Country Report

Nigeria at a glance: 2004-05

OVERVIEW The president, , faces the daunting task of containing simmering political tensions, ethnic and religious unrest, and mass disillusion- ment with the government, while at the same time implementing challenging economic reforms that may, in the short term, alienate more volatile sections of Nigerian society and the political elite. Because the president's party, the People's Democratic Party, has overwhelming control of all tiers of government, the administration should just about be able to maintain support for its reform programme. However, the deep divisions in the country will act as a constant brake on the reform process and political animosity could explode into the open at any time. Despite the reform effort, oil and gas production will continue to drive economic growth, with real GDP growth forecast to fall back from 4.2% in 2003, when oil production expanded rapidly, to 3.4% in 2004 and 3.1% in 2005 as the pace of increase in oil production slows.

Key changes from last month Political outlook • There have been a number of arrests in what seems to have been a coup plot against the government. Most of those arrested seem to be disgruntled members of the army, which highlights the fact that many within the military remain unhappy about the civilian administration's inability to resolve many of the pressing problems facing Nigeria. Economic policy outlook • The government has officially published its National Economic Empowerment and Development Strategy for a month of public consultation. However, the delay in its publication has substantially reduced the amount of time available in which it can be implemented before election campaigning starts again. • Charles Soludu has been appointed the new governor of the Central Bank of Nigeria. The appointment is unlikely to have any immediate impact on monetary policy, but it does support the president's efforts to push ahead with economic reform. Economic forecast • There has been no major change to the Economist Intelligence Unit's economic forecast. May 2004

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Contents

Nigeria

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2004-05 7 Political outlook 9 Economic policy outlook 10 Economic forecast

13 The political scene

20 Economic policy

28 The domestic economy 28 Economic trends 30 Oil and gas 34 Agriculture 34 Financial markets 35 Infrastructure

37 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 22 Selected macroeconomic and sectoral targets in NEEDS 24 Key Nigerian interest rates 25 NEEDS monetary sector projections

List of figures

13 Gross domestic product 13 Consumer price inflation 31 Monthly oil production 35 NSE market returns by sector in 2003 36 NEEDS power generation targets

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Nigeria May 2004 Summary

Outlook for 2004-05 The president, Olusegun Obasanjo, faces the daunting task of containing simmering political tensions, ethnic and religious unrest, and mass disillusion- ment with the government, while at the same time implementing challenging economic reforms that may, in the short term, alienate more volatile sections of Nigerian society and the political elite. Because the president's party, the People's Democratic Party (PDP), has overwhelming control of all tiers of government, the administration should just about be able to maintain support for its reform programme. But the deep internal divisions in the country will act as a constant brake on the reform process and political animosity could explode into the open at any time. Oil and gas production will continue to drive economic growth, with real GDP growth forecast to fall back from 4.2% in 2003, when oil production expanded rapidly, to 3.4% in 2004 and 3.1% in 2005 as the pace of increase in oil production slows.

The political scene Several military officers and civilians have been arrested in connection with what officials have described as a "serious breach of security", but which many political analysts believe was a coup plot. The PDP has won control of most local governments in elections held in 30 states. Observers have said that the polls were marred by violence and widespread fraud. Federal government troops have clashed with militants in the oil-producing Niger Delta. Hundreds of people have been killed in renewed religious fighting in Plateau state.

Economic policy The 2004 budget has been passed, but only after a delay caused by Mr Obasanjo's initial refusal to accept amendments to his original proposal made by the National Assembly. The National Economic Empowerment and Development Strategy (NEEDS) reform programme has been published for a period of national consultation. The Central Bank of Nigeria has come under renewed pressure to reduced interest rates. The Bureau of Public Enterprises has revised the timetable for Nigeria's slow-moving privatisation programme.

The domestic economy There are considerable discrepancies in estimates of real GDP growth in 2003. Inflation has continued to rise, reaching 15.3% in February, owing mainly to increases in domestic fuel prices. Nigeria has continued to produce oil at well above its OPEC production quota, and the government has requested an increase in its OPEC quota. Legislators and trade unions have warned Shell against implementing a plan to cut jobs as part of a cost-cutting strategy.

Foreign trade and payments The government has announced that it has reached an agreement with the Paris Club to reduce Nigeria's debt-service payments to US$1bn a year. Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: May 1st 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report May 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 4 Nigeria

Political structure

Official name Federal Republic of Nigeria

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

Legal system Based on English common law

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

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

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

State government State governors and state houses of assembly

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

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

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

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

Central Bank governor Charles Soludu

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Economic structure

Annual indicators 1999a 2000a 2001a 2002b 2003b GDP at market prices (N bn) 3,211 4,178 4,602 5,617 6,824 GDP (US$ bn) 34.8c 41.1 41.4 46.6 52.8 Real GDP growth (%) 1.1 3.8 3.9 3.2d 4.2 Consumer price inflation (av; %) 6.6 6.9 18.2 13.6a 13.8 Population (m) 120.1b 123.3b 126.6b 129.9 133.2 Exports of goods fob (US$ m) 12,971 21,395 17,949b 18,027 22,169 Imports of goods fob (US$ m) -10,367 -11,068 -12,303b -13,053 -14,213 Current-account balance (US$ m) -3,319 4,263 1,184b -136 1,439 Foreign-exchange reserves excl gold (US$ m) 5,450 9,911 10,457 7,331a 7,128a Total external debt (US$ bn) 29.1 31.4 31.1 30.7 31.1 Debt-service ratio, paid (%) 6.9 8.2b 13.1b 16.8 6.8 Exchange rate (av) N:US$ 92.34 101.70 111.23 120.58a 129.22a a Actual. b Economist Intelligence Unit estimates. c Converted at the autonomous rate from 1995 to 1999. d Official estimate.

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

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

Main destinations of exports 2002b % of total Main origins of imports 2002b % of total US 37.4 UK 15.7 Brazil 9.4 US 15.4 Spain 8.3 China 15.3 France 6.4 France 14.3 a Central Bank of Nigeria data. b Derived from partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2002 2003 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output Industrial production index (1995=100) 111.6 111.8 112.7 116.8 112.2 112.5 114.0 114.1 Industrial production index (% change, year on year) 0.6 0.2 -0.1 4.0 0.5 0.6 1.2 -2.3 Prices Consumer prices (1995=100)a 226.1 233.6 244.8 240.0 249.3 263.4 286.5 n/a Consumer prices (% change, year on year) 17.9 11.7 10.5 9.8 10.3 12.8 17.0 n/a Petroleum spot price (Bonny Light 37°; US$/barrel) 21.3 25.0 27.2 26.9 31.8 26.5 28.7 29.7 Financial indicators Exchange rate N:US$ (av) 114.4 116.6 125.0 126.3 128.0 127.2 127.7 134.0 Exchange rate N:US$ (end-period) 115.6 119.6 125.8 126.4 126.9 127.4 127.9 136.5 Discount rate (end-period) 20.5 20.5 18.5 16.5 16.5 16.5 15.0 15.0 M1 (end-period; N bn) 835.92 872.09 933.55 946.25 1,121.55 1,319.73 1,264.03 1,225.56 M1 (% change, year on year) 8.2 16.1 20.7 15.9 34.2 51.3 35.4 29.5 M2 (end-period; N bn) 1,423.35 1,502.06 1,605.42 1,599.49 1,918.93 2,124.33 1,981.07 1,985.19 M2 (% change, year on year) 11.7 18.9 20.9 21.6 34.8 41.4 23.4 24.1 Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 11,376 12,441 11,812 12,138 13,531 14,566 16,379 20,095 Stockmarket index (% change, year on year) 24.2 13.7 15.0 10.7 18.9 17.1 38.7 65.6 Sectoral trends Crude oil production (m barrels/day)b 1.91 1.91 1.97 2.01 2.13 2.03 2.17 2.28 Crude oil production (% change, year on year) -11.2 -5.0 -3.9 -4.7 11.5 6.3 10.2 13.4 Foreign trade (US$ m) Exports fob 3,180 3,421 4,101 4,405 5,202 4,376 4,854 n/a Petroleum 3,121 3,347 4,051 4,336 5,195 4,314 4,680 n/a Imports cif -2,510 -1,289 -1,824 -1,924 -2,949 -2,673 -2,648 n/a Trade balance 670 2,132 2,277 2,481 2,253 1,703 2,206 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 9,502 8,239 7,035 7,331 7,864 7,352 6,793 7,128 a The Nigerian government uses the 12-month moving average as its official measure of inflation. b Excluding condensates. Sources: Central Bank of Nigeria; IMF, International Financial Statistics; Direction of Trade Statistics; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence; Standard & Poor's, Emerging Stock Markets Review.

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Outlook for 2004-05

Political outlook

Domestic politics The ruling People's Democratic Party (PDP) has consolidated its grip on power at all levels of government following its victories in the March local council elections. Nonetheless, a climate of tension and uncertainty still prevails, created by ongoing politically motivated violence, unrelenting sectarian unrest and apparent disquiet within sections of the military about the government's inability to resolve many of the country's pressing problems. This is likely to weaken the ability of the president, Olusegun Obasanjo, to push forward difficult economic and political reforms during the outlook period. In fact, the attempt to impose change and attack endemic corruption could undermine any existing political consensus, prompting an outbreak of factional fighting within the PDP that could kill off the efforts at reform. Despite this, the president probably has roughly eighteen months to carry out reforms before campaigning starts for what are likely to be keenly contested elections in 2007. Of the immediate problems facing the president, perhaps the most pressing is the need to reduce the outbreaks of ethnic and religious violence that have occurred since the return to civilian rule in 1999. So far the government's main response has been to use the military to help to restore order, but this has been called into question, as military intervention has, in some cases, led to an escalation of violence rather than the control of it. However, without a firm response to the problem by the government, outbreaks of ethnic and religious violence are likely to persist throughout the forecast period. The potent mix of communal tensions, religious intolerance and political disillusionment that exists in Nigeria provides a fertile breeding ground for the militancy that continues to pose a threat to the authority of the weak Nigerian state. Outbreaks of religious and ethnic violence will be a particular problem in the north of the country, where 12 states have declared sharia (Islamic) law, and in the oil producing states in the Niger Delta. Having made significant concessions to boost revenue to the Delta states, the federal government is now working towards ensuring that the Niger Delta Development Commission (NDDC), which it established in 2001, actually delivers successful projects that help to ease tensions. In the meantime, the government is likely to continue to use military force to impose law and order in this unruly region. However, it will need take care that any military-led clampdown against the criminal gangs who are exploiting ethnic tensions in the region as a cover for their nefarious activities in the oil sector does not aggravate the situation by further alienating local communities. Although it was put down by the military, an uprising by a small band of self-styled "Taliban" Islamist militants in northern Nigeria at New Year highlighted the danger that a more fundamentalist brand of Islam may assert itself in areas marked by religious tensions, political alienation and economic dissatisfaction. Although Nigeria is unlikely to see a centralised, Afghanistan-type, Islamist rebellion, sporadic, rudderless uprisings could be just as destabilising.

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Following the government's overwhelming victories in the April 2003 presidential and legislative elections and the March 2004 local government polls, it is not clear where the main opposition to its rule will come from, bar factional infighting within the PDP. As regards the opposition parties, most seem to have accepted the results with resignation. However, the legal challenge to Mr Obasanjo's April victory by Mohammadu Buhari, a former military ruler and the defeated candidate of the All Nigeria People's Party (ANPP), remains unresolved. If the Supreme Court were to order fresh ballots in several states as a result of the legal challenge, this could provide the opposition with renewed vigour and a series of election re-runs might prove politically destabilising. Political opposition to the government from the trade unions—notably over privatisation and the deregulation of domestic fuel prices, but also over the administration's plan to pass legislation that could undermine trade union funding and thus weaken the labour movement—also seems to have faded. The umbrella union body, the Nigeria Labour Congress (NLC), has so far proved unable to deliver promised strikes, which has placed some major question marks over its real political strength. The decision made by the president in early 2004 to sack his labour minister over bribery allegations was widely praised by anti-corruption campaigners, but although further revelations of corruption scandals involving top govern- ment officials would be welcomed by the public, these could undermine the administration's credibility. Any major campaign to reduce official corruption and fiscal mismanagement is liable to stir up discontent among the powerful vested interests that benefit from the anarchic system of government. If the government's anti-corruption campaign does target more high-profile cases of corrupt practices, as many hope will happen during Mr Obasanjo's final term in office, the administration will need to be wary of a backlash in a country where behind-the-scenes manipulation is sometimes the root cause of outbreaks of ethnic and religious unrest. Despite the many faultlines ahead, the Economist Intelligence Unit believes that a military takeover is unlikely, as it would lack popular support and would probably be resisted by civil and labour organisations. In addition, the inter- national community would probably be less accepting of another period of military rule than it was previously. Nigeria's armed forces, which are still tarnished by their previous spell in government, are probably also less inclined to return to power than formerly, although the possibility cannot be dis- counted, as was shown in April, when the government seems to have foiled an apparent coup plot. However, the seriousness of the plot is questionable and, as many retired generals are now leading figures in both the PDP and the ANPP, the army's allegiance would probably be divided in any political showdown. Although unlikely, military intervention in politics is not inconceivable in the short or medium term, especially if a downturn in oil prices were to cause an economic downturn against a background of a series of political crises.

International relations Mr Obasanjo is likely to remain deeply involved in foreign policy matters, even though most Nigerians would prefer him to focus on domestic issues. As well as seeking to promote the New Partnership for Africa's Development (Nepad), he will seek to be an influential voice in efforts to settle disputes in Liberia and

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other parts of West Africa, as well as further afield, in places such as Zimbabwe and Sudan. However, he has failed to convince as a mediator and will struggle on issues such as Zimbabwe, where he must seek to reconcile Western interests with those of the leaders of several African countries. Following UN-sponsored bilateral discussions in 2003, Nigeria has finally agreed to hand over the oil-rich Bakassi Peninsular to Cameroon in September 2004, in compliance with the October 2002 ruling of the International Court of Justice. The withdrawal of Nigeria should bring an end to the long-running border dispute, but relations between the two neighbours may still depend on the fate of the majority Nigerian inhabitants on the peninsula who do not want to join Cameroon.

Economic policy outlook

Policy trends Several factors have increased the prospects for at least some economic reform in 2004-05: the appointment of a new finance minister, Ngozi Okonjo-Iweala, who has worked at the World Bank; the inclusion in government of several respected advisers from the private sector; and the feeling that there are now ministers in cabinet and a new governor of the Central Bank of Nigeria (CBN, the Central Bank), Charles Soludu, who are committed to economic reform. The new economic team has worked hard to consult widely—including implementing a period of national consultation in March—while drawing up a new policy document, the National Economic Empowerment and Development Strategy (NEEDS). NEEDS is set to run until 2007 and seeks both to transform the government in Nigeria away from its historically more direct role in the economy towards adopting an enabling role and to promote diversification of the economy. The key steps to be undertaken will be privatisation; deregulation and liberalisation; infrastructural development—especially in the electricity, transport and water sectors; and policies to develop agriculture, manufacturing, solid minerals and tourism, the emphasis being on small- and medium-scale enterprises with the aim of boosting job creation. Although NEEDS looks promising on paper, poor policy implementation will continue to be one of the government's biggest weaknesses, particularly if animosity reappears between the executive and the legislature when tough economic policy choices have to be made because of the forecast fall in oil prices in 2005. Poor policy implementation will also be compounded by a weak civil service and overlaps between local, state and federal government. In such an atmosphere, progress with reform could again grind to a halt and the government will have to work hard to convince donors of its real commitment to implementing difficult changes, given that it seems unwilling to seek a deal with the IMF in the immediate future.

Fiscal policy The 2004 budget, which was eventually signed off by the president in mid- April, is based on an oil price of US$25/barrel and oil output of 2.24m barrels/day. With total expenditure of N1.3trn (US$7bn) approved by the National Assembly, the government forecasts a modest deficit of around 2% of GDP in 2004. Although we do not expect the government to be as effective at controlling expenditure as it envisages—particularly with regard to the savings it hopes to make from privatisation and various anti-corruption initiatives, and

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because it will need to fund a 12.5% pay rise agreed for federal civil servants in late 2003—it looks increasingly likely that revenue will exceed forecast levels. We forecast an oil price of US$27/b in 2004, which should result in a deficit of 2.9% of GDP in 2004, even assuming that further supplementary budgets are passed during the year. The government's commitment to fiscal reform is likely to be tested only in 2005 as oil prices fall back making it necessary for the administration to win the approval of the National Assembly to make cutbacks in expenditure. This is likely to prove difficult and we therefore expect the budget deficit to be 4.7% of GDP in 2005. The government is expected to be able to finance deficits of 2-5% of GDP through domestic borrowing and privatisation receipts, but it is also likely to build up domestic arrears.

Monetary policy Despite the recent appointment of Charles Soludu, the former chief economic adviser to the president, as the new Central Bank governor, we expect little immediate change in monetary policy. The CBN will continue to be guided by the two-year framework outlined in its monetary, credit, foreign trade and exchange policy guidelines released in January 2004. If anything, Mr Soludu will be more committed than his predecessor to the monetary policy framework of recent years, notably the use of open market operations and changes in the minimum rediscount rate to determine interest rates, as well as the continued use of the Dutch auction system to determine the value of the naira. However, the CBN will continue to face considerable political pressure to keep interest rates low enough to boost non-oil economic activity, while money supply growth is likely to remain high until the government makes a sustained effort to reduce the fiscal deficit. Given these problems, the CBN will struggle to raise interest rates substantially and we expect inflation to remain in double digits over the forecast period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.8 4.7 4.1 OECD 1.6 2.1 3.2 2.5 EU 1.0 0.7 1.8 2.0 Exchange rates ¥:US$ 125.3 115.9 105.3 106.5 US$:€ 0.945 1.132 1.270 1.357 SDR:US$ 0.772 0.714 0.665 0.646 Financial indicators ¥ 2-month private bill rate 0.10 0.03 0.03 0.10 US$ 3-month commercial paper rate 1.70 1.10 1.15 2.69 Commodity prices Oil (Brent; US$/b) 25.0 28.8 27.0 22.1 Gold (US$/troy oz) 310.3 362.8 421.3 375.0 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 6.4 2.5 Industrial raw materials (% change in US$ terms) 2.2 12.7 20.3 -2.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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We expect the global economic recovery that started in the second half of 2003 to continue in 2004. Led by rapid growth in the US and Asia, world GDP growth, calculated on a purchasing power parity basis, is forecast to reach 4.7% in 2004 and remain robust, at 4.1%, in 2005. Owing to strong demand from Asia, an ongoing risk premium built into the price and low stocks in the US, global oil prices have remained high in early 2004 and we expect the price of Brent crude to average US$27/b in 2004. However, our forecasts still indicate that there is not a fundamental shortage of supply and, even allowing for OPEC's e ffo rts to s top o il pri ces fro m fall ing back, we fo recast an average pr ice of US$22.1/b in 2005.

Economic growth We estimate that real GDP growth in 2003 was 4.2%, boosted by strong growth in the agricultural sector and in oil production. However, with the growth rate in both the agricultural sector and in oil and gas production set to fall slowly over the forecast period, the rate of real GDP growth will also slow. The slowdown in the growth rate in 2005 is also partly the result of the government's expected efforts to reduce its spending; we forecast growth of 3.4% in 2004 and 3.1% in 2005. Although the headline growth rate will remain robust over the outlook period, it is likely to be considerably below the government's targeted levels of 5-6% unless real progress is made in implementing economic reforms. It will also have little impact on the high levels of poverty and underemployment in the country, which are the root causes of political frustration.

Inflation Boosted by increased domestic fuel prices, high levels of government spending and rapid money supply growth, the upward trend in the inflation rate, which started in the second half of 2003, is set to continue into the first half of 2004. Data from the CBN show that the 12-month moving average inflation rate in Nigeria reached 15.4% in February 2004. However, the inflation rate should start to edge down later in the year as the price rises that occurred in late 2003, such as the increase in domestic fuel prices, work through the system and govern- ment spending slows in 2004. Average inflation in 2004 is therefore forecast at 12.8%. Even assuming good harvests, given the looseness of fiscal and monetary policy and the expected fall in the value of the naira in 2005, which will push up import prices, we expect the CBN to struggle to bring inflation down to single digits, and forecast average inflation of 10.7% in 2005.

Exchange rates The CBN's intervention in the currency market in late 2003 illustrated once again the government's reluctance to let the value of the currency fall sharply. Because of this, coupled with the fact that oil prices are set to remain high for most of 2004, we expect the naira to fall only marginally during the year. It ended 2003 at N136.5:US$1 and, having strengthened in early 2004, we estimate that it will average N135.8:US$1 for the year. Although the accumulation of foreign-exchange reserves will allow the CBN initially to defend the currency in 2005 as oil prices start to fall, the Central Bank will increasingly struggle to support the naira without running down its reserves as the year progresses. Given that building up foreign-exchange reserves has been one of the few positive achievements of the civilian government, we expect that it will allow

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the naira to drop, although the CBN will try to limit the extent of any fall. We therefore forecast that the naira will average N146.7:US$1 in 2005.

External sector Although the strong increase in imports seen in 2003 is unlikely to continue in 2004, strong domestic demand and the easy availability of foreign exchange, owing to high oil prices, will keep the overall level of imports high. Nonetheless, Nigeria is still expected to continue to run a current-account surplus in 2004, equivalent to 2.4% of GDP (compared with 2.7% of GDP in 2003). Even with an increase in oil and gas production in 2005, owing to the forecast fall in the oil price export earnings are expected to fall back sharply. In consequence, foreign-exchange shortages will start to emerge which, coupled with the expected fall in the naira, should lead to a fall in imports. Overall, there will be a sharp reduction in the trade surplus in 2005, which will push the current account into a deficit of 4.7% of GDP. Although changes in the current account are driven mainly by the trade account, some trends in invisible trade will be discernible in 2004-05. The income and services accounts will remain firmly in deficit, the services account because of Nigeria's heavy dependence on international services, and the income account because of profit remittances by multinational oil companies and interest charges on external debt. By contrast, the current transfers account will remain in surplus over the forecast period owing to large inflows of private transfers from the Nigerian diaspora.

Forecast summary (% unless otherwise indicated) 2002a 2003a 2004b 2005b Real GDP growth 3.2c 4.2 3.4 3.1 Industrial production growth 1.2d 2.3 0.7 -0.2 Gross agricultural production growth 5.3 6.5 4.0 4.5 Consumer price inflation (av) 13.6d 13.8 12.8 10.7 Consumer price inflation (year-end) 12.2d 18.2 11.7 11.8 Short-term interbank rate 24.8d 20.7d 19.0 17.8 Government balance (% of GDP) -5.4 -5.8 -2.9 -4.7 Exports of goods fob (US$ bn) 18.0 22.2 22.3 18.0 Imports of goods fob (US$ bn) 13.1 14.2 14.5 14.0 Current-account balance (US$ bn) -0.1 1.4 1.4 -2.7 Current-account balance (% of GDP) -0.3 2.7 2.4 -4.7 External debt (year-end; US$ bn) 30.7 31.1 31.3 31.3 Exchange rate N:US$ (av) 120.6d 129.2d 135.8 146.7 Exchange rate N:¥100 (av) 96.19d 111.49d 128.96 137.72 Exchange rate N:€ (year-end) 132.6d 172.2d 187.8 208.8 Exchange rate N:SDR (year-end) 171.8d 202.8d 217.0 239.5 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official estimate. d Actual.

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The political scene

The president urges vigilance Amid mounting political tension throughout the country, the president, after a "security breach" Olusegun Obasanjo, used his Easter message to urge Nigerians to defend their barely five-year-old democracy "against the machinations of evil revisionists" and to support his reforms to mend an impoverished economy. "We must remain constantly alert and ready to thwart any attempt by unpatriotic elements to breach the peace and security of our nation", Mr Obasanjo said on April 11th. Although the 67-year-old ruler did not elaborate on the threat that he saw facing Africa's most populous nation, coming after a period of growing political violence, disputed elections and, more recently, rumours of a coup plot, it was evident to most political observers that the president has become concerned that Nigeria's third attempt at establishing a stable democracy may be faltering.

The government probes the Mr Obasanjo's call for public vigilance came a little over a week after his "security breach" spokeswoman, Remi Oyo, said that several military officers and civilians had been arrested and were being questioned over what she described as "serious breaches of security." Ms Oyo told reporters in Abuja on April 2nd that she could not call what was being investigated a coup plot, as it had been reported in the newspapers, and stressed that the president still had a firm grip on power. Government officials also refused to disclose the number of people detained, but did confirm reports that Major Hamza al-Mustapha, the notorious chief of security under the late dictator, General Sani Abacha, had been picked up in connection with the security breach, by the Directorate of Military Intelligence, from the maximum security prison where he was being held. According to an army officer quoted in various press reports, dozens of middle- ranking army officers of ethnic Hausa Muslim origin from northern Nigeria were being detained and interrogated in connection with the alleged plot.

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The alleged plotters seem to be Most of those questioned were said to be disgruntled elements of the army disgruntled army elements without current commands, who had allegedly been playing up the unresolved issues of last year's disputed general election results (the legal challenge by Muhammadu Buhari, the defeated All Nigeria Peoples Party—ANPP—candidate, has not yet been resolved by the courts), general insecurity, corruption, unpaid salaries and widespread political disaffection in order to rally support among rank-and-file soldiers for their planned insurrection. Evidently worried by the security breach, the military leadership recalled soldiers to barracks in what an army spokesman, Colonel Chukwuemeka Onwuamaegbu, described as a precautionary move. The chief of defence staff, General Alexander Ogomudia, announced on April 14th that a special panel had been set up to probe the military officers detained in connection with the security breach, but he declined to specify the nature of the alleged threat, arguing that whether it was described as a coup, a revolution or a riot was really not important at this preliminary stage of investigation. The seriousness of the security threat may remain unclear for some time in a country where the army has successfully toppled the government six times since 1960 and where there have been many foiled coup attempts, coup plots and phantom coup plots used to round up opponents of the government. Meanwhile, the debate over whether there was or was not a coup plot is bound to rage on in the press. For example, a human rights activist, Beko Ransome- Kuti, who, along with Mr Obasanjo and many others, was jailed for three years for alleged coup plotting in 1995, publicly stated that he doubted whether there was a plot to topple Mr Obasanjo, arguing that he felt that the plotters would have been only too aware that the country in general would not support such a move. His doubts over whether the coup was real are supported by other political analysts, who suspect the president of generating the uncertainty over national security as a ruse to divert attention from domestic political problems, although this suspicion was not openly stated by Mr Ransome-Kuti. Whatever the truth of the matter, the news of a security breach involving soldiers has raised in the minds of Nigerians the disturbing possibility that the army could attempt to recapture control of the country, which they have ruled with generally disastrous consequences for most of the years since independence. Worried by the prospect, local civil society groups warned the military against contemplating a comeback. The National Association of Nigerian Students (NANS) said that, although Nigeria's fledgling democracy is clearly flawed, students would resist any military incursion, noting that even a seriously flawed democracy is better than a military regime. Meanwhile, senior members of the military, including the army chief of staff, Lieutenant-General Martin Agwai, have sought to reassure the public that the armed forces remain committed to the survival of democracy.

The ruling PDP dominates The problems in establishing democracy in Nigeria were clearly evident in the local council polls local government elections held on March 27th, which were marred by voter apathy, violence and allegations of ballot-rigging, similar to the shortcomings that spoilt federal and state polls last April and May. Prior to the polls, the councils were run by state government appointed caretaker committees, as the

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tenures of the previously elected counsellors had expired in 1999 and the electoral authorities had failed to arrange new polls. The ruling People's Democratic Party (PDP) swept the latest elections, winning the majority of councils in 25 out of the 30 states in which the contests were held. The nation's second largest party, the ANPP, won most of the councils in four states, while the Alliance for Democracy (AD) won convincingly in Lagos, Nigeria's commercial hub. With the PDP already controlling over two-thirds of the National Assembly and state governments, the March result further con- solidated the party's grip on power, but also raised concerns among civil liberties organisations and opposition parties that Nigeria is drifting towards becoming a one-party state. However, on a more positive note, at least the elections were keenly fought across the country, although it could be argued that this really reflects the fact that local governments provide an important point of access to federal funds for local politicians and officials. In fact, in recent years they have also become uncontrolled local fiefdoms.

The ballots were marred by The polls were also, unfortunately, dogged by politically motivated violence, violence with newspapers reporting that about 50 people died in election-related clashes in the two days leading up to the polls. Dozens more people died in political clashes in the aftermath of the elections. Some 30 people, for example, were reported killed in Gonga, in the north-eastern state of Taraba, in fighting between PDP and ANPP supporters after the returning officer made conflicting declarations of the results of the chairmanship election. Having declared the ANPP candidate victorious, he later changed the result in favour of the PDP candidate, allegedly under pressure from the ruling party. This type of manipulation is not, however, uncommon. Opposition parties in various states alleged that state governors used their powers to have their preferred candidates win control of local councils, while officials of the various state independent electoral commissions were accused of unashamedly fixing ballots, sometimes within view of journalists. For instance, in Port Harcourt a Reuters correspondent witnessed electoral officials filling in ballot papers for the PDP in full view of five policemen and five PDP militia.

Election monitors report wide- Unsurprisingly, in many parts of Nigeria the results of the elections were hotly spread voting irregularities disputed by the losing candidates and their parties. The two main parties both claimed that they were victims of rigging. The PDP in Kano rejected its defeat in Nigeria's second largest city, citing malpractice by the governing ANPP. For its part, the ANPP rejected the results in several states of the federation. Independent election-monitoring groups blamed both parties for much of the disorder that accompanied the elections. The Transition Monitoring Groups, a coalition of civil rights organisations, concluded that there was massive fraud, noting in a press statement that it "was doubtful, given the substantial flaws … and the level of irregularities observed on election day, that the elections can in any way be considered to be reflective of the will of the people". The Catholic Church's Justice, Development and Peace Commission, which had some 10,000 election monitors on the ground, accused some state governors of simply annulling elections in districts where the opposition seemed to be on the verge of victory.

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According to many observers, voter turnout for the elections was low, especially in cities where there was massive deployment of troops and police to maintain law and order. Civil liberties groups said that the poor turnout (estimated at about 30% of registered voters) also reflected the electorate's general disenchantment with Nigeria's corruption-ridden electoral system, especially in the wake of last year's disputed national ballot. According to Femi Falana, the secretary-general of the African Bar Association, this disenchant- ment was magnified because, even in the rare cases where courts have overturned election results from last year because of fraud, to date nobody has been prosecuted. This has created a climate of impunity, encouraging acts of political violence and corruption in the recent elections and devaluing democracy in the eyes of the electorate. Tribunal nullifies Adamawa state governor's election

On March 24th an election petition tribunal nullified the results of the April 2003 election for governor in the north-eastern state of Adamawa. The poll had been won by Boni Haruna. The court upheld an opposition party claim that the ballot was rigged in favour of Mr Haruna and the People's Democratic Party (PDP). The judgement against a member of the ruling PDP has helped to restore some public confidence in Nigeria's discredited election system. Mr Haruna said that he would appeal against the verdict. In its challenge, the defeated All Nigeria People's Party (ANPP) alleged that the elections in Adamawa were marked by large-scale fraud, including the stuffing of ballot boxes and the alteration of results. The court also ordered fresh elections in 14 of the 21 local governments in the state. One of the places where fresh elections were ordered was Jada, the home area of the vice- president, Atiku Abubakar. A witness told the tribunal that a senior electoral official had altered the results for Jada to save the vice-president from the embarrassment of having his party lose in his own local council. In Nigeria's political culture, the ability of senior politicians to deliver election victories in their home areas to their party is an important indication of political potency. The court ruling was a blow to the PDP and particularly to Mr Atiku, who is widely believed to be eyeing the presidency in 2007. The ANPP welcomed the judgement, saying that this vindicates its contention that the PDP rigged last year's polls. The court ruling has raised the possibility that other election challenges by opposition parties in courts elsewhere in Nigeria may be similarly successful, including a petition against the re-election of the president, Olusegun Obasanjo. A wave of assassinations Even without the disillusionment with the democratic process that exists in the erupts prior to the elections country, the political tension in the weeks leading up to the elections was probably enough to convince many voters to stay at home. In particular, there was a wave of assassinations and attempted assassinations that highlighted the desperation and intolerance that has emerged in recent years. The main incidents, all involving leading politicians, occurred in February and March. • In early February the national vice-chairman of the PDP, Aminasoari Dikibo, was killed by an armed gang while travelling to a party meeting in Asaba, Delta state.

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• In early March the convoy of the Benue state governor, George Akume, was ambushed by armed assailants. The governor escaped with minor injuries but his travelling companion, the former managing director of Nigeria Airways, Andrew Agom, and a police sergeant were killed. • In the same week as Mr Akume was attacked, the Lagos state governor, Bola Tinubu, was attacked while travelling in south-east Nigeria. • Several days after Mr Akume was attacked, Phillip Olurunipa, the head of the Kogi State Electoral Commission, was shot dead in his home village.

Police blame armed robbery In early April the inspector-general of police, Tafa Balogun, told reporters that fo r the vi ol ence police investigations had concluded that the attacks against the convoys of Messrs Dikibo and Akume, as well as the murder of the ANPP leader, Harry Marshal, in March 2003 (May 2003, The political scene), were all simple armed robbery. The killing of Mr Marshal, a former PDP member turned regional ANPP leader, stirred up much controversy, as his party blamed the PDP for his death. Supporters of the victims were unconvinced by the police findings and some accused the government of a cover-up. Armed robbery is a major problem in Nigeria, but in a climate of political intolerance people are more inclined to see political motivation behind the killing of prominent politicians by gunmen, even where the assailants are bandits. Civil liberties activists have long warned that, amid the grinding poverty and corruption in the country, it has become increasingly easy and inexpensive for unscrupulous politicians to hire thugs from the underworld to carry out targeted killings. However, the problem could run deeper. Human rights organisations accuse some elected state officials of establishing personal militias to advance their political interests. On March 30th the police arrested the deputy governor of Delta state, Benjamin Elue, after a dozen AK-47 rifles were found in one of his official cars. The deputy's aides, who were caught with the weapons on the eve of the March 27th local council elections, told investigators that they were on "an errand for their boss". Under Nigeria's current constitution, state governors and their deputies enjoy constitutional immunity and cannot be prosecuted while in office. However, the police said that if Mr Elue were indicted, he would be prosecuted at the end of his tenure in office. Meanwhile, Mr Balogun has called for a review of the impunity provision, saying that it has been abused frequently by some governors.

Troops and youths clash in the Against the background of the political tensions generated by the local troubled Niger Delta government elections, violence has continued to build up in the Niger Delta in the last few months, despite the deployment of federal troops in late 2003 in an effort to help to put an end to the incessant fighting between rival ethnic groups that are seemingly permanently locked in conflict over access to the region's oil wealth (February 2004, The political scene). In one of the latest clashes, on March 9th in Warri, Delta state, local residents claimed that at least 21 people, including a soldier, were killed in a shootout between troops and militant youths at Awor Waterside. However, Elias Zamani, the commander of the Joint Military Task Force, told a news conference that only one soldier and four ethnic Ijaw militants had died. The Ijaw Youth Council said in a statement

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that the trouble began when a soldier refused to pay for Indian hemp (marijuana) that he had smoked with some Ijaws. An activist group, the Federated Niger Delta Ijaw Communities, alleged in a statement that within hours of the Awor incident members of the military task force massacred at least 51 unarmed people in nearby Fenegbene village, apparently in reprisal for the killing of the soldier in Awor. The task force denied the allegation. Tensions in the Niger Delta

The ongoing tensions in the Niger Delta continue to be a major problem for the government, and there is a very real possibility that the area could explode into violence. The possibility that the situation could spin out of control moved one step closer in April, as two US citizens working for ChevronTexaco were killed when their boat was ambushed. This is the first time that expatriates have been killed in such attacks and the incident will trigger increased concern within the multinational oil companies operating in the region that they may become established as the targets of future attacks.

The government's response to the deep-rooted problems in the region has so far been weak. Its main initiative was the establishment of the state-financed Niger Delta Development Commission (NDDC), which was set up in 2001 (November 2000, The political scene). However, the NDDC has remained under-funded, with little to show in terms of concrete development projects. Meanwhile, the decision to deploy federal troops more widely so as to keep order in the region can, as recent incidents show, serve just as much as a flashpoint for violence as a way of keeping it under control.

Meanwhile, the government and the international community continue to search for ways to bring a semblance of order to this crucial oil-producing region. On March 8th the government inaugurated a ten-man Presidential Committee on the Niger Delta to work out ways to contain the problems of pipeline vandalism, illegal bunkering, violence and political agitation in the region. The government's efforts are likely to receive international support, and the World Bank recently announced that it plans to launch its first lending programme for the region, which is likely to be targeted at supporting the NDDC, while the UNDP is to work with oil multi- nationals, such as Shell, to try to resolve some of the region's huge social problems.

The potential problem is that, as with other efforts to run projects in the region, the projects could easily run into difficulties if they are captured by various groups, and could then become the source of new political friction. In the end, such projects will probably not work unless there is first a serious effort to restore law and order in the region. This, however, still seems some way off. Religious violence claims On April 9th the Christian Association of Nigeria (CAN) claimed that more hundreds of lives than 1,000 people have been killed since the beginning of the year in a series of attacks on Christians across predominantly Muslim northern Nigeria. CAN, an umbrella group representing various Christian churches in Nigeria, blamed Islamic militants for the attacks, which it said also razed 63 churches. The association said that it had pulled out of government-backed peace talks with its Muslim counterpart, Jamatu'ul Nasir Islam (JNI), in Kaduna state because of

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the attacks. The Economist Intelligence Unit was unable to verify CAN's rather high casualty claim, but the media did report that between February and March at least 220 people were killed in tit-for-tat clashes between Christians and Muslims in Plateau state, a predominantly Christian state in north-central Nigeria. On March 26th at least 20 people, mostly Muslims, were slain in an early morning raid by Christians on Wase town. It was unclear what sparked the onslaught but it followed a series of clashes between Muslims and Christians in nearby farming towns in late February. According to the Nigerian army, between 40 and 50 people were killed on February 26th when Christians in Garkawa town attacked their Muslim neighbours in retaliation for the killing of 90 Christians in nearby Yelwa town, including 48 massacred at a church on February 24th. The Yelwa attack appeared to have been in reprisal for a Christian attack on a nearby Muslim village in which ten people died, and the incident has since escalated, with further attacks and reprisals leaving an estimated 300 people dead by early May. The JNI said in April that, contrary to CAN's claim, most of the victims of the clashes in Plateau state were Muslims. The secretary-general of the JNI, Abdulkadir Orire, even accused the Christians of "genocide against Muslims" as the attacks intensified in late April. Meanwhile, it is still not clear what triggered the latest outbreak of warfare in Plateau state, where violence has raged intermittently since September 2001, when an outburst of sectarian violence in the capital, Jos, claimed more than 1,000 lives (November 2001, The political scene). One of the underlying causes of the conflict in Nigeria's central states is the rivalry between the mainly Christian and animist indigenes and the predominantly Muslim ethnic Hausa/Fulani settlers. The two sets of peoples have coexisted peacefully for decades but hostility has grown in recent years, particularly as competition for scarce resources, especially land, has intensified.

There is a real potential for What is clear is that the government faces a difficult task in easing religious radical Islamic groups to tension in a society roughly evenly divided between Christians and Muslims, emerge in Nigeria where, although faith and ethnicity have long coalesced, there have also been periodic outbreaks of intense violence. In particular, relations between Christians and Muslims have worsen since a dozen states in northern Nigeria introduced sharia (strict Islamic law) following the restoration of democracy in 1999. Meanwhile, although Nigeria has so far not been drawn into the global Islamic fundamentalist movement, the potential for such radicalism was evident in an abortive uprising by a student-led Islamic sect last December (February 2004, The political scene). This concern is increasingly shared by officials in the US, who believe that the West African giant is vulnerable to Islamic terrorist infiltration. On April 1st the former US ambassador to Nigeria, Princeton Lyman, told the US House Africa Subcommittee looking into terrorism that the US should help Nigeria to enhance its security system. He said that Nigeria was currently undergoing "tension and debate" that makes it vulnerable to Islamist extremism, noting that although so far there is no indication that terrorist networks have taken hold in the country, the potential for links between terrorist groups and Nigeria's already well-developed criminal and drug-trafficking groups is a worrying prospect. Mr Lyman urged the US Congress to resolve the impasse over providing security assistance to Nigeria—

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stemming from human rights concerns about the Nigerian military—suggesting that helping to bolster Nigeria's security forces is in everyone's interests.

Kano state stays out of the The depth of suspicion among some sections of Nigeria's Muslim communities polio vaccination programme towards the Christian West, especially the US, was illustrated by the ongoing problems of organising a mass global polio immunisation programme in Kano state, following claims by some Muslim clerics that the drug is part of a Western plot to render Muslim women infertile. Kano is Nigeria's second most populous state and the high incidence of the disease in the state is a major hurdle to the efforts of the World Health Organisation (WHO) to eliminate the disease: Nigeria is one of five countries where the disease is endemic, and accounted for about half of all 758 polio cases worldwide in 2003. Opposition to the immunisation programme was so great that the programme has been suspended since last September, despite assurances from the federal govern- ment that the vaccines are safe. In March another mainly Muslim northern state, Zamfara, which also boycotted the programme last year, rejoined the WHO efforts to eradicate polio by the end of 2004.

Nigeria agrees to hand over The Nigerian government has apparently agreed to hand over the oil-rich Bakassi Bakassi Peninsula to Cameroon on September 15th, according to the UN- sponsored Cameroon-Nigeria Mixed Commission. A communiqué from the ninth session of the commission, held on April 8th, said that the decision was made to shift the handover date from April at the behest of Nigeria. The commission was established in November 2002 in Geneva (February 2003, The political scene) following a UN-brokered meeting between Mr Obasanjo and his Cameroonian counterpart, Paul Biya, to implement the October 2002 World Court ruling that ceded Bakassi to Cameroon. Nigeria initially rejected the ruling, but later indicated that it would abide by it provided that the interests of its citizens living in Bakassi were protected. In late February thousands of Nigerian residents on the peninsula staged a protest during the visit of a UN team to the disputed territory, making it clear that they did not want to join Cameroon, a view apparently shared by the majority of the inhabitants. In early March a delegation of the Cameroon-Nigeria Mixed Commission, on a fundraising tour of Europe and America, urged the international community to support the mission's work in order to ensure that no radical elements from either Nigeria or Cameroon derail the peaceful resolution of the border dispute.

Economic policy

NEEDS is circulated for public In the last few months, the Nigerian government has embarked on the public consultation consultation phase of the implementation of its new economic policy, the National Economic Empowerment and Development Strategy (NEEDS). The idea of having a public consultation phase when developing economic policy is something that has slowly gained ground in Sub-Saharan Africa and is an integral part of the various IMF-World Bank poverty reduction policies that many countries have introduced. There has been concern, however, that in such policies the public consultation phase was little more than a cosmetic exercise. Whether this will also be the case in Nigeria is not clear, but, during

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his visit to the country in late March, the president of the World Bank, James Wolfensohn, expressed confidence in the new policy, even telling reporters that NEEDS has a major advantage over many of the World Bank-supported poverty reduction strategy papers because it is genuinely home-grown; this seems to have strengthened the government's commitment to the participatory process. He also announced that the World Bank is now prepared to lend up to US$1bn over the next two years to support the reform effort. In addition to the positive response to NEEDS from Mr Wolfensohn, the IMF has welcomed the new policy document, with officials from the Fund noting that NEEDS could provide a much-needed framework for co-ordinating eco- nomic management at federal and state levels of government: overlapping tiers of government with little co-ordination have long been a constraint to sensible economic management in Nigeria. In the concluding statement of the 2004 Article IV consultations discussions with Nigeria in early March, the IMF mission said that it was imperative that NEEDS became operational, noting that its policies should also be clearly linked to the budget process, including the development of a medium-term expenditure framework to guide annual budget allocations.

NEEDS aims to boost the Although still in a draft form until after the consultation phase, the Economist private sector Intelligence Unit expects the current NEEDS policy to remain broadly unchanged. NEEDS is set to run until 2007 and seeks both to transform the government in Nigeria away from its historically more direct role in the economy towards adopting an enabling role, and to promote diversification of the economy. The key to this will be privatisation; deregulation and liberalisation; infrastructural development—especially in the electricity, transport and water sectors; and policies to develop agriculture, manufacturing, solid minerals and tourism, the emphasis being on small- and medium-scale enterprises with the aim of boosting job creation. The four-year programme also contains—as has been typical of recent government policy documents—a range of highly ambitious targets, including: • raising the real GDP growth rate from 5% in 2004 to 7% in 2007 and boosting non-oil growth from 7.27% in 2004 to 9.52% in 2007; • cutting public spending as a ratio of GDP from 23.54% in 2004 to 22.33% in 2007 and pegging the government budget deficit, which averaged 4.7% in the past five years, at a maximum of 3%; • creating 7m new jobs by 2007; and • reducing poverty incidence by 5% a year, increasing the adult literacy rate from 57% in 2003 to 65% in 2007 and raising access to clean water from 64.1% in 2003 to 70% in 2007.

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Selected macroeconomic and sectoral targets in NEEDS (Annual % change, unless otherwise stated) 2003 2004 2005 2006 2007 Macroeconomic targets Real GDP growth 8.6 5.0 6.0 6.0 7.0 Oil sector 15.0 0.0 0.0 0.0 0.0 Non-oil sector 5.8 7.3 8.5 8.3 9.5 Reduction in poverty incidence 5.0 5.0 5.0 5.0 5.0 Minimum number of new jobs created (m) - 1.0 2.0 2.0 2.0 Growth in real private consumption expenditure - 4.8 4.8 4.8 4.8 Growth in real per capita consumption - 2.0 2.0 2.0 2.0 Inflation rate 11.0 10.0 9.5 9.5 9.0 Sectoral targets Growth in agricultural sector 7.0 6.0 6.0 6.0 6.0 Growth in manufacturing sector - 7.0 7.0 7.0 7.0 Manufacturing capacity utilisation 53.0 - - - 70.0 Tourist visitors to Nigeria - 10.0 10.0 10.0 10.0 Communication Improve teledensity from 1:40 in 2003 to 1:25 in 2007 and improve access especially in the rural areas Solid minerals Provide self-employment for at least 500,000 Nigerians Agricultural exports Earn at least $3bn from exports of cassava and related products by 2007

Source: NEEDS (First draft, for comments and suggestions).

There is little new in terms of There is little in terms of policy orientation that is new in NEEDS. Like previous policy in NEEDS government macroeconomic policies, it holds out promises of economic liberalisation and lists numerous targets which, if achieved, would start the country's economic transformation. However, many of the cultural and political obstacles that undermined past efforts at reform remain unresolved. Besides political instability and lack of economic freedom, including secure property rights, there remains a shortage of resolve within the political system to actually reform the economy. Nigeria's federal system is enmeshed in internal struggles for power that undermine its capacity to carry out reforms, even ones that are supposedly home-grown. In response to such criticism, the administration's economic team has been keen to stress that the way that NEEDS has been developed is designed to address this problem, by involving all layers of government in its formulation. When, on March 15th, the president, Olusegun Obasanjo, publicly launched the six-week nationwide NEEDS consultation exercise involving all the stakeholders, he particularly highlighted that this was the first time that federal and state governments were being involved in co-ordinating a planning framework with agreed common priorities: agriculture, small-scale enterprises, infrastructure, public finance and public sector reforms. However, a major drawback exists, in that the broad consultation exercise has meant that the document will be accepted only in June 2004, well over a year after the president's re-election. As we have consistently argued, although the new administration seems to have a much stronger commitment to reform than during the president's first term in office, it only has a relatively short window of opportunity to introduce difficult reforms, given that campaigning for the next presidential election is likely to pick up from late 2005. The fact that

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drawing up the policy document took over a year has, therefore, substantially shortened the period in which the policy can be implemented, and this could just as much prove to be its undoing as its success.

The president initially refuses The most obvious example of how politics has hindered economic manage- to sign 2004 Appropriation bill ment in Nigeria since the return to civilian rule has been the perennial delays in the passing of the government budget. As at mid-April, the 2004 budget was still gridlocked in a dispute between the president and the National Assembly, despite assurances given last year that the usual hold-up in the enactment of the Appropriation bill would not recur this year. Mr Obasanjo refused to assent the budget passed by the National Assembly on March 24th, arguing that the two houses had overreached their constitutional power in their amendments to the draft that he had presented in late 2003. In a letter to parliament, the president complained that the legislature had raised the budget from N1.2trn (US$8.9bn), as proposed by him, to N1.3trn. Parliament also approved N539bn (US$3.9bn) for recurrent expenditure, N349bn for capital spending and about N369bn for debt servicing, producing a deficit of N187bn. Mr Obasanjo also objected to the inclusion in the budget of a provision for the creation of an escrow account into which excess oil revenue is to be deposited. Another of his objections was to provisions that would give the National Assembly greater powers to control approved expenditure, in particular a clause that required the finance minister to seek a waiver from the legislature when, owing to revenue shortfalls, amounts appropriated in the budget cannot be funded. Representatives of the National Assembly claim that the provisions were designed to compel the executive to implement the budget as passed by the National Assembly and to make it more accountable. Some of the president's critics argue that, despite his advocating financial prudence and transparency, his administration has consistently failed to account for windfall oil earnings. The current wrangle is unsurprising, given that since the return of democracy in 1999 the executive and parliament have been at loggerheads over budget management, with National Assembly members regularly accusing Mr Obasanjo of failing to implement approved budgets. Legislators from both the ruling People's Democratic Party (PDP) and opposition parties condemned Mr Obasanjo's refusal to sign the latest budget. Some warned that by his arrogance the president may be repeating the mistakes that led to aborted moves to impeach him in 2002 (November 2002, The political scene). A compromise agreement was eventually reached by a joint-harmonisation committee of both houses of the National Assembly and signed by the president in mid-April. However, the president could not resist a final dig at the National Assembly, noting that owing to the delays it would now not be possible to fully implement the budget as approved.

Pressure to reduce interest Another major problem with macroeconomic management in recent years has rates been the lack of co-ordination between fiscal and monetary policy. With no signs that the government has yet reined in the fiscal deficit, there is still substantial pressure to continue to reduce interest rates despite the rising inflation rate. The most recent example of this occurred on March 18th, when

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Mr Obasanjo directed the Central Bank of Nigeria (CBN, the Central Bank) to bring down rising bank lending rates to ensure growth outside the oil sector. A government press release quoted the president as saying that if current interest rates remained unchecked, the productive sector would not grow, even with all other parameters put in place by the government. The president's position was supported by Professor Ibrahim Ayagi, the chairman of the National Economic Intelligence Committee (NEIC). Speaking at the presentation of the NEIC's Fourth Quarter 2003 Report, Mr Ayagi also called for a downward review of the interest rates charged by commercial banks, which he said had remained at 30% last year, against the 19% voluntary limit agreed by the banks (this agreement was reached in November 2002 between the Banker's Committee and the CBN and was for commercial banks to charge no more than 4% above the minimum rediscount rate, which is currently 15%. Mr Ayagi seems to have based his 30% figure not only on the headline interest rate charged by banks but also on the various charges associated with taking out a loan, such as the processing, management and renewal fees levied by banks. He also argued that the persistent high level of interest rates indicates that, while the moral suasion put on the banks during the year initially succeeded, the impact was only temporary and should be revisited.

Key Nigerian interest rates (%, average for year) 1999 2000 2001 2002 2003 Discount rate (end period) 18.00 14.00 20.50 16.50 15.00 Treasury-bill rate 17.82 15.50 17.50 19.03 14.79 Deposit rate 12.81 11.69 15.26 16.67 14.22 Lending rate 20.29 21.27 23.44 24.77 20.71 Inflation rate 4.8 12.7 13.0 12.9 14.0

Sources: Central Bank of Nigeria; IMF.

However, in April the CBN stated that the maximum lending rates of banks had declined by 1.7 percentage points, to 19.9%, at the end of February. In its monthly report for February, the CBN noted that there was a general decline in banks' deposit and lending rates in February, but the spread between weighted average deposit and maximum lending had widened marginally, to 9.4 percentage points, from 9.3 percentage points in January. Private bankers said that commercial banks were trying to keep to the agreement with the CBN to charge no more than 4% above the 15% minimum rediscount rate, but market forces sometimes made this difficult. Moreover, the situation was made more difficult because of the high level of government borrowing in the last few years, which has ensured that the interest rate on Treasury bills has remained high, thus pushing up overall rates in the economy. On a more positive note, the government has at least partially recognised the contradictory thrust of its policy in the NEEDS document, where it projects a relatively high inflation rate, which falls to only 9% by 2007 (although the inflation rate and rapid growth in real GDP do not seem to correspond very logically to the low levels of money supply growth projected).

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NEEDS monetary sector projections (% change, unless otherwise stated) 2003 2004 2005 2006 2007 Inflation rate (%) 11.0 10.0 9.5 9.5 9.0 Net domestic credit 28.3 24.5 24.6 22.5 21.8 Net credit to government 44.4 29.9 29.9 23.5 21.5 Credit to private sector 30.0 30.0 30.0 30.0 30.0 Narrow money (M1) 10.3 10.8 8.3 16.7 19.8 Broad money (M2) 15.0 15.0 15.5 15.5 16.0

Source: NEEDS (First draft, for comments and suggestions).

A new central bank governor

In late April Charles Soludu, the former chief economic adviser to the president, Olusegun Obasanjo, was appointed the new governor of the Central Bank of Nigeria (CBN, the Central Bank), replacing the long-standing former governor, Joseph Sanusi. Mr Sanusi had announced his retirement unexpectedly, although his current tenure was due to expire in June. Despite the new appointment, the Economist Intelligence Unit expects little immediate change in monetary policy. If anything, given his background, Mr Soludu will be more committed than his predecessor to the implementation of the CBN's current monetary policy framework and the greater use of market forces and indirect instruments to conduct monetary policy, including open-market operations and the continued use of the Dutch auction system to determine the value of the naira. In the medium term, it has become more likely that under Mr Soludu the CBN will be more open in terms of its dealing with the public and less willing to use up foreign-exchange reserves to defend the naira (although there are strong political interests opposed to allowing the naira to fall). It may also favour a system of inflation targeting rather than the current system of setting money supply growth targets.

Instead, the main impact of the appointment of the new Central Bank governor in the short term is that it further increases the the prospects for at least some economic reform in 2004-05. Mr Soludu's appointment needs to be seen in the light of the appointment of the finance minister, Ngozi Okonjo-Iweala; the bringing-in of several respected advisers to the government from the private sector; and the feeling that there is now a cabal of ministers in cabinet committed to economic reform. Together, this has created a strong group within the government and the political elite that is committed to economic reform and has placed its faith in achieving it through the new policy document currently under public consultation, the National Economic Empowerment and Development Strategy (NEEDS). Whether the new team has the political clout to achieve the goals outlined in NEEDS is still far from clear, especially given the short window of opportunity that exists before campaigning starts for the 2007 presidential election. However, it does continue to signal the president's commitment to the reform process. Corruption moves up the Another major theme, which was taken up by Mr Wolfensohn during his policy agenda March visit to the country, was that of corruption. In his address to the cabinet and members of the National Assembly, he stressed that corruption is a cancer and that although you can "pretend to live with the cancer" it will eventually

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kill you. Mr Wolfensohn's comments were, however, not all negative; he took the opportunity to commended the government's determination to combat corruption, while calling for a "national change of heart" in which all levels of society mobilised behind the anti-corruption drive. The Obasanjo adminis- tration has in recent months taken some steps in the right direction, including signing up for the Extractive Industries Transparency Initiative, which provides for greater dis-closure of government oil and gas revenues. In addition, in late March Nigeria ratified the UN Convention against Corruption and enacted a money-laundering law that makes it an offence for individuals to carry cash above N500,000 (US$3,704) and restricts corporate transactions outside a financial institution to N1m (US$7,408). In addition to stepping up attempts to tackle corruption, the administration has increased its efforts to combat rampant financial fraud, with which Nigeria has become synonymous, especially the infamous advance-fee scams—so-called 419 scams, after the relevant provision in the Nigerian legal code—where greedy individuals around the world are conned into depositing their money into an account on the promise of a much larger gain at the conclusion of a transaction that turns out to be fictitious. The trial began in February of five Nigerians accused of tricking an employee of a Brazilian bank, Banco Noroeste of São Paulo, into paying out US$242m of his bank's money to finance the construction of a fictitious new airport in Nigeria. The fraud, committed in the early 1990s, is thought to be the biggest single advance-fee fraud on record. The Brazilian bank collapsed in 2001 after the money was transferred into foreign bank accounts by the employee, who thought he would receive a massive kickback on the building contract. The administration is hoping that the prosecution of the fraudsters by the Economic and Financial Crimes Commission (EFCC), established in May 2003, will send a positive signal to genuine investors.

The privatisation timetable is The government has once again revised its much-delayed privatisation revised once again programme. In mid-March the Bureau of Public Enterprises (BPE) said that it had restructured the third phase of the programme into short-, medium- and long-term projects. It is not clear whether the second phase was implemented, since many of the companies that it contained are now listed in the third phase (February 2004, Economic policy). The BPE said that the completion date of the short-term category, which includes the failed multi-billion dollar Aluminium Smelter Company (Alscon), had been shifted from end-March to end-June 2004, and that it could be shifted again. The medium-term category comprises 36 enterprises, including three paper mills, five vehicle-assembly plants and two fertiliser companies. Another 13 companies, including the giant electric utility firm, National Electric Power Authority (NEPA), are now listed in the long-term category, with no specified completion date. Under the original plan, the entire privatisation agenda was to have been finished by 2003, but by April none of Nigeria's major state-owned corporations had been sold. Despite the government's efforts to keep the privatisation programme going and its apparent commitment to economic reforms, the recent delays clearly illustrate the difficulties facing the BPE in its task. One of the major problems is that the enterprises that it is attempting to sell are in such poor financial and

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physical shape that they are unattractive to investors. Many are also carrying huge and often hidden liabilities in terms of unaccounted-for debts and under- funded pension commitments. As a result, the BPE has had difficulty in finding appropriate buyers. For example, it is once again seeking a core investor for the National Fertiliser Company of Nigeria (Nafcon) after the Sino-Africa Petroleum Company failed to pay for the 100% of Nafcon's equity that it was awarded last year for US$75m, a fraction of the sum that Nigeria had invested in the enterprise. Sino-Africa was then the only bidder left after the disqualification of another company that had failed to pay a US$3m bid bond. Nafcon, opened in 1987, was highly productive in the early 1990s but later declined as a result of mismanagement. It has been closed since 1999.

The reform of NEPA is slowed The political process has also continued to undermine the privatisation and by politicking reform process. For instance, after years of promising to liberalise the power sector and the development of advanced plans to do so—the BPE organised a series of road shows in early 2002 at which it presented its detailed plans to break up the sector (November 2002, Infrastructure)—by April 2004 the government had still not legislated to end the current state monopoly and set the legal framework for private-sector participation in the crucial industry. The long-awaited Power Sector Reform Bill was passed by the National Assembly early last year, but Mr Obasanjo did not sign it, allowing it to lapse. It is unclear what he objected to in the bill, but media reports suggest that the bill was sunk by a power struggle over who should appoint members of the proposed Nigerian Electric Regulatory Commission. The bill had been presented to Mr Obasanjo earlier in 2004 and power ministry officials had expected him to sign it, paving the way for the delayed privatisation of the grossly inept NEPA.

Domestic fuel supplies remain As well as its promises to reform the power supply, the government has also a problem made various promises to resolve the problem of shortages of basic domestic fuel products, notably petrol, in the world's seventh-largest oil exporting country. However, as with other policies, the exact status of the various policy initiatives remains confused and contradictory. With respect to its efforts to sell off a majority stake in the country's four oil refineries, in March the BPE director-general, Julius Bala, told reporters that the delay in privatising Nigeria's four oil refineries was due to the government's attempts to convince major oil companies operating in the country to acquire 51% stakes in the four refineries. The multinationals remain unenthusiastic about taking up the offer for a number of reasons, including the continued regulation of fuel pricing, the poor shape of the refineries and the insecurity in the Niger Delta where three of the plants are located. In early April Mr Obasanjo set up a committee to expedite the privatisation of the refineries, which proposed requisite down-sector reforms. An official statement said that the committee, headed by the pres- idential adviser on petroleum and energy, , would initially ensure the successful privatisation of the two refineries in Port Harcourt. What is clear is that the oil majors would probably be more interested in building a new refinery from scratch in the location of their choice if the issue of domestic fuel pricing were clarified. Meanwhile, the government has given its first go-ahead for the commencement of construction work on a private

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refinery in the country. According to Mr Daukoru, Orient Petroleum, a subsidiary of Zaver Petroleum Corporation of Pakistan, received the approval after submitting a basic design package and paying the mandatory US$50,000 fee on March 12th. The company will be expected to pay an additional US$100,000 after the plant has been built before it can begin refining products. Orient was among 18 firms that were granted a preliminary licence in 2002. Mr Daukoru said that three other companies out of the 18 have qualified to have their papers processed for presidential approval. In the race to build Nigeria's first private refinery, a Nigerian company, Amakpe International, seems well placed after winning a US$10.3m guarantee loan approval from the US Export Import Bank at the end of January for the purchase of equipment from a Texas-based firm, Ventech, for the construction of a 12,000 barrels/day refinery in Eket in Akwa Ibom state. Phase 1 of the project involves the installation of a 6,000 b/d unit and is estimated to cost about US$30m. It is scheduled to start production by February 2005 and will be supplied by ExxonMobil's terminal at Qua Iboe.

Marketers withdraw from fuel Despite the deregulation of the downstream oil sector last October, enabling importing private marketers to import fuel freely, since February the major oil companies have been reluctant to ship in products as they have been unable to adjust domestic pump prices to reflect increases in world oil prices. This has left the burden of fuel importation with the Nigerian National Petroleum Corporation, which usually imports most of the fuel consumed in Nigeria. Private oil marketers wanted a 10-15% review of pump prices (to take petrol to about N47/litre), but the official Petroleum Products Pricing Regulatory Agency has argued that it is unable to raise fuel-price ceilings because of a court order that stopped the government from collecting the N1.50/litre fuel tax that it introduced on January 1st. After some marketers raised pump prices, Nigeria's powerful trade unions threatened strike action if fuel prices were not returned to pre-January levels. Marketers say that it is absurd that a row between the government and the unions over a tax to raise revenue for road maintenance should prevent oil-pump prices from responding to market forces. With Nigeria's four state-run oil refineries producing well below capacity, the world's seventh-largest oil exporting country is likely to remain dependent on fuel imports for some time.

The domestic economy

Economic trends

The Nigerian economy records The official first draft of the government's National Economic Empowerment high real GDP growth in 2003 and Development Strategy (NEEDS) policy document put Nigeria's real GDP growth at 8.6% in 2003, the highest level in more than a decade. According to the government, this remarkable growth, from just over 3% in 2002, was largely fuelled by unusually strong oil export revenue. The NEEDS document estimated GDP oil sector growth at 15% in 2003 and non-oil sector growth at 5.8%. The government does not expect last year's growth rate to be sustained, forecasting a fall to 5% in 2004, despite a target rise in non-oil sector growth to 7.3%. In the

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concluding statement of its 2004 Article IV discussions with Nigeria, held between February 23rd and March 8th, the visiting IMF mission estimated that Nigeria's GDP grew by 10.8% in 2003. The statement said that this growth largely resulted from a significant rise in oil output. The same figure was subsequently published in the IMF's April 2004 World Economic Outlook. However, it is unclear whether the improvement in Nigeria's oil sector would have pushed the country's GDP as high as suggested by NEEDS or the IMF. In its monetary guidelines published in January, the Central Bank of Nigeria (CBN, the Central Bank) estimated real GDP growth for 2003 at 3.5%. The National Economic Intelligence Committee (NEIC) also estimated Nigeria's GDP growth rate in 2003 at a similar level, 3.8%. The NEIC said that agriculture grew by 5.3% in 2003 and manufacturing by 3.3%. The report estimated that 90,717 new jobs were created last year, a long way from the government's target of 1m in 2004. Similarly, the World Bank's Global Development Finance 2004 report, published in April, estimated Nigeria's real GDP growth in 2003 at 3%, up from 1.8% in 2002. It should also be noted that last year the IMF had forecast a negative growth rate in Nigeria for 2003 in the World Economic Outlook, which seems to have subsequently been contradicted by official data. What is clear is that both the agricultural and oil sectors expanded strongly in 2003, which pushed up growth—probably to around 4-5%—and we expect a figure of around this level when the CBN publishes its annual report in the coming months. In the past few years the CBN annual report has at least provided a consistent data series that seems to be intuitively correct. However, as the growth rate in both sectors falls off, real GDP will fall back to around 3% in 2004.

The inflation rate rises steadily Having fallen for the first eight months of 2003, inflation increased steadily in the final quarter of the year. Since then, the 12-month average inflation rate, the measure preferred by the CBN, has continued to rise in 2004, to 15.3% in February, from 15% in January and 14% in December. The Central Bank said that the rise in inflation was largely due to domestic fuel prices hikes and the attendant increase in transport costs. In its official commentary on the inflation rate it argued that inflationary pressure reflected mainly structural/cost-push factors as the money and foreign-exchange markets witnessed favourable development. Although the government set a target of 9% inflation in its 2004 budget—but has a 10% target in the NEEDS document—it is likely that the rate will remain firmly in double figures, particularly given the growing pressure on the government to further raise domestic fuel prices to reflect recent increases in world oil prices.

The naira is relatively stable With oil prices remaining relatively high, resulting in a steady flow of foreign exchange into the country, the naira appreciated in the first three months of the year but was fairly stable in April. According to Bloomberg, the naira started the year on the interbank foreign-exchange market at N139:US$1 and strengthened steadily, to cross the N136:U$1 level at the end of February. It crossed the N135:US$1 level in mid-March and had reached N134:US$1 by the end of the month. In April, however, it stabilised, trading at N134-135:US$1. As well as a steady supply of foreign exchange on the market, there has been a fall in demand: on March 24th, for the first time since the CBN reintroduced its Dutch

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auction system in July 2002, supply of hard currencies outstripped demand. The CBN offered US$70m at the auction but the banks demanded only US$66.44m on behalf of their clients. Some dealers linked the decline in demand to a new CBN regulation requiring companies to possess a Tax Clearance Certificate (TCC), which is a proof of tax payment, before they can source foreign exchange at the auction. According to a CBN statement, author- ised dealers must submit to the CBN certified copies of the TCCs of corporate customers at the end of each year. However, the new rule, designed to cut off market access to speculators, did not drive up demand for hard currencies at the parallel market, as might be expected. Instead, the parallel market rate has strengthened along with the other rates, from N150:US$1 at the start of the year to around N136:US$1 in April, according to the rates published by Afrinvest.

Oil and gas

Nigeria presses for a higher Nigeria has intensified its campaign to get OPEC to increase the country's OPEC production limit production quota to reflect growth in its output capacity and reserves in recent years. A government news release on February 10th said that a Nigerian delegation had been sent to Algiers to lobby OPEC ministers attending an extra- ordinary meeting in the Algerian capital to review two earlier presentations made by Nigeria to have its quota raised to 3m barrels/day. Edmund Daukoru, the petroleum and energy adviser to the president, Olusegun Obasanjo, said that Nigeria would present another formal request for a higher quota at the March OPEC ministers' meeting, but this did not have an immediate impact. Mr Daukoru contended that, having already reached its target of raising its potential production capacity to 3m b/d, Nigeria should be allowed to pump at that level or thereabouts. Despite the government's efforts, to date its hopes that the quota will be increased have not received much backing from its OPEC partners, who argue that this would encourage other cash-strapped producers with spare capacity to claim higher quotas. Meanwhile, Nigeria's joint-venture oil partners—who have already invested substantial resources in programmes to boost the country's oil capacity, and will continue to do so—will keep up the pressure on the government. Chris Finlayson, the chairman and managing director of Shell Petroleum Development Company (SPDC, Royal Dutch/Shell's operating company in Nigeria) told an oil industry conference in Abuja on March 17th that the need to raise Nigeria's OPEC quota would become "urgent" in the next few years as the various offshore finds come on stream.

Nigeria busts OPEC quota Meanwhile, with global oil prices high, the cartel has tended to turn a blind eye to Nigeria's habitual violation of its OPEC quota. According to International Energy Agency (IEA) data, Nigeria's oil output was 2.33m b/d in March (excluding condensate), virtually unchanged from its production of 2.35m b/d in January but still well above its 2.02m b/d OPEC quota. According to figures released by the CBN on April 15th, Nigeria's oil output in February hit a record high of 2.58m b/d, including condensate and natural gas liquids, up from 2.35m b/d in January. It is unclear how much of Nigeria's output is actually condensate, which is not counted as oil production under OPEC's quota rules, as the country is said to apply a flexible definition to what passes as condensate. Some oil companies, led by French-based Total, are already

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pushing to have their offshore oil production classified as condensate, as this would mean that it could be excluded from the OPEC oil quota.

How long overproduction will continue remains unclear. At its February 10th extraordinary meeting OPEC surprised the market by agreeing to begin curbing overproduction by members immediately and to reduce overall output by 1m b/d, to 23.5m b/d, from April 1st. OPEC's actions were apparently driven by the fear of a spring price drop, which could be the trigger that forces speculative investors out of the market. According to some estimates, speculators have driven the oil price at least 10% above where it should be at this stage in 2004. Accordingly, Nigeria's quota was slashed from 2.02m b/d to 1.94m b/d, effective April 1st. As a result, although Nigeria curbed production slightly towards the end of February following a government directive to bring output into compliance with OPEC—the government demanded that companies reduce production by around 10%—market observers do not expect Nigeria to rein in production enough to comply with its lower quota from April.

Nigeria revises its oil reserves The fallout from the ongoing problems at Shell and the misclassification of its after Shell downgrade reserves continue to impact on Nigeria. On April 1st Mr Daukoru said that oil reserves in Nigeria had fallen by 1.9bn barrels. Although this was partly the result of Shell's shock reclassification in January, the total fall was 600m barrels more than the 1.3bn barrels that Shell said were removed from its proven reserves in Nigeria. Mr Daukoru told a press briefing after the OPEC meeting in Vienna that the Shell downgrade meant that Nigeria's total reserves had drop- ped by 6%, from 33bn barrels to around 31bn barrels. He explained that much of the downgrade was due to oil trapped under gas caps, which is expected to be exploited although approval has not yet been gained. Later in the month, the head of the Department of Petroleum Resources, Macaulay Ofurhie, said that all foreign operators in Nigeria, not just Shell, had overstated their reserves during the 1990s to benefit from government incentives to find more oil.

Shell announces a Shell angered trade unions and local officials in the oil-producing Niger Delta controversial plan to cut jobs when it confirmed local newspaper reports that it planned to cut some jobs in Nigeria as part of a cost-saving exercise. In a statement on March 22nd, the SPDC announced that it aims to carry out a "strategic transformation" of its

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Nigerian unit, involving job cuts and rapid growth in output. It said that the aim is to raise oil production from about 1m b/d to 1.5m b/d and cut operating costs to US$1.5/barrel by 2006. At about US$2-US$2.4/b, current oil production costs in Nigeria are already among the cheapest in the world, but, according to the company, in the current extremely tight budget environment it is essential to reduce operating costs to allow sufficient funds for profitable investments. The announcement came after a Lagos-based newspaper, the Guardian, reported that Shell had threatened to cut 1,000 jobs, or 20% of its Nigerian workforce. Shell's formal statement on the issue did not, however, specify how many jobs will be lost, although officials indicated that the reorganisation would involve relocation of the company's headquarters from Lagos to the south-eastern oil industry capital of Port Harcourt and that the company is seeking to scale down operations in Warri in Delta state. For government and anti-poverty groups looking to the oil industry to provide more jobs for local people in the Delta, news of Shell's rationalisation plan came as a shock. Delta state officials warned Shell that the state government would force the company to shut production in the state if it goes ahead with plans to close offices and cut jobs there. "I can't see anybody in Delta who would like to see Shell close its office here and continue exploiting our oil. They might as well say bye-bye to Delta state", warned Abel Oshevire, the spokesman for the state governor, James Ibori. The federal House of Representatives Committee on Petroleum Resources also warned Shell against jeopardising Nigerian jobs. "We shall do everything within our capacity to protect those privileged Nigerians who are working in the oil and gas industry", the committee's chairman, Cairo Ojugbo, said at a public hearing on industrial relations in the oil industry. Labour unions and ethnic militant groups have also threatened to shut down Shell's operations if the company pursues its rationalisation plans.

Parliament cuts cash call vote The tensions between Shell and the administration tend, in fact, to mirror a wider unease that has been steadily growing between foreign oil companies and a nationalistic National Assembly since the return to civilian rule. Many politicians resent the dominance of multinationals in the nation's oil industry, claiming that the oil giants are cheating Nigeria in one way or another, and their position has considerable public support. Meanwhile, the oil majors are concerned by the lack of a solution to the ongoing OPEC quota issue and the continued problems of operating in the Niger Delta. Another major source of dispute in the first half of the administration's first term in office was the high level of arrears that the government-owned Nigeria National Petroleum Corpor- ation (NNPC) had built up on its joint-venture commitments. While tensions over this had eased substantially since 2001, as high oil prices since then have allowed much of the arrears to be cleared, the issue could become a source of contention again, following the National Assembly's decision to earmark only US$3.2bn to the NNPC's joint-venture operations in the 2004 budget compared with the US$4.9bn requested by the multinationals. Operators complained that the amount approved to cover Nigeria's cash call obligations with respect to its average 57% equity share in the six joint venture companies is inadequate to meet planned programmes, particularly because offshore development costs are being forced up quickly owing to the need to integrate oil and gas schemes as the companies try to comply with the government's target of eliminating gas

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flaring by 2008. In early March the Senate Committee on Petroleum Resources told the NNPC not to pay cash call payments totalling US$1.6bn to Shell, Agip and Pan Ocean until they provided adequate documents to support their pro- posed exploration and production expenditure for 2004. However, the NNPC dismissed the committee's claim, saying that the companies involved had adequately defended their budgets. The clashes between parliament and multinational oil operators should also be seen partly as simple positioning between the government and joint-venture oil operators ahead of the start of new negotiations for the Joint Operating Agreement (JOA). This is the standard accord that sets the guidelines and modalities for the six joint-venture partnerships. A Lagos-based newspaper, This Day, reported in mid-March that the government had begun a review of the JOA with a view to renegotiating most of the contractual terms that it deems unfavourable to Nigeria's interests. The paper said that the government will be looking to instil in a new JOA greater transparency in project-costing and clauses to commit the oil majors to improving the environment.

The NNPC acquires six oil The long-held aim of the government that the NNPC should become a more fields active player in the offshore oil industry has moved forward in the last few months, as the NNPC's exploration subsidiary, the Nigerian Petroleum Develop- ment Company (NPDC), has acquired stakes in at least five smaller offshore fields. According to Africa Oil and Gas, the fields and stakes are as follows: • a 15% stake in US-based ExxonMobil's Oil Prospecting Licence (OPL) 214; • a 20% stake in US-based Conoco Philips' OPL 318; • a 12% stake in Italian-based Agip's OPL 244; and • a 25% stake in OPL 242 and a 5% stake in OPL 256, both operated by US- based Devon. In some cases the stakes are new, but in the case of OPLs 214 and 244 the NPDC will simply replace a Malaysian oil company, Petronas, which has struggled to negotiate the terms under which it would be involved in the fields' development. No indication of the price being paid for the stakes has been provided. In early April the NNPC also signed production-sharing contracts with five oil firms to develop three deepwater oilfields. The agreements—with a US oil giant, ChevronTexaco; a Brazilian company, Petrobras; and the Nigerian firms, Famfa, Heritage, and Oil and Gas Company—concerned the development of OPLs 216, 247 and 249. The NNPC will hold 50% of the stake in each. In addition, it was announced in late March that the NNPC had reached agreements with various companies, notably Shell and ChevronTexaco, that were actively seeking to hand over some of their onshore and shallow water fields to the NNPC, with a potential combined yield of 457m barrels of crude. An NNPC spokesman, Levi Ajuonuma, said that the transfer would enable the NPDC to operate the fields and to attain the "objective of becoming an independent and world class exploration and production company". The fields are believed to include Aroh, Ogherki, Yorla, Egbema South and East, Utapake and Orogo. The move would allow the multinational companies to concentrate

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their efforts on their offshore fields, which they currently have under production-sharing contracts that they consider to be much more favourable. However, many of the fields will need substantial development and at the time of writing the NNPC had not raised the funds to allow this to happen, although the company has said that it is talking with multinational credit institutions to raise funds on behalf of the NPDC for exploring the fields.

Agriculture

Government sets ambitious Mr Obasanjo, who ran a chicken farm before returning to power in 1999, has targets for agriculture always placed a considerable amount of faith in the ability of agriculture to transform Nigeria's economic fortunes. His administration has set ambitious production and export targets for the sector. Most recently, the president has put his faith in boosting cassava production and, while inaugurating the National Committee on Cassava Production, claimed that he saw no reason why the country could not, in three years' time, be exporting up to US$5bn-worth of cassava annually. On February 26th the administration set up a presidential committee headed by the commerce minister, Idris Waziri, to achieve this target. The government's NEEDS economic blueprint set a more realistic target of US$3bn-worth of annual agricultural exports by 2007, a major component of which will be cassava. Even this goal is highly optimistic, given that the figure for Nigeria's total annual non-oil exports is currently less than US$1bn. Although the government's overall agricultural policy has not been the most coherent, both federal and state governments have continued to launch various initiatives to try to boost agricultural production. The government's most recent scheme, announced in February, is to provide soft loans to unemployed graduates to start up agricultural projects. At state level, the most high-profile effort was when the government of Kwara state, in central Nigeria, invited a group of six white Zimbabwean farmers on a visit, with the possibility of relocating to Nigeria. One of the visiting farmers told the media that Kwara state offered large blocks of land on 99-year leases. Mr Obasanjo has given his support to the project, noting that Nigeria was keen to try to benefit from their expertise and experience of farming in Africa.

Financial markets

Insurance firms receive a On April 2nd the National Insurance Commission announced that it had given liquidation notice a 30-day notice of liquidation to 15 insurance companies that failed to meet the deadline to recapitalise. It said that the affected companies could appeal to the finance minister within the period to retain their certificate of registration. Earlier, on March 26th, the commission said that 107 insurance firms had successfully recapitalised in accordance with the 2003 Insurance Act, which came into force last year when insurance operators were given a nine-month grace period to comply with its terms. The new law, which replaced the 1997 legislation, is designed to sanitise the insurance industry, which the government said has been plagued by under-utilised and financially unstable companies. Underwriting companies were required to raise their minimum paid-up capital to N350m (US$2.6m), from N90m, while general insurance business were

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required to raise their paid-up share capital to N250m, from N70m, and life insurance firms were expected to increase their equity to N150m, from N20m.

Nigeria stock prices hit record The Nigerian Stock Exchange (NSE) all-share index reached a record high of highs 26,282 on April 15th and seemed set to break new ground, having risen by 30.6% since the beginning of the year and by 116.5% since the start of 2003. In addition, market capitalisation reached a record N1.88trn (US$14bn) on April 15th, compared with N1.36trn in January 2004 and N764bn (US$5.6bn) at the start of 2003. Market operators attributed this remarkable showing to strong corporate performances, despite the difficult operating environment in the country, as well as to the entry into the market of new investors drawn by its growing prosperity. The NSE should to get a further boost in June, when the government is expected to launch the much delayed initial public offer (IPO) of 20% of the shares of the state telecommunications utility, Nitel. On April 15th the Bureau of Public Enterprises (BPE) said that the government had fixed the share price at 50 kobo (100 kobo=N1) and will offer 120bn shares for sale at the exchange. The BPE said that the delay in the Nitel IPO was due to the review of the corporation's consolidated accounts.

Infrastructure

The government struggles to Following his failure to sign the Power Sector Reform Bill, in March boost power supplies Mr Obasanjo received a new action plan for the reform of Nigeria's troubled power sector to enable it to more than triple output, to 10,000 mw by 2007. The minister of power and steel, Liyel Imoke, told reporters that the programme was comprehensive and included the privatisation of the state-owned National Electric Power Authority (NEPA): in fact it seems to be only marginally changed from the original National Electric Power Policy published in March 2001. Several times since coming to power the government has announced impressive measures to solve the perennial power shortage problem, including twice sacking NEPA's entire board. However, little progress has been made to date with the basic efforts to move the privatisation process forward, despite a clearly thought out privatisation programme, owing to political constraints, and it is not clear whether anything will change this time. Meanwhile, households

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and businesses across the country continue to suffer frequent and long power outages, which cause misery and raise production costs. For instance, in the week ending March 27th, NEPA generated a daily average of 2,898 mw, 270 mw above the previous week's level, although it was capable of producing 3,806 mw and had actual capacity of 4,103 mw. There are many reasons for the dismal state of Nigeria's energy sector. NEPA has been under-funded and, although the government repeatedly says that it cannot afford to finance the power sector alone, it has been incredibly slow to legislate to end NEPA's monopoly and set a framework for privatisation and private investment in the industry. One particularly important problem facing NEPA has been poor revenue collection, owing partly to the habit of many of its customers, including government organisations, not to pay their bills or illegally to avoid incurring charges. The depth of this problem was illustrated by a report in April in the Lagos-based Daily Times that claimed that no fewer than 43 federal legislators were fined by NEPA for tampering with pre-payment meters installed in their official residences in Abuja. Another problem facing NEPA is that many of its facilities are too old or run- down to generate anywhere near its installed capacity of almost 6,000 mw. NEPA has, in recent months, stepped up pressure on oil firms to implement planned projects to build gas-fed power plants, and there are ongoing reports that NEPA is to seek to build additional capacity. On April 2nd NEPA said that the government had allocated N25.1bn in the 2004 budget for the construction of five new power plants, two of which are to be built by the Chinese and another two by German firms (the four plants will have a combined capacity of 725 mw). It should be noted, however, that there have been a number of announcements of potential, mainly independent, power projects over recent years, which have never materialised. The problem is that the investment environment is uncertain, given that the future of NEPA remains in the balance and it is not clear to what extent companies' contractual relationships with a privatised NEPA will remain legally binding. However, on March 31st the president set up a task force on power generation from Nigeria's considerable coal deposits. An official statement said that Mr Obasanjo had formed the committee after receiving a report from a South African power generating firm, Eskom, on how to boost Nigeria's power supply. The task force will, among other things, examine the Enugu and Okaba coal deposit sites, which are capable of generating 4,800 mw of electricity each, according to the statement.

State telecom, Nitel, awards a The state-owned telecoms company, Nigeria Telecommunications Limited contract for 250,000 fixed lines (Nitel), now being run under a private management contract, has awarded contracts worth N20bn to install 250,000 new fixed lines at its Lagos network. An official news release said in February that Siemens of Germany and Huawei Technologies of China had won the contracts, which are to be completed within nine months. Nitel's dominance of the telecoms sector has collapsed in recent years, following the liberalisation of the market and particularly the entry in 2001 of two private mobile-phone operators. However, the corporation's fortunes appear have picked up since its management was handed to a Dutch telecommunications consultancy, Pentascope, in March 2003, after an attempt to privatise it had collapsed in 2001. Nitel's new chief

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executive, Rein Zwolsman, said that he was determined to pull the corporation back to the leadership position and bring back customers lost in the Lagos area, which had hitherto provided about 70% of the company's revenue.

Foreign trade and payments

Nigeria gets negotiations On April 13th, the finance minister, Ngozi Okonjo-Iweala, publicly announced reduction in debt servicing that Nigeria had reached an agreement with the Paris Club of official creditors under which it would reduce its annual debt-service payments to the club of government creditors to US$1bn. Mrs Okonjo-Iweala said that the deal was negotiated by a Nigerian government team in Paris earlier in April. According to Nigeria's Debt Management Office, the country repaid only US$251m to the Paris Club in 2003, substantially less than the amount due. Nasir El-Rufai, a cabinet minister who was part of the delegation that visited Paris, said in the capital, Abuja, on April 14th that Nigeria had informed the Paris Club that it could not meet its US$2.9bn debt obligation to the Club this year and could only spend US$1bn servicing debt. The agreement follows the fact that Nigeria has now reached bilateral deals with all the Paris Club members bar Italy, with whom the deal is still being negotiated (November 2003, Foreign trade and payments). The onus is now on the Nigerian government to ensure that it sticks to this payment level, as one of the main issues raised by creditor nations in recent years has been that they would prefer to receive regular payments of smaller amounts than unpredictable and irregular payments of larger sums. Despite the agreement, the government has made little headway in persuading creditors to give it substantial debt relief. During his visit to Nigeria in March, the World Bank president, James Wolfensohn, confirmed the position of other governments, saying that the Nigerian government would have to establish a track record of improved resource management and effective anti-corruption policies to convince creditors that debt relief can accelerate poverty reduction. Mr Wolfensohn also noted that the country's oil revenue placed it outside the threshold of the IMF-World Bank's heavily indebted poor countries (HIPC) debt- relief initiative. As a result, Nigerian debt relief would require a separate plan tailored to the country's special situation, as proposed by the Paris Club.

The government boasts of On April 13th Mrs Okonjo-Iweala publicly stated that Nigeria had attracted over inflow of foreign investment US$1.6bn in foreign direct investment within the first four months of the year. She mentioned some of the investors, including a Nigerian businessman, Deinde Fernandez, who has invested US$20m in the exploration of tantalite solid mineral, which is used in the manufacture of mobile phones; a group of American investors who are investing US$40m in a power plant in Abia State; a Swiss firm, Nestlé, which is committing Swfr30m (US$24m) to expanding its plant in Ogun state; and South African investors who are committing US$1bn to tourism, hotel development, agriculture, oil and gas. However, it remains unclear over what period the promised US$1.6bn investment will be disbursed and even if it will all be disbursed. The actual sum invested in a country is often substantially below that which is initially promised by investors and often highlighted by both the government and investment promotion agencies.

Country Report May 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004