face charges of complicity in money-laundering. The EFC, which was set up in 2002 by the president, alleged that Mr Dariye colluded with top executives of the bank to divert over N1bn (US$7.6m) from a fund held in a federation account for Plateau State into a private account. In late January officers from the Special Investigation Unit of Scotland Yard testified at the Kaduna court at the invitation of the Commission. One detective told the court how seven Nigerian banks assisted the embattled governor to launder nearly £1m to one of his London bank accounts. The officer explained that Mr Dariye has been under Scotland Yard investigation since January 2004, when officers investigating credit card scams at Barclays Bank were led to a company belonging to Mr Dariye.

President's election victory is Mr Obasanjo!s own credibility was further called into question on December upheld with a sting in the tail 20th, when the Court of Appeal upheld his 2003 election victory, but also confirmed some of the allegations of ballot-rigging made by the opposition. The court dismissed a suit by the defeated presidential challenger, Muhammadu Buhari, to overturn the election results because of poll-rigging (August 2004, The political scene). However, to the president!s embarrassment, the court also annulled the results in Mr Obasanjo!s home state of Ogun, saying that they had been manipulated. Furthermore, it said there were irregularities in 14 states, but noted that the scale was insufficient to have affected the overall result of the poll; in the presidential election, Mr Obasanjo won 61% of the vote to Mr Buhari!s 32%. Nuru Abdullahi, the president of the Court of Appeal, explained that if the election were annulled it would lead to absurdity and bring uncertainty to the nation. Mr Obasanjo swept to victory in his home state with an incredible 99% of the vote. He also won more than 90% of the polls in the Niger Delta, where observers reported that no voting took place in many areas. Local and international monitors said that the contest was marked by widespread fraud and intimidation. Mr Buhari, a former military ruler, said that he would appeal against the court ruling to the Supreme Court. Justice Sylvester Nsofor, who voted for an annulment of the entire election result, said in a minority

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judgement that Nigerians had not had the poll they "wanted and deserved". The Court of Appeal also raised an important complaint against the Independent National Electoral Commission (INEC), noting that it had failed to produce the detailed breakdown of the results of the 2003 elections that it had demanded. Manoeuvring to be the next presidential candidate may cause turmoil within the ruling party

For many political observers, the recent rise in tension within the People!s Democratic Party (PDP), largely reflects behind-the-scenes manoeuvring by candidates jockeying for the party!s nomination for the next presidential election. In particular, the rift within the PDP has been connected to a struggle for control of the machinery of the party by factions backing the presidential ambitions of some of the prime contenders, including the vice-president, Atiku Abubakar, and former military ruler, Ibrahim Babangida. Another destabilising factor is the fact that, despite repeated assurances from aides of the president, Olusegun Obasanjo, that he is not seeking a third term in office, opposition politicians still believe that the 67-year-old ruler is scheming to amend Nigeria!s constitution to enable him to run for another term. Rumours about whether Mr Obasanjo will, or will not, seek a third term, are likely to continue to escalate in 2005. Reacting to the resignation of the PDP chairman, Audu Ogbeh, in early January, the outspoken leader of the National Conscience Party opined that "the underlining factor in the Ogbeh/Obasanjo face-off is the third term agenda of Obasanjo". In late December a group of human rights and civil society organisations urged Nigerians to resist what it described as "the subterranean moves by Mr Obasanjo to run for a third term".

Growing concerns about the possibility of a third-term bid have caused opposition politicians and activists to step up their calls for reform of the political system, especially its electoral mechanism, to ensure that those in power cannot use their positions to hang onto power, as happened in the past. Nobel Prize Laureate in Literature, Wole Soyinka, said in late January, in response to the revelations of poll- rigging by the PDP, that the national electoral body, the Independent National Electoral Commission, should be disbanded so that it can be reconstructed and made genuinely autonomous. In December a summit of human rights and civil society groups looking into the electoral challenges that Nigeria will face in 2007 called for the amendment of Nigeria!s electoral law so that the president and state governors are compelled to vacate office three months before the elections in order to reduce manipulation of the electoral process.

Power struggle also grips It is not only the PDP that is affected by internal power struggles: all the main opposition parties political parties seem to be facing similar problems. For example, Nigeria!s second biggest party, the All Nigeria People!s Party (ANPP), is split down the middle over claims by two of its leaders to be the legitimate chairman of the organisation. As political analyst Rotimi Ajayi wrote in Vanguard newspaper in November: "the race for the 2007 presidential election is at the root of the crisis". Most of Nigeria!s other registered parties are currently too small and poorly organised to stand a chance of winning power at any tier of government, although this may change if there is a fallout among the power brokers in the PDP. In early January Balarabe Musa, the chairman of the

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Conference of Nigerian Parties (CNP), which groups the 29 opposition parties, told journalists that the alliance aims to produce a joint presidential candidate for 2007. However, no sooner had Mr Musa announced the idea of fielding a single opposition candidate, than it was dismissed by leaders of some of the parties within the CNP. The pre-occupation of Nigerian parties with elections more than two years in advance is unsurprising given that most of them exist primarily as vehicles for their owners or promoters to gain power. Few are associations of like-minded people seeking to effect changes in society along a given ideology. Indeed, it is difficult to discern any ideological differences between the parties, with perhaps the exception of those representing ethnic nationalists demanding self-determination.

A national political reform After years of agitation by opposition activists for the convening of a national conference will be held conference to enable Nigeria!s diverse ethnic and religious groups to thrash out a formula to reconstitute the nation, it appears that the government has finally agreed to organise such a gathering. On January 12th the governor, Ahmed Makarfi, told reporters in Abuja that the National Council of State (NSC) had approved the organisation of a National Political Reform Conference. Speaking after a meeting of the Council, Nigeria!s highest advisory body, the governor said that the conference would last three months and be made up of some 400 delegates, 50 of whom are to be nominated by Mr Obasanjo. There will be six representatives from each of Nigeria!s 36 states as well as representatives of religious, student, civil society, business and professional organisations. It is unclear when the debate will begin: media reports suggest some time between February and April. It is also unclear what the agenda will be, although a press release by the presidency said that convening the conference is in line with the administration!s efforts towards "restructuring Nigeria on a sounder footing". Mr Obasanjo was reported to be seeking legislation to give legal backing to the conference and has asked the Senate for N931.7m (US$7m) for the event. Decisions made at the conference will have to be approved by the National Assembly, which alone has the constitutional right to amend the constitution, although it would be under considerable pressure to act if the conference were to reach a unified position on possible reforms.

Public reaction to proposed Public reaction to the proposed conference has been mixed. Some conference is mixed commentators see it as an opportunity for Nigerians to tackle the many thorny and unresolved issues in the country today. Others, especially more strident ethnic nationalists, have criticised the proposal, saying that it falls short of their demands. In particular, questions have arisen over the manner of selection of participants, especially the idea of the president handpicking 50 delegates. Critics also argue that only a conference with sovereign powers and made up of elected representatives from all of Nigeria!s ethnic, religious and civil groups would be able to arrive at lasting solutions to Nigeria!s protracted political and social problems. It is difficult to see how the views of radical opposition activists and those of the government can be reconciled, since the former want a debate on refashioning the political relationship between Nigeria!s diverse ethno-political regions, which could even question the viability of Nigeria as a sovereign entity, while the latter is committed to maintaining the integrity of

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the federation. Mr Makarfi told newsmen that although the proposed conference will be able to consider a wide range of topics, delegates will not be free to discuss the unity and federal status of Nigeria. Undoubtedly Nigeria needs to build a consensus on political reforms that can take the nation forward. It currently operates a constitution that was written under military rule and which virtually everyone believes is gravely flawed. To date, Mr Obasanjo!s administration has failed to come up with widely acceptable solutions to the thorny issues that generate tension in the country, such as a formula for sharing revenue among Nigeria!s different government tiers and geo-ethnic regions; reconciling religious diversity and cultural freedom; and curbing economic and political corruption. Perhaps reaching a national consensus on such issues has proved illusive because most Nigerian politicians view government as an organ for advancing group interests rather than as a guardian of individual rights. Moreover, as long as politicians pursue power and wealth along sectarian lines, it will remain difficult to achieve the political consensus the country desperately needs.

Head of Nigeria's police The federal administration!s anti-corruption drive received a potential boost in resigns amid corruption probe mid-January, when the head of the country!s police force, Tafa Balogun, resigned while a government corruption watchdog probed allegations that he had misappropriated public funds. An official statement said that Mr Balogun, the inspector-general since 2002, had announced his intention to retire in March but had already been replaced by one of his deputies, Sunday Ehindero. Soon after the announcement, Nuhu Ribadu, chairman of the Economic and Financial Crimes Commission (EFCC), told reporters that his unit was investigating more than US$7m allegedly held by Mr Balogun in 11 separate bank accounts. Mr Ribadu said that the commission had reported its findings to Mr Obasanjo and that this had triggered Mr Balogun!s surprise resignation. A spokesman for the EFCC said that Mr Balogun was still being investigated and was likely to face corruption charges. Independent anti-corruption groups will be watching to see if any further action is taken against Mr Balogun. Critics of the government!s anti-corruption programme point out that after five years of supposedly waging war against graft, no top official has yet been convicted on corruption charges (November 2004, The political scene). Amid signs that corruption remains widespread, the impunity with which officials continue to abuse power is fuelling public cynicism about the administration!s reform agenda.

President discloses farm income Even Mr Obasanjo, who returned to power in 1999 with a reputation for to quell corruption rumours honesty, has been subjected to rumours of stealing state funds, prompting one of his aids to declare the president!s private income from his farm in . In late November, Femi Fani-Kayode, a special assistant to the president, told reporters that he earned N30m (US$226,000) a month from his professionally managed commercial farm, which is also used for diplomatic meetings. Mr Kayode said that the president was making the public declaration to counter allegations being circulated by "some unknown people" that he was diverting state funds to the farm. The depth of public mistrust of politicians in Nigeria is illustrated by a recent survey of 60 countries conducted by the World

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Economic Forum. According to the survey, which was issued on November 18th, Nigeria returned a dishonesty rating of 92%; only in Ecuador and Mexico did a higher percentage of those surveyed see their political leaders as dishonest.

Nigeria retains control of oil- By early February Nigeria had still not given up the oil-rich Bakassi Peninsula, rich Bakassi Peninsula more than four months after the September 15th deadline on which it had agreed to cede the territory to Cameroon in line with the International Court of Justice (ICJ) ruling in 2002. However, officials in two neighbouring countries appeared to be confident that the transfer of sovereignty will take place, sooner or later, despite opposition in Nigeria to the release of the disputed territory. In late November the government defended its decision to abide by the ICJ judgement at a Federal High Court hearing in Abuja of a suit filed by the paramount ruler of Bakassi kingdom and three others to stop the transfer of sovereignty. The suit reflects fierce opposition, including in parliament, to losing the peninsula. However, government lawyers contended that the only way Nigeria could retain the disputed territory was to go to war with Cameroon and that Abuja was not prepared for such an option. Last September Nigeria cited "technical difficulties" for missing the deadline for withdrawing its troops from Bakassi, as set by the UN-sponsored Nigeria and Cameroon Mixed Commission (November 2004, The political scene). In spite of Nigeria!s apparent foot-dragging, Cameroon seems optimistic that the long-running dispute with its giant neighbour will be resolved soon. In his New Year!s greeting to the diplomatic corps, the president of Cameroon, Paul Biya, said that he had met with Mr Obasanjo several times in 2004 and had no doubt that the dispute would be resolved in the near future.

Economic policy

The government is keen to The administration of the current president, Olusegun Obasanjo, has started highlight progress with reform 2005 with a determined effort to highlight the positive efforts it is making to push ahead with economic reform, as well as the progress already made in 2004. The president made keynote addresses at both a business roundtable, organised by The Economist, in Abuja in mid-January and at the Nigerian Investment Forum, organised by the Commonwealth Business Council in early February. At both events he clearly articulated the viewpoint that the economic reform programme being implemented had been clearly outlined in the National Economic Empowerment and Development Strategy (NEEDS), which itself was based on a clear vision, sound values and enduring principles. The president was also keen to highlight the irreversibility of legislation that has recently been passed, a recurring theme of senior members of the administration in recent months. The government has also been keen to stress that it is committed to fighting corruption, and has made some progress in this area, and that it is desperately seeking to improve the country’s poor image in this respect, which it feels is at least, partially, unjustified (November 2004, The political scene).

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The IMF praises Nigeria's After a decade of dealing with economically inept governments in Nigeria, it is reform efforts clear that the Bretton Woods institutions are keen to support the current administration!s commitment to economic reforms (November 2004, Economic policy). Echoing the positive assessment of NEEDS made by the IMF!s managing director, Rodrigo de Rato, during his visit to Nigeria in August, his deputy, Anne Krueger, told a news conference in Lagos in early December that the Fund supports the overall thrust and direction of the programme. She also argued that the benefits of the reform effort to date were already beginning to show, most notably in "the improved macroeconomic performance seen in 2004", which she felt marked a clear break with the boom-bust policies of the past. In particular she felt that 2004 had seen the government more prudently manage the significant oil revenue windfall, which had helped to stabilise the economy and allowed inflation to start to fall against the background of a more stable naira and the significant build-up of international reserves. However, as with Mr de Rato, Ms Krueger tempered her praise of the government with notes of caution on the need to maintain prudent financial management, noting that the 2005 budget proposal, which already seeks to boost spending, notably on infrastructure, will need to be carefully managed if it is not to fuel another sharp rise in inflation. Furthermore, the government needs to pursue structural reforms, especially privatisation, trade liberalisation and bank restructuring, to enhance the prospects for growth in the non-oil sector. In this respect, 2005 will be a very important year for the government, which is acutely aware that if legislation is not passed by early 2006, the prospects of it doing so are very limited as political infighting in the run-up to the 2007 elections starts to pick up pace. In particular, the government has identified seven key pieces of legislation that it wants to try and push through the National Assembly during the year. These are broad ranging and include: the power sector reform bill; reforming public procurement procedures; reforming the tax system; re-formalising fiscal relations with the states; improving the transparency of the oil industry in line with the Extractive Industries Transparency Initiative; and laying down the legal basis for allowing public-private partnerships to help develop infrastructure. If all were passed, it would represent a major breakthrough in the reform programme, but this will involve a major political battle.

The government must also be Although the government has made progress in its reform programme, it must realistic also be careful not to overstate its claims. While it has made progress in stabilising the macroeconomic environment, this is as much, if not more, down to the huge windfall oil earnings it has received in recent years than its own reform efforts, and it still has a long way to go in restructuring the economy to foster the growth of private enterprise and enable the free flow of economic resources. Another area in which Nigerian officials have overstated the impact of recent reform is in the fight against corruption. A possible illustration of this was the claim made by anti-corruption chief, Nuhu Ribadu, in an interview with Reuters in mid-December, in which he claimed that whereas 70% of Nigeria!s oil revenue was being stolen or wasted two years ago, now only 40% was, owing to new controls on federal government finances. Of course, there is no way to verify these estimates, but most impartial observers would find the

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degree of improvement claimed incredible, especially as Mr Ribadu also noted that there was still considerable corruption at state government level.

Passing the 2005 budget is The problem of pushing economic reform through the National Assembly was delayed again clearly highlighted once again by the problems the administration has had in obtaining approval for the Appropriation Bill before the start of the budget year on January 1st. Despite our initial optimism that the budget would be passed quickly this year"after Mr Obasanjo had submitted his budget proposals to parliament as early as October, with the view of avoiding the usual delay (November 2004, Economic policy)"the Appropriation Bill had not been approved by early February. The delay was apparently due to differences between the executive and parliament over the assumed benchmark price of oil. After asking the lawmakers in December to refrain from altering the forecast price of US$27/barrel, Mr Obasanjo later requested an upward revision to US$30/b, which the Assembly agreed to in January. Mr Obasanjo also submitted an extra-recurrent expenditure request of N115bn (US$865m), bringing the total revised budget for 2005 to N1.68trn.

CBN governor highlights One of the biggest challenges facing the federal administration in formulating problems of fiscal federalism and implementing economic policy is to get all tiers of government to agree to change. This has proved difficult in a country where sub-federal governments, which between them spend about half of all national revenue, are less inclined to fiscal restraint and are not under pressure to reform from foreign creditors. Charles Soludo, the governor of the Central Bank of Nigeria (CBN), highlighted the problem when he said in November that the constitutional provision of fiscal federalism is a major barrier to the maintenance of macroeconomic stability in Nigeria. Speaking on national television, Mr Soludo once again raised a long-running concern that the combined budgets of all state governments were higher than that of the central government and that the different tiers of government have unlimited powers to spend their share of federation revenue as they please (November 2001, Economic policy). Not surprisingly, the lack of ability on the part of the CBN and the Ministry of Finance to control the level and quality of spending makes policy implementation more difficult.

State mounts legal challenge Although the administration has plans to force states to adhere to prudent fiscal over windfall revenue policies through its Fiscal Responsibility Bill, these came under threat in January, when the government of filed a suit at the High Court challenging Abuja!s decision to retain some US$3bn in excess oil revenue in 2004. The state, in south-eastern Nigeria, claims that the federal government violated the constitution, which requires money accruing to the Federation Account to be shared between the three tiers of government. No date has yet been fixed for the hearing of the suit, which is likely to be closely watched by federal and state officials in the country. The outcome of the case could affect the ability of Mr Obasanjo to enforce the Fiscal Responsibility Bill, which is expected to be passed soon by the National Assembly. The legislation sets out rules to ensure fiscal prudence and accountability at all levels of government, with penalties for violation.

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Substantial changes are made In late January the CBN published some important amendments to its to monetary policy monetary policy guidelines. The current monetary policy framework was released on January 2nd in its Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Year 2004/05 (February 2004, Economic policy). The CBN argues that the changes are necessary owing to the financial sector reforms it is currently pushing through; the greater commitment to economic reform by the government; the ongoing high price of oil; and the increase in government spending on infrastructure, which is set to go ahead in 2005. However, the overall objectives of monetary policy are broadly unchanged and are to: • push for single-digit inflation by the end of 2005; • reduce the cost of borrowing for the private sector; • maintain monetary stability; and • achieve exchange rate stability.

The exchange rate is to be kept To achieve these goals, the main practical change to policy has been the within a 3% band announcement that the CBN will now actively manage the value of the naira, through the existing Dutch auction system, but within a tight band of 3% around a central rate (although it has still not indicated what the central rate of the band will be). In the long run, the CBN is seeking to introduce a wholesale market for foreign exchange, following the successful completion of the reform of the banking system, when there will, hopefully, be far fewer banks in the country. The CBN argues that the new policy will not only achieve exchange rate stability, but that investors and savers will also have a greater degree of certainty when making decisions. Other advantages claimed by the CBN are that speculation will be discouraged and there will be no need for businesses to carry large inventories of foreign exchange. The reality, however, is probably more complex than alluded to by the CBN. Although the CBN is only committing itself to maintaining the band for a year, it is worried that there could be a major appreciation of the exchange rate in 2005-06 if oil prices remain high and if imports do not continue to pick up. This could be the case if plans to ban the import of rice are actually implemented, which may even see the total value of imports fall. The CBN argues that it has already struggled to keep the naira from strengthening in value in 2004 by pumping liquidity into the market. The extent to which this has occurred is clear from the narrowing of the gap between the official and the parallel exchange rate, which averaged only 3% in 2005 (November 2004, The domestic economy: Economic trends). In other words, the introduction of the band is an attempt to stop appreciation of the currency, rather than depreciation.

Much will depend on the price However, the actual outcome will largely depend on what happens to oil of oil prices. Under the CBN scenario, the fear is that oil prices will remain high in the outlook period. According to the Economist Intelligence Unit!s forecast, the price of oil will fall back quite sharply in 2006, especially in the second half of the year, owing to rising global production and slowing world growth; we forecast that Brent crude will average US$29/b. Under this scenario, the CBN would be faced with the difficult choice of either allowing the currency to fall

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by more than 3%, something which it has let occur in most years since the return to civilian rule in 1999, or running down the foreign-exchange reserves that it has steadily built up in 2004 to defend its value.

Interest rate policy is to be The other major announcement by the CBN was that interest policy is to be more active again more active again. Although the CBN did make regular changes to its key minimum re-discount rate (MRR) in the first few years following the return to civilian rule, it has left the rate unchanged at 15% since August 2003, despite the steady upward rise in inflation since then. It has now, however, announced that it plans to review its interest rate regime on a quarterly basis depending on trends in the seasonally adjusted inflation rate, rather than the 12-month moving average, which had previously been its guiding inflation rate in determining the value of the MRR. In this respect, its first move has been to lower the rate to 13%.

Consumer price inflation % change, year on year 20 Changes in the minimum 18 rediscount rate Aug 15th 2000 16.0% 16 Nov 23rd 2000 14.0% Jan 17th 2001 14.5% 14 Feb 1st 2001 15.5% Apr 12th 2001 16.5% 12 Jun 29th 2001 18.5% Sep 20th 2001 20.5% 10 Jul 18th 2002 18.5% 8 Dec 18th 2002 16.5% Aug 18th 2003 15.0% 6 Feb 1st 2005 13.0% 2000 01 02 03 04 Source: Economist Intelligence Unit.

Whether such a sharp reduction in interest rates at this stage is a sensible move remains unclear. Although the CBN could justify the lowering of the rate on the grounds that inflation has trended down steadily in the second half of 2004, the inflation rate in Nigeria is still high and as the CBN points out, the increased government spending proposed for 2005 means that there will be considerable inflationary pressure generated in the economy. The problem for the CBN is that it is caught in a policy dilemma. On the one hand, it wants to lower the inflation rate, which requires a tighter monetary policy; while on the other hand, as outlined in the NEEDS policy, there is major pressure to keep interest rates low to boost lending to the non-oil sectors of the economy. The difficulty of reconciling these two competing goals is one of the main reasons why we expect inflation to remain in double digits in 2005-06.

The domestic economy

Economic trends

GDP growth in 2004 exceeded Despite a general consensus that Nigeria’s macroeconomic performance was target says government broadly positive in 2004, given Nigeria’s extremely weak statistical database,

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reaching an accurate picture of what happened in the economy during the year remains difficult. In February the government said that it had exceeded most of its economic targets for 2004. Following a meeting of the Federal Executive Council on February 2nd, the president!s economic adviser, Ode Ojowu, claimed that real GDP had risen by an estimated 5.5% in 2004, compared with the 5% growth target outlined in the National Economic Empowerment and Development Strategy (NEEDS) policy document. In contrast, the IMF, in its most recent review of the country’s economic performance, estimated that real GDP growth in 2004 was 3.6%. As the Economist Intelligence Unit has argued, much of the variation depends on the numbers used for oil production and the base year on which the series is calculated (August 2004, The domestic economy: Economic trends).

GDP growth rates (Annual % change in real GDP growth, in 1990 constant prices) 2001 2002 2003 2004 IMF Total 3.3 1.4 10.9 3.6 Non-oil sector 4.3 8.0 4.4 4.5 CBN Total 4.6 3.5 10.2 5.5 Non-oil sector 4.3 7.9 4.5 n/a

Sources: IMF ; Central Bank of Nigeria.

What most economists do at least seem to agree on, is that whatever has gone on in the oil sector in recent years, non-oil-sector growth has been reasonably robust. However, even with strong growth in the non-oil sector"and despite the exceptional 8% non-oil growth recorded in 2002, owing to strong growth in the agricultural sector"we would still be very surprised if the performance of recent years had really led to a fall in the percentage of the population living in poverty, from 66.5% in 1996 to only 57% in 2004, as claimed by Mr Ojowu. He based these estimates on the Nigerian Living Standards Survey covering September 2003 to August 2004, which claims that 75.14m of Nigeria!s estimated 130m population were living below the poverty line at that time. The reality is probably that until the statistical database of the country is improved, all quoted data like this should be treated with caution, although in a country like Nigeria, where more than half of its population work in the informal sector, there is a strong case that the widely quoted figure that 70% of Nigerians live in poverty may not fully take into account the multiple sources of income used by Nigerians to survive.

Inflation does seem to have Not only did growth remain robust in 2004, it also seems that inflation trended trended down in late 2004 down in the second half of the year. According to the Central Bank of Nigeria (CBN), the 12-month moving average inflation rate fell to 15% in December, from a peak of 19.7% in June, as increases in food prices steadily moderated. More importantly for the government, this meant that the year-on-year rate had fallen to 9.5% in December, compared to 23.8% in December 2003, allowing it to claim that inflation had fallen into single digits and that it had met another of the economic targets outlined in the NEEDS policy document (in this case to push inflation into single digits).

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Nigerian inflation, 2004 (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 12-month moving averagea 15.0 16.5 17.8 18.6 19.4 19.7 19.1 19.1 18.9 17.1 16.1 15.0 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).

Achieving annual targets However, we do have a concern that the government is a little too focused on builds confidence judging the success of its reform efforts in terms of meeting the various targets it has set out in the NEEDS document. The most obvious example is GDP growth, which, owing to the economy’s dependence on oil, is highly volatile and subject to exogenous factors beyond the government’s control. What is of more importance than achieving a given growth rate is any one particular year, is that a sustained rate of growth is achieved over a prolonged period. Similarly, with inflation, the aim is to achieve a low and stable inflation rate over a number of years, a target which has remained illusive. Although highlighting its success in meeting targets is useful to the government, as it gives its reform effort a focus and allows it a chance to highlight that it is actually making progress and achieving stated goals, it also takes attention away from the much more important issue in the reform programme: the need to pass key pieces of legislation, which is crucial to the long-term success of the programme.

The naira remains stable Despite heavy demand for hard currency at the bi-weekly Dutch Auction in 2004 System (DAS), the naira remained extremely stable in 2004 as the CBN continued to meet the increased demand while still being able to build up foreign-exchange reserves. According to the CBN, the nominal exchange rate appreciated in 2004 from N136.83:US$1 at the start of the year to N132.85:US$1 at the close, and has hovered at this level through January 2005. However, most of this appreciation was in the first quarter of the year, with the naira remaining very stable since the end of March 2004; it traded for much of the year at just below N132.5:US$1. Given the introduction of the proposed 3% trading band for the naira in 2005, we expect that this trend for nominal exchange rate stability will continue for most of the year. However, because we expect that the inflation rate in Nigeria is likely to be substantially above those in its main trading partners, this means that the real value of the naira will continue to rise during the year.

Average value of the naira 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Average for period 127.97 127.18 127.70 134.04 134.44 132.42 132.32 132.37 End period 126.87 127.42 127.86 136.50 133.35 132.25 132.37 132.35 Real effective exchange ratea 100.50 101.60 108.90 107.10 104.70 107.10 105.40 103.50 a Index, base year of 2000=100. Source: IMF.

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Oil and gas

Oil production is hit by According to International Energy Agency (IEA) data, Nigeria’s oil output sporadic community unrest (excluding condensate) was 2.37m barrels/day in October, before falling to 2.35m b/d in November and to only 2.27m b/d in December, to average 2.33 m b/d for 2004 (an increase of 8.8% over the 2003 production level). Earlier in the year, production had been above 2.4m b/d (November 2004, The domestic economy: Oil and gas). Although this level of output is substantially more than the country!s current OPEC production quota of 2.22m b/d (effective from November 1st 2004), owing to high global oil prices, there has been little pressure from OPEC for members to produce at their quota levels, especially Nigeria, which has traditionally over produced. As is usually the case in Nigeria, the main cause of the fall in production in late 2004 seems to have been sporadic community unrest in Nigeria!s volatile Niger Delta region. On December 5th hundreds of protesters from Kula village in occupied flow stations operated by Shell and ChevronTexaco, forcing the shut-in of 120,000 b/d. Although the occupation to demand jobs and greater public investment ended two days later following government- brokered talks, the two companies did not restart production at their respective facilities until the dispute was fully resolved. On December 22nd Shell declared force majeure"affecting 114,000 b/d of oil"owing to a shutdown caused by a vandalised pipeline in a separate incident in the Egbema area. ChevronTexaco resumed production from its 20,000 b/d Robertkiri flow station in late December after reaching a deal with Kula community leaders, which reportedly included a commitment to road building. Shell resolved its dispute with the Kula community on January 4th and by mid-month had restored more than two-thirds of the 100,000 b/d shut in by the protest.

Nigerian oil production in 2004 ’000 barrels/day 2,400

2,380

2,360

2,340

2,320

2,300

2,280

2,260 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: International Energy Agency.

Before Shell had fully recovered from the trouble in Rivers State, on January 7th the company was forced to shutdown a 8,000 b/d flow station in for almost two weeks after villagers from the Odioma area invaded the facility in protest against what they alleged was the firm!s refusal to repair an electricity generator they received under a community development programme. No sooner was Shell able to resolve that dispute than on January

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25th it shut in 35,000 b/d of output in the south-eastern Abia State after a group of around 300 people from Owaza community, armed with machetes and other weapons, blocked access to its flow stations. Shell said in a statement that it had evacuated staff while seeking government help to resolve the dispute. The protest was apparently over the choice of a representative on the board of the Niger Delta Development Commission, a government agency charged with developing the impoverished Niger Delta region.

Shell is fired at from different Shell, by far the biggest oil company in Nigeria, producing about 40% of its total directions crude output, has come under fire from various quarters in this oil-dependent society, from disgruntled host communities to opportunist ethnic militants and nationalist politicians. Shell was blamed when, on November 20th, at least 17 ethnic Ijaw militants from Ozobo villages were wounded when soldiers opened fire on them as they stormed a Shell drilling rig. The leader of the separatist Ijaw militia, Dokubo Asari, condemned Shell for allowing the posting of troops on its platform and urged them to pull out of the country. Shell officials explained that the presence of security forces at oil facilities was part of the government!s policy to protect the strategic industry and that the soldiers were not under the firm!s control, but the relationship between oil firms and state security forces is bound to continue to generate controversy, as well as creating a moral dilemma for multinationals operating in the Niger Delta. On top of its trouble with discontented villagers, Shell has come up against hostile national legislators who share much of the militants! disdain for foreign oil companies. In the latest face-off with Nigerian politicians, in early December the Senate threatened to impose sanctions against Shell for rejecting its order for the company to pay US$1.5bn compensation to the Ijaw people in Bayelsa State for alleged environmental damage caused by oil spillages since the company began operating in Nigeria in the 1950s. John Brambaifa, the chairman of the Senate Committee on the Niger Delta, publicly claimed that the upper chamber would consider what sanctions to impose against Shell for failing to meet the November 23rd deadline for making the payment. The Senate ordered the compensation in response to a petition filed in 2000 by the Ijaw aborigines of Bayelsa State. Shell, which strongly contested the pollution claim, maintains that the Senate lacks the jurisdiction to order the compensation. Although Nigeria is one of the most difficult operating environments in the world for multinational oil firms, it is also one of the most rewarding because of its low production costs and high quality oil. There is no sign that oil firms are being put off the country; on the contrary, most remain optimistic and are increasing their investment in Nigeria. In early February, Chris Finlayson, the chief executive of Shell exploration and production in Africa, said that despite violence and community unrest, Shell had suffered fewer disruptions in Nigeria in 2004 than in recent years. He described the security situation as serious, but manageable, and indicated that Shell was up to the challenge having operated in the Niger Delta for 60 years "through thick and thin".

Nigeria announces boost in oil The Nigerian government has continued its campaign for an increase of its industry capacity OPEC quota, based partly on the argument that as an impoverished country it

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needs to utilise its fast expanding oil production capacity (May 2004, The domestic economy: Oil and gas). In early January the managing director of the Nigerian National Petroleum Corporation (NNPC), Funsho Kupolokun, announced that Nigeria!s oil production capacity had reached 3m b/d, compared to between 2m and 2.3m b/d in 2000. However, some industry analysts doubt whether Nigeria can actually sustain this level of output. In its December Monthly Oil Market Report, the IEA said that recent production performance, statements from the NNPC and a survey of other analysts! opinion led it to estimate that Nigeria!s sustainable capacity was closer to 2.4m b/d. The government!s target is to raise production capacity to 4m b/d and reserves to 40bn barrels by 2010.

Government reviews The government was reported to be drafting a new model of the production- production sharing contracts haring contract (PSC) that would limit the amount that companies can claim as cost oil. Under the existing PSC, operators pay royalties until they recover all their initial investment outlays and only thereafter start sharing revenue with shareholders on the field. Royalty rates depend on water depth, with royalties not payable with respect to fields in water deeper than 1,000m. PSCs were introduced in the 1990s for new fields as a way to avoid the funding problems associated with the joint venture arrangement under which the government is obliged to share development costs. The government!s review of the terms of PSC contracts comes as it prepares for a new 2005 licensing round for 27 deep offshore blocks. The authorities probably want to limit the amounts that operators earmark for offsetting development costs, so that in the event of a commercial discovery the government will receive revenue from the concessions within a shorter time period.

Government approves "third The government has indicated that it is looking to enter alternative funding party funding" for gas project arrangements with its joint-venture oil-production partners. This would enable firms to raise the funds to pay the entire development bill of a project and to recover the costs from production. Although this would entail operators bearing greater risk, it would have the advantage that they could proceed with projects which would have been stalled by the NNPC!s inability to pay its pro-rata share of development costs. In late January the government approved the funding arrangement for the US$1.3bn Natural Gas Liquids (NGL) project being executed by the NNPC and ExxonMobil as the benchmark for all alternative oil and gas funding schemes in the country. Funding for the project was packaged by New- York-based Credit Suisse First Boston (CSFB) in collaboration with three Nigerian banks. CSFB will provide a 12-year tenure loan of US$575m, of which US$325m has been guaranteed by the Overseas Private Investment Corporation; while the local banks, Union Bank, United Bank for Africa and Standard Trust Bank, will provide US$50. Speaking at the signing ceremony in London, Mr Kupolokun said that the NNPC could not have raised funds for the project without the third-party financing secured through the alternative funding scheme, adding that the gas project has created a major opportunity for the NNPC and its joint venture partners. Alternative funding arrangements whereby multinationals have fully covered development costs have already been used by Total, Shell and ExxonMobil on some offshore oil projects.

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Legislation will be passed to In a move to compel oil multinationals to help boost Nigeria!s inadequate refine output locally refining capacity, the government is enacting legislation that will require producers to refine increasing portions of their crude output in the country. An amendment to the Petroleum Act of 1990 going through the House of Representatives states that 25% of the total oil production of each operator must be refined locally, with the proportion rising to 50% within five years and 100% within ten years. In late December Mr Kupolokun said that the proposed local refining requirements were designed to boost the downstream sector by maintaining self-sufficiency in refining, ensuring regular and uninterrupted domestic supply of fuel, and making Nigeria an exporter of refined products. However, the law clearly has an ulterior motive, in that it is designed to force oil majors to invest in domestic refineries after they shunned government calls for them to buy stakes in the NNPC!s four poorly-run refineries, which have a total capacity of 445,000 b/d. The government aims to privatise at least one of its refineries this year after much delay, due largely to difficulties finding appropriate buyers. Press reports indicate that the Indian Oil Corporation could be the closest to making a deal.

A major new liquefied natural The government is planning another major liquefied natural gas (LNG) project gas plant is planned to utilise Nigeria!s abundant natural gas deposits. In mid-January US oil major, ExxonMobil, signed a Memorandum of Understanding with the NNPC to do a feasibility study on building a 4.8m-tonne LNG plant at Bonny Island in south- eastern Nigeria. ExxonMobil said in a statement that the project will start to export LNG in 2010. The project also includes a power plant to feed Nigeria!s national grid. This agreement came after ChevronTexaco and British Gas said on January 17th that they were in talks with the NNPC about constructing an LNG plant in , south-west Nigeria. Nigerian newspapers reported NNPC officials as saying that a final investment decision on the US$6bn project would be taken in the second quarter of 2006. The project will be constructed in several phases, starting with a 10m tonnes/year plant by 2008, reaching 30m t/y by the end of the project. After securing World Bank support, the NNPC has announced that it will start work on the 678-km pipeline to supply natural gas to Ghana, Togo and Benin, know as the West African Gas Pipeline (WAGP). WAGP is owned by the NNPC, ChevronTexaco, Shell and the Takoradi Power Company and was first conceived in 1995.

Natural gas production (Bn cu feet) 2002 2003 2004a 2005b Total production 1,772 1,818 2,007 2,205 Production by NLNG 279 438 530 636 Re-injected 273 257 259 284 Flared 667 864 833 762 Flaring as a % of production 37.6 47.5 41.5 34.6 a Estimates. b Forecasts. Sources: IMF ; Nigerian National Petroleum Corporation.

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Manufacturing

The textile industry has Although the Obasanjo administration has made some headway with undergone major decline economic reform, industrialists in the country complain that little has been done to help manufacturing companies. Industrialists cite the rapid decline of Nigeria!s textiles and garment industry, which for decades was a major employer of labour, as exemplifying the failure of government policy. The Manufacturers Association of Nigeria (MAN) said in a statement that more than 82,000 jobs were lost in the textile sector between 1997 and 2004, and that the sector!s workforce fell from 136,000 in 1996 to around only 50,000 in 2004. According to MAN, 86 textile firms have closed down within the same period, which it blames on adverse government policies and poor infrastructure. According to the National Union of Textile, Garment and Tailoring Workers of Nigeria (NUTGTWN), even though the government has shown an increased interest in reviving the sector since 2002, it has still been in decline: the union estimates that in 2002 there were 50 companies operating at 30% capacity utilisation, compared with 175 mills in the mid-1980s, but in the past two years more than half of these 50 mills have closed.

Import bans hurt local mills Textile manufacturers and unions have also been waging a campaign to get the government to fully enforce its ban on the importation of various textile items. In mid-January NUTGTWN called on the government to stop the massive smuggling of textile materials into the country, including substandard and second-hand fabrics, and claimed that this is happening with the active connivance of customs and security officials. Textile companies have also complained that the government ban and high duties on the importation of various raw materials used by them, including rayon, viscose and yarns, is hampering their ability to produce competitively. Michael Adebayo, general manager of Haffer Industrial Company, told Vanguard newspaper that many of the raw materials needed by spinners cannot be sourced locally. He said that while raw material imports carry about 70% duty, most of the finished and imported products coming in from Asia attract only 5-15% in duty, which means that Nigerian manufacturers are at a considerable disadvantage.

Mining

Iron ore mining firm is The government has handed over the management of its ailing National Iron concessioned to an Indian firm Ore Mining Company to Global Infrastructure Holdings, a unit of the Indian steel giant, Ispat. A statement by the Ministry of Power and Steel said that under the concession agreement Global Infrastructure will refurbish and operate the iron ore mining firm and pay royalties to the government. The mine was built in the 1980s in Itakpe in as a primary source of raw materials to the 1.3m tonnes/year Ajaokuta Steel complex, which is now managed by Global Infrastructure under an agreement signed in August 2004. (November 2004, The domestic economy: Mining).

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Financial and other services

Merger is announced to create Nigeria!s banking sector does now appear to be undergoing the major biggest bank in West Africa transformation the Central Bank of Nigeria (CBN) hoped would be achieved when it announced its decision to raise the minimum capital requirement to N25bn (US$188m), up from N2bn, by December 31st 2005 (August 2004, Economic policy). The most recent indication of this trend came on January 17th when United Bank of Africa and Standard Trust Bank announced plans to merge, which would potentially create the largest bank in West Africa. The combined assets of the two banks exceed N348bn, while their combined shareholders! fund is over N39.5bn. Since the CBN announced its plan to raise the minimum capital base to encourage consolidation of the nation!s crowded banking sector, at least six planned mergers of banks have been announced. On January 26th the CBN governor, Charles Soludo, announced that seven banks had notified the CBN that they had met the new N25bn capital base requirement, through mergers or by issuing new shares to investors. The governor said that the momentum for consolidation in the banking industry had "taken hold" and that there is hardly any bank not currently involved in the consolidation process.

2004 was a good year for the The Nigerian Stock Exchange (NSE) all-share index rose by 18.5% in 2004 to Nigerian Stock Exchange close the year at 23,844.45, after having risen to an all-time record high of 30,703.46 mid-year. The index closed on February 2nd at 22,426.60. According to the NSE, the total market value of the 276 securities listed on the exchange rose by 55.5% to end 2004 at N2.112trn (US$15.9bn); while turnover on the exchange rose by 87.1% from N120.7bn to N225.8bn, 99.1% of which was equity transactions. By far the most active stocks by turnover volume in 2004 were of banks, led by Standard Trust Bank, IMB International Bank and Liberty Bank, while six new companies listed on the NSE, of which four were banks. In her annual review of the stock market, the director-general of the NSE, Ndi Okereke-Onyiuke noted that the market had been held back in the second half of 2004 owing to the mixed performance of the economy in 2004 and the significant gap between expectation and achievement. She argued that while growth in the telecommunications sector had been strong, and aspects of economic management had improved, the high rate of inflation, high lending rates, the inability of the refineries to work at full capacity, and weak infrastructure support, especially the unreliable power supply and the dilapidated intra-city road network, had all been problems. She was also disappointed at the delays in launching promised initial public offers of large public enterprises slated for privatisation, especially Nitel. However, she expressed optimism about economic prospects in 2005, saying that the NSE hopes that the privatisation programme will be energised with the sale of some major enterprises like Nitel and the refineries.

Infrastructure

National electricity supplies Electricity supply from the state monopoly, the National Electric Power plummet Authority (NEPA), deteriorated in the closing months of 2004 from already low

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levels. NEPA explained in a statement that during the second half of November and most of December it experienced generation shortages, owing mainly to losses totalling 560 mw at Hydro Station, which was shut down for two weeks, and at Egbin station. This led to NEPA!s peak daily generation dropping to as low as 2,800 mw. No sooner had it restored the two stations to full production and returned national output to over 3,000 mw, than in early January NEPA lost 400 mw as a result of a shortage of gas supplies from the Nigeria Gas Company following production problems at Shell and Chevron plants. According to NEPA!s weekly system status summary, the authority!s average generation for the week ending January 23rd was 2,363.90 mw, up from 2,023.66 mw the previous week. According to NEPA, the corporation!s actual generation capability at the end of January was 3,615 mw, compared with a peak demand forecast of 6,700 mw, in a country where only one-third of the population is connected to the national grid. Mr Obasanjo!s administration has pumped more than US$800m into the power sector since 2000, with little improvement in service delivery to show for it.

Power-sector reform bill is The government is aiming to boost generating capacity in Nigeria to 10,000 mw approved by lawmakers by 2007. But this is unlikely to be achieved without the liberalisation of the energy sector, which would pave the way for private-sector investment. The prospect of this happening has improved as both the House of Representatives and the Senate have passed the Power Sector Reform Bill, which will pave the way for the privatisation of NEPA and the opening up of the power sector. The bill enables the unbundling of NEPA into distinct business units and the establishment of an independent electricity regulatory commission, as well as the setting up a rural electricity agency and a fund to increase rural access to electricity. In anticipation of the passing of the bill, on November 29th NEPA was unbundled into six semi-independent power generation firms that will generate and sell power to the transmission company, TransysCo, at bulk unit cost. However, the versions of the bill passed by the two houses are different and it seems that reconciling the two versions is taking longer than the government expected.

The sale of Nitel may A key measure of progress in the government!s slow-moving privatisation move ahead programme is likely to be the sale of a 51% stake in Nigeria Telecommunications (Nitel) and its mobile phone unit, M-Tel, by end-June 2005. In a statement on February 1st, the Bureau for Private Enterprises (BPE) announced that 21 companies have expressed interest in acquiring the controlling stake, although it gave no additional details. In December South Africa!s fixed line operator, Telkom, and its cellular network arm, Vodacom, indicated that they would bid for Nitel. Nigerian newspapers also reported that Johannesburg-based MTN Group, the rapidly emerging Chinese telecommunications companies, Huawei Technologies and ZTE Corp, as well as UK-based Tel Africa, are also among Nitel!s suitors. The debt-laden utility has been under the management of a Dutch consultancy, Pentascope, since 2003. An attempt to sell Nitel in 2001 collapsed after the preferred buyer failed to pay the US$1.3bn purchase price. Pentascope has been criticised for not living up to its promise to transform the company. Responding to allegations of incompetence and mismanagement, Pentascope!s director of operations, Pety Versendaal, told a media briefing in

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Lagos in November that progress had been slower than expected because of resistance to its programme to turn the corporation around from the many parties who used to benefit directly, or indirectly, from Nitel.

Unions oppose privatisation of Pentascope!s experience partially reflects the considerable opposition to the major state assets privatisation programme from trade unions and politicians concerned about the loss of state assets and staff retrenchment. For instance, the National Union of Postal and Telecommunications Employees has been pressing the government to retain 51% of shares in Nitel to protect the national interest. The Maritime Workers Union of Nigeria has threatened strike action over the government!s decision to sack some 10,000 of the 13,000 workforce of the Nigeria Ports Authority, as part of its plan to privatise port operations. Meanwhile on January 26th the BPE opened 26 technical bids for the concession of the Lagos Apapa Port. But the government still faces the problem of finding the N80bn required to pay off workers made redundant by the exercise to reform the country!s notoriously inefficient seaports.

Foreign trade and payments

The current account runs a Data in the Report for the First Half of 2004 published by the Central Bank of surplus in 2004 Nigeria (CBN) show that the current account recorded a surplus of N663.7bn (US$4,947m) in the first half of 2004. This is a threefold increase on the surplus recorded in the first half of 2003, of N218.8bn. However, the data must be treated with caution, as the revisions made since the last half yearly report now put the surplus in 2003 much higher than provisionally estimated (February 2004, Foreign trade and payments).

Balance of payments (N bn; Jan-Jun) 2000 2001 2002 2003 2004 Trade balance 481 550.2 300.4 563.1 955.2 Net services & income -195.4 -516 -463.3 -423.9 -419.4 Net current transfers 35.3 116.4 80.5 79.6 127.9 Current-account balance 320.9 150.5 -82.4 218.8 663.7

Source: Central Bank of Nigeria, Report for the First Half of 2004.

Sources differ hugely over It is hardly surprising that Nigeria ran a current-account surplus in 2004 given import and invisibles data the very high oil price for the year. This is clear from both the CBN data"which estimate that oil exports rose from N1,331.3bn in the first six months of 2003 to N1,928bn in the first six months of 2004"and in IMF estimates of the current- account surplus for 2004. The real issue in determining the size of the current- account surplus in Nigeria is not differences over the value of exports, but over determining imports and payments on the services and income accounts. It is in these areas that there are still some major problems with the CBN data, notably that they underestimate the volume of imports and that there are problems with the breakdown of services and income payments, although the CBN is working with the IMF to resolve these issues. According to the CBN data, imports did rise sharply in the first half of 2004, up to N1,016.9bn (US$7.6bn) compared to N815bn in the first half of 2003. However, even

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assuming ongoing import growth in the second half of the year, this would still imply an annual import bill of only around US$16bn. In contrast, according to the IMF’s most recent assessment of the Nigerian economy, imports are estimated at US$17.6bn in 2004. The discrepancy is even larger in the case of invisible trade. The CBN estimates that the combined services and income deficit in the first six months of 2004 was US$3.1bn, meaning a full year figure of around US$7bn. In contrast, the IMF is estimating a deficit on these accounts of U$16.7bn in 2004. The differences mean that whereas the CBN data will show a substantial current-account surplus in 2004, in the order of 10-20% of GDP, the IMF are forecasting a much more modest surplus of 1% of GDP in 2004. Reconciling the different sets of data will take considerable time, but in general, the IMF data are probably more accurate and serve as the basis on which the Economist Intelligence Unit makes its forecasts. However, the IMF!s failure to provide a detailed breakdown of payments on the services and income accounts does significantly complicate the picture and highlights the fact that all Nigerian data, and especially trade data, should be treated with considerable caution, with a greater focus being placed on trends in the data, rather than the actual figures.

Nigeria steps up its campaign Despite Nigeria!s oil-windfall income and the build-up of external reserves, the for debt relief administration of the current president, Olusegun Obasanjo, continues to insist that it is too poor to service its foreign debt of US$34bn and needs radical debt relief. To support its claim, the Debt Management Office has produced a range of data to show the current burden, challenging the common conception of the country as oil-rich. For example, it points out that Nigeria’s earnings from crude exports amount to only 50 US cents a day per head. It also notes in its latest annual report that annual debt-service payments of more than US$1.8bn amount to 366% of its education budget and 709% of its expenditure on health in 2003. The government is also keen to stress that it is aware that the simple fact of being poor will not be enough to convince creditors to forgive debt, and is stressing that Mr Obasanjo!s administration has demonstrated its commitment to implementing reforms and using resources wisely. Finally, the government has also noted that although the current situation of repeated reschedulings can theoretically carry on for years, it is hardly a long-term, or viable solution to the problem. However, the government is aware that it is unlikely to achieve HIPC status, and is instead opting to try and obtain what it calls "Evian" status, although it is unlikely to seek a 100% debt reduction. This refers to a commitment by G7 leaders at the Evian summit in 2003 to look at the debt burden in specific countries on a case-by-case basis and may well become a central issue at the next G7 summit in the UK in July.

A commercial debt payment After some delay and confusion, the Debt Management Office did admit that is missed the country had not made a payment on its restructured commercial debt, but it was keen to stress that it did not consider that it had defaulted on the debt. The payment was for an estimated US$30m and was due on November 15th. The missed payment related to bond warrants that become payable when the price of oil exceeds a given level over a certain time period. The warrants were issued with Nigeria!s Brady Par Bonds in 1992 as an incentive to London Club

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creditors to enter the restructuring deal. According to the minister of finance, Ngozi Okonjo-Iweala, the reason for the non-payment is a dispute over the interpretation of a clause relating to the warrants, but the government will completely honour any contractual payment once the disagreement has been resolved. We fully expect this to be the case, given the government’s good record in meeting its London Club obligations in recent years.

External reserves climb According to data published in the IMF’s International Financial Statistics, Nigeria’s external reserves reached a record high of US$16.9bn at the end of 2004, up from US$7.4bn at the start of 2004. The December level of reserves far exceeds the target of US$7.68bn for 2004. The remarkable pick-up in foreign- exchange reserves in 2004 is probably the most visible sign of the economic reforms undertaken by the current administration and its commitment not to spend the oil windfall that has accrued to it immediately. Future growth in reserves will depend on a combination of the price of oil and the ongoing ability of the government to balance demands for it to increase spending while at the same time limiting transfers to the states. With expenditure set to pick up sharply in 2005, and a fall-back expected in the oil price, reserves are unlikely to grow as rapidly in 2005, but as long as the price of oil is above that projected in the budget, reserves should still grow.

Foreign-exchange reserves (US$ m) 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr End period 7,864 7,352 6,793 7,128 9,303 11,118 12,873 16,905

Source: IMF, International Financial Statistics.

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