Country Report August 2003

Nigeria at a glance: 2003-04

OVERVIEW Nigeria’s re-elected president, , faces a daunting task if he is to steer his disoriented country onto a path of long-term political and economic development during his second and final term in office. As a former military ruler with a strong sense of his own place in history, Mr Obasanjo may pursue controversial reforms to shake up Nigeria’s inefficient political system and stalled economy, but he is likely to come up against stiff resistance from vested interests opposed to change in this corruption-ridden, violence- prone society which is marked by deep ethnic and religious divisions, endemic poverty and growing political disillusionment. On top of this, the president may have to contend with uncertainties generated by legal challenges to his authority from opposition parties who allege that April’s presidential poll was rigged. However, assuming that the president is able to navigate Nigeria’s turbulent political waters and achieve some progress with reform, and particularly if he can harness his party’s overwhelming majority in the National Assembly, the Economist Intelligence Unit forecasts real GDP growth of 3.2% in 2003, rising to 4% in 2004. Key changes from last month Political outlook • The US president, George Bush, stopped in Nigeria as part of his tour of Africa in July. Although there is a strong basis for Nigeria to build stronger relations with the US, this also carries an element of risk for Mr Obasanjo domestically, who has already been accused of merely being a US puppet. Economic policy outlook • A compromise has been reached between the government and the Nigeria Labour Congress over the proposed increases in domestic fuel prices. The violence that accompanied the nationwide strike opposing the increases and the fact that prices will probably have to be raised again highlights the difficulty of achieving economic reform in Nigeria and the fact that any progress with reform is likely to be slow and subject to setbacks. Economic forecast • Although the 12-month rate of inflation has not moved into single digits, it has continued to trend down in 2003, reaching 10% in May. Owing to rising food and fuel prices, against a background of relatively loose fiscal and monetary policy, inflation should move up in late 2003 to average 12.9% for the year. August 2003

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 10 Economic forecast

12 The political scene

20 Economic policy

25 The domestic economy 25 Economic trends 26 Oil and gas 29 Manufacturing 30 Financial markets 30 Infrastructure

31 Foreign trade and payments

List of tables 10 International assumptions summary 12 Forecast summary 22 Federal government finances 25 Real gross domestic product by sector 28 Performance of refineries 29 Export composition 32 Balance of payments 34 Foreign-exchange reserves

List of figures

12 Gross domestic product 12 Consumer price inflation 19 Nigerian oil exports to the US 24 Good governance and anti-corruption survey results 26 Monthly oil production

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Nigeria 3

Summary August 2003 Outlook for 2003-04 Nigeria’s re-elected president, Olusegun Obasanjo, faces a daunting task if he is to steer his disoriented country onto a path of long-term political and economic development during his second and final term in office. As a former military ruler with a strong sense of his own place in history, Mr Obasanjo may pursue controversial reforms to shake up Nigeria’s inefficient political system and stalled economy, but he is likely to come up against stiff resistance from vested interests opposed to change in this corruption-ridden, violence-prone society which is marked by deep ethnic and religious divisions, endemic poverty and growing political disillusionment. The president may also have to contend with uncertainties generated by legal challenges to his authority from opposition parties who allege that April’s presidential poll was rigged. However, assuming that the president is able to navigate Nigeria’s turbulent political waters and achieve some progress with reform, and particularly if he can harness his party’s overwhelming majority in the National Assembly, the Economist Intelligence Unit forecasts real GDP growth of 3.2% in 2003 rising to 4% in 2004. The political scene Mr Obasanjo has been sworn in for a second term amid tight security following calls for protest by defeated opposition politicians seeking to stop his inauguration. The president has nominated a new cabinet made up mainly of new faces and high-profile technocrats. The government has set up a committee to review the role of Nigeria’s inefficient local government system. The government has said that it will dispatch two battalions to join a regional peacekeeping force going to war-torn Liberia. The US president, George Bush, visited Nigeria as part of his five-nation tour of Africa in early July. Economic policy Mr Obasanjo’s administration has started its second term in office by announcing a rash of reforms to reduce financial waste and mismanagement of limited public resources. Its decision to deregulate domestic petroleum product pricing and raise fuel prices triggered a general strike and violent protests which forced the government to cut back some of the price increases. Meanwhile, the government has been operating without a budget, raising concerns about transparency in one of Africa’s most corrupt countries. The domestic economy According to the Central Bank of Nigeria (CBN), real GDP growth in 2002 was only 3.3%, owing mainly to lower crude oil production. Nigeria’s oil production has increased as oil companies recovered losses incurred in March/April because of ethnic unrest in the oil-producing Niger Delta. The government has signed a US$3.6bn agreement with Solgas for the rehabilitation and operation of the controversial and unfinished state-owned Ajaokuta steel complex. Foreign trade and payments The CBN estimates that Nigeria’s current-account deficit narrowed to 2.9% of GDP in 2002 despite falling oil exports. The World Bank has estimated that Nigeria’s external debt was US$31.1bn at the end of 2001, virtually unchanged from the stock at the end of 2000 as a result of limited new lending. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: August 1st 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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

Political structure

Official name Federal Republic of Nigeria

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

Legal system Based on English common law

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

National elections The legislative election was held on April 12th 2003, the presidential election on April 19th 2003. Olusegun Obasanjo was re-elected president, and his party, the PDP, won a majority of seats in both houses of the National Assembly. The new president was sworn in on May 29th. The next national elections are scheduled to be held in 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 (APP); Alliance for Democracy (AD); All Progressive Grand Alliance (APGA); National Democratic Party (NDP); United Nigeria People’s Party (UNPP). There are currently 30 registered political parties in Nigeria

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

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

Central Bank governor Joseph Sanusi

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Economic structure

Annual indicators 1998a 1999a 2000a 2001b 2002b GDP at market prices (N bn) 2.8 3.2 4.2 4.9 5.7 GDP (US$ bn) 33.2c 34.8c 41.3 44.3 47.5 Real GDP growth (%) 1.9 1.1 3.9 4.2d 3.3d Consumer price inflation (av; %) 10.0 6.6 6.9 18.2a 13.6a Population (m) 116.8b 120.1b 123.3b 126.6 129.9 Exports of goods fob (US$ m) 10,082.0 12,971.0 21,395.0 17,949.0 17,248.0 Imports of goods fob (US$ m) 7,383.0 10,367.0 11,068.0 12,303.0 12,999.1 Current-account balance (US$ m) -2,079.0 -3,319.0 4,263.0 1,184.0 -1,571.7 Foreign-exchange reserves excl gold (US$ m) 7,101.0 5,450.0 9,911.0 10,457.0a 7,331.0a Total external debt (US$ bn) 30.3 29.1 31.4 31.1a 31.3 Debt-service ratio, paid (%) 10.3 6.9 8.2b 13.1 5.1 Exchange rate (av) N:US$ 85.25 92.34 101.70 111.23a 120.58a a Actual. b Economist Intelligence Unit estimates. c Converted at the autonomous rate from 1995 to 1999. d Official estimate.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2002a % of total Agriculture (excl livestock) 36.1 Private consumption 59.8 Livestock 5.1 Government consumption 14.2 Crude petroleum & gas 9.7 Gross fixed capital formation 7.0 Manufacturing 6.0 Exports of goods & services 25.5 Wholesale & retail trade 11.3 Imports of goods & services -6.7 Finance & insurance 9.8

Principal exports 2002a US$ m Principal imports 2002a US$ m Oil 13,680 Manufactured goods 2,990 Gas 1,097 Machinery & transport 2,471 Chemicals 2,297 Food & live animals 1,160

Main destinations of exports 2002b % of total Main origins of imports 2002b % of total US 37.4 UK 15.7 Brazil 9.4 US 15.4 Spain 8.3 China 15.3 France 6.4 France 14.3 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 2001 2002 2003 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Output Industrial production index (1995=100) 111.6 112.8 112.3 111.6 111.8 112.7 116.8 n/a Industrial production index (% change, year on year) 5.6 -0.2 -2.9 0.6 0.2 -0.1 4.0 n/a Prices Consumer prices (Sep 1985=100)a 4,264 4,517 4,401 4,644 4,784 4,653 4,937 4,916 Consumer prices (% change, year on year) 16.1 19.1 16.5 17.4 12.2 3.0 12.2 5.9 Petroleum spot price (Bonny Light 37°; US$/barrel) 25.4 25.4 19.4 21.3 25.0 27.2 26.9 31.8 Financial indicators Exchange rate N:US$ (av) 112.8 110.9 111.2 114.4 116.6 125.0 126.3 128.0 Exchange rate N:US$ (end-period) 111.5 110.1 113.0 115.6 119.6 125.8 126.4 126.9 Discount rate (end-period) 18.5 20.5 20.5 20.5 20.5 18.5 16.5 16.5 M1 (end-period; N bn) 751.14 773.72 816.71 835.92 872.09 933.55 946.25 1,121.55 M1 (% change, year on year) 44.5 39.1 25.7 8.2 16.1 20.7 15.9 34.2 M2 (end-period; N bn) 1,263.16 1,327.63 1,315.87 1,423.35 1,502.06 1,605.42 1,599.49 1,918.93 M2 (% change, year on year) 39.7 37.9 37.4 11.7 18.9 20.9 21.6 34.8 Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 10,937 10,274 10,963 11,376 12,441 11,812 12,138 13,531 Stockmarket index (% change, year on year) 69.1 40.8 35.2 24.2 13.7 15.0 10.7 18.9 Sectoral trends Crude oil production (m barrels/day)b 2.01 2.05 2.11 1.91 1.91 1.97 2.01 2.13 Crude oil production (% change, year on year) 0.0 0.5 -1.9 -11.2 -5.0 -3.9 -4.7 11.5 Foreign trade (US$ m) Exports fob 4,915 4,587 3,565 3,180 3,421 4,101 4,405 5,202 Petroleum 4,889 4,485 3,521 3,121 3,347 4,051 4,336 4,945 Imports cif -2,796 -2,975 -2,605 -2,510 -1,289 -1,824 -1,924 -2,949 Trade balance 2,119 1,612 960 670 2,132 2,056 2,481 2,253 Foreign reserves (US$ m) Reserves excl gold (end-period) 10,559 10,517 10,457 9,502 8,239 7,035 7,331 n/a a Figures for March, June, September, December. The Nigerian government uses the 12-month moving average as its official measure of inflation. b Excluding condensates. Sources: Central Bank of Nigeria; IMF, International Financial Statistics; Direction of Trade Statistics; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence; Standard & Poor's, Emerging Stock Markets Review.

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Outlook for 2003-04

Political outlook

Domestic politics Although the president, Olusegun Obasanjo, and his People’s Democratic Party (PDP) secured overwhelming victories in the presidential and legislative elections held in April and May, the polls were clearly flawed by irregularities and fraud. However, it is apparent that Mr Obasanjo was the popular choice, and that the PDP is the only party with nationwide support. Given the various disputes, the All Nigeria People’s Party (ANPP), along with other minor parties, has, not surprisingly, rejected the election results. The fallout from the elections will be the biggest test of Mr Obasanjo’s political skills since he returned to power as a civilian president in 1999. Consequently, Nigeria faces several months of political uncertainty. The dispute over the elections is likely to intensify in the coming months, as the ANPP and other opposition parties have openly stated that they have no confidence in the ability of Nigeria’s judicial system to redress their complaints, although they have filed a case to challenge the election results which is currently dragging through the courts. Given that political tensions following disputed elections led to the collapse of previous civilian republics, it is plausible that this could happen again. There are currently many faultlines in this impoverished and divided nation that politicians bent on fomenting trouble could easily exploit!more than 10,000 people have died in religious, ethnic and communal violence since civilian rule was restored in 1999. However, there are important differences between the current situation and those in 1966 and 1983, when turmoil over elections led to military coups a few months after the polls. Whereas past military takeovers had popular support, civil organisations, including Nigeria’s powerful trade unions, have warned that they will resist any attempt to truncate the present democracy. In addition, the international community is likely to be less accepting of another period of military rule than it was previously. Moreover, Nigeria’s armed forces, still tarnished by their last spell in government, are probably less inclined to return to power. And as many of the leading figures in both the PDP and ANPP are retired generals, the army’s allegiance is likely to be divided in any political showdown in the barracks. Nevertheless, although unlikely, military intervention in politics is not inconceivable in the short- to medium-term, particularly if politicians fail to resolve the crisis and stability appears to be disintegrating. Assuming that Mr Obasanjo’s administration can survive into the second half of 2003, there are some more positive factors which could help to promote both political stability and effectiveness in 2004. Mr Obasanjo, who has considerable political skill!although he sometimes lacks tact!is expected to invite key opposition parties to join his government (the ANPP has said that it would decline such an invitation, but this mood may pass). The PDP’s increased majority in the National Assembly could also improve relations between the executive and legislature and give rise to more effective government than during Mr Obasanjo’s first term in office. However, these

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factors could also work against the president. Opting for an inclusive cabinet, in which achieving a balance of ethnic and regional concerns counts more than individual merit, may be politically expedient, but it could just as easily result in ineffective government. Although the president and the PDP should theoretically be in a stronger position to tackle the pressing issues confronting the country!including calls for a new constitution, the revision of the formula for sharing revenue between the competing tiers of government, and the increasingly problematic ethnic and religious divides!for this to happen, the PDP will need to become more cohesive and disciplined than it has been during the past four years when the relationship between Mr Obasanjo and the National Assembly has been little better than a war of attrition. Unfortunately, owing to the personalised nature of Nigerian politics, this is unlikely to happen and, although there may be a honeymoon period of improved relations between the executive and the legislature, this co-operation is unlikely to last long enough to allow the government to fashion a solution to Nigeria’s problems or impose lasting order on the country. This will be particularly the case because oil prices are forecast to fall back in late 2003 and into 2004, which will make it necessary for the government to take important policy decisions, many of which are likely to be unpopular.

International relations In his second term Mr Obasanjo is likely to remain deeply involved in foreign policy matters, even though most Nigerians would prefer him to focus on domestic issues. As well as seeking to actively promote the New Partnership for Africa’s Development (Nepad), he will also seek to be an influential voice in efforts to settle disputes not only in Liberia and other parts of West Africa, but also further afield, in places such as Zimbabwe or Sudan. However, the president has failed to prove convincing as a successful mediator, and will struggle on issues such as Zimbabwe, where he must seek to reconcile Western interests with those of the leaders of several African countries. The decision to contribute troops to a planned regional peacekeeping operation in Liberia may also become controversial if Nigeria’s renewed intervention in the war-torn country looks like becoming prolonged and expensive, as it was in 1990. Progress is expected to be slow on a more pressing issue, the sovereignty of the Bakassi peninsula. The work of the boundary commission established in November to draw the new border with Cameroon is likely to be prolonged, given Nigeria’s reluctance to cede sovereignty in accordance with the ruling of the International Court of Justice made in October 2002.

Economic policy outlook

Policy trends As the political class is exhausted by campaigning, or otherwise distracted by the attractions of holding office, it is highly likely that the executive may seek to announce more controversial, or politically risky, reforms in the next few months. Many within the administration are acutely aware that, based on historical precedent, what is not achieved, or at least set in motion, during the first months in the life of a new administration, is often not achieved at all. The first sign of this was the quick announcement of the decision to significantly increase domestic fuel prices!a politically controversial reform in Nigeria!and

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more announcements are likely in the coming months. However, poor policy implementation will continue to be one of the government’s biggest weaknesses, particularly once the honeymoon period is over, and the animosity between the executive and legislature is likely to reappear over the next few years. Poor policy implementation will be compounded by a weak civil service and overlapping tiers of local, state and federal government. Consequently, despite the early signs of optimism, the Economist Intelligence Unit expects a quick return to the status quo, characterised by long delays in approving policy and even longer delays in its implementation. However, it is possible that the IMF and the new administration will agree on a basic macroeconomic reform programme in late 2003 or 2004, particularly as oil prices look set to fall back in 2004. Although implementation will be patchy, the IMF is likely to be under political pressure to maintain the agreement in order to support a re-elected civilian government in Nigeria. It is, therefore, likely to make concessions to the government on a range of required reforms and on non-compliance.

Fiscal policy After a prolonged debate in the run-up to the elections, the 2003 budget was eventually ratified by the National Assembly, although it has yet to be signed by the president. Based on a forecast oil price of US$22/barrel, the budget proposes total expenditure of just under N1trn (US$7.5bn), which is very similar to total spending in recent years and substantially above the N765bn initially proposed by the president. However, in recent years, the budget approved by the National Assembly (if passed at all) has often borne little similarity to the eventual budget outturn, because of the delay in passing the original budget, subsequent supplementary budgets and oil-price volatility, which has a major impact on revenue. This is likely to be the case in 2003 as well. We are forecasting a higher oil price for the year than the government and expect considerable delays in expenditure. Consequently, we expect the fiscal deficit to narrow from an estimated 5.3% of GDP in 2002 to 3.8% of GDP in 2003. Although the government will try to tighten fiscal policy in 2004, as oil prices fall back and in accordance with its overall policy agreement with the IMF, getting parliament to agree on expenditure cutbacks is likely to prove difficult. As a result, the budget deficit should continue to fall back, to 3.4% of GDP in 2004. The government should have little problem financing deficits of 3-5% of GDP through domestic borrowing.

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

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Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.2 2.9 2.9 3.7 OECD 0.9 1.8 1.6 2.2 EU 1.5 1.0 0.7 1.8 Exchange rates ¥:US$ 121.5 125.3 117.1 115.5 US$:€ 0.896 0.945 1.123 1.183 SDR:US$ 0.785 0.772 0.717 0.701 Financial indicators ¥ 2-month private bill rate 0.17 0.10 0.07 0.10 US$ 3-month commercial paper rate 3.61 1.70 1.01 1.33 Commodity prices Oil (Brent; US$/b) 24.5 25.0 26.8 18.9 Gold (US$/troy oz) 271.1 310.3 338.8 315.0 Food, feedstuffs & beverages (% change in US$ terms) -1.9 12.7 2.1 1.8 Industrial raw materials (% change in US$ terms) -9.7 2.2 9.1 3.9 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is undergoing its second serious slowdown in two years. The short-term outlook for most major economies is very subdued growth with growth having slowed sharply in 2003; the US, Germany and Japan are, in fact, all close to recession. We do not expect the US to return to a trend pace of growth until the first half of 2004, and for the euro zone to lag behind. Owing to this slow, weak economic recovery, world GDP growth will be disappointing in 2003, at just 2.9%. A return to a more normal rate of growth in most major markets by the second half of 2004 will cause world GDP growth to pick up to 3.7% in 2004. In the first half of 2003, oil has continued to trade in the upper range of the OPEC price target of US$22-28/barrel. However, as global economic growth remains subdued and a surplus of oil is available on the global market, we expect prices to slip back in late 2003 and into 2004. Although OPEC will initially make only feeble efforts to curb supply, as prices fall back quickly in 2004 the oil cartel will eventually have to move to actively wrestle back control of the oil market during the year, which should result in the price fall bottoming out towards the end of the year.

Economic growth According to the CBN’s 2002 annual report, real GDP grew by 3.3% in 2002. Although growth in the industrial sector was constrained by adherence to the country’s OPEC quota, this was offset by strong growth in services and agriculture. Although in the first half of 2003 investment and confidence are likely to have been affected by political uncertainty in the run-up to the elections and in their immediate aftermath, growth in agriculture and services should remain reasonably strong in 2003 and, even if weaker than last year, will be supported by the gradual pick-up in oil production which should lead to improved growth in the industrial sector. Therefore, we forecast that real GDP growth in 2003 will be largely unchanged from that in 2002, at a forecast 3.2%. After the uncertainty of an election year, we expect that GDP growth will

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pick up to 4% in 2004, as the forecast increase in offshore oil production and investment in the gas sector continue apace, economic policy improves and political uncertainty subsides against the background of reasonably robust growth in agriculture and services.

Inflation Although inflation has continued to trend downwards in 2003, it has still remained in double digits, provisional data from the CBN putting the 12-month moving average rate of inflation at 10% in May 2003, compared with 10.1% in April (although this may be subject to revision). Despite the downward trend in the first half of the year, we expect inflation to rise in the second half of the year as food prices pick up and the rise in domestic fuel prices in July begins to feed through to other sectors of the economy, against a background of relatively loose monetary and fiscal policy. However, inflation will trend downwards towards the end of 2003 and into 2004, as the government tightens fiscal policy and pushes ahead with some economic reforms following the elections. Even if inflation does move into single digits, it will not stay there for long, owing to the size of the fiscal deficit, the limited scope for raising interest rates in the face of pressure from industrialists and politicians to cut rates, and the forecast fall in the exchange rate, which will increase the cost of imports. We are, therefore, forecasting average inflation of 12.9% in 2003 and 10.4% in 2004.

Exchange rates Against the background of relatively strong oil prices and with no major policy initiatives in place, the naira has remained relatively stable in the first seven months of 2003, trading at just under N130:US$1. However, as oil prices are forecast to fall in the final quarter of 2003 and the government is acutely aware of the costs of defending the naira (external reserves fell sharply in 2002 when it tried to defend the currency), and is also trying to reach some sort of policy agreement with the IMF, we expect the balance of power to turn in favour of those who are willing to allow a further depreciation of the naira. Thus we are forecasting that the value of the naira will begin to fall in the second half of 2003, averaging N131.7:US$1 for the year as a whole. The naira will depreciate more rapidly in 2004, to an average ofN146.4:US$1, owing to lower oil prices, the widening of the current-account deficit and the slow strengthening of the US dollar on global markets.

External sector We estimate that Nigeria ran a current-account deficit of 3.3% of GDP in 2002, despite fairly high oil prices, owing to the constraints imposed on oil production by Nigeria’s OPEC quota and strong import growth. The deficit is forecast to narrow to 2.9% of GDP in 2003, as the volume of oil exports increases and prices remain high during the first half of the year. However, any further increase in the volume of oil exports in 2004 will be more than offset by the fall in oil prices to below US$20/b. This will cause a sharp reduction in the trade surplus in 2004 and, as a result, the current-account deficit will widen to 7.9% of GDP. Although changes in the current account are driven mainly by the trade account, some trends in invisible trade will be discernible in 2003-04. The income and services accounts will remain firmly in deficit, the services account because of Nigeria’s heavy dependence on international services, and the income account because of profit remittances by multinational oil companies and interest charges on external debt. In contrast, current transfers

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will be in surplus owing to large inflows of private transfers from the Nigerian diaspora.

Forecast summary (% unless otherwise indicated) 2001a 2002b 2003c 2004c Real GDP growth 4.2d 3.3d 3.2 4.0 Industrial production growth 1.7 1.2a 0.9 2.3 Gross agricultural production growth 3.8b 5.3 4.2 4.5 Consumer price inflation (av) 18.2 13.6a 12.9 10.4 Consumer price inflation (year-end) 16.5 12.2a 15.9 10.4 Short-term interbank rate 23.4 24.8a 20.1 18.0 Government balance (% of GDP) -4.5b -5.3 -3.4 -3.4 Exports of goods fob (US$ bn) 17.9b 17.2 19.0 15.5 Imports of goods fob (US$ bn) 12.3b 13.0 13.6 12.7 Current-account balance (US$ bn) 1.2b -1.6 -1.4 -4.0 Current-account balance (% of GDP) 2.7b -3.3 -2.9 -7.9 External debt (year-end; US$ bn) 31.1 31.3 32.8 32.7 Exchange rate N:US$ (av) 111.2 120.6a 131.7 146.4 Exchange rate N:¥100 (av) 91.53 96.19a 113.35 126.77 Exchange rate N:€ (year-end) 99.5 132.6a 166.2 174.8 Exchange rate N:SDR (year-end) 141.9 171.8a 199.3 213.0 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Official estimate.

The political scene

Mr Obasanjo is sworn in for a Nigeria’s recently re-elected president, Olusegun Obasanjo, was sworn into second term office for a second four-year term on May 29th amid tight security at a colourful ceremony in the capital, Abuja. In his inauguration speech the 66-year-old former military ruler vowed “to heal the wounds” created by the disputed elections that were held in April and May in which his People’s Democratic Party (PDP) extended its hold on power. Mr Obasanjo, whose own election victory, with 62% of votes cast, was condemned by opponents as the result of

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widespread rigging and intimidation, also promised to tackle corruption and poverty in Africa’s most populous nation. The inauguration passed off peacefully in spite of threats from opposition parties to thwart the ceremony, but the president faces what may be protracted legal challenges to his authority. Two days before the ceremony, the Court of Appeal declined a request from defeated presidential candidate and former military ruler, Mohammadu Buhari, for an injunction to stop the inauguration of Mr Obasanjo and his vice-president, Atiku Abubakar. Mr Buhari had argued that the swearing in could undermine his election petition filed at the court on May 20th. On June 6th, a persistent Mr Buhari filed a suit with the Supreme Court seeking to annul the inauguration. Mr Buhari, who led the coup that toppled Nigeria’s second republic in 1984, now spearheads a collection of opposition parties fighting the election results. In a joint statement in May, Mr Buhari and another defeated presidential candidate, Odumegwu Ojukwu of the All Progressive People’s Party, vowed not to accept or recognise Mr Obasanjo’s government and called on Nigerians to stand up and protect their electoral rights. In response to such grandstanding statements, the police warned against any unauthorised political demonstrations in the week leading up to the inauguration. However, on May 28th hundreds of supporters from Mr Buhari’s All Nigeria People’s Party (ANPP)!the main opposition party! ignored the warning and staged a peaceful demonstration in Kano city, capital of one of the seven northern states controlled by the ANPP (and one of the most religiously volatile).

A post-election crisis remains a Although most Nigerian political commentators now seem to broadly agree concern that the elections held in April and May were flawed!there were numerous irregularities including unbelievably high voter turnouts and improbably large victory margins in several states!Mr Obasanjo was probably the most popular candidate in the presidential contest. This also appears to have been the view of the international community. Mr Obasanjo’s swearing in was attended by 15 African heads of states and representatives of dozens of other countries, including senior government officials from the UK and the US. However, there is concern within political circles and the general population that a post- election row could still explode into the kind of crisis that triggered collapse after Nigeria’s two previous civilian-conducted elections; the last time the system crumbled was not until four months after the disputed polls in 1983. Although disgruntled election losers appear adamant in their stand against the results!and will continue to push ahead with their legal challenges!most elected officials in the ANPP are unlikely to support activities that could undermine democracy. Civilian politicians on both sides of the divide are acutely aware of the risks to themselves and society of courting military intervention; several senior politicians were slain in the first coup in 1966, while Mr Buhari himself humiliated and jailed dozens of elected politicians in the months after leading his coup. Moreover, just in case they needed a stark reminder, Nigeria’s outgoing defence minister, retired General Theophilus Danjuma, warned politicians against politicising the armed forces in the name of safeguarding democracy: “if the cancer of politics is allowed to inflict the armed forces, it would be like AIDS which has no cure,” the 65-year-old former

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chief of army staff said at a military parade organised in his honour in Abuja on May 28th. Also, unlike the 1966 and 1983 post-election debacles, the latest quarrel has so far not generated large-scale popular protests, partly because Mr Buhari has not had the support of any mass movement and is generally perceived as a conservative by trade unions and human-rights and pro- democracy activists who have organised mass political protests in the past.

A new cabinet is put forward On May 21st the cabinet was officially dissolved and just over one month later, for approval on June 24th, the Senate made public the names of the 40 nominees submitted by the president for his second-term cabinet. This list includes only five members of the 49-strong cabinet that was dissolved, although six former ministers were among the 18 special advisers and aids appointed by the president on June 26th. Of these the most important appointments include: • the retention of two influential advisors, Lieutenant-General Aliyu Mohammed (national security) and (petroleum and energy); and • the appointment of two former ministers who were close allies in the cabinet; the ex-information minister, Jerry Gana, was made special adviser on political matters, and the ex-attorney general, Kanu Agabi, was made special adviser on constitutional and legal matters. Mr Obasanjo also appointed two non-PDP affiliated advisers!the former ANPP presidential aspirant, Chief Rochas Okorocha and Ahmed Adbdulkadir, the chairman of the Alliance for Democracy (AD)!continuing his policy of incorporating opposition party members into his government. In addition to his own substantial staff, the president also approved the appointment of 19 aides for the vice-president, leading some media commentators to criticise the president for not living up to a promise to operate a slimmer and less costly government. However, Mr Obasanjo is somewhat constricted in forming his cabinet by the constitutional requirement that at least one minister must come from each of Nigeria’s 36 states!a formula which gives more weight to geo- ethnic origin than to merit.

The cabinet will include Although the completion of the National Assembly hearings on those politically inexperienced appointed to the cabinet is a prolonged process, on July 10th Mr Obasanjo members swore in Oluyemi Adeniji, a former UN special envoy on Sierra Leone, as Nigeria’s foreign minister. Mr Adeniji, a 65-year old career diplomat, was among four people sworn in as ministers, but the only one assigned a portfolio. Mr Obasanjo said he wanted to swear in the foreign minister so that he could accompany him to Mozambique for the African Union summit. The cabinet, the majority of which were eventually sworn in on July 16th, includes several other well respected technocrats, fuelling hope of better government. Probably the most notable nominee is Ngozi Okonjo-Iweala, who, prior to her appointment, was a vice-president at the World Bank. She is earmarked to be finance minister. Also nominated was Nasir el-Rufai, erstwhile head of Nigeria’s privatisation agency, the Bureau of Public Enterprises (BPE). Unsurprisingly, the cabinet also includes regular politicians, including at least four defeated candidates from the April general elections.

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Cabinet nominations trigger The publication of Mr Obasanjo’s ministerial list spurred a flurry of protests protests from state-based groups dissatisfied with the person picked from their state. By the time the Senate began screening the nominees on July 3rd it had received at least seven public petitions seeking to stop the appointment of some of the nominees. For instance, a petition from the Middle Belt Liberation Front objected to the nomination of former minister of industry, Iyorchia Ayu, arguing that since he had previously served as president of the Senate and as minister in Mr Obasanjo’s administration (1999-2000) and earlier under General Sani Abacha, someone else from his native should have been chosen. It was said that Mr Ayu’s nomination “violates the Tiv power rotation philosophy of eat and give your brother to eat”. Such reasoning clearly illustrates the common perception in Nigeria of public office as a vehicle for individual and community gain. The group also argued that since Mr Ayu comes from the same zone of Benue as the state governor, his nomination violates the principle that senior politicians should be drawn from all parts of the state.

A minor reshuffle of military As was the case after his election victory in 1999, Mr Obasanjo also made top brass takes place changes in Nigeria’s military hierarchy, although he very consciously opted to retain known loyalists in the most senior positions. The former chief of army staff, Lieutenant-General Alexander Ogomudia, was promoted to chief of defence staff, replacing Admiral Ibrahim Ogohi, who voluntarily retired as head of the armed forces. Major-General Martin Agwai, a senior peacekeeping official with the UN, succeeded General Ogomudia as head of the army. The heads of the navy and air force retained their positions.

The National Assembly elects On June 3rd the two-chamber National Assembly elected new leaders loyal to new leaders Mr Obasanjo, hopefully paving the way for more harmonious relations between the executive and legislature. The 109-member Senate picked 55-year- old Adolphus Wabara as its president while the 360-strong House of Representatives chose 53-year-old Bello Masari as speaker of the lower house. The ruling PDP maintains a large overall majority in both chambers, but its dominance during the first parliament did not do much to prevent a tense and unproductive relationship between the executive and legislature. Part of the past animosity stemmed from rifts between Mr Obasanjo and the then Senate president, Anyim Pius Anyim, and the speaker of the house, Ghali Na’Abba. Neither man was returned to the National Assembly; Mr Anyim did not re- contest his seat, while Mr Na’Abba lost his. In his second term, Mr Obasanjo has promised to build a smoother relationship between the executive and the lawmakers. This may require changes in the president’s dictatorial leadership style which has alienated many lawmakers, who themselves often misconstrued their constitutional powers.

The president seeks radical Although his position on constitutional reform is unlikely to be made clear for reform of local government some time to come, Mr Obasanjo’s new administration has outlined ambitious plans to restructure Nigeria’s political system, perhaps the most far-reaching of which involve changing the country’s costly system of local government. On June 25th the president inaugurated a 12-member technical committee formed to review the structure of local governments and their continued relevance to

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governance in Nigeria. The committee will recommend whether or not local councils should exist as a tier of government. In a nationwide broadcast on June 18th, Mr Obasanjo argued that a review was necessary because Nigeria’s local government system has failed abysmally and continues to waste scarce public funds. He argued that the resources spent on local government could be better used for grassroots development programmes rather than salaries for workers in unproductive bureaucracies. The number of municipal councils has more than doubled from 310 in 1976 to 774 at present. Moreover, since 1999 more than 500 new ones have either been established, or are in the process of being set up, in a country where government structures are more commonly viewed as gateways to accessing the country’s oil revenue. However, some opposition parties and civil liberties groups have condemned what seems to be the government’s agenda to scrap, or diminish, the local government structure, arguing that there is no clear reason why local councils should be singled out when all levels of government have grossly underperformed and have bloated workforces. Criticisms levied against local councils could equally apply to regional or state governments, which have proliferated in number from three in 1960 to 36 today. With few exceptions, the states are almost totally dependent on financial allocations from the centre which go mainly to cover personnel and overhead costs. The need for more widespread reform of the system of government was most coherently summed up by Wole Olanipekun, president of the Nigerian Bar Association, who argues that if local government councils are to be scrapped, or punished for corruption or embezzlement of allocated funds, then something more drastic should be meted out to other tiers of government in the country. Mr Olanipekun and other critics of the apparent move to scrap local councils say that such a fundamental change to Nigeria’s political structure should be decided by a national conference, convened to address both this and the probably much wider myriad of problems facing the country’s political institutions.

It is unlikely the government Holding an overwhelming majority in parliament and having won the will embark on wider reform governorships of 28 out of Nigeria’s 36 states, the ruling PDP appears to have the capacity to amend Nigeria’s constitution to alter the country’s political structure. However, it is debatable whether the political leadership of two-thirds of Nigeria’s states would support the scrapping of local government, which many of them treat as an extension of their domain. In addition, there is still tension between the federal and state levels of government. The return of civilian rule has profoundly altered the relationship between the federal government and the states. After years of increasing centralisation under the military, which had its own single, hierarchical structure, the balance of political power has begun to shift back to the states, as was the situation in the First Republic. Following the failure of the electoral commission to organise local government elections!due since May 2002!the councils have been administered by caretaker committees appointed by state governors, further increasing their considerable powers of patronage. Meanwhile, it remains unclear whether the elections will be delayed until the committee to reform local government submits its report to Mr Obasanjo.

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As part of new reforms to make the public sector more efficient and cost- effective, in June the president announced the introduction of a policy of monetising fringe benefits for public servants. Under the scheme, which came into effect on July 1st, all public officers will be paid fixed sums for entitlements such as housing and furniture. When he announced the policy in May, Mr Obasanjo said that he had made a personal decision to pay 10% of his salary for living in official accommodation, even though he is entitled to free housing. The government hopes to save substantial sums of money through the monetisation policy, as well as better preserve public properties which have too often been treated with contempt by occupants. However, the Lagos-based Guardian newspaper estimated that implementation of the monetisation policy was likely to cost the federal government N228.9bn (US$1.8bn). This represents around 62% of its current wage bill.

Political violence persists Although dozens of people died in election-related violence in April and May this year, the scale of the bloodshed was less intense than many Nigerians had feared in a country where more than 10,000 people have died in political, ethnic and religious clashes since the restoration of civilian rule in 1999 (the most intense election-related clashes occurred in the already politically volatile oil-producing Niger Delta region). The election violence also seems to have consisted mainly of spontaneous outbursts by unruly party supporters, rather than organised conflicts between political parties. Nevertheless, prominent politicians were sometimes caught in the mayhem, as was the case with the commissioner of women’s affairs, Joyce Maimuna Katai, who was among at least five people killed in a fracas after she tried to settle a voting dispute during the House of Assembly polls on May 3rd. However, there were also several political assassinations before and after the elections, the latest having occurred on June 20th when Jibola Olanipekun, a prominent PDP member and ally of Mr Obasanjo, was slain by gunmen in Ibadan, capital of .

Probe begins into the attempt One of the most bizarre incidents of post-election political manoeuvring in to topple governor of Nigeria has been the alleged attempt to remove the state governor of Anambra , Chris Ngige, in what appears to have been a localised coup attempt by a faction of the party. Mr Ngige, who was elected on a PDP platform in April, was apparently abducted on July 10th by a contingent of over 200 policemen who held him while a letter of resignation purportedly written by the governor was read out in the state legislature. Mr Ngige later phoned Radio Nigeria saying the resignation letter was a forgery and that he was being held by the police against his will. Nigeria’s inspector-general of police, Tafa Balogun, ordered the governor’s release, describing his arrest as unauthorised, and ordered an investigation into police involvement in the sordid affair. Mr Obasanjo has also ordered his PDP party to conduct a full-scale investigation into the affair. Mr Ngige has already put the blame for the incident on a former political ally and faction leader of the PDP, whom he said had been pressuring him to authorise payment of N3bn (US$23m) he claimed he had spent on securing the governor’s election.

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Religious riots flare in north- As well as politically related violence, violent religious clashes have continued. east town over stabbing At least 15 people died in several days of sectarian fighting in early June in the north-eastern town of Numan and nearby villages in . The disturbance first erupted in the mainly Christian town on June 8th, after an itinerant Muslim trader murdered a Christian woman over a dispute. Bystanders appraised the conflict as religious, triggering a rampage in which warring factions torched both churches and mosques. Relations between Muslims and Christians in Nigeria have been tense since a dozen states in the predominantly Muslim north adopted Sharia, a strict legal code that prescribes draconian punishments such as public flogging, limb amputation and stoning to death. Several thousand people have died in religious riots since 1999, but fortunately for the country the political row between Mr Obasanjo, a southern Christian, and Mr Buhari, a northern Muslim, has so far not manifested itself in religious warfare. Although the stronghold of Mr Buhari’s ANPP is in the conservative far northern states, the ruling PDP controls the majority of northern states.

Nigeria prepares to send Although Nigeria has conspicuously not been deeply involved in the Economic peacekeepers to Liberia Community of West Africa States’ (ECOWAS) peacekeeping role in Côte d’Ivoire (February 2003, page 21), in early July Nigeria was preparing to despatch two battalions with some 1,600 soldiers to war-ravaged Liberia as part of a regional peacekeeping force to secure a fragile ceasefire between troops loyal to the embattled Liberian president, Charles Taylor, and rebels fighting to topple him. A Nigerian army spokesman said the troops should leave for Liberia by the end of the month. A Nigerian government news release said that Mr Taylor, who has been indicted for war crimes by a UN court in Sierra Leone, had accepted an offer of asylum in Nigeria made by Mr Obasanjo during a meeting between the two leaders in Monrovia on July 6th. Mr Taylor’s removal from power had been one of the conditions outlined by the US president, George Bush, for the US to cede to the pressure from ECOWAS, the UN, the UK and France!as well as ordinary Liberians!to send peacekeeping troops to Liberia. The Nigerian government is also keen for Mr Taylor to quit power, not wanting a repeat of Nigeria’s prolonged and expensive intervention in Liberia in the 1990s when the West African peacekeeping group, Ecomog, ended up shoring up a collapsed Liberian government against advancing rebel groups, the main one led by Mr Taylor. However, Nigeria’s offer of asylum and protection to Mr Taylor has been widely criticised by Nigerian human rights organisations who want the indicted Liberian president to face charges for fuelling civil war in neighbouring Sierra Leone.

Liberia and oil dominate Liberia probably topped the agenda of talks between Mr Obasanjo and discussions with Mr Bush Mr Bush during the US leader’s visit to Nigeria on July 11-12th, which marked the conclusion of Mr Bush’s five-day, five-nation tour of Sub-Saharan Africa. During his visit, Mr Bush seemed to be leaning towards agreeing to send a small military contingent (of between 500 and 1,000 troops) to Liberia to spearhead an international peacekeeping operation but would expect Nigeria, as it possesses the region’s largest and best-trained armed forces, to provide the

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bulk of the intervention force. The US leader would also have encouraged Abuja to play a more prominent role in restoring security to the troubled West Africa region. Mr Obasanjo, who in his May 29th inaugural address said that his administration aims to be at the forefront of advancing ECOWAS programmes, seems to be willing to take on the responsibility of regional leadership (although he would probably have sought a commitment to material assistance from Mr Bush to help achieve this). Nigeria’s cash-strapped democratic government is unlikely to be able to expend large sums of money supporting peacekeeping in West Africa, as did the country’s military rulers in the 1990s. As a result, the request for US assistance probably included not only a plea for a direct financial contribution to ECOWAS’s peacekeeping costs, but also for the extension of military aid to Nigeria and help securing debt relief for the country, including paving the way for a new agreement with the IMF. The discussions between the two presidents probably also touched on trade, particularly US oil imports from Nigeria and the implications of the African country’s growing spare oil production capacity owing to OPEC quota restrictions (see Oil and gas). ChevronTexaco and Exxon-Mobil are amongst the lead investors in offshore oil production in the Gulf of Guinea, but their work is being held back by the lack of clarity on whether the oil produced will be subject to OPEC quotas. The US government’s official policy is to continue to diversify US oil imports away from the Middle East and the Gulf of Guinea and Nigeria, which is already Africa’s largest oil producer, has been identified as an important source of new oil. However, although there are compelling factors pulling the US and Nigeria closer as strategic allies, building closer relations with the US also carries a domestic political risk for Mr Obasanjo in a country with one of the world’s largest Muslim populations. Mr Bush’s visit was greeted with anti-American demonstrations in Kano in the mainly Muslim north and was condemned by hardline Muslim groups; one Shiite cleric accused Mr Obasanjo of being a puppet of the US and presiding over the country’s re- colonisation.

Nigeria considers timetable to One of the most important outstanding issues for Nigerian foreign policy is the pull out of Bakassi border dispute with Cameroon over the Bakassi peninsula (November 2002, page 17). Under the attempts to resolve the issue, Cameroon has proposed a timetable for Nigeria to withdraw its troops and administrative personnel from the disputed Bakassi peninsula, which the International Court of Justice (ICJ) ruled belonged to Cameroon in October 2002. The timetable was presented during the fourth session of the UN-chaired, Cameroon-Nigeria Mixed Commission in Abuja on June 10th-12th. Nigeria is expected to respond by July 15th and the commission said in a communiqué that the issue will be discussed further in early August at the commission’s next meeting in the Cameroonian capital, Yaoundé. The commission was established to resolve the boundary dispute after Nigeria refused to accept the ICJ’s judgement which ruled that the Bakassi peninsula was part of Cameroon, but also made other associated rulings relating to the Nigeria-Cameroon border that were more favourable to Nigeria. At the same meeting both countries agreed to each contribute US$1.25m towards implementing a broader agreement. However, it remains unclear whether Nigeria will fully accept that it has to cede the 400 sq mile

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Bakassi territory to Cameroon. Nigeria insists that its prime interest is the fate of its estimated 300,000 citizens who make up more than 90% of Bakassi’s population and not the peninsula’s rich natural resources.

Economic policy

The president reiterates his During the opening month of his new mandate, the president, Olusegun commitment to economic reform Obasanjo, took a number of steps that may indicate that he is willing to pursue some of the difficult economic reforms required to turn around Nigeria’s ailing economy, particularly cutting state subsidies and reforming the government sector. The president has also made a number of public statements which suggest that his resolve for this difficult task may be greater than during his first term of office. For instance, in an address in mid-June he declared that in the next four years, “our efforts to integrate Nigeria into a global competitive economy mean that we will continue to insist on a market-driven economy that will ensure a level playing field for all investors”.

The government climbs down However, although Mr Obasanjo has expressed a desire to liberalise Nigeria’s on fuel price hikes state dominated economy, there have already been signs of continued policy inconsistencies and of the administration’s inability to implement tough economic policies which it has announced publicly. A good example of such inconsistency was the early decision to extend its list of banned imports, which is hardly a move aimed at opening the economy up to greater competition (see Foreign trade and payments). The government’s inability to implement tough reforms to enable the private sector to take the economic lead was also illustrated by the administration’s retreat on its decision to deregulate domestic fuel pricing to end wasteful subsidies. After initially defying Nigeria’s powerful trade unions by hiking the prices of petroleum products on June 20th!taking a litre of blended petrol from N26 (20 US cents) to N40 (31 US cents)!the government eventually backed down and agreed to implement a much reduced price rise. On July 8th the price of petrol was officially set at N34 (27 US cents) per litre, in order to end a eight-day general strike in protest against the fuel price increases. The government initially imposed the 54% increase in the petrol price to end the fuel subsidies it claimed were costing the country N250bn (US$2bn) in forfeited revenue (see May 2003, page 22 for IMF estimates of the cost of the subsidy). Mr Obasanjo explained that his administration decided to liberalise petroleum pricing to release much needed revenue which would be better used to address social needs, such as education and health. But the country’s umbrella trade union, the Nigeria Labour Congress (NLC), which has traditionally opposed domestic fuel price rises, quickly declared its opposition to the move, calling for an indefinite national strike which began on June 30th. The strike!declared illegal by the government!paralysed Nigerian cities and at least 14 people were killed in the protests before the government and the NLC agreed a compromise price deal. However, some oil majors have said that the revised prices remain inadequate as an incentive to importing fuel, explaining that at least N37 per litre for petrol is needed to achieve reasonable profit levels. Marketers have long argued that by fixing fuel prices below international

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market levels the government, in effect, precludes private-sector importation of products, giving the state-subsidised, and generally incompetent, Nigerian National Petroleum Corporation (NNPC) a monopoly on imports.

Fuel price subsidies will The issue of fuel subsidies in Nigeria is particularly emotive as both unions and remain a political issue anti-poverty groups see cheap fuel as a birthright of citizens of an oil rich country and argue that price increases only aggravate poverty in a nation where 70% of the people are estimated to live on less than one US dollar a day. They also accuse the government of exaggerating the amount by which it subsidises fuel consumption, in order to justify excessive price increases. Mr Obasanjo faces a tough challenge to convince Nigerians that fuel price deregulation can help to stimulate economic growth by encouraging private investment in local refining which should boost output, and in turn help to end the perennial fuel shortages that have hampered production activities in the country. Also, competition in the downstream sector could result in lower domestic fuel prices and Nigeria becoming an exporter of petroleum products rather than an importer. As the government has backed down on the proposed fuel price increase, by July it was unclear what the future of the Petroleum Products Pricing Agency, opened by Mr Obasanjo on June 19th to monitor and regulate the pricing and distribution of petroleum products, would be. The opening of the 25-member agency, headed by industrialist Rasheed Gbadamasi, was meant to mark the government’s formal disengagement from fixing petroleum prices. The agency will now have its work cut out to encourage private investment in fuel marketing in the world’s eighth biggest crude oil exporting country. The inability of Mr Obasanjo’s administration to make its deregulation decision stick will also be seen by Nigeria’s creditors as an illustration of the limitations of a government caught between popular demands and pressure to carry out economic reform. Inclusion of World Bank official in cabinet draws praise

The choice of one of the World Bank’s vice-presidents, Ngozi Okonjo-Iweala, as finance minister has generally been welcomed by local business leaders and donors as a further indication of Mr Obasanjo’s stated intention to pursue liberal economic policies. There is also hope that the move will help to improve relations with the Bretton Woods institutions. Observers believe that Ms Okonjo-Iweala will be well placed to work towards bringing Nigeria back under the IMF’s formal monitoring programme which was abandoned in 2002 (May 2002, page 18). However, Ms Okonjo-Iweala and other technocrats brought into the cabinet may not have the political experience or power base to be able to manoeuvre in Nigeria’s choppy political waters and, despite producing well thought out economic policies, may struggle to have them implemented. However, the Harvard-educated economist does have some idea of the problems she is likely to confront, having taken leave of absence in 2000 to serve as economic adviser to Mr Obasanjo and having helped to set up the Debt Management Office in Abuja.

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Federal government finances (N m) 2000 2001 2002 Total federal government retained revenue 597,282.1 796,976.7 716,754.2 Total expenditure 701,059.4 1,018,025.6 1,018,155.8 Recurrent expenditure 461,608.5 579,329.1 696,777.7 Personnel costs 278,700.8 285,118.4 369,181.7 Overhead costs 71,376.9 117,985.9 109,111.6 Capital expenditure 239,450.9 438,696.5 321,378.1 Overall deficit -103,777.3 -221,048.9 -301,401.6

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

The government agrees to Mr Obasanjo may face another battle with the unions if he seeks to implement increase public-sector wages a programme to rationalise Nigeria’s bloated public sector as part of his promise to raise federal government workers’ pay by 12.5%. In his May day speech, the president said that his administration would pay the 12.5% salary increment, but hinted that this might be accompanied by retrenchments, saying that “something will have to give way”, given that recurrent expenditure by the government already accounts for around 65% of government revenue. The president said that state and local government would not be bound by the 12.5% pay agreement with the NLC, many state governors having already stated that they cannot afford to implement the increase. Following the, albeit scaled back, increase in fuel prices, the NLC is liable to intensify the pressure on the government to carry out the pay increment quickly.

The state of the 2003 budget is Although the Central Bank of Nigeria (CBN) has now published government still confused financial data for 2003, which show that expenditure was once again marginally above N1trn (US$8.3bn) in late July, more than half way into the 2003 fiscal year, the federal government was still operating without a budget. Parliament passed the 2003 appropriation bill in April after a four month delay, increasing the president’s proposed level of budget expenditure from N765.13bn to N976.25bn. However, Mr Obasanjo did not sign the bill, apparently because he was awaiting details of the changes to the expenditure levels made by parliament. Meanwhile, business leaders have become increasingly concerned about the opacity in budget formulation under the civilian administration, a failing more associated with military rule. In May, Kola Bajomo, president of the Institute of Chartered Accountants of Nigeria, told a public/private sector budgetary review meeting that the delay in the implementation of the 2002 budget had had a negative impact on business planning and investment activities. He said that copies of the final Appropriation Act were rarely seen in circulation, making people wonder whether there was really a budgetary proposal for the year. At a different forum, the president of the Nigeria Employers’ Consultative Association, Dayo Lawuyi, advised the government to aim to finish the 2004 budget no later than the fourth quarter of 2003 to avoid yet another economically damaging delay.

The privatisation programme Although Mr Obasanjo has failed dismally to achieve his target to sell off misses its target Nigeria’s big loss-making enterprises within his term in office, he has promised to intensify implementation of the slow-moving privatisation programme. On June 24th the director-general of the Bureau of Public Affairs (BPE), Nasir El-

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Rufai, told a media briefing that since launching the scheme in 1999 the government had earned about N57.6bn (US$450m) from 35 privatisation transactions, and a further N13bn was expected from the sale of the National Fertiliser Company of Nigeria (N10.2bn) and the Iwopin Pulp and Paper Company (N3.1bn). Of the 35 transactions carried out in the first two phases of the programme, 25 were successfully completed and are now financially closed, according to the BPE. Data from the CBN show that the federal government received N18.1bn in 2000 and N19.7bn in 2002 in privatisation proceeds, a total of N37.8bn, although this excludes any sales that have been made so far in 2003 (there was no privatisation revenue recorded in 2001).

A variety of sources oppose Despite the sales made to date, the privatisation programme is running well privatisation behind the original schedule according to which the three-phase programme was to have been completed by 2003. Moreover, and crucially for the government’s finances, none of the major loss-making state enterprises that have drained public resources in the past, and continue to do so, have so far been sold. Mr El-Rufai said that the BPE was currently working on the privatisation of some 22 enterprises remaining in phase two, including vehicle assembly plants, steel companies and oil palm companies. The BPE will also tackle the sale of the National Electric Power Authority (NEPA) and the downstream operations of the Nigerian National Petroleum Corporation (NNPC) in the third phase, two enterprises which require major pre-sale work. Even if some progress has been made with privatisations, there is deep concern that as Mr El-Rufai is leaving the BPE!he has been appointed as the minister for the Federal Capital Territory!the process will slow down even further. Even a competent administrator such as Mr El-Rufai has failed to take on many of the vested interests which are keen to maintain the current status quo, including the management and workers of affected enterprises. For instance, in late May the National Union of Electricity Employees asked the president not to sign the Power Reform Bill (see Infrastructure), saying that the privatisation of NEPA is impractical. Amongst other objections stated in its memorandum, the union pointed out that the total liabilities of NEPA amount to roughly N733.2bn (US$5.7bn), a burden it claimed the BPE has not resolved in its rush to privatise the parastatal. Critics of privatisation also worry that the government will dispose of major state assets at give away prices, instead of canvassing for public investment to resuscitate the ailing concerns. Officials have been at pains to tell the public that Nigeria cannot hope to recover most of its estimated US$100bn investment in state enterprises and that privatisation should be seen as a means of saving money rather than a big revenue booster. Hassan Usman, a deputy director at BPE, said in a public lecture in Lagos in mid-May that as at December 2000 the total liabilities of some 39 government agencies were in excess of N1.1trn (US$8.6bn), with accumulated losses of N92.3bn (US$721m).

Corruption moves to centre In his address at the opening of the new National Assembly on June 5th stage Mr Obasanjo vowed to “leave no stone unturned” in the fight against corruption. However, such tough words sound empty in relation to his first administration’s poor record on combating corruption. Nigeria continues to be perceived by organisations and businesses as one of the most corrupt countries in the world. In a new good governance and corruption index published by the

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Geneva-based World Economic Forum on June 10th, Nigeria was ranked as the second most corrupt country in Africa after Chad in a survey ranking 21 African countries according to the quality of their public institutions. Nigeria holds a similar position in the latest corruption index produced by the Berlin-based Transparency International.

Corruption remains deeply entrenched in Nigeria, mainly because the country’s political elites have shown little interest in curbing it and have sometimes obstructed efforts to root it out. This was clearly illustrated in early May when the outgoing National Assembly overrode a presidential veto and passed a new anti-graft law that watered down the existing corruption law passed in 2000. However, the Abuja High Court nullified the new act, saying that the National Assembly had defied a court order restraining it from passing the bill, pending determination of a suit filed by some MPs opposed to the new law. It is unclear whether the new parliament will pursue the enactment of the weakened anti-corruption bill, which was pushed through parliament by supporters of the then senate president, Anyim Pius Anyim, and house speaker, Ghali Na’Abba, both of whom were under investigation by the Anti-Corruption Commission. The commission, formed in 2000 as the centrepiece of Mr Obasanjo’s anti-graft campaign, has been widely criticised for being ineffectual, having failed to prosecute any senior official in a state so riddled with corruption. In his inaugural speech on May 29th, Mr Obasanjo said that the Anti-Corruption Commission had been hampered by “legislative and constitutional hurdles” and that his administration would seek to amend the initial anti-corruption act to ensure the more expeditious handling of corruption cases in the courts. Responding to public criticism of the commission, Mr Obasanjo also noted that it had filed 39 corruption cases in court as against zero in the last two decades. However, many Nigerians still need convincing that the government can come to grips with corruption, as indicated in a survey by Transparency International published on July 3rd. This showed that 44.5% of Nigerians questioned expected corruption to worsen in the country over the next three years, compared with 38.6% who said that it would decline.

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The domestic economy

Economic trends

Real GDP growth was 3.3% in According to the 2002 Annual Report and Statement of Accounts published by 2003 the Central Bank of Nigeria (CBN), real GDP grew by 3.3% in 2002, a substantial fall from the 4.2% recorded in 2001. (The CBN has revised the 2001 figure up to 4.2% from 3.9% in its 2001 report).

Real gross domestic product by sector (N bn; at 1984 factor cost) % change 1999 2000 2001 2002 2001-02 Agriculture 47.59 48.99 50.85 53.53 5.3 Crude petroleum 12.47 13.87 14.59 12.6 -13.6 Mining & quarrying 0.37 0.39 0.42 0.48 14.3 Manufacturing 6.93 7.18 7.48 7.81 4.4 Utilities 0.61 0.63 0.68 0.88 29.4 Construction 2.46 2.55 2.86 3.35 17.1 Transport 3.64 3.75 3.91 4.1 4.9 Communications 0.37 0.37 0.47 0.59 25.5 Wholesale & retail trade 13.62 13.84 14.18 14.68 3.5 Hotels & restaurants 0.57 0.59 0.62 0.65 4.8 Finance & insurance 11.16 11.61 12.13 12.73 4.9 Real estate 0.35 0.37 0.39 0.41 5.1 Housing 2.94 3.08 3.21 3.39 5.6 Government services 11.06 11.29 11.57 11.91 2.9 Others 1.99 2.13 2.36 2.72 15.3 GDP 116.13 120.64 125.72 129.83 3.3 Non-oil GDP 103.66 106.77 111.13 117.23 5.5 Real GDP growth rate (%) 2.8 3.9 4.2 3.3 –

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

As we have long argued, the growth rate in 2002 was held back by the very slow rate of growth in the oil sector. According to the CBN, only one sector of the economy, crude petroleum production, declined in 2002. It fell by a considerable 13.6%, reflecting the fact that Nigeria’s oil production was quite severely curtailed by the country’s broad adherence to its OPEC quota. However, this was offset by positive improvements elsewhere. • The largest sector in the economy, and that which is most relevant to the average Nigerian, agriculture, continued to grow relatively strongly, expanding by 5.3% in 2002. This builds on its strong performance of recent years. • This was supported by reasonably strong growth in the services sector, with “hotels and restaurants”, “finance and insurance” and “transport” all doing reasonably well with growth rates of around 5%. • The two “star” sectors of the economy were the communications sector, which expanded by a very large 25.5% in the year on the back of the very rapid growth in the mobile phone industry, and the construction sector, which

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boomed in the run-up to the elections and because of the largish increases in government expenditure, growing by 17.1%.

Oil and gas

Oil production recovers Nigeria’s crude oil production has recovered in recent months after multinational producers recovered most of the losses incurred in March and April owing to political unrest in the restive Niger Delta region. According to the International Energy Agency (IEA), Nigeria’s oil output, excluding condensate, was 2.11m barrels/day (b/d) in June and 2.09m b/d in May, up from only 1.88m b/d in April, when the impact of the unrest was greatest, and 2m b/d in March. The agency said that production initially rose to 2.17m b/d but that this was unsustainable owing to new problems encountered by producers. Shell, the biggest producer in Nigeria, declared fo rce ma je ure on Forcados production on May 9th owing to a pipeline rupture, after having restored most of the 440,000 b/d lost in March/April in the pre-election ethnic unrest. In early July Shell, ChevronTexaco and Total still had a combined total of some 300,000 b/d shut in from the March disruptions. To compound the country’s problems, about 140,000 b/d of condensate and natural gas liquids (NGL) from ExxonMobil’s Oso field were shut in in May following a fire at an offshore platform. Although according to IEA data Nigeria was producing above its OPEC quota of 2.018m b/d (which was due to rise to 2.092m b/d from June 1st), it is worth noting that according to the CBN’s monthly economic report, oil output has been below Nigeria’s OPEC quota, with production, including condensate and NGL, put at 1.98m b/d in May; official government oil data rarely show Nigeria in breach of its OPEC quota even though it has a reputation as one of the most persistent over producers. Whatever the precise level of oil output, everyone agrees that Nigeria is fast developing its crude production capacity. According to the IEA’s monthly energy market report for June, 260,000 b/d have been added to Nigeria’s oil output capacity since December 2002 and further gains are likely later in 2003 as more new fields come into operation. Moreover, the country is also considering a new licensing round. In early May Mr Obasanjo’s oil and energy adviser, Rilwanu Lukman, told a conference in the US that Nigeria plans to offer 22 offshore blocs to oil companies in the next bidding round which is expected to start by mid-2004. As a result of a large number of ongoing oil projects, the government expects Nigeria’s production capacity to rise to 3m b/d by end-2003 and 4m b/d by 2005. Mr Lukman said that total reserves stood at 33bn barrels at the end of 2002, compared with 26bn barrels at the end of 1998, and noted that discoveries in the deep offshore area accounted for 5bn barrels of current reserves. Owing to Nigeria’s rapidly expanding oil production capacity, the government is coming under increasing pressure from multinational oil companies to reach an agreement with OPEC over its production quota. Mr Lukman, a former secretary-general of the oil cartel, acknowledged that Nigeria was constrained on how oil from recent discoveries will be accommodated within the quota system. However, government officials still insist that Nigeria does not plan to ditch OPEC, but rather will negotiate a higher quota to take account of its increasing deep-water assets. Macaulay Ofurhie, director of the Directorate of

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Petroleum Resources, told a workshop in June that renegotiations of the quota were necessary for Nigeria to sustain investor confidence in its deep-water potential and promote the development of its hydrocarbon resources. However, as supply is likely to remain buoyant in the next few years, it is doubtful whether OPEC will be receptive to demands from members for increased quotas.

Violence continues in the Another major challenge facing the authorities is how to reduce the high levels Niger Delta region of oil-targeted political unrest and crime that have made oil operations in the Niger Delta increasingly risky. Although most of the new oil discoveries have been deep offshore, most of Nigeria’s crude production will continue to originate in the inland delta region for some time to come, where groups have made a business of attacking oil installations and personnel. In the latest kidnapping incident, one German and two Filipino contract workers for Shell were abducted on June 23rd and held for two weeks by pirates demanding a ransom of N25m (US$2m) and another N100,000 for feeding the captives. The hostages were released following the intervention of the government, which claims that no ransom was paid. Attacks against oil multinationals began as the reaction of alienated and impoverished communities against their neglect by indifferent central governments, but have increasingly become manifestations of anarchy and greed. As the World Bank noted in its report Breaking the Conflict Trap: Civil War and Development Policy, published in June 2003, the character of the violence in the Niger Delta has changed since it started in the mid-1990s as a political struggle against a military government. Instead, under the civilian government it has both escalated and been transformed into something more akin to American gangland fights for control of the drug trade. The report aptly talks of “violence entrepreneurs” in local communities who target oil facilities to extort money from vulnerable multinationals and sometimes battle each other for the right to extort. Imposing law and order in the region is a difficult task for the government given the area’s difficult terrain, inadequate security forces and human rights sensitivities.

Crude theft is on the increase The lawlessness in the region is also evident in the increasing theft of oil. Calling for new strategies to tackle the problem, the Nigerian navy said on June 5th that the country was losing about N10bn (US$78m) a month in revenue through oil pipeline vandalism and illegal bunkering. Later in June the managing director of the Shell Petroleum Development Company, Ronald Van den Berg, told reporters that between February and April Shell alone lost an average of 90,000 b/d through theft, and that the volume had since increased to over 120,000 b/d. Mr Van den Berg suggested that Shell would support the adoption of a certification regime for tracing the flow of crude oil from production to sale to help check theft in Nigeria, but noted that the system, which involves the finger-printing of all crude, would only work with the co- operation of international traders and OPEC. Nigerian newspapers say that illegal bunkering of oil, which may be costing Nigeria up to 200,000 b/d, is mainly carried out by organised criminal syndicates.

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Pipeline explosion disaster In the latest of a series of disasters related to fuel theft, about 130 people were kills 130 villagers killed on June 19th when a ruptured petrol pipeline exploded at a remote village in south-east Nigeria. The victims had gathered to scoop up petrol from a leaking NNPC pipeline at Onicha Amiyi-Uhu, in , and were caught in the fire started by a spark from a motorbike. The pipeline had been deliberately punctured by thieves to steal fuel some two weeks earlier. The NNPC was criticised by local inhabitants for not having mended the broken pipeline, but the tragedy also illustrated the common lack of respect for public property in Nigeria. According to This Day newspaper the broken pipeline had become such a popular source of fuel that hours before the explosion some enterprising policemen stationed their petrol vehicle on the road of the site and charged people N100 each to allow them to collect spilt fuel which they could sell on the black market. Over the past five years more than 1,000 villagers have died in at least five major instances of explosions of vandalised fuel pipelines.

Performance of refineries (capacity utilisation; %) 2000 2001 2002 Kaduna refinery 45.0 31.8 36.5 Warri refinery 5.0 48.3 60.9 Port Harcourt refinery 31.0 60.6 51.5 Average 27.0 46.9 49.6

Source: Nigerian National Petroleum Corporation, Report on Operations.

Fuel scarcity persists Nigeria’s thriving black market in petroleum products is sustained by the low official price for domestic fuel and the perennial shortage of fuel at official outlets owing to inadequate supply from the nation’s oil refineries. Outside of the main cities, consumers regularly pay well above official pump prices for fuel, with petrol selling for as much as N60/litre from roadside dealers in south- eastern and northern parts of the country. The NNPC’s four refineries, which have a combined installed capacity of 445,000 b/d, have for years operated at well below capacity, owing to frequent breakdowns caused by ageing and poorly maintained facilities as well as mismanagement and corruption. According to the NNPC’s Report on Operations January-December 2002, the average capacity utilisation of the refineries was 49.6% in 2002, slightly above 46.9% in 2001. This poor performance means that Nigeria is dependent on fuel imports, which last year accounted for 54.5% of domestic consumption. In June private-sector organisations urged the government to rehabilitate the NNPC’s refineries, saying that properly operated plants could meet local fuel needs at lower unit costs and thereby reduce the need for imports. However, the government’s official position!when it announced the hike in fuel prices!was that it had spent US$700m in the last four years on repairs of the refineries and that, despite the investment, capacity utilisation remained low. The government has issued a number of provisional licences for the establishment of private refineries, but investors are reluctant to build plants as long as domestic fuel prices are fixed below market levels. BPE officials say that the NNPC’s refineries will be privatised by 2004 (two of the plants are to be sold this year) and that

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some multinational oil firms have expressed an interest in acquiring them. But as with new plants, it seems unlikely that investors will be keen to acquire government refineries without assurances that they can charge commercial prices for their products. In sum, little has changed from this time last year and not much may have changed at this point next year (August 2002, page 28).

NLNG begins shipment of On June 26th the joint venture Nigeria Liquefied Natural Gas (NLNG) company liquefied petroleum gas (jointly owned by the NNPC, Shell, TotalFinaElf and Agip) made its first shipment of liquefied petroleum gas (LPG) from its integrated plant in Bonny Island, south-eastern Nigeria. NLNG said that 40,000 tonnes of LPG that had been sold to Switzerland’s Vitol had left Nigeria for the US. NLNG’s three-train plant has a capacity of 9m tonnes of LNG and 1.2m tonnes of LPG per year. The LPG facilities were constructed as part of the train three expansion and began operation in April 2003. NLNG’s total LPG capacity is expected to rise to 2.2m tonnes when trains four and five, which are currently under construction, come on stream in 2005. The company made further progress in the advance sale of the LNG output from the two coming trains when, on May 13th, it signed a supply contract with BG LNG Services, the US arm of the British Gas group, for 3bn cu metres of LNG per year for 20 years. NLNG said that the agreement would make it a significant player in the US LNG import market.

Export composition (US$ m) 1998 1999 2000 2001 2002 Exports 8,971.2 12,876.0 19,141.4 17,884.1 15,563.1 Crude oil 8,564.7 12,637.1 18,318.5 16,436.8 13,680.4 % of total 95.5 98.1 95.7 91.9 87.9 Gas – 27.8 578.7 1,197.0 1,097.0 % of total – 0.2 3.0 6.7 7.0

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

Manufacturing

Nigeria signs a major steel At the end of June the government signed a US$3.6bn agreement with Solgas agreement with Solgas Energy Nigeria for the rehabilitation and running of the Ajaokuta Steel Complex in . Under the agreement Solgas will rehabilitate, complete, commission and operate the Ajaokuta plant as well as build and operate an electricity generating plant and a gas processing plant. The projects, which are scheduled to come on stream within two years, will be financed by Solgas, which will own the facilities for ten years, before ownership and control are transferred back to the government. The financial details of the deal were unclear in July, but the agreement presumably foreclosed the planned privatisation of the Ajaokuta Steel Company in which Nigeria has sunk nearly US$5bn since the 1980s without any steel being produced. The chairman of Solgas, Tom Russel, told reporters in Abuja that the federal government should realise about US$12bn in revenue from the steel plant during the ten years of operation by Solgas. In addition, the planned electricity generating plant is expected to produce 2,300 mw of electricity within 18 months and provide 110,000 jobs, while the steel and gas processing plants will provide 9,000 and 10,000 jobs, respectively. However the sale of the steel company remains

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controversial, some critics questioning the speed of the sale and whether the generation of power at a reasonable cost is even possible.

Two fo reign compa ni es bid for The government is expected to soon announce the preferred bidder for its aluminium smelter company shares in the troubled Aluminium Smelter Company (Alscon), from either the German company, Ferrostaal or Russian Aluminium. The two were the only companies that met the June 30th deadline for submission of final bids after a third short-listed bidder!the US firm, Alcoa!failed to return a final bid. The government said on July 1st that the amount of equity up for sale in the 193,000 tonnes/year plant had risen from 51% to 70%!out of its 90% equity holding. The plant was commissioned in 1997, but has been shut since mid-1999 owing to a lack of working capital after only producing 40,000 tonnes of aluminium. In total, successive governments have sunk around US$2.5bn in the plant in what must rank, along with the Ajaokuta steel project, among the largest wastes of public funds in the country’s post-independence history.

Financial markets

Nigerian share index reaches a The Nigerian Stock Exchange (NSE) all-share index climbed to an all-time record new record high high in June, apparently oblivious to the political uncertainties generated by the April/May general elections. The index rose from 13,596.62 on April 1st to a peak of 14,684.7 on June 19th, before dipping to 14,570.25 on July 8th. Investors said that the market has been largely buoyed up by the good performances of blue chip companies and the prospect of economic upturn spurred by the hope that the new government will demonstrate a greater commitment to reform. The market is expected to see further growth when the government begins to float its shares in major state enterprises. To help ordinary Nigerians participate in the privatisation programme, on May 6th the government launched a Privatisation Share Loan Scheme, under which credit of up to N10,000 (US$78) will be given to people to buy privatisation shares. The scheme is to have initial capital of N10bn (US$78m), but officials said that this may be increased once the scheme gets off the ground. One of the first major privatisations that will come under the scheme is likely to be the offering to the public of 25% of Nitel’s shares, which BPE plans will take place this year. The sale has arisen following the bungled sale of the telecoms corporation to a core investor last year. The flotation will have an estimated value of N21bn (US$164m) and will open by the end of August, having been delayed from October 2002.

Infrastructure

Government aims to boost In spite of the large sums of money invested by the Obasanjo administration to electricity output by 2007 boost power generation and supply, the state-run National Electric Power Authority (NEPA) has continued to perform dismally, struggling to maintain output at just over half of its 5,900-mw installed capacity owing to frequent breakdowns of its decrepit and poorly maintained facilities. The last of the most serious of these was in January 2003 (February 2003, page 30). In his inauguration speech on May 29th, Mr Obasanjo said that his administration will expand electricity output to at least 10,000 mw by 2007. However, he has

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pledged himself to meeting similar targets before. Moreover, he has recently been the source of delays in reforming NEPA. In March the National Assembly passed the long-awaited Power Reform Bill needed for NEPA’s privatisation, but by July the president had not signed it into law, apparently because he objects to aspects of the legislation. The need for the government to show more determination in liberalising the energy sector was clearly illustrated by Andrew Alli, the International Finance Corporation’s country manager for Nigeria. At a seminar in Lagos in June, he argued that whereas the country’s sustainable electricity generation capacity is currently below 4,000 mw, the nation needs 12,000 mw. Such an improvement in power supply would not only require billions of dollars of investment!which the government patently does not have!but even if it did, it lacks the institutional capacity to deliver the required reforms. As such, the only real solution to Nigeria’s energy problem is the unbundling and privatisation of NEPA.

The government liquidates The federal government has finally opted to liquidate the heavily indebted insolvent Nigeria Airways national carrier, Nigeria Airways, a step many observers believe was long overdue. The former information minister, Jerry Gana, said that the decision was taken by the cabinet on May 21st, before it was dissolved, after the government’s failed attempts to revive the ailing airline. Arguing that the more money the government injects into the airline to revive it, the more it seems to go into debt, Mr Gana said that the government would work out measures to establish a private airline that can grow into becoming the national carrier. Nigeria Airways, established in 1959, has, for over two decades, epitomised all that is bad about state management and parastatals in Nigeria with its fleet gradually being depleted from 30 aircraft in the early 1980s to only two planes. The move was not unexpected, as the former aviation minister, Keme Chikwe, had recently said that the government might liquidate the airline as a pre- emptive measure if it looked as though a case currently being heard against the company in the high court!over unpaid debts to some British organisations, including the British Airport Authority and Inland Revenue Services!would be successful. Just before Abuja announced Nigeria Airways’ liquidation, the aircraft leasing company, Air Atlanta Icelandic, started the process of suing the airline over unpaid debts. In the absence of a national carrier capable of flying overseas, international airlines will continue to dominate the provision of air services into and out of the country. Hoping to build on some of the publicity generated by the stopover visit to Nigeria by the US president, George Bush, on May 29th, World Airways became the first US airline to make a direct regular flight from the US to Nigeria following the lifting of the ban imposed on such flights by Washington in 1993. World Airways will now schedule regular flights between Lagos and the American cities of New York, Houston and Atlanta.

Foreign trade and payments

The current-account deficit According to the Central Bank of Nigeria (CBN), the country’s current-account narrows marginally surplus narrowed marginally compared with 2001, falling from 4.9% of GDP in 2001 to 3.9% of GDP in 2002. The Central Bank estimates that although oil exports fell in 2002 compared with 2001!as a result of lower oil production!

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imports also contracted significantly, resulting in only a relatively small reduction in the trade surplus. There was also a significant narrowing of the deficit on the services account, which was only US$2.3bn in 2002, compared with nearly US$3bn in 2001. This was not because of a decline in services debits, but a substantial increase in services credits, which, according to the CBN, rose from US$1.6bn in 2001 to US$2.5bn in 2002. The CBN provides no rationale for this in its commentary on the data, concentrating its analysis instead on the size of the overall deficit on the services account.

Balance of payments (US$ m) 2000 2001 2002 Exports 19,141.40 17,884.10 15,563.10 Imports -8,721.30 -11,030.10 -9,532.30 Trade balance 10,420.10 6,854.00 6,030.80 Services (net) -1,468.00 -2,968.50 -2,342.50 Income (net) -3,565.30 -3,073.20 -3,163.80 Current transfers (net) 1,627.70 1,358.40 1,408.70 Current-account balance 7,014.50 2,170.70 1,933.20 Current account (% of GDP) 14.3 4.9 3.9 Net capital account 32.70 – 54.30 Net financial account -3,872.90 -1,887.50 -6,274.80 Direct investment 1,140.70 1,183.50 1,868.00 Portfolio investment 502.50 826.80 133.50 Capital & financial account balance -3,840.20 -1,887.50 -6,220.50 Net errors & omissions -83.90 -62.20 -76.40 Overall balance 3,090.40 221 -4,363.70

Source: Central Bank of Nigeria, Annual Report and Statement of Accounts 2002.

Although the CBN data are a useful guide to trends in the current account, the Central Bank has still not taken on board concerns raised by the IMF about the under recording of imports and services payments, which means that it probably overestimates the size of the current-account surplus by a considerable margin. For example, in the IMF’s Direction of Trade Yearbook, Nigeria’s imports are put at US$12.1bn in 2002, US$2.6bn above the CBN’s figure. The IMF’s figure is derived not only by looking at the Nigerian trade data, but also at the export data from other countries; for example, US and EU exports to Nigeria which are often more reliable. However, even this excludes smuggling across Nigeria’s borders which is rife and would push imports up even further. In the case of services payments, in its last Article IV report on Nigeria, the IMF estimated that the net non-factor services deficit was US$3.74bn in both 2000 and 2001, substantially above the net services account deficit shown in the CBN data.

The import prohibition list is Despite its rhetorical commitment to liberalising the economy, the government expanded has recently expanded the list of goods banned for importation to include sugar, confectionery, canned and bottled beer, toilet roll, exercise books and envelopes. Also prohibited are two minerals used in oil drilling and the construction industry!barite and bentonite. The Nigeria Customs Service said in a statement on June 19th that the ban would be effective from July 1st, but that importers had a 21-day grace period to clear through customs items already

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bought. In recent years the government of the president, Olusegun Obasanjo, has banned the importation of a series of goods, mainly consumer products, as a protectionist measure to encourage local industrialists who complain about the influx of cheap imports.

Government sets new date for The government has also set a new date for the start of destination inspection destination inspection at ports of goods imported into Nigeria. The Nigerian Customs Service (NCS) said in June that the government had approved January 1st 2004 as the date for the re- introduction of destination inspection, which was initially scheduled to begin on January 1st 2002 but was shifted twice because of a lack of adequate infrastructure at the ports to make the system work. Importers have been deeply concerned that without a robust pre-inspection report, NCS officials would be able to use their new powers to extract additional fees and bribes from importers. Although Nigeria has been using pre-shipment inspection since 1979, it has continued to be plagued by problems, customs officials claiming that it has led to the under declaration of goods, the importation of fake and substandard cargoes, the concealment of goods and other abuses. However, even if some of these problems have been ironed out, the new scheme is likely to cause importers considerable problems, and delays in the time taken to clear imports, which is already very poor, are set to increase further.

External debt remains broadly The most recent internationally comparable data for Nigeria’s external debt is stable that published in the World Bank’s Global Development Finance 2003. These show that Nigeria’s external debt stock at the end of 2001 was US$31.1bn. The World Bank data include the debt-rescheduling deal that was agreed with the Paris Club in December 200o. However, the exact status of this deal is still not entirely clear, as Nigeria did not meet all of the agreed criteria for it to be implemented. In particular, although bilateral deals had been signed with a number of the Paris club creditors by the end of June 2003, some are still outstanding. However, we still expect the process to be completed in 2003, which will allow the agreement to become operational, even though an additional complication has arisen in that Nigeria has built up new arrears since the December 200o deal was agreed (to be exact, since the cut-off date of July 2001). The latest bilateral deal to be reached was with Spain in early June, which was the seventh to be reached. If a new agreement can be reached with the IMF in late 2003, then it is likely that Nigeria will meet the Paris Club again and agree a further rescheduling deal on Naples terms. Once again, this would seek to consolidate outstanding arrears and marginally reduce debt repayments. Although not strictly comparable with the data provided by the World Bank, which we use as our base data to make projections, according to the CBN’s 2002 annual report, Nigeria’s debt stock rose from US$28.35bn in 2001 to US$29.79bn in 2002. Although we expect that Nigeria will be able to agree a new rescheduling deal with official creditors, the outlook for writing off external debt is less promising given the government’s poor record on economic management and the fact that although Nigeria’s total external debt stock is large by the standards of Sub- Saharan Africa, it is not particularly onerous for the country by the standards outlined in the IMF-World Bank’s heavily indebted poor countries (HIPC)

Country Report August 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 34 Nigeria

initiative which seeks to reduce the external debt of many of the poorer countries of the world. Although Mr Obasanjo’s administration has pressed creditor governments for substantial debt relief!particularly early on its first term in office!arguing that traditional debt rescheduling deals have not reduced Nigeria’s crippling debt stock, the most likely response to this from creditors was laid out in June by the US ambassador to Nigeria, Howard Jeter. He stated that Nigeria was unlikely to win any formal debt forgiveness until it implements a comprehensive programme of economic reforms and enters, and remains in, a formal agreement with the IMF, for some time.

Foreign-exchange reserves rise, Having ended 2002 at US$8bn according to the CBN (US$7.3bn according to the but are revised IMF), there has been considerable confusion over trends in the country’s foreign-exchange reserves. As the price of oil remains high, the government budget has not been passed and the National Assembly has been dissolved, it is not surprising that reserves should have risen quite sharply. According to the CBN’s Economic Report for the Month of April they reached US$9.4bn. However, in the May report it stated in a footnote that reserves in April had been adjusted to US$8.2bn and that they had risen to US$8.3bn at end-May, but gave no explanation for the 13% change to the figure published in its previous month’s report. The numbers do change from month to month in the monthly CBN reports, but not usually by this margin, and such changes are usually explained by differences in the timing of valuations and exchange rates. This substantial change is more of a concern, although there could be a simple explanation. It also highlights the fact that although the CBN has become much better at publishing data in the last 12-months, it may need to explain any significant changes if these have arisen simply as a result of errors.

Foreign-exchange reserves (US$ m) 2002 2003 Dec Jan Feb Mar Apr May Old series 7,986.7 7,134.4 7,657.5 8,199.1 9,426.0 – Revised series – – – – 8,206.1 8,269.6

Source: Central Bank of Nigeria, Monthly Economic Reports.

Country Report August 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003