Country Report

Nigeria

Nigeria at a glance: 2006-07

OVERVIEW Following the failure of the widely unpopular bid to change the constitution, which would have allowed the president, , to stand for a third term, most potential candidates are actively starting to campaign for the 2007 elections, which they expect will be more open and closely contested than the polls in 1999 or 2003. Nigeria faces considerable political uncertainty in the run-up to the presidential and legislative elections next April. The situation is complicated by the fact that Mr Obasanjo has little time for either of the two heavyweight northern candidates who are currently best placed to secure the presidential candidacy for his party, the People’s Democratic Party. As a result, the president is likely to step up efforts to find alternative candidates who are more committed to reform, although none is likely to have the financial resources or political networks of the leading contenders. Although the Economist Intelligence Unit expects economic growth to remain robust in the non-oil sector, ongoing unrest in the Niger Delta will continue to constrain oil production in 2006, pushing down overall GDP growth to 4.2%. However, with oil production set to pick up strongly in the second half of 2007, growth should pick up to 5.6% in 2007.

Key changes from last month Political outlook • There has been no major change to our political outlook. Economic policy outlook • There has been no major change to our economic policy outlook. Economic forecast • New data from the Central Bank of Nigeria show that foreign investment into Nigeria was strong in 2005. Net foreign direct investment (FDI) inflows increased to US$2.3bn, helped by non-oil investment. Portfolio inflows rose even more dramatically, to US$2.9bn, largely because of the recapitalisation of the banking sector. Although provisional data show that investment inflows remained strong in early 2006, we expect them to fall back sharply as political uncertainty mounts in the run-up to the April 2007 elections.

August 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

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

Copyright © 2006 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-4204

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

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

Nigeria 1

Contents

Nigeria

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 9 Economic policy outlook 11 Economic forecast

13 The political scene

22 Economic policy

26 The domestic economy 28 Oil and gas 31 Manufacturing 32 Agriculture 32 Infrastructure 33 Finance and other services

33 Foreign trade and payments

List of tables

11 International assumptions summary 13 Forecast summary 23 Federal government budget 25 Domestic debt stock by instrument 26 Breakdown of GDP 28 Naira exchange rates 30 Gas production and main uses 34 Foreign investment into Nigeria 34 Federal government external debt to private creditors

List of figures

13 Gross domestic product 13 Consumer price inflation 28 Official and parallel exchange rates, 2006 29 Monthly oil production

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006

Nigeria 3

Nigeria August 2006 Summary

Outlook for 2006-07 Following the failure of the widely unpopular bid to change the constitution, which would have allowed the incumbent president, Olusegun Obasanjo, to stand for a third term, most potential candidates are actively starting to campaign for the 2007 elections, which they anticipate will be more open and closely contested than was the case in 1999 or 2003. Nigeria faces considerable political uncertainty in the run-up to the presidential and legislative polls, both of which are scheduled for next April. Although the Economist Intelligence Unit expects economic growth to remain robust in the non-oil sector, ongoing unrest in the Niger Delta will continue to constrain oil production in 2006, pushing real GDP growth down to 4.2%. However, with oil output set to pick up strongly in the second half of 2007, GDP growth is forecast to recover to 5.6% in 2007.

The political scene Candidates have begun election campaigning following the decision by the Senate not to amend the constitution to allow Mr Obasanjo to run for a third presidential term. The president has reshuffled the cabinet, which ultimately led to the resignation of the finance minister, Ngozi Okonjo-Iweala. He has also implemented a major shake-up of Nigeria’s military leadership.

Economic policy The administration has announced plans to lay off 33,000 civil servants by the end of the year. The president and his economic team have continued to assure local and foreign investors that the administration’s reforms will survive the political transition in 2007. The administration has announced plans to settle the government’s outstanding domestic debt arrears before leaving office.

The domestic economy The Central Bank of Nigeria (CBN) estimates that real GDP grew by 6.2% in 2005, helped by strong growth in the agricultural sector. The CBN has raised the minimum rediscount rate by 100 basis points to 14% to help keep inflation in check. The year-on-year inflation rate was 10.5% in May, down from 12.6% in April. The premium between official and parallel exchange rates has narrowed sharply since the CBN’s liberalisation of the foreign-exchange market. Oil production has begun to pick up following problems in the Delta region in late 2005 and early 2006. The third attempt to privatise the telecommunications parastatal, Nigeria Telecommunication, has suffered a setback as Transcorp has struggled to make the initial payment.

Foreign trade and payments CBN data shows that foreign direct investment amounted to US$2.3bn in 2005, helped by increased investment in the non-oil sector.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: August 4th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 4 Nigeria

Political structure

Official name Federal Republic of Nigeria

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

Legal system Based on English common law

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

National elections Most recent legislative election, April 12th 2003, most recent presidential election, April 19th 2003; Olusegun Obasanjo was re-elected to the presidency, while his party, the PDP, won a majority of seats in both houses of the National Assembly; he was sworn in on May 29th 2003; next national elections scheduled for April 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); Advanced Congress of Democrats (ACD); All Nigeria People’s Party (ANPP); Alliance for Democracy (AD); All Progressive Grand Alliance (APGA); National Democratic Party (NDP); 37 political parties are currently registered

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

Key ministers Agriculture Commerce Aliyu Modibo Communications Defence Education Obiageli Ezekwesili Environment Federal Capital Territory Nasir El-Rufai Finance Foreign affairs Va can t Health Industry Information Internal affairs Justice & attorney-general of the federation Bayo Ojo Labour & productivity Hassan Lawal Police Power & steel Solid minerals Leslie Obiorah Transport Abiye Sekibo Water resources Mukhtar Shagari Works Obafemi Anibaba

Central Bank governor Charles Soludo

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 5

Economic structure

Annual indicators 2001a 2002a 2003 a 2004 a 2005b GDP at market prices (N bn) 5,339 5,632 7,533 9,575 11,785 GDP (US$ bn) 48.0 46.7 58.3 72.1 89.8 Real GDP growth (%) 4.4 3.8 10.4 6.4 6.2c Consumer price inflation (av; %) 18.8 13.0 14.1 19.4 13.5a Population (m) 126.6b 129.9b 133.2 b 136.5 b 139.8 Exports of goods fob (US$ m) 19,598 17,672 27,250 37,317 b 49,426 Imports of goods fob (US$ m) -11,482 -13,631 -17,193 -15,175 b -22,456 Current-account balance (US$ m) 1,256 -5,400 -1,569 3,476 b 7,536 Foreign-exchange reserves excl gold (US$ m) 10,457 7,331 7,128 16,956 28,280a Total external debt (US$ bn) 31.0 30.5 35.0 35.9 20.9 Debt-service ratio, paid (%) 11.2 7.4 5.5 5.8 b 4.0 Exchange rate (av) N:US$ 111.23 120.58 129.22 132.89 131.27a a Actual. b Economist Intelligence Unit estimates. c Provisional estimate from Central Bank of Nigeria.

Origins of gross domestic product 2005a % of total Components of gross domestic product 2005a % of total Agriculture (excl livestock) 38.6 Private consumption 61.9 Livestock 2.6 Government consumption 15.1 Crude petroleum & gas 24.3 Gross fixed capital formation 16.0 Manufacturing 3.8 Exports of goods & services 33.3 Wholesale & retail trade 13.6 Imports of goods & services -26.3 Finance & insurance 4.0

Principal exports 2005a US$ m Principal imports 2005a US$ m Oil 46,771 Manufactured goods 6,105 Gas 456 Chemicals 4,599 Machinery & transport 4,172 Food & live animals 1,318

Main destinations of exports 2005b % of total Main origins of imports 2005b % of total US 54.0 China 10.5 Brazil 10.4 US 7.4 Spain 8.3 UK 6.9 France 3.2 Netherlands 6.2 a Provisional data from Central Bank of Nigeria. b Derived from partners’ trade returns; subject to a wide margin of error.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 6 Nigeria

Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Output Industrial production index (2000=100) 106.2 105.7 106.6 111.7 111.8 111.8 111.6 111.3 Industrial production index (% change, year on year) 2.8 2.2 3.5 1.0 5.3 5.8 4.7 -0.4 Prices Consumer prices (% change, year on year)a 18.9 15.0 12.5 12.9 16.8 17.9 17.4 n/a Petroleum spot price (Bonny Light 37°; US$/barrel) 42.1 43.8 47.9 52.0 63.2 57.9 62.8 70.9 Financial indicators Exchange rate N:US$ (av) 132.3 132.4 132.4 132.3 131.0 129.3 128.3 127.2 Exchange rate N:US$ (end-period) 132.4 132.4 132.4 132.4 129.0 129.0 127.3 127.2 Discount rate (end-period) 15.0 15.0 13.0 13.0 13.0 13.0 13.0 14.0 M1 (end-period; N bn) 1,262.91 1,330.66 1,469.58 1,454.23 1,557.01 1,541.65 n/a n/a M1 (% change, year on year) -0.1 8.6 22.3 19.7 23.3 15.9 n/a n/a M2 (end-period; N bn) 2,156.84 2,263.59 2,568.07 2,691.29 2,773.00 2,631.10 n/a n/a M2 (% change, year on year) 8.9 14.0 21.9 27.4 28.6 16.2 n/a n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 22,740 23,845 20,682 21,565 24,636 23,922 23,337 26,161 Stockmarket index (% change, year on year) 38.8 18.5 -9.7 -25.3 8.3 0.3 12.8 21.3 Sectoral trends Crude oil production (m barrels/day)b 2.35 2.32 2.36 2.43 2.39 2.45 2.23 2.19 Crude oil production (% change, year on year) 8.3 1.8 1.3 4.3 1.7 5.6 -5.5 -9.9 Foreign trade (US$ m) Exports fob 8,314 8,589 8,645 10,001 11,943 8,151 8,093 12,270 Petroleum 7,626 7,968 7,993 9,321 11,470 7,410 9,614 11,569 Imports cif -3,405 -3,346 -3,711 -4,404 -4,616 -3,908 -4,989 -3,235 Trade balance 4,909 5,243 4,934 5,597 7,327 4,243 3,104 9,035 Foreign reserves (US$ m) Reserves excl gold (end-period) 12,873 16,956 21,810 24,370 30,024 28,280 36,073 36,629 a The 12-month moving average for March, June, September and December. The Central Bank of Nigeria uses this rate as its official measure of inflation. b Excluding condensates. Sources: Central Bank of Nigeria; IMF, International Financial Statistics; Direction of Trade Statistics; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence; Bloomberg.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 7

Outlook for 2006-07

Political outlook

Domestic politics Nigeria faces a period of considerable political uncertainty in the run-up to the next presidential and legislative elections, which are scheduled to be held in April 2007. This reflects the nature of the political system, where competition for office is intense, with the political elite more occupied by efforts to influence the outcome of the polls and retain political influence after them than with pushing through much-needed political and economic reforms. Following the failure of the widely unpopular bid to change the constitution—which would have allowed the incumbent president, Olusegun Obasanjo, to stand for a third term—most leading politicians have already begun to plan and actively campaign for what they anticipate to be a more open and closely contested election than was the case in either 1999 or 2003. However, the situation is made extremely difficult by the fact that Mr Obasanjo has little time for either of the two heavyweight northern candidates who are currently best placed to secure the People’s Democratic Party (PDP) nomination for the presidency—the vote to select the candidate is likely in late 2006. These are his deputy, Atiku Abubakar, and Ibrahim Babangida, a former military ruler (1985-93). Although the PDP nomination is the prize—the party is fairly well established and interwoven into the apparatus of the state—the losing candidate may seek to contest the poll for a rival party, and in the process seek to undermine the PDP as an effective political force. A number of high-profile politicians have been attracted to the Advanced Congress of Democrats—a new party launched in April—which could provide a vehicle for Mr Atiku. Although efforts have been made to find alternative candidates, none is likely to have the financial resources or political networks to match those of Mr Atiku or General Babangida. There seem to be two alternatives. Under the first scenario, the president selects an alternative northern candidate. The front- runner seems to be the former national security adviser, Aliyu Mohammed Gusau. However, he has spent his entire career in the political shadows and may find it hard to adapt to the level of scrutiny that running for office in Nigeria is likely to attract. Under the second scenario, therefore, the president may throw his weight behind one of his favoured state governors. The governors of Kaduna, Nassarawa and Katsina have all been mentioned as potential contenders. Some reports suggest that Mr Obasanjo could back a southern candidate, with Peter Odili from Rivers and Donald Duke from Cross Rivers most frequently mentioned. But support for a southerner is more likely to be a spoiling tactic, although presidential bids by either would improve their chances of selection as vice-presidential running-mate to a northerner. The immediate political outlook has been further complicated by the cabinet reshuffle in June, which saw the redeployment, and subsequent resignation, of the respected finance minister, Ngozi Okonjo-Iweala. Some political analysts have argued that the president felt that Mrs Okonjo-Iweala’s move to the foreign affairs ministry would have allowed her to gain broader experience,

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 8 Nigeria

and would distance her from political difficulty if corruption were to rise in the run-up to the 2007 elections. This would then have enabled her to contest the polls as either a candidate for the presidency or, more probably, as a running- mate to the de facto leader of the reform team within the government, the Federal Capital Territory minister, Nasir El-Rufai. Other analysts take a more cautious view. They are concerned that the reshuffle may simply destabilise what had become an increasingly influential clique at the heart of government, and will hamper any attempts by Mrs Okonjo-Iweala, or other members of the reform team, to run for high office. However, the president’s capacity to intervene on behalf of any protégé is likely to be limited. The lack of political exposure of leading reform team members— technocrats who have so far made an asset of their absence of party-political pedigree—leaves them ill-equipped to challenge more established rivals. In addition, Mr Obasanjo’s bid to secure a third term in office has generated considerable ill-feeling, which has undermined his current political position. Despite the lack of clarity as to who will compete in—let alone win—the elections, if the country is able to resolve these rising political tensions and complete the electoral process, the prospects for the survival of a civilian government remain good—even if the process is flawed and the elected president compromised. Although this will continue to generate political instability, with the country stumbling from crisis to crisis, it should be noted that Mr Obasanjo was not a natural reformer early in his presidency, growing into the role only in his second term, a pattern that could well be repeated. Meanwhile, with the attention of those in government and the formal opposition focused on the elections, there is a real possibility that destabilising political forces will be able to act with impunity. There could be a sharp increase in ethnic and religious tensions, and the political process could still be marked by an unexpected assassination. It is also likely that the conflict in the volatile oil-producing areas of the Niger Delta, where acts of sabotage were carried out against multinational oil companies in early 2006, will escalate further in the run-up to the elections. The swampy and heavily forested terrain in the Delta makes it difficult to use conventional military tactics to track down the vigilante groups orchestrating the attacks. Violence could break out in other potential hot spots such as the ethnically mixed cities of Lagos, Kano and Kaduna, where poverty is most visible and the population most cynical about corruption. Problems could also emerge in states such as Anambra, Plateau, Benue and Taraba, which have a recent history of tension. Lastly, if the election process were to degenerate quickly, stopgap measures, such as a military-backed interim government, would be introduced to keep the country together.

International relations With the president increasingly concentrating on domestic political issues in the coming year, the appointment in June of the high-profile finance minister, Mrs Okonjo-Iweala, to the foreign affairs portfolio represented an attempt to reassure the international community that the elections would pass off reasonably peacefully, and that any incoming administration would continue with the reform programme. However, her subsequent resignation and the fact that the post has been left empty, even if only temporarily, confirms that foreign

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 9

policy will continue to take a back seat in the run-up to the elections. Meanwhile, the president will continue to be an influential voice in efforts to settle regional disputes, should these arise, while also ensuring that Nigerian troops remain at the forefront of any peacekeeping missions, especially if they help to promote the country as a leading power on the continent. Finally, one outstanding international issue seems to have been at least partly resolved with the June agreement to accelerate implementation of a much- delayed International Court of Justice ruling for the transfer of sovereignty of the Bakassi peninsula to Cameroon (although the full transfer will still take several years and may be subject to further setbacks).

Economic policy outlook

Policy trends Although economic policy will continue to be guided by the National Economic Empowerment and Development Strategy (NEEDS), which is due to run until 2007, the time for implementing the reforms detailed in NEEDS has effectively run out. With election campaigning set to pick up sharply in the second half of 2006 and with the National Assembly sidetracked by political developments, the deadlock is likely to limit the ability of the small team of economic reformers within the administration to push on with the programme. Although the reformers are likely to continue to put on a brave face about what can be achieved, increasingly the focus will be on consolidating the reforms currently being implemented in order to limit the capacity of any incoming administration to reverse them. As a last resort, the president may use his considerable executive powers to try to complete some outstanding reforms, including the passage of the Fiscal Responsibility Bill, tax and port reform, and the sale of more state-owned industries. The government will continue to highlight its success in meeting the main macroeconomic targets outlined in the NEEDS policy. Its claims must be viewed with caution: some apparent successes are as much the result of high oil prices and rising oil and gas production as the benefits of genuine economic reform. Nevertheless, it would be wrong to dismiss the government’s reform efforts entirely. There has been progress in budgetary management, saving windfall oil revenue, privatising the power sector and pushing through radical restructuring of the banking sector. Regardless of the commitment of elements of any administration to economic reform, progress will be hampered by the deeply entrenched vested interests in the country, the weak civil service, and confusion caused by overlaps and contradictions between local, state and federal government actions. A huge list of issues will remain to be resolved by the new administration in 2007, ranging from insecure property rights to the weak judicial system and further reform of the civil service, although much will depend on the new president’s commitment to continuing the current reform programme.

Fiscal policy With the price of Brent Blend forecast to average US$70/barrel in 2006, the Economist Intelligence Unit expects the government to continue its fiscal strategy of recent years. This has seen it boost spending—notably on infrastructure—while saving part of the windfall oil revenue for use in future

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 10 Nigeria

years when oil prices fall back (this is currently being implemented through an informal agreement, but is expected to be formalised under the Fiscal Responsibility Bill, which should be passed later this year). Despite the rise in spending, we estimate that, because of the revenue windfall, the federal government will run only a very modest deficit, of 1% of GDP, in 2006. Although spending—for example on civil-service salaries and various proposed power projects—could pick up sharply in late 2006 and into early 2007 if the government gives in to pre-election pressures, the change in administration in 2007, which is likely to paralyse all levels of government for at least three months, will help to control spending. Therefore, even though oil prices are expected to fall back, we forecast a fiscal deficit of only 1.7% of GDP for the year. The government can easily finance deficits of this size through domestic borrowing, and it will also continue to issue more long-term government bonds to encourage the development of a domestic capital market (although some of these will be part of the process of clearing arrears to contractors).

000 Monetary policy A decision by the Central Bank of Nigeria (CBN) in June to raise the minimum rediscount rate (MRR) by 1 percentage point, to 14%, is arguably a bold move in the current political climate. Most political pressure is aimed at keeping interest rates low in order to boost non-oil economic activity and to allow cheaper lending to the politically connected. In response to this pressure, the Bankers’ Committee (which consists of commercial banks and discount houses) has agreed since November 2002 to limit lending rates to the MRR plus 4%. The decision to increase the MRR appears to be designed to persuade the sceptical local financial market that the government is determined to keep a tight grip on the economy—and inflationary pressures in particular—in the typically free- spending pre-election environment. The move is the first change in the benchmark interest rate since February 2005, when it was cut from 15% to 13%. At that time, the CBN committed itself to a more interventionist policy, stating that it would review the interest rate on a quarterly basis, with its decisions depending on trends in the seasonally adjusted inflation rate. At the same time as the rise in the MRR, the CBN governor, Charles Soludo, said he was working on a new framework for monetary policy that would include “fundamental changes”. Details of this remain sketchy but, given the pressures on the government to boost spending, the political uncertainty in the run-up to the elections and the difficulty of controlling the excess liquidity in the economy caused by high oil prices, the CBN will struggle to reduce inflation to single digits during the forecast period. The introduction of the wholesale Dutch auction system (DAS) in late February was intended to allow a unification of the DAS, the interbank and the parallel exchange rates in the medium term. However, for this to happen, the CBN would have to liberalise the operation of the DAS market further, something that it has been slow to do. Significant liberalisation would also complicate the CBN’s efforts to keep the naira trading within a 3% band based around its central rate. The CBN has emphasised that the band has helped to improve confidence in the naira, as well as limiting the currency’s appreciation, given high oil prices (although it has also limited its ability to use the exchange rate to control inflation). However, the CBN’s commitment to defending the band has

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 11

yet to be tested, and if oil prices were to fall back sharply, this would be possible only if it were prepared to run down its foreign-exchange reserves.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2004 2005 2006 2007 Real GDP growth World 5.6 5.0 5.2 4.8 OECD 3.2 2.7 3.0 2.3 EU25 2.4 1.7 2.4 2.1 Exchange rates ¥:US$ 108.1 110.1 114.3 100.3 US$:€ 1.244 1.245 1.258 1.385 SDR:US$ 0.675 0.677 0.678 0.637 Financial indicators ¥ 2-month private bill rate 0.00 0.00 0.20 0.58 US$ 3-month commercial paper rate 1.48 3.49 5.46 5.53 Commodity prices Oil (Brent; US$/b) 38.5 54.7 69.7 66.0 Gold (US$/troy oz) 409.5 445.0 639.5 700.0 Food, feedstuffs & beverages (% change in US$ terms) 8.5 -0.5 8.9 -4.5 Industrial raw materials (% change in US$ terms) 21.0 10.3 41.4 -3.4 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Although growth in the global economy is forecast to decelerate from 5.2% (at purchasing power parity) in 2006 to 4.8% in 2007, this compares favourably with rates achieved for much of the 1990s. As a result of the ongoing risk premium built into the oil price—because of the continued risk of supply disruptions for geopolitical or other reasons—oil markets are expected to remain nervous and speculators are likely to continue to bet on higher prices. Because of this, coupled with refining capacity constraints, we expect the price of Brent Blend to remain high, averaging US$70/barrel in 2006 and US$66/b in 2007, even though growth in demand is expected to slow and world production is forecast to start picking up in the next two years.

Economic growth The CBN provisionally estimates Nigeria’s real GDP growth in 2005 at 6.2%, a robust rate by historical standards, reflecting strong growth in agriculture and services and increased government spending on infrastructure, against a background of steady rises in oil and gas production. Although strong growth in the non-oil sector is set to continue during 2006, we expect periodic flare-ups of political unrest in the Delta region to constrain growth in oil and gas production this year and in the first half of 2007, although oil output should pick up sharply in the second half of 2007. Moreover, because of the weakness of the country’s infrastructure (notably the electricity supply), as well as the low level of income per head and major constraints in the labour market—there is a shortage of skilled and manual workers, and it is difficult to find senior managers—growth will be well below its optimum level, particularly in manufacturing. These problems will be compounded by the high level of

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 12 Nigeria

uncertainty surrounding the political transition in 2007. Given these constraints, we forecast that growth will slow to 4.2% in 2006 and 5.6% in 2007. Another concern is that, despite the robust growth of recent years, its impact on reducing poverty has been far less than the headline figures suggest. This is because of the heavy dependence on the oil and gas sector, which has few linkages to the rest of the economy and tends not to create significant new employment.

Inflation Having fallen sharply in the final quarter of 2005, the inflation rate continued to trend downwards in early 2006: the year-on-year rate fell to only 7.9% in February, owing to the ready availability of most foodstuffs, the stability of domestic fuel prices and the ongoing stability of the naira, which has helped to keep the cost of imports down. With the government committed to making no further increases in domestic fuel prices during 2006, and with rises in food prices expected to remain modest in the second half of the year, year-on-year inflation should remain around the 10% level. It is, however, unlikely to fall into single digits for any prolonged period, owing to high levels of government spending (particularly during the second half of 2006 and early 2007), a relatively loose monetary policy and high levels of liquidity in the economy. Overall, inflation is forecast to average 12.3% in 2006 and 10.8% in 2007.

Exchange rates Given the weakness of the US dollar on global currency markets, coupled with high oil prices, the CBN has had little difficulty intervening in the market to keep the naira within its 3% trading band, and the currency remained broadly stable in 2004-05. The continuing strength of oil prices, together with ongoing implementation of the CBN’s intervention band, should ensure that this stability is maintained throughout the forecast period. We forecast that the naira will average N127.9:US$1 in 2006 and N131.5:US$1 in 2007. However, the gap between the official rate and the parallel rate remains significant, despite the introduction in February of the wholesale DAS, and despite steps to liberalise the market further and make foreign-exchange applications easier. Pressure on the naira is likely to be especially strong in late 2006 and early 2007 as political uncertainty increases in the election run-up, which could see the currency’s value slip significantly on the parallel market. However, as long as oil prices remain high, the CBN should be able to maintain the naira’s official value.

External sector Nigeria traditionally runs a trade surplus, which is offset by a deficit on the services account, with trends in these two more volatile components driving changes in the overall current account. The current transfers account is traditionally in surplus, a trend that is expected to continue throughout 2006-07, owing to large inflows of private transfers from the Nigerian diaspora. The income account, by contrast, is always firmly in deficit, owing to profit remittances, notably from oil companies. Even allowing for a rapid pick-up in imports, high services payments and rising income debits, and potential disruptions in supply stemming from political problems in the Niger Delta, we expect the trade balance, and hence the current account, to remain firmly in surplus, given that oil prices are now expected to average over US$65/b in 2006-07. We forecast that the current-account surplus will increase from an estimated 8.4% of GDP in 2005 to 12.4% of GDP in 2006, before falling back modestly to 11.4% of GDP in 2007 as oil prices decline marginally.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 13

Forecast summary (% unless otherwise indicated) 2004 a 2005 b 2006c 2007c Real GDP growth 6.4 6.2 d 4.2 5.6 Industrial production growth 3.7 3.9 a -1.8 3.8 Gross agricultural production growth 6.5 8.2 8.5 5.3 Consumer price inflation (av) 19.4 13.5 a 12.3 10.8 Consumer price inflation (year-end) 10.0 11.6 a 17.5 10.6 Commercial lending rate 19.2 17.9 a 16.7 17.3 Government balance (% of GDP) -2.0 -1.4 -1.0 -1.7 Exports of goods fob (US$ bn) 37.3 b 49.4 60.8 66.4 Imports of goods fob (US$ bn) 15.2 b 22.5 24.7 27.2 Current-account balance (US$ bn) 3.5 b 7.5 14.6 14.7 Current-account balance (% of GDP) 4.8 b 8.4 12.4 11.4 External debt (year-end; US$ bn) 35.9 20.9 4.7 4.8 Exchange rate N:US$ (av) 132.9 131.3 a 127.9 131.5 Exchange rate N:¥100 (av) 122.9 119.3 a 111.9 131.2 Exchange rate N:€ (year-end) 179.2 152.2 a 173.2 181.5 Exchange rate N:SDR (year-end) 205.5 184.4 a 198.3 208.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Provisional estimate from Central Bank of Nigeria.

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

Nigeria Sub-Saharan Africa Nigeria Sub-Saharan Africa 12.0 20.0 18.0 10.0 16.0 8.0 14.0 6.0 12.0 10.0 4.0 8.0 2.0 6.0 0.0 4.0 07 02 03 04 05 06 02 03 04 05 06 07 2001 2001

The political scene

Manoeuvrings to be the next Since the Senate voted against a controversial constitutional amendment that

president start would have enabled the president, Olusegun Obasanjo, to run for a third term of office in 2007, the manoeuvrings to succeed him have begun. The defeat of the amendment came as a surprise to many people as the leadership of the ruling People’s Democratic Party (PDP), which has a comfortable overall majority in the National Assembly, seemed broadly to support the amendment. However, there was stiff opposition from supporters of the vice-president, Atiku Abubakar, and other influential politicians within the party, many of whom coveted Mr Obasanjo’s job, as well as from civil society organisations who condemned the moves to keep the president in power as the undemocratic

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 14 Nigeria

machinations of an incumbent to manipulate the system for selfish ends, despite already having ruled Nigeria longer than any other leader (May 2006, The political scene).

Race to be next president is The president responded to the defeat of the so-called third term agenda in a

still wide open statesmanlike fashion, presenting the development as a victory for democracy, while seeking to distance himself from the fracas and divisions the campaign had caused within the PDP. He criticised the media for publishing baseless speculations on the subject and what he called the “unfounded allegations” about him and his position concerning a third term. With the president out of contention, the path has been opened up for previously hesitant hopefuls to step up to join a presidential race that promises to be one of the most hotly contested in Nigeria’s 45 turbulent years of independence. However, the abortive battle to secure a third term has meant that in many ways the leading contenders are not yet in a position to launch their campaigns. To some extent, the country is experiencing a lull before election campaigning really picks up in late 2006, notably when the PDP eventually manages to agree when it will hold its long-awaited primaries to select its candidate. This hiatus also means that there currently is no true front-runner, although candidates can probably be divided into four broad categories, as follows. The first group is effectively a group of one, consisting of the vice-president, Atiku Abubakar, who has had his eye on the top job almost from the start of his political partnership with Mr Obasanjo at the 1999 elections. However, in recent years there has been a falling-out between Mr Atiku and the president, who has done little to counter the widely held belief that he is strongly opposed to his deputy succeeding him. Given these clear divisions, Mr Atiku’s influence in the PDP has waned in recent years, with many of his supporters having been removed from key positions or forced out of the party. However, the vice-president’s fortunes appear to be on the rise again following the defeat of the Obasanjo third term agenda. Mr Atiku told reporters, upon opening his presidential campaign office in Abuja in late May, that he intends to run as PDP candidate, apparently confounding the expectations of many political pundits and opposition politicians, who have maintained that the vice-president is biding his time in the ruling party before leaving to seek the presidential ticket of one of the recently formed opposition parties, most probably the Advanced Congress of Democrats (ACD).

Former military rulers aim to A second category of presidential hopefuls consists of former military rulers return to power via ballot-box who seek to emulate Mr Obasanjo by returning to power as a civilian leader. The main contenders in this respect are the retired generals Ibrahim Babangida and Muhammadu Buhari, both northern Muslims. General Babangida, a charismatic and well-connected politician who governed Nigeria between 1985 and 1993, is widely regarded as a potential front-runner in the presidential race, especially given his large personal wealth. Like Mr Atiku, the retired general is a member of the PDP, but is rumoured to have sponsored at least one of the new political parties as a possible vehicle for his presidential bid in the event of failing to win the nomination for the ruling party.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 15

General Buhari, who ruled Nigeria from 1983 until he was toppled by General Babangida in 1985, was the defeated candidate of the All Nigeria People’s Party (ANPP) in the 2003 elections. He has a reputation for being stringent, which when in office made him unpopular with unruly Nigerians as well as social democrats. Another retired general who has joined the presidential race is Mr Obasanjo’s former national security adviser, Aliyu Mohammed Gusau, who was sacked in June. Although no official reason was given for the dismissal, many analysts think it was related to his opposition to the president’s bid for a third term. General Gusau has a deep knowledge of security matters, having served as national security co-ordinator under the Babangida regime, but it is doubtful whether he has the popular appeal to win an open election. Yet another ex-soldier eyeing the presidency is Mohammed Marwa, a former Lagos state military governor (1995-98).

Incumbent state governors The third group of presidential contenders consists of incumbent state

also seek high office governors seeking higher office. At least eight of the 27 governors belonging to the PDP have signalled their interest in the party’s presidential nomination. They include the rulers of the northern states of Bauchi, Kaduna and Nassarawa, those of the south-south states of Akwa-Ibom, Cross Rivers and Rivers, as well as the governors of Abia and Enugu in the south-east. Newspapers reported that 14 PDP governors met in Akwa-Ibom to devise a strategy to ensure that the next president comes from among their ranks, but they failed to agree on who should be put forward. At least two of the ANPP’s seven state governors—those of Sokoto and Zamfara—have also indicated their interest in the presidency. The fourth group of presidential hopefuls comprises a miscellaneous collection of people who are either relatively new to politics, or who operate outside the political mainstream and probably have little prospect of achieving power. Such aspirants include the head of the Lagos Business School and a prominent pastor. However, the hope must be that they will improve the level of political debate and ask the appropriate questions of the leading candidates, even if they have little chance of winning the poll.

Squabbling over regional Despite the range of candidates seeking to contest the polls, so far there has

claims to the presidency been little sign that the election campaigns will generate serious policy debates. Most of the talk and political manoeuvring by the main contenders, at both federal and state level, has revolved around geo-ethnic claims to power, with politicians from different parts of the country staking their claims, not on the strength of their ideas, but on the entitlement of their particular ethnic group/zone to assume power. The strongest advocates of such regional claims to power come from the northern political elites, who claim that the PDP made a gentleman’s agreement before the 1999 elections that power would return to the north in 2007 after northern politicians agreed to back a southern candidate in the 1998 primaries. However, southern politicians reject the claim, with many arguing that even after Mr Obasanjo’s eight-year presidency, the north will have governed Nigeria for most of the years since independence. In early July a meeting of southern ethno-political organisations under the aegis of the Ethnic Nationalities

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 16 Nigeria

Movement pledged to work for a southern presidency, particularly from the south-south or south-east.

Mr Odili and Mr Duke may Politicians from the oil-producing south-south zone have been quite vocal in

contest the presidency demanding that Nigeria’s next leader should come from their area, a view which has grown with the rumours that the president is keen on the potential candidatures of at least two state governors from the region, Peter Odili from Rivers and Donald Duke from Cross Rivers. Politicians within the region are increasingly sensitive to the fact that although their region is the economic mainstay of the country, it has never produced its leader. The main problem is that the various ethnic minorities that make up the region’s population lack the numerical strength seriously to challenge Nigeria’s major ethnic groups in an geopolitical struggle for electoral power. However, many political commentators have linked the recent ethnic insurgency and the targeting of oil installations with the region’s demands to secure more power at the centre. Finally, politicians from the Igbo ethnic group in the south-east have also been arguing their case for a shift in power to their region. Although the Igbo is Nigeria’s third largest ethnic group, Igbo politicians have long complained of their marginalisation following the end of the 1967-70 civil war fought over the south-east secession attempt. In mid-June Igbo leaders met in Owerri to choose a presidential candidate from the region, but failed to reach a consensus and instead opted to set up a committee to look for a suitable candidate.

Political violence is already With no real front-runner and a growing ethnic and regional battle for power,

mounting there is an increasing possibility that a divisive election campaign may spill over into widespread political violence. There have already been a number of violent incidents linked to the elections and to tussles between rival contenders for power, especially at the state level. At least 15 people were killed in July in political violence in two southern states. At least seven people were reported to have died in fighting between gangs sponsored by two rival politicians from the town of Bodo in Rivers. In a different part of the state, six people lost their lives in clashes between rival gangs from Emohua and Ogbakiri communities connected with a power struggle between local figures manoeuvring for office in 2007. In early July two people were killed and several injured in fighting between rival factions of the ruling PDP at a political rally in Ekori in Cross Rivers state. In addition, in early June, there was an attempt to blow up the Port Harcourt home of the deputy speaker of the House of Representatives.

Militant attacks against oil By far the most serious manifestation of political unrest has continued to be in

industry intensify the Niger Delta, where it is linked to the campaign of violence waged by ethnic militants seeking local control of Nigeria’s oil revenue and greater political autonomy for the region, if not secession. Attacks by mainly ethnic Ijaw militias against oil installations and personnel reached a new level of intensity at the end of last year and have shown no sign of diminishing in 2006. If anything, the violence has escalated, resulting in the loss of about a quarter of Nigeria’s oil output so far this year. Dozens of oil workers have been kidnapped and several pipelines destroyed since January in attacks claimed mainly by rebels of

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 17

the Movement for the Emancipation of the Niger Delta (Mend), which emerged in late 2005 (February 2006, The political scene).

Kidnappings on the rise Although many political analysts argue that Mend is engaged in little more than organised robbery, it does have some immediate political demands, including the release from federal custody of a separatist militia chief, Mujahid Dokubo- Asari, who is facing treason charges, and the former Bayelsa state governor, Diepreye Alamieyeseigha, who has been impeached for money-laundering and is facing corruption charges after skipping bail in the UK. In early July the British authorities handed Nigerian officials a cheque for nearly £1m (US$1.8m) which police in London had seized from Mr Alamieyeseigha while investigating him for money-laundering (November 2005, The political scene). Recent violent incidents include the following: • a pre-dawn raid on June 2nd, in which eight foreign oil workers were abducted from an offshore rig operated by Norwegian firm Fred Olsen on behalf of Peak Industries of Nigeria, 42 km off the coast near Warri; • the kidnapping of five South Korean engineers and gas workers during an attack on June 7th on a gas plant operated by Shell, near Port Harcourt, in which several people were killed; • the kidnapping of two Filipino oil workers on June 20th by armed militants at a jetty at Akar Base, near Port Harcourt; • the abduction by gunmen of a Dutch man on July 6th who was working on Shell’s unfinished Gbaran gas-gathering plant in Bayelsa state; • two suspected explosions on July 12th at a crude oil pipeline operated by the Italian company Agip, in Bayelsa state, which caused damage and spillages, according to state government officials. In a separate incident in neighbouring , armed militants engaged troops protecting a convoy of Chevron supplies in a skirmish. According to the army, no-one was killed in the attack; • the seizure on July 25th by armed militants of the Ogbainbiri oil flow station, operated by Agip off Bayelsa state. The company said that the attack, which took place while about 40 workers were at the facility, had resulted in a considerable reduction in the amount of oil treated there; • the kidnapping on August 3rd of a German oil contractor in Port Harcourt by armed men dressed in military fatigues; and • the abduction by gunmen on August 4th of three Filipinos working at the Nigeria Liquefied Natural Gas complex in Bonny.

Government under pressure to The concerted attack against the oil industry in the Delta region is arguably the

resolve Delta crisis biggest challenge to the authority of the federal government since the civil war in the late 1960s, and clearly exposes the weakness of the Nigerian state. The disturbances have meant that around 700,000 barrels/day of oil production have been shut in since early in the year, and hence the government has lost large amounts of potential revenue at a time when world oil prices have been soaring. The crisis in the Delta is also of growing concern to oil-importing

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 18 Nigeria

countries as the instability in Nigeria is cited as one of the factors driving up world oil prices. However, the causes of the problems in the Delta are complex and deep-rooted, militating against their swift resolution.

Money is unlikely to resolve What is clear is that simply pumping more money into the Niger Delta will not

the problem necessarily provide a long-term solution to the crisis in the region, as there are other underlying causes besides local perception of unfair revenue allocation. The corruption and incompetence of local ruling elites has meant that increased federal funding for the region since 2000 has not led to much improvement in the living conditions of its inhabitants. Mr Obasanjo alluded to this when, on June 9th at the Nigeria Economic Summit (NESG), he described the Delta crisis as a total collapse of community life, noting that the derivation fund payments made to the region had not been wisely spent. The president also stressed that the problems in the Delta cannot be resolved quickly as the communities need to be rebuilt and jobs created, which can only be long-term goals. A shifting power configuration

The crisis in the Niger Delta can be seen as a manifestation of a shift in the configuration of Nigeria’s geo-ethnic politics over the past decade. In the initial post- independence period, politics in Nigeria was largely a triangular power struggle between its three main ethnic groups—the Hausa-Fulani, the Yoruba and the Igbo—to share the nation’s wealth, and there was little resistance from minorities. However, in recent years the minority groups—notably in the oil-producing region, especially the relatively large Ijaw group—have become increasingly vocal for not only a share of power, but also a greater share of the country’s oil wealth. The elites from the oil- producing region have become increasingly aware of the strategic strength of their position. This is one reason why some federal officials suspect that some ambitious political leaders from the Delta have not done as much as they could to rein in rebellious youths in their communities, and that some are fuelling the troubles to booster their own political bargaining positions.

Anambra continues to be Besides the Niger Delta, many other areas of Nigeria have been mired in

dogged by violence tension and violence fuelled by a cocktail of factors similar to those at play in the oil states, including popular disillusionment, widespread poverty and political opportunism. For example, the south-eastern state of Anambra has been in turmoil as a result of a power struggle between the state authorities and a local political kingpin, as well as the activities of the separatists fighting for an independent Igbo state. In one of the most recent incidents, two policemen were killed when dozens of armed men attacked and torched the central police station in the town of Nnewi in late July. Earlier, on June 19th, a prison in Onitsha was raided and more than 200 inmates freed. It is not clear who has been behind the incidents: the police blame members of the banned Movement for the Actualisation of the Sovereign State of Biafra (Mossob), while the state authorities claim that they are the work of the National Association of Road Transport Owners (Narto). Mossob, which is campaigning for an independent Igbo state, has been in conflict with the security forces for some time, and several of its members have been killed or arrested. Supporters of the state government claim that Narto has close links to Chris Uba, a rich and powerful kingpin in Anambra state, and is being used by

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 19

the PDP to destabilise Onitsha to get rid of the governor, Peter Obi, who was installed after his predecessor, Chris Ngige, stepped down in compliance with a court ruling in March that invalidated his 2003 election victory.

Opposition parties express In late May the chairman of the Independent National Electoral Commission

lack of confidence in INEC (INEC), Maurice Iwu, told reporters that his agency was “70% ready” to conduct the 2007 elections, which are to be held between April 7th and April 28th. Thirty-seven political parties are already registered with the INEC, although most are likely to field only a few candidates. Some politicians have complained that the timing of the polls ahead of the installation of the new governments on May 29th will not leave sufficient time to settle any disputed results (which is highly likely). Addressing this concern, Mr Iwu said that INEC was constitutionally required to conduct the polls no earlier than 60 days before the expiration of the tenure of the incumbent government, which means that voting could not be held before March 29th 2007. Some opposition politicians remain unsatisfied with this explanation and have expressed a lack of confidence in INEC’s capacity to oversee free and fair elections. The Conference of Nigerian Political Parties (CNPP), a coalition of several opposition parties, threatened in late June to boycott the elections unless INEC’s membership is reconstituted. The CNPP’s chairman, Balarabe Musa, told reporters that Mr Iwu is known to have a relationship with core members of the ruling party and the government. Mr Musa, a former civilian governor of Kaduna state, also called for the presidential elections to be held no later than the end of January. He warned that if the CNPP’s demands were not met, the coalition would mobilise Nigerians to oppose the results of any election conducted by INEC as currently constituted.

A boycott would create further Threats of boycotts of major political events by disgruntled opposition groups

electoral chaos are not unusual in a country in which many politicians are prone to grandstanding. However, the dispute could, if it persists, provide more mainstream parties and candidates with a rallying cause in the event of their defeat in the elections. The CNPP’s concerns also reflect the worry of many political analysts who doubt whether INEC has been sufficiently reformed in recent years to avoid a repeat of its failings when overseeing the 2003 elections, which local and foreign observers judged to have been marred by irregularities and fraud. Mr Iwu has pledged that local and foreign observers would be granted unrestricted access to the 2007 elections. Even at this early stage, some politicians are predicting a political crisis, owing to what they see as INEC’s inability to organise free and fair elections. They argue that the only solution would be the formation of a national interim government to take over from Mr Obasanjo next May. Understandably, this suggestion has been condemned by mainstream politicians confident of their chances of winning the forthcoming polls. The vice-president’s campaign team issued a statement in late July which strongly condemned attempts to create a political crisis by foisting an illegal interim government on the country. It maintained that INEC has sufficient time to organise credible elections and that it only needs to be allocated more resources to enable it to do so.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 20 Nigeria

Anti-graft agencies vow to rein Meanwhile, the Economic and Financial Crimes Commission (EFCC) has been

in corrupt politicians trying to clamp down on corrupt politicians ahead of the elections. The EFCC’s chairman, Nuhu Ribadu, said in a television interview on May 29th that his agency would launch a fresh crackdown on politicians, especially those aiming to participate in the 2007 polls. The EFCC has a responsibility to ensure that “rogues and thieves” will not get into the government, he said. The commission, along with other government agencies and non-governmental organisations (NGOs), has accused some state governors of using public funds to pursue their presidential ambitions. In early July Mr Ribadu told a summit looking at the possible challenges of the political transition in 2007, that the EFCC would soon publish the names of state governors it was investigating, in the hope that the exposure would stop them from contesting the polls. Many Nigerians share his view that there cannot be “free and fair” elections as long as corrupt politicians are in the running. However, Mr Ribadu is well aware of the difficulties faced by anti-graft agencies in pursuing corrupt politicians who are protected by constitutional immunity from prosecution while in office. Perhaps overoptimistically, he called on government officials seeking to contest the 2007 elections to resign their positions now in order to enable the EFCC to investigate them, thereby advancing probity and transparency in the democratic process.

US documents incriminate Meanwhile, the vice-president, Mr Atiku, has publicly denied an allegation that vice-president in bribe scandal he had accepted bribes from a US Congressman, William Jefferson, who is under investigation by the Federal Bureau of Investigation (FBI) for corrupt dealings with Nigeria (November 2005, The political scene). In a statement released by his Washington lawyers in mid-July, Mr Atiku said he had had “no relationship with Mr Jefferson, personal or private, other than the usual diplomatic courtesies” extended to a foreign official promoting development in Nigeria. According to official documents released in the US on June 6th, the FBI raided the Maryland home of Mr Atiku apparently in search of bribe money the FBI believed had been paid to him. The documents, cited by The New York Times, included an affidavit signed by an FBI agent who said that Mr Atiku had asked for at least half of the profits of a technology company controlled by Mr Jefferson that was seeking to do business in Nigeria. According to the documents, Mr Jefferson told colleagues of his plans to bribe Nigerian officials, including Mr Atiku, in exchange for help in winning business in Nigeria, and that Mr Atiku would be paid as much as US$500,000 in cash. The documents, released by a federal court, indicate that the Nigerian vice- president’s connection with Mr Jefferson went well beyond “usual diplomatic courtesies”, including an FBI agent’s statement that mobile-phone records suggested that Mr Jefferson had visited Mr Atiku’s Maryland home at around midnight on July 31st 2005 with the intention of delivering money to Mr Atiku while he was on a visit to the US. An FBI report in May revealed that, in a taped conversation, Mr Jefferson had described Mr Atiku’s wife, Jennifer, and an anti-HIV/AIDS NGO she runs, as fronts used for channelling illegal funds. However the FBI documents do not show if Mr Atiku ever received any money from Mr Jefferson. The New York Times reported that US government officials

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 21

have been reluctant to speculate publicly about the effects of the investigation of Mr Jefferson on US relations with Nigeria. Clearly, if the investigation and possible future prosecution of the US politician reveals damaging evidence of corrupt links with Mr Atiku, or any other senior Nigerian official, this would create an embarrassing situation, especially if Mr Atiku were to succeed in his bid to become president of Nigeria.

The president reshuffles key Mr Obasanjo made several changes to his government in June, in preparation

cabinet posts for the final leg of his term of office. He announced a major cabinet reshuffle on June 21st. Under this, the finance minister, Ngozi Okonjo-Iweala, was moved to head the foreign affairs ministry, but remained the chairperson of the Economic Management Team and retained oversight responsibilities for relations with external financial institutions and foreign transactions (although these responsibilities were later removed from her). Mrs Okonjo-Iweala’s deputy, Nenadi Usman, was upgraded to become finance minister. The outgoing foreign minister, Oluyemi Adeniji, was put in charge of the internal affairs ministry, and Obiageli Ezekwesili, the minister of solid minerals, became education minister. The changes came three weeks after five ministers were dropped from the cabinet to enable them to participate in the 2007 elections.

Mrs Okonjo-Iweala quits Less than two weeks after her redeployment to the foreign affairs ministry,

government Mrs Okonjo-Iweala resigned from the administration. It is not clear why she quit, but it was believed that she was unhappy with the unexpected decision to move her from finance and, subsequently, from heading the economic team. Mrs Okonjo-Iweala, who has a strong personality, is credited with having negotiated the landmark debt deal with the Paris Club. However, the deal has had a mixed response in Nigeria. Although it has been supported by some economists as a one-off step to cut the heavy debt burden, critics of the deal have complained about its cost and also because, they say, it shows that Nigeria’s economic policy is still controlled by the international finance agencies, particularly the IMF and the World Bank. The new finance minister, Mrs Usman, has clearly indicated that she plans to stick to the government’s reform programme, although some analysts believe that she will focus on domestic problems, rather than seeking the international spotlight. Presidential shake-up of military top brass

In late May the president, Olusegun Obasanjo, carried out a major shake-up of Nigeria’s military leadership. The Chief of Defence Staff, General , and the Chief of Air Staff, Air Marshal Jonah Domfa Wuyep, were sacked, along with the national security adviser, Aliyu Mohammed Gusau, a retired general. A government statement on May 30th named Lieutenant-General as the new Chief of Defence Staff; Major-General Owoye Andrew Azaze as the new Chief of Army Staff; and Air Vice-Marshal Paul Dike as the new Chief of Air Staff. Major-General Sarki Muktar was appointed national security adviser. No reasons were given for the changes. The dismissal of the national security adviser drew most public comment, as it appears to have stemmed from General Gusau’s desire to contest the 2007 presidential elections and the suspicion within Mr Obasanjo’s circle of political advisers that General Gusau had lobbied abroad against him standing for a third

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 22 Nigeria

presidential term and for support for his own candidacy. Some analysts believe that the changes may have reflected a desire by the president to put people loyal to him in key military and security positions for the closing period of his administration, given the potential for political instability. This theory is supported by the fact that General Gusau, who retired from the army in the early 1990s, has been replaced with a serving general who is loyal to Mr Obasanjo and who has served successively as military governor of the states of Katsina and Kaduna.

Nigeria agrees timetable to Nigeria has finally agreed to hand over the oil-rich Bakassi peninsula to hand over Bakassi neighbouring Cameroon, in compliance with a 2002 World Court ruling. The agreement came at talks in New York in mid-June between Mr Obasanjo and his Cameroonian counterpart, Paul Biya, hosted by the UN secretary-general, Kofi Annan. Nigerian troops are to withdraw from the area within 60 days, with a possibility of a 30-day extension. The islands of Atabong and Abana, located off the western part of the peninsula, will continue to be administered by Nigeria for two years after Nigerian troops withdraw. Mr Obasanjo described the agreement as a great achievement in conflict resolution, cheaper than war and providing a model for settling similar conflicts in Africa. After initially opposing the court ruling, Nigeria subsequently agreed to abide by it, but in 2004 insisted that “technical difficulties” prevented it from withdrawing from the peninsula. The government has insisted that the welfare of Nigerians living in Bakassi, rather than the area’s mineral riches, has been its main concern in negotiations on its status. Most inhabitants of Bakassi are Nigerians and strongly oppose coming under Cameroonian jurisdiction. In a nationwide radio and television broadcast on June 15th, Mr Obasanjo said that, in agreeing to the transfer of the territory, his administration had taken adequate measures for the protection, security and welfare of Nigerians living there. Cameroonian obligations under the agreement, he explained, include respecting the culture, language, beliefs, property and fishing rights of Nigerians who choose to continue to live in Bakassi, as well as a commitment not to impose discriminatory taxes. He added that a transitional arrangement will be in place for five years. The decade-long dispute over ownership of Bakassi sparked military clashes between Nigeria and Cameroon during the 1990s.

Economic policy

Government unfolds plans for The government announced a bold plan in early July to lay off 33,000 civil

massive job cuts servants by the end of the year as part of its reform efforts to trim a bloated public sector. The move may represent a major effort to show that the administration will try to push ahead with its economic reforms during the closing months of its tenure, notwithstanding the recent change in finance minister. The minister in charge of the Federal Capital Territory, Nasir El-Rufai, who is arguably the de facto head of the economic management team, said those who would lose their jobs—about 20% of all federal civil servants—were people who should not be in the civil service in any case, including those who are unqualified for their posts, “ghost” workers or guilty of serious misconduct. He argued that the civil service had grown to its current levels during military rule, largely because ministers did not followed proper recruitment procedures

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 23

but “just went to their villages and packed everybody” into it, with the result that it is now “bottom-heavy”, with 70% of its workers in the lower cadres.

Federal government budget (N bn) 2001 2002 2003 2004 2005 Retained revenue 797.0 716.8 1,023.2 1,253.6 1,660.7 Expenditure 1,018.0 1,018.2 1,226.0 1,426.2 1,822.1 Personnel costs 285.1 369.2 304.1 370.4 443.3 Pensions 0.0 0.0 63.9 72.2 84.1 Overall deficit -221.0 -301.4 -202.8 -172.6 -161.4

Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, 2005.

Mr El-Rufai also added that those civil servants who are not sacked would be given a pay rise, although he did not specify the amount. Although the reform has a large one-off cost—the government has earmarked N50bn (US$395m) for the payments of redundancies and increased salaries—it is relatively easy to cover, given the current windfall oil revenue accruing to the government. The restructuring of the public sector is part of the administration’s medium-term economic reform programme and the Policy Support Instrument (PSI) agreement with the IMF. The government has recently implemented a pilot scheme which involved significant retrenchments. It aims to introduce an Integrated Personnel and Payroll Information System by the end of 2006, which should enable proper monitoring of public-sector recruitment.

Unions react angrily to the Labour unions have, unsurprisingly, reacted angrily to the retrenchment plan,

lay-offs claiming that the cuts will hurt the economy and worsen poverty. The Federal Civil Service Union has threatened a strike if the plan goes ahead, and has demanded that the government opens negotiations with the unions on the issue. Public-sector unions also fear that many more workers than announced may lose their jobs before the current administration leaves office. The umbrella Nigerian Labour Congress (NLC) has indicated it would back strike actions if the retrenchment plan is implemented, while also highlighting the social consequences of offloading such a large number of workers at one time. Anti-poverty groups have backed the unions, maintaining that any massive retrenchment of public workers contradicts government promises to tackle unemployment and chronic poverty. The administration’s National Economic Empowerment and Development Strategy (NEEDS) programme aimed to create 7m new jobs in 2003-07, but has fallen far short of this number. However, the impact of the planned job cuts should not be overstated. Although many workers will be affected, many of the salaries are being paid to “ghost” workers. Moreover, on a macroeconomic level, the priority would be to cut the excess employees at state and local government level—notably state level, which is hugely overstaffed but extremely poorly accounted for. One of the drawbacks with an outgoing government implementing a retrenchment exercise on such a scale is that the incoming administration may embark on a new recruitment drive even after large severance payments have been made.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 24 Nigeria

President emphasises Despite these concerns, the president, Olusegun Obasanjo, and his economic irreversibility of reforms team have repeatedly assured local and foreign investors that the administration’s reforms are firmly established and will survive the political transition in 2007. They reiterated this message on June 9th, when Mr Obasanjo confidently told a group of visiting South African businesspeople that many of the reforms are so firmly established they cannot be undone, adding that anyone not reform-minded would find it difficult to succeed him as president. In July the vice-president, Atiku Abubakar, representing Mr Obasanjo at a summit in Abuja, reassured the World Bank president, Paul Wolfowitz, that the change of leadership in 2007 will not place the reforms at risk. Although several important reform-related laws have been passed in recent years, some key bills relating to public finance management have not yet been approved by the National Assembly. Arguably, the most important of these is the Fiscal Responsibility Bill, which aims to strengthen fiscal management, improve policy co-ordination between the three tiers of government, and promote fiscal transparency. Also awaiting approval are the Public Procurement Bill, which seeks to institutionalise open and competitive procurement procedures; the Nigerian Extractive Industries Transparency Initiative Bill, aimed at ensuring transparency and accountability in the reporting of revenue receipts from the extractive industries; and the Auditor-General’s Bill, which aims to strengthen the capacity and independence of the audit office.

Cabinet agrees 2007 budget With elections scheduled to be held in April 2007, there is a risk that, unless the outline government acts early, the 2007 budget may not be passed before it leaves office and the National Assembly is dissolved. In a bid to ensure that this does not happen, as well as to show the administration’s commitment to continuity in economic policy, the federal cabinet agreed on July 26th to the broad outlines for the 2007 budget and the parameters of the medium-term expenditure framework to run from 2007 to 2009. The new finance minister, Nenadi Usman, told reporters that the federal government envisages spending N1.9trn (US$15bn) in 2007—1% above the figure in the 2006 budget—as follows: • N1.6trn (US$12.6bn) is earmarked for federal ministries and agencies; and • N250bn (US$2bn) will be spent on debt servicing, including N80bn (US$632m) for the London Club of commercial creditors and N150bn (US$1.18bn) for domestic debts. In line with this, the government expects a deficit equal to 1% of GDP. The administration has made it clear that it will try to stick firmly to the fiscal rule that it has implemented in recent years, even if the Fiscal Responsibility Bill is not passed by the National Assembly. Under this rule, any revenue from oil sales above the budgeted oil price has been saved—in the excess crude account—although a significant proportion of the savings have eventually been allocated. The former finance minister, Ngozi Okonjo-Iweala, said recently in a lecture in Kingston, Jamaica, that the government has deliberately assumed conservative oil prices in budgeting, despite prevailing high oil prices, and that this practice has enabled it to break the link between its expenditure levels and fluctuations in world oil prices.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 25

Plan unveiled to settle The administration appears to be aiming to settle the government’s outstanding

domestic arrears domestic debt arrears before leaving office. The main arrears are owed to contractors and an estimated 300,000 pensioners in Nigeria. At its meeting on July 26th the cabinet approved a plan for the payment of N75bn (US$592.4m) owed to pensioners. Under the plan, the Debt Management Office has issued a N75bn bond with a three-year maturity date to five banks. The banks will pay the beneficiaries the cash value of the pension arrears and collect the full value of the bonds on maturity. The government announced on July 10th that it would settle arrears owed to local contractors with a N4.5bn payment. The plan, outlined by Mrs Usman, is for the government to start by clearing arrears of under N100m (US$790,000) owned to small contractors. Thereafter larger debts, mainly to bigger contractors, will be tackled. It is estimated that the government owes contractors a total of about N300bn; it earmarked N25bn in the 2006 budget for repayment.

Domestic debt stock by instrument (N bn; end-period) 2001 2002 2003 2004 2005 Treasury billsa 584.5 733.8 825.1 871.6 854.8 Treasury bonds 430.6 430.6 430.6 424.9 419.3 FRN development stocks 1.8 1.6 1.5 1.3 1.0 1st FGN bonds - - 72.6 72.6 72.6 2nd FGN bonds - - - - 178.3 Total 1,017.0 1,166.0 1,329.7 1,370.2 1,525.9 a Traditionally, these were mainly in the form of 91-day bills. However, the government has lengthened their maturity profile. At end-2005, N224.8bn were in this form; the majority, N480.1bn, were 182-day bills; and N150bn were 360-day bills. Source: Debt Management Office.

As well as issuing a bond to clear its pension arrears, the government has continued its policy of issuing longer-dated domestic debt instruments to try to increase the maturity profile of its domestic debt stock. In the first half of 2006, under its 3rd FGN bond series, the Debt Management Office issued a range of bonds, with maturity profiles of three to seven years. It will have been particularly pleased that the seven-year bonds were heavily oversubscribed, given that these were unsuccessful when issued under the 1st FGN bond series in 2003 (ensuring that all the bonds under the 2nd FGN bond series had maturities of two to three years). The three- and five-year bonds were also heavily oversubscribed, with demand mainly from commercial banks.

President launches new On July 27th Mr Obasanjo inaugurated the Technical Unit of Governance and

anti-corruption unit Anti-Corruption Reform (TUGAR), the latest of many schemes designed to counter the widespread problem of corruption in government. The president said that TUGAR will co-ordinate government activities on monitoring and evaluation of governance, and serve as an information bank and a “one-stop shop” for related data and indices. The unit, he stressed, will not seek to duplicate the efforts of existing anti-corruption agencies but will serve as a platform to promote collaboration among them. Mr Obasanjo noted that the greatest reform for Nigeria has been the establishment and institutionalisation of infrastructure for good governance, especially in the area of public resource

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 26 Nigeria

management. Notably, he argued that the establishment of the Budget Monitoring and Price Intelligence Unit to ensure due process in procurement has led to savings of more than N140bn (US$1.1bn) during the past four years. The president also argued that the reform effort had produced significant improvements in governance indicators such as the percentage of firms reporting bribery; responses on leakages of public funds; and reductions in bureaucratic impediment to business. Mr Obasanjo claimed that the percentage of firms reporting bribery had declined from 98% in 2002 to 60% in 2005. The largest area of improvement was in public procurement. Similarly, the proportion of firms reporting diversion of public funds to companies and/or individuals dropped from 100% in 2003 to 70% in 2005.

The domestic economy

Nigerian economy recorded According to data in the Central Bank of Nigeria (CBN) Annual Report and

6.2% GDP growth in 2005 Statement of Accounts for 2005, real GDP grew by 6.2% in 2005 (measured by 1990 prices), compared with 6.5% in 2004, and a provisional government estimate of 6.5%. As in recent years, non-oil sector growth was impressive, helped by a strong performance by the agricultural sector. However, growth in the oil sector continued to fall sharply, to only 0.5%. Overall performance was roughly in line with the 6% target in the government’s National Economic Empowerment and Development Strategy (NEEDS) programme but far below the 10% government officials had hoped for (February 2006, Economic trends).

Breakdown of GDP (N bn; 1990 constant prices unless otherwise indicated) 2001 2002 2003 2004 2005 Agriculture 182.7 190.4 203.0 216.2 230.9 Crop production 162.2 168.9 180.7 192.5 205.7 Industry 128.7 123.9 150.3 156.5 159.1 Crude petroleum 112.4 106.0 131.3 135.7 136.4 Manufacturing 15.2 16.7 17.7 19.4 21.3 Building & construction 6.1 6.4 6.9 7.6 8.5 Wholesale & retail trade 55.1 58.7 62.1 68.1 76.5 Services 59.2 72.5 72.8 79.2 85.4 Communication 2.7 3.9 5.2 6.7 8.6 Transport 11.1 13.1 13.2 14.0 14.9 Utilities 12.9 16.5 17.0 18.9 20.1 Finance & insurance 17.9 23.2 21.0 21.5 22.1 Total 431.8 451.8 495.0 527.6 560.4 GDP (% change) 4.7 4.6 9.6 6.6 6.2 Oil GDP (% change) 5.2 -5.7 23.9 3.3 0.5 Non-oil GDP (% change) 4.5 8.3 5.2 7.8 8.2

Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, 2005.

Meanwhile, provisional data from the CBN used by its Monetary Policy Committee (MPC) indicate that year-on-year real GDP growth slowed to 2.7% in the first quarter of 2006, from 6.9% in the same period in 2005. As in recent years, the main sectors driving growth were telecommunications and postal services, solid minerals, manufacturing, and agriculture. The main problem has

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 27

been the subdued growth in the oil sector. The MPC blamed the slowdown in oil sector growth on unrest in the Niger Delta, which has disrupted production.

Few jobs created The other problem for the government is that, despite the high growth rate in recent years, the number of new jobs created has been insufficient. According to the CBN Annual Report and Statement of Accounts, the number of registered unemployed increased by 1.3% in 2005, which suggests that the government failed to meet its target of creating 2m new jobs during the year. The CBN reported that registered unemployment among professional and executive staff rose by 443.5% to 22,533, while the number of registered unemployed lower- grade workers fell by 4.6% to 295,236. These figures should be treated with some caution. In its 2004 report, the CBN claimed that the number of unemployed was 402,382, an increase of 112.4% over the 2003 figure. Its 2003 report, however, cited the 2003 figure as 143,690. Not only is the data series, therefore, inconsistent, but in any case it provides only an indication of the trends because relatively few jobless people bother to register with the authorities as there is no state unemployment benefit. Moreover, the data fail to take into account the more significant problem of underemployment. However, the report reiterated the government’s claim that the incidence of poverty has been in decline, with the rate down from 70% in 2000 to 54.4% in 2004, according to the latest Nigerian Living Standard Survey. Independent poverty monitoring groups report little evidence to support the government’s claim. Nevertheless, the trends are not completely incompatible. The strong growth in the agricultural sector could have helped to reduce the rate of poverty, with very little impact on the unemployment rate, as few agricultural workers register as unemployed. For the government to make real progress in resolving the issue of unemployment, it would, however, need to boost growth in the manufacturing sector, which has remained very low.

CBN raises minimum The CBN announced on June 14th that it was raising the minimum rediscount

rediscount rate to 14% rate (MRR) by 100 basis points to 14% in a move to check inflation. Despite the improved fiscal position in recent years, the CBN has been unsuccessful in its aim of reducing the inflation rate to single digits for any sustained period. This largely reflects the fact that it has struggled to fully sterilise the high levels of oil revenue flowing into the economy, with the MPC still worried by the potential threat of inflation from the surging liquidity in the system. According to the most recent CBN Monthly Report, for May, the 12-month moving average inflation rate was 16.4% at end-May, slightly down from 16.9% in April and 17.9% in January, while the year-on-year inflation rate was 10.5% in May, down from 12.6% in April. The report said the fall stemmed partly from the early harvest of maize and some fruits, which lowered food prices. The concerns of the MPC are clear elsewhere in the report, notably in the money supply data, which show that, at end-May, broad money (M2) had risen by 14.1% over the December 2005 level, representing an annualised growth rate of 33.8%, compared with a target of 15-17% set by the CBN for the whole of 2006. Nigerian banks again appear to be awash with money, as in mid-2005, when this pushed up the inflation rate (November 2005, Economic trends). This is clear from the sharp fall in Treasury-bill rates in recent months as the banks

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 28 Nigeria

search for a home for the excess funds. The 91-day T-bill rate fell from around 12% in January to 4% in June, although the CBN managed to push it back up to around 9% by late July. The situation highlights the difficulty the CBN is having in containing the oil boom and maintaining macroeconomic stability.

Premium with parallel Although the CBN has struggled to reduce the inflation rate, it has been more

exchange rate falls effective in stabilising the exchange rate and narrowing the gap between official and parallel rates, notably following the change in CBN policy in April to allow bureaux de change (BDC) access to the CBN foreign-exchange market (Economic policy, May 2006). According to the CBN, the BDC exchange rate fell Official and parallel exchange from N151:US$1 in late March to N130:US$1 by the first week of June. With the rates, 2006 (N:US$1) exchange rate on the official wholesale Dutch auction system (DAS) market remaining stable at around N127:US$1, this meant that the premium with the Official rate Bureau de change rate BDC fell from N24 in March to under N5 in the first week of June. However, the 150 liberalisation of the foreign-exchange market has triggered a rise in demand for 145 currencies. CBN sales to the DAS rose by 22.2% in May to US$1.1bn.

140 Naira exchange rates

135 (N:US$1; av) 2001 2002 2003 2004 2005 130 Official exchange rate 111.9 121.0 129.4 133.5 131.7

125 Bureau de change (BDC) rate 133.0 137.8 142.0 140.8 142.6 Jan Feb Mar Apr May Jun Jul Premium (BDC/official rate) 18.9 13.9 9.7 5.5 8.3 Source: Afrinvest. Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, 2005.

This rise in demand is a source of concern, as it indicates that there is potentially considerable latent demand for foreign currency in Nigeria, which will rise as the elections approach and political uncertainty increases. The CBN will either have to meet this demand or return to imposing restrictions on supply—either formally or informally—which will widen the premium between the BDC rate and the DAS rate. The CBN may not worry much as long as the premium remains below 5%—the level at which it is of little concern to the IMF—but it would be a problem if it exceeds this. There may also be substantial differences between publicly quoted rates and the actual rates obtainable.

Oil and gas

Nigeria’s crude output rises According to the International Energy Agency (IEA), Nigeria’s crude oil output rose steadily in the second quarter of 2006, despite community unrest in the oil-producing Niger Delta. The agency’s latest monthly report put Nigeria’s crude output in June at 2.29m barrels/day (b/d), excluding condensate, compared with 2.2m b/d in May and 2.09m b/d in April. However, production in the first half of this year was considerably below the average for 2005, owing mainly to the unrest in the oil-producing areas. Production averaged 2.19m b/d in the second quarter of 2006, compared with 2.23m b/d in the first quarter and 2.4m b/d in 2005. The IEA reported that the rise in output in June came from newer offshore fields. In addition, a reduction in local refining capacity, after militant attacks effectively disabled Warri and Kaduna refineries allowed an increase in crude oil exports in June, which were estimated at 2.2m b/d, a rise

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 29

of 100,000 b/d from May. The country’s June output of 2.29m b/d was only a Monthly oil production (m b/d) little below its OPEC quota of 2.31m b/d.

2.5 Shell—Nigeria’s largest foreign oil producer, which is responsible for about 40% of the country’s normal output—was worst affected. Its production accounted 2.4 for about 94% of the estimated 718,000 b/d of oil shut in to the pipeline system

2.3 following the militants’ attacks. On July 31st the firm said that it had a total of 675,000 barrels of oil equivalent (boe)/day of production shut in at its Nigerian 2.2 fields. Other companies that have shut in production as a result of the attacks include Agip and Chevron. 2.1 However, Shell’s problems do not stem entirely from unrest in the region. A 2.0 leak at a Shell-operated pipeline accounted for a total of 21,000 b/d of the crude Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2005 06 shut in to the system. The damage to a section of the Nembe Creek trunk line in Source: International Energy Agency. Rivers state was discovered on July 21st and was apparently caused by an accident unrelated to the political unrest.

Nigerian oil output capacity Nigerian oil officials have been unable to give any indication of when normal

expected to rise this year production will resume, as the unrest in the oil-producing areas is far from being brought under control. The minister of state for petroleum, , urged oil companies in late July to continue to be patient with the government, adding that the government also has to be patient with the restive communities. Mr Daukoru noted that some oil firms had “pre-emptively” halted operations because of fears of attacks on their facilities. However, Mr Daukoru expressed optimism that Nigeria’s oil production will rise substantially by the end of the year, despite the troubles in the Niger Delta. He said that an extra 500,000 b/d is expected to be added to current output as a result of more offshore fields coming on stream and higher production at new fields such as Bongo, Erha and EA. If so, this would take Nigeria’s production capacity beyond 3m b/d, significantly above its current OPEC quota. Although this is possible, it is just as likely that there will be at least one more major outbreak of unrest in the region in the run-up to the April 2007 elections, which will mean that production growth will continue to be constrained.

Panel on pipeline vandalism A committee set up in June by the president, Olusegun Obasanjo, to investigate reports extensive tampering growing incidences of petroleum pipeline vandalism, reported back on July 28th. The committee chairman, Aderemi Esan, described the situation as a “cancer that is spreading”. The report identified 900 instances of vandalism along Nigeria’s 8,000-km pipeline network in 2000 alone. It said the total cost was around US$8m a month, excluding the cost in human lives through explosions. The panel was set up after more than 150 people died in May when a pipeline near Lagos exploded, owing to a leak caused by suspected illegal tapping of fuel. Some 2,000 people have died in similar explosions in recent years. The committee recommended 12 measures, including steps to boost enforcement, regulation, community mobilisation and intelligence gathering.

Government to review The government plans to carry out a major review of Nigeria’s agreements with

agreement with oil operators oil multinationals operating in the country, with a view to ironing out fiscal problems. The minister of state for petroleum was quoted by the state-owned

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 30 Nigeria

News Agency of Nigeria as saying that the exercise would take place by the end of this year, with the aim that it will be one of the president’s main legacies in the oil and gas upstream sector. In particular, Mr Daukoru expects that the exercise will address the problem of the government not paying its cash calls on joint-venture operations, as well as the issue of profit-sharing between operating companies and the Nigerian National Petroleum Corporation (NNPC). Oil companies have complained about inadequate funding of joint-venture operations as well as what they see as an unsatisfactory rewards regime for risky investment. On the other hand, many Nigerian oil officials and legislators accuse oil multinationals of inflating their exploration and operation costs and not doing enough to help boost local companies and the indigenisation of the sector. The government also hopes that the review, when completed, will boost government revenue as well as interest in the upstream sector.

Olokola gas project partners The NNPC and three foreign oil partners signed a Memorandum of

sign MoU Understanding (MoU) on July 25th to site a US$6bn liquefied natural gas (LNG) project in the Olokola Free Trade Zone, located in the south-western states of Ondo and Ogun. When completed, the project, to be called OKLNG, will have four trains and a total capacity of 22m tonnes/year (t/y). NNPC has a 49.5% stake in the project; Chevron and Shell each have 18.5%; and BG Group has 13.5%. The complex is designed for four trains, each with 5.5m t/y, but it will start with two plants, with the first commercial exports of gas expected in early 2011. As well as providing a new source of exports, the project is part of the government’s long-term plans to eliminate gas flaring. Mr Obasanjo told a parliamentary committee on gas resources on July 3rd that “Nigeria is really more of a gas nation than an oil nation”, and noted that in 2002 alone the country lost about US$2.2bn of potential revenue through gas flaring. According to the president’s media office, the government estimates that, by 2009, Nigeria will earn about US$12bn per year from natural gas exports.

Gas production and main uses (bn cu metres) 2001 2002 2003 2004 2005 Production 52,083.5 47,188.3 52,230.1 59,493.8 57,861.1 Sold for Liquid Natural Gas 6,292.6 6,301.4 6,764.7 7,734.1 7,808.7 Re-injected 10,334.9 10,367.1 10,554.3 12,387.1 12,555.2 Flared 26,311.6 21,260.2 24,158.3 25,316.3 23,117.0

Source: Central Bank of Nigeria, Annual Report and Statement of Accounts, 2005.

However, militant groups in the Niger Delta have threatened to attack the Olokola project if the plan goes ahead. In a statement issued shortly after the signing of the MoU, the Joint Revolutionary Council, made up of four militant groups, demanded the cancellation of OKLNG and vowed to sabotage the project and vandalise its facilities. The militants, like some politicians from the Niger Delta, appear to be peeved that a major LNG project is being sited outside their region, using gas piped in from the Niger Delta. They accused the partners in the project of seeking to “short change our people and deprive them of that which should be given to them”.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 31

Government opts to hold on to In the latest of many revisions of its privatisation programme, the government

Port Harcourt refinery announced in mid-June that it no longer planned to privatise the Port Harcourt refinery (PHRC), which operates two plants with a combined capacity of 210,000 b/d (May 2006, Oil and gas). Mr Daukoru said that, under a new initiative, the PHRC will be managed by the NNPC, which will seek to raise its refining capacity from 80% to 100%. The NNPC’s head, Funsho Kupolokun, said that the corporation wants to make Nigeria a major fuel supplier to the West African market. Although this is an achievable ambition, Nigeria’s state- dominated refining industry still needs to bring an end to continuing local fuel shortages, which stem from inadequate domestic refining capacity. The government’s efforts to attract investment into oil refining in Nigeria have achieved little. Not only has it not been able to attract any of the major multinational oil companies to buy the existing refineries, but talks with them to build a new one seem limited. The government has issued 18 licences for private refineries, but progress on the projects seems minimal. Mr Daukoru told the newspaper Vanguard that he was baffled by the private sector’s failure to take up the opportunities. The minister thought that one reason could be that many of those who have made verbal commitments to build refineries were speculators who saw this as a way of getting crude oil lifting rights. The other major problem remains the government’s unwillingness fully to deregulate domestic fuel pricing, partly because of stiff union opposition. This continues to deter investors from making a long-term commitment to build refineries unless they can export a large part of the output.

Manufacturing

Government moves to rescue The government set up a panel on July 24th to raise N50bn (US$395m) to rescue

struggling textile firms the country’s ailing textile industry. The funds will be given to textile firms as soft loans to finance the rehabilitation and modernisation of their operations, according to the finance minister, Nenadi Usman, who heads the ten-member panel. She said that, whereas the industry consisted of 175 companies a few years ago, a mere 24 firms are operating now. She added that the government had decided to help the industry because of the potential employment it can provide and because it remains Nigeria’s largest employer. The Manufacturing Association of Nigeria (MAN) and textile employer and employee unions have put considerable pressure on the government to act. They complain that the influx of cheap garment imports into Nigeria, especially from China—despite import bans on textiles and garments—has eroded their domestic market. As with many other manufacturing industries in Nigeria, the textile industry has suffered from a lack of investment in modernising dilapidated and outdated plants, and its ability to operate efficiently is seriously hampered by Nigeria’s extremely poor infrastructure, especially the unreliability of power supplies. Moreover, it also shows that, even in the face of an import ban, customs officials are unable to stem the flood of illegal imports. The potential good news is that the government appears to be aware of the need to change the business environment. At its meeting on June 20th the cabinet decided to set up a high-level presidential committee with a mandate to improve the process of doing business in Nigeria. Various rankings, including those by the

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 32 Nigeria

World Bank and the IMF, regularly place Nigeria at the bottom of the list of countries in terms of the ease of conducting business there. The government has set itself a target to make Nigeria the 30th best country in which to do business, according to these rankings, by 2010. This is clearly a tall order, given how entrenched are the obstacles to improving the business environment.

Agriculture

First commodity exchange Nigeria’s first commodity exchange opened trading in the capital, Abuja, on

opens in Abuja July 25th, realising an idea that was first mooted more than a decade ago. Chris Echikwu, spokesman for the Abuja Security and Commodity Exchange, said that the first day had seen trading of 7,000 tonnes of maize and soybean in seven contracts with a total value of N230,000 (US$1,817). Although a humble beginning, the opening of the exchange could help to reduce Nigeria’s seasonal price fluctuations. These reflect inadequate storage, processing, distribution and marketing facilities, and also lead to substantial post-harvest waste. Trading at the exchange will initially be manual but will later become computerised.

Infrastructure

Sale of Nitel drags on The third attempt to privatise the state-owned telecommunications parastatal, Nigeria Telecommunication (Nitel), has suffered a setback. Transnational Corporation of Nigeria (Transcorp) was named on July 3rd as the preferred core investor for a 75% equity holding at a price of US$750m. The firm was given seven days to pay the first instalment of US$500m and the balance of US$250m within 60 days, or forfeit the bid. Transcorp failed to meet the first deadline, placing the authorities in a similar situation to that in 2002, when the first attempt to privatise Nitel collapsed after the then preferred bidder failed to pay the balance on its US$1.3bn offer. In the second privatisation attempt, in late 2005, the government rejected a US$256m offer by Orascom for a 51% stake in Nitel as grossly inadequate (February 2006, Economic policy). For the latest sale, five other companies were shortlisted: Nigerian-owned Globacom; Kuwait’s MTC-owned Celtel; Telkom of South Africa; Dubai-based Investcom; and the little-known Afro Telecommunications Limited. Transcorp’s bid for Nitel was made in conjunction with the UK’s BT Group and the Abu Dhabi-based Emirates Telecommunications Corp (Etisalat) as technical partners. According to the chairman of Transcorp, Ndi Okereke-Onyiuke, in addition to the bid fee, a sum of US$1bn is to be injected immediately into Nitel. To cover this, a credit facility has been secured from the European Economic Council at a 4% interest rate. Under the privatisation deal, Transcorp is also to bear Nitel’s sundry liabilities of about N60bn, but the government will offset its pension liabilities. Transcorp emerges as a leading investor

Transnational Corporation of Nigeria was officially launched in July 2005 as a private-sector response to the government’s economic reforms. Its board of directors consists of leading Nigerian business figures, led by the director-general of the

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Nigeria 33

Nigerian Stock Exchange, Ndi Okereke-Onyiuke. According to the presidency’s media unit, Transcorp was designed to provide a vehicle to mobilise domestic capital on a scale that had hitherto been the exclusive preserve of foreign investors. Transcorp has since acquired assets including oil blocks and the Hilton Hotel in Abuja. The company’s apparent connections to the government have led to accusations of cronyism. Its decision to buy Nigeria Telecommunication (Nitel), one of Nigeria’s biggest parastatals, has been criticised by individuals and unions who fear that too many assets are being concentrated in one organisation. Critics have also questioned the decision to sell 75% of the utility to Transcorp, as opposed to the 51% normally reserved for core investors.

Major upgrade of railway On July 18th the cabinet ratified a 25-year railway development programme

system in the offing which aims to upgrade Nigeria’s antiquated railway system. Mr Obasanjo said that the first phase will be financed with a US$1bn concessionary loan from China, as well as counterpart funding by the government. The project involves replacing the existing (narrow) rail line, built over a century ago, with standard- gauge track on which high-speed trains could run. The new network will incorporate seven major cities—Lagos, Ibadan, Ilorin, Abuja, Kaduna and Kano— covering a distance of 1,010 km of rail line. The first phase will cover the Lagos- Kano route. This is expected to be completed within three to four years, enabling the running of 36 trains per day and the carriage of 50.5m tonnes of goods per year. Only two railway lines (Lagos-Kano and Port Harcourt- Maiduguri) are currently in operation in Nigeria, despite its vast area, and so rail is not currently a major form of transport in the country.

Finance and other services

Banking sector continues to The Nigerian Stock Exchange (NSE) all-share index rose by 8.6% in the first half

dominate stockmarket of 2006, to close at 26,161.5, continuing its upward trend (at end-June 2005 the index stood at 21,563.78). According to the NSE’s Half-Year Review of Performance report, the banking sector continued to dominate transactions following the raising of the minimum capital requirement for banks from N2bn to N25bn at the start of 2006. The index made further gains in July, and closed on August 4th at 28,918.67. In its outlook for the second half of 2006, the NSE said that the rise in the minimum rediscount rate (MRR), which increased by 100 basis points to 14% in June, should encourage more companies to seek funds on the exchange.

Foreign trade and payments

Foreign investment rises According to new figures from the Central Bank of Nigeria (CBN), foreign direct

sharply investment (FDI) in Nigeria increased by 23% to US$2.3bn in 2005. The CBN attributed the increase to improvements in the investment climate arising from improved macroeconomic stability and the implementation of the ongoing reform programme. Net portfolio investment inflows also rose in 2005, by 1,516% to US$2.86bn, from a mere US$177m in 2004. This huge leap was the result of foreign equity investment in the banking sector following the increase in the minimum capital requirements. Although it is clear that FDI into Nigeria

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 34 Nigeria

has picked up in recent years, including FDI into the non-oil sector, it remains unclear how long this trend will continue. FDI inflows continued to rise steeply in early 2006, according to the CBN’s economic report for the first quarter of the year. However, the Economist Intelligence Unit expects investment to slow down as the elections approach and firms adopt a wait-and-see approach to Nigeria. In addition, with the restructuring of the banking sector now completed, portfolio investment inflows are likely to move down closer to their usual low levels in 2006.

Foreign investment into Nigeria (US$ m; net value) 2001 2002 2003 2004 2005 Foreign direct investment 1,183.5 1,868.0 2,004.1 1,866.4 2,303.9 Portfolio 235.1 205.6 182.7 177.0 2,860.2

Source: CBN, Annual Report and Statement of Accounts, 2005.

An agreement with the In her first speech after her appointment, the new finance minister, Nenadi

London Club is the final goal Usman, told an economic summit on July 4th that, with Nigeria having successfully exited its Paris Club debt, one of her ministry’s immediate priorities was to conclude the selection of a financial institution to handle the restructuring of the country’s debt with the London Club. At present, the government only pays interest on this debt; the outstanding principal is to be paid off in 2020 in a one-off payment. However, in recent years overseas banks holding the debt have been unwilling to agree to a buyback deal—the 2002 deal was only partly subscribed to—as the Nigerian debt has provided them with a more diversified African investment portfolio, with regular repayments.

Federal government external debt to private creditors (US$ m; end-period) 2001 2002 2003 2004 2005 Promissory notes 1,291.8 1,153.2 911.4 783.2 649.8 London Club 2,043.2 1,441.8 1,441.8 1,441.8 1,441.8

Source: Debt Management Office, Annual Report, 2005.

Country Report August 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006