COUNTRY REPORT

Nigeria Nigeria at a glance: 2002-03

OVERVIEW Nigeria is facing an uncertain future as outbreaks of ethnic and religious violence continue to place strains on a diverse nation. As the 2003 elections approach, the struggle between competing ethnic and regional groups for power and access to the country’s oil wealth is likely to intensify and test Nigeria’s fragile democracy, and it is uncertain whether the country can survive civilian-managed elections without descending into chaos and an eventual military coup, as happened to previous civilian republics. President Obasanjo’s administration is expected to continue with economic liberalisation, but the pace of reform will remain slow. Improving energy, transport and communications infrastructure and increasing private investment in the non-oil sector will remain the government’s main economic challenges. Although the rate of economic growth will gradually increase from 3% in 2001 to 4.1% in 2003, the government will struggle to reduce the fiscal deficit and restore macroeconomic stability over the outlook period, and inflation is forecast to remain in double digits. Key changes from last month Political outlook • Further clashes between Muslims and Christians have occurred in Kano state, further highlighting the precarious religious and ethnic balance in the country. Economic policy outlook • The government presented the first draft of the 2002 budget to the National Assembly. Although a broadly balanced budget is proposed, we still forecast that both capital and recurrent expenditure will breach the budget targets by a wide margin. Economic forecast • Nigeria produced significantly above its OPEC oil production quota of 1.911m barrels/day in August and September. According to IEA data, production was 2.07m b/d in August and 2.13m b/d in September. We now forecast production of 2.06m b/d in 2001 rising to 2.23m b/d in 2002 and 2.45m b/d in 2003.

November 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7830 1023 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

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

Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-4204

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

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

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

18 Economic policy

24 The domestic economy 24 Economic trends 27 Oil and gas 29 Industry 30 Financial services 30 Infrastructure and other services

32 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 21 Central government finances 25 Agricultural and industrial production 25 Exchange rates 26 Inflation, 2001 26 Minimum rediscount rate 30 Nigerian Stock Exchange all-share index, 2001 31 Perception of NEPA’s services in the last year 32 Balance of payments 33 FDI inflows into Nigeria 33 Foreign-exchange reserves

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 2 Nigeria

List of figures

12 Gross domestic product 12 Real exchange rates 20 Fiscal deficit, Jan-Jun 2001 29 Gas exports 32 Trade balance

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 3

Summary

November 2001

Outlook for 2002-03 As the 2003 elections approach, the struggle between competing ethnic and regional groups for power and access to the country’s oil wealth is likely to intensify and test Nigeria’s fragile democracy, and it is uncertain whether the country can survive civilian-managed elections without descending into chaos and an eventual military coup, as befell previous civilian republics. President Obasanjo’s administration is expected to continue with economic liberalisation, but the pace of reform will remain slow. Improving energy, transport and communications infrastructure and increasing private investment in the non-oil sector will remain the government’s main economic challenges. Although the rate of economic growth will gradually increase from 3% in 2001 to 4.1% in 2003, the government will struggle to reduce the fiscal deficit and restore macroeconomic stability over the outlook period.

The political scene Hundreds of people were killed in sporadic outbreaks of religious and ethnic violence, the worst of which was in the city of Jos. Troops were reported to have killed more than 200 civilians in Benue state in reprisal for the murder of 19 soldiers by Tiv militiamen. State governors and the National Assembly have remained in conflict over the timetable for municipal elections.

Economic policy The IMF is likely to extend the current stand-by agreement until December. Heavy expenditure by independent-minded state administrations and trade union resistance to market reforms have undermined the government’s control of state spending, and a proposal for sharing federal revenue was condemned by sub-federal tiers of government. In an effort to curb corruption, the government has introduced measures to increase transparency in its procurement and contract system.

The domestic economy The agricultural sector is estimated to have grown by 3.9% in the first half of 2001, whereas industry grew marginally. Inflation reached 18.1% in August. The CBN increased the minimum discount rate to 18.5% at the end of September. The CBN stepped up its efforts to eliminate foreign-exchange malpractices, in order to narrow the widening gap between official and parallel market exchange rates. According to the CBN the rate between the IFEM and the parallel rate was 16.7% in the first half of 2001. Nigeria’s oil production rose to 2.13m b/d in September, well above its OPEC oil quota of 1.911m b/d.

Foreign trade and payments Nigeria’s current-account surplus fell in the first half of 2001 as a result of falling oil exports and growing imports, service and income debits. FDI inflows were US$1bn in 2000 according to UNCTAD, marginally lower than in 1999.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: November 7th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 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 elected by universal suffrage to serve a four-year term

National elections February 1999 (legislative and presidential); next elections (presidential, legislative and municipal) due in March 2003

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 People’s Party (APP); Alliance for Democracy (AD)

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

Key ministers Agriculture & rural development Adamu Bello Aviation Kema Chikwe Commerce in Africa Mustapha Bello Communications Muhammed Bello Culture & tourism Tonye Graham-Douglas Defence Lieutenant-General (rtd) Theophilus Yakubu Danjuma Education Babalola Borishade Environment Mohammed Kabir Said FCT administration Mohammed Abba-Gana Finance Adamu Ciroma Foreign affairs Sule Lamido Health Alphonsus Nwosa Industries Kolawole Jamodu Information Jerry Gana Internal affairs Sunday Afolabi Attorney-general of the federation & justice Bola Ige Labour & productivity Musa Gwadabe Police affairs Steven Akiga Power & steel Olusegun Agagu Science & technology Turner Isong Solid minerals Kanu Godwin Agabi Sports Ishaya Mark Aku Transport Ojo Maduekwe Water resources Muktari Shagari Works & housing Tony Anenih

Central Bank governor Joseph Sanusi

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 5

Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (N bn) 2,823.9 2,939.7 2,837.9 3,236.0 3,568.8 GDP (US$ bn)b 34.9 35.2 33.3 35.0 35.1 Real GDP growth (%) 4.3 2.7 1.8 1.0 3.8 c Consumer price inflation (av; %) 29.3 8.2 10.3 6.7 6.9d Population (m)e 102.1 105.0 107.9 110.9 115.2 Exports of goods fob (US$ m) 16,117 15,539 10,114 11,927 20,441 Imports of goods fob (US$ m) 6,438 9,630 9,276 10,531 12,372 Current-account balance (US$ m) 3,508 2,277 –3,085 –3,308 2,037 Foreign-exchange reserves excl gold (US$ m) 4,075 7,581 7,100 5,450 9,910d Total external debt (US$ bn) 31.4 28.5 30.3 29.4 28.7 Debt-service ratio, paid (%) 14.2 7.9 10.6 6.4 6.0 Exchange ratef N:US$ (av) 81.00 c 83.50 c 85.25 c 92.34 101.70d

November 6th 2001 N114:US$1

Origins of gross domestic product 2000c % of total Components of gross domestic product 2000c % of total Agriculture (excl livestock) 36.4 Private consumption 63.8 Livestock 5.2 Government consumption 24.9 Crude petroleum & gas 10.4 Gross fixed capital formation 8.0 Manufacturing 6.0 Exports of goods & services 16.7 Wholesale & retail trade 11.6 Imports of goods & services –13.4 Finance & insurance 9.4 GDP at market prices 100.0 GDP at factor cost incl others 100.0

Principal exports 2000c US$ m Principal imports 2000c US$ m Oil 18,897 Manufactured goods 2,746 Non-oil 244 Machinery & transport 2,282 Chemicals 2,149 Food & live animals 1,117

Main destinations of exports 2000g % of total Main origins of imports 2000g % of total US 46.1 UK 7.4 India 10.7 US 10.9 Spain 6.1 France 9.2 France 3.4 Germany 8.7 a EIU estimates. b Autonomous rate used for conversion. c Official estimates. d Actual. e IMF series based on the official census held in November 1991; the UN estimated the population in mid-1997 at 120.5m. f Autonomous rate; the official rate, applicable to selected government transactions and fixed at N21.9:US$1 in January 1995, was abolished in January 1999; the interbank foreign-exchange market (IFEM) rate is used thereafter. g Derived from partners’ trade returns; subject to a wide margin of error.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 6 Nigeria

Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Output Industrial production index (1995=100) 100.0 101.3 107.8 107.8 115.2 117.9 113.0 113.7 % change, year on year –2.4 –4.9 5.0 3.1 15.2 16.4 4.8 5.5 Prices Consumer pricesa (1995=100) 163.7 160.4 162.2 173.3 182.8 185.5 191.7 209.1 % change, year on year 2.4 0.5 –1.9 2.7 11.7 15.6 18.2 20.7 Petroleum spot price Bonny Light 37° (US$/barrel) 20.8 24.3 27.2 30.1 29.6 29.6 25.8 25.4 Financial indicators Exchange rateb N:US$ (av) 94.406 96.022 99.575 100.451 103.025 103.738 110.122 n/a N:US$ (end-period) 94.406 97.950 100.120 101.700 101.750 109.550 110.200 n/a Discount rate (end-period) 20.0 18.0 18.0 17.0 16.0 14.0 15.5 18.5 M1 (end-period; N bn) 360.61 400.83 487.95 519.68 556.39 649.68 772.72 n/a % change, year on year 16.7 22.5 28.9 38.0 54.3 62.1 58.4 n/a M2 (end-period; N bn) 655.62 699.73 795.53 904.15 962.74 1,036.08 1,274.03 n/a % change, year on year 24.4 33.1 30.6 42.4 46.8 48.1 60.1 n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 4,891 5,240 5,998 6,467 7,299 8,111 9,160 10,937 % change, year on year –14.2 –7.6 9.9 8.2 49.2 54.8 52.7 69.1 Sectoral trends Crude oil productionc (m barrels/day) 1.88 1.95 1.95 2.01 2.04 2.15 2.15 2.01 % change, year on year –6.9 –0.5 –3.0 0.0 8.5 10.3 10.3 0.0 Foreign traded (US$ m) Exports fob 3,179 3,387 4,417 4,928 5,792 6,254 5,641 n/a Imports cif –2,019 –1,894 –2,061 –2,086 –2,111 –2,571 –2,406 n/a Trade balance 1,160 1,493 2,356 2,842 3,681 3,683 3,235 n/a Foreign reservese (US$ m) Reserves excl gold (end-period) 4,650 5,500 5,893 6,336 8,118 9,910 9,390 10,498 a The Nigerian government uses 12-month moving averages as its official measure of inflation. b Inter-bank foreign-exchange market. c Excluding condensates. d DOTS estimates. e Official/EIU estimates. 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.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 7

Outlook for 2002-03

Political outlook

Domestic politics The outlook period is likely to prove a critical one in the political history of Nigeria: elections for the presidency and legislature are now likely to be held in March 2003, with state and municipal elections following a few weeks later. Until now there has never been a successful transfer of power from one civilian government to another in Nigeria and, though it looks possible this time, the intervention of the military in the political process cannot be discounted.

Although political campaigning for the elections has already started, it has so far been at a low level, and only one presidential candidate has declared his intention to run. However, it will pick up in earnest in early 2002. Unfortunately, the election campaigning is occurring at a difficult time for Nigeria. Although real GDP growth is set to remain relatively robust, it will continue to be driven by the energy sector and will not lead to any improve- ment in living standards for the majority of the population. General economic discontent is compounded by anger at the failure to improve the country’s basic infrastructure despite rapid increases in government expenditure, which are not seen to benefit ordinary Nigerians, but are wasted on projects driven by the dictates of politics and corruption. Moreover, though often left unfinished, they still generate inflation and exchange-rate instability.

In addition, the election is occurring amid the controversy over the introduction of sharia (Islamic law) in northern, Muslim-majority states. Violent clashes between religious and ethnic groups have been a common occurrence in Nigeria over the past two years, and President Obasanjo's administration has had little room to manoeuvre on the potentially explosive sharia issue as it tries to avoid aggravating the situation by being identified with one side of the religious divide. The possibility, therefore, of widespread unrest will never be far from the surface in the north during the next few years (especially in the months following the September 11th terrorist attacks in the United States). In fact, the election campaign is likely to see various attempts to stir up ethnic and religious conflict by forces seeking to raise their own profile and make political capital. Finally, there is also the continuing argument over the constitutional division of power between federal and state governments, which in itself is likely to become an increasing source of political tension, especially as southern states push for a greater share of oil revenue in the run- up to the elections.

Not surprisingly, in such a climate there is a chance that a crisis might erupt at any time in the next two years, which would ultimately undermine the viability of the current political system. But, even if President Obasanjo continues to manage tension and crises with the success displayed by both his own and previous military regimes, and even if the elections pass off without excessive controversy, the failure to resolve underlying tensions will keep civilian rule weak. Such a fragile political system will also always create

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 8 Nigeria

opportunities for ambitious elements of the armed forces to consider intervening in the political process.

Election watch President Obasanjo has consistently argued that it will take many years to establish genuine democracy in Nigeria. However, though this may be true, progress so far has been slow, and the weakness of the political parties—and their vulnerability to corruption and influence-peddling—augurs ill for the next round of elections. The political parties may be able to patch up their internal problems sufficiently to contest the elections. But it is more likely that there will be a realignment of political forces, especially since new parties may be allowed to register for the elections. The elections are also likely to be characterised by fraud and vote-rigging as politicians seek to win re-election, especially at the state level, which is likely to increase tension and discredit the electoral system. Though it is doubtful whether the military as an institution has the capacity, the internal unity or even the desire to intervene once more in domestic politics (because of Nigeria’s history of military intervention, there would be little popular support for a coup despite the weakness of the civilian government), the possibility of opportunistic action by junior officers cannot be discounted.

International relations Despite a pressing domestic agenda, Mr Obasanjo spends much of his time travelling abroad, and foreign relations will retain a high profile. At present, relations with Western donors remain good, but they could easily become more strained over the lack of progress with economic reform and increased corruption. However, because of increasing tension in the Middle East, the US and other countries will see Nigeria as an increasingly important oil supplier. The government is keen to play a more active role in African economic and political affairs outside West Africa, and will claim that its leading role in the Commonwealth effort to solve the political crisis in Zimbabwe was a major diplomatic success. President Obasanjo will also seek to promote the New Africa Initiative, an ambitious attempt co-ordinated between the G8 and various African leaders to promote economic recovery in Africa. Success in these ventures may help offset his unpopularity at home, since many Nigerians like to look on their country as a regional superpower.

Economic policy outlook

Policy trends To date, the administration has made only hesitant moves towards economic reform. Although there have been some high-profile successes, such as the forthcoming sale of the state telecommunications company, Nitel, Nigeria’s privatisation effort has been erratic and dogged by controversy. Similarly, other policy initiatives to liberalise power and domestic fuel prices, or to allow the naira to find a market-determined value, have been confused and often contradictory, and the budget process has been drawn out for months by political wrangling. Moreover, the lack of political consensus on the need for reform is likely to continue to constrain policy implementation.

Although the government failed to meet most of the performance targets agreed under its 12-month stand-by credit with the IMF (this was due to expire in August 2001), the IMF is keen to extend the stand-by credit to December

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 9

2002 and it is likely that a new short-term arrangement will then be agreed. Although the poor level of compliance might normally have led the IMF to halt its support, in turn causing other donors to withdraw their assistance, President Obasanjo appears to have assumed—correctly to date—that political factors, rather than policy performance, are the key to external support. This viewpoint seems to continue to hold sway, although the IMF will attempt to be stricter about compliance.

Fiscal policy The 2002 budget, set in the context of the 2001-03 macroeconomic framework, has the aim of being broadly balanced, while boosting the non-energy sectors of the economy, and of addressing the twin issues of unemployment and poverty through the more efficient use of resources and increased private- sector involvement in the economy. However, as oil revenue is forecast to fall back, the government may not be able significantly to its reduce capital and recurrent spending from the high levels reached in 2001, which undermined macroeconomic stability and created opportunities for corruption (especially faced with profligate state administrations and mounting political pressure to achieve quick results in its anti-poverty drive). Therefore the Economist Intelligence Unit forecasts only a modest fall in the deficit, from 6.8% of GDP in 2001 to 5.6% of GDP in 2002. Although the overall thrust of the 2003 budget will be unchanged, following the elections and under pressure from donors the government should have greater success in reining in expenditure, and we forecast a deficit of 5.2% of GDP in 2003. The deficit will continue to be funded through domestic borrowing, although the government has the option of running down its foreign-exchange reserves which have increased strongly in recent years.

Monetary policy Because of rapidly rising inflation and the increased volatility of the naira in the first half of 2001, the Central Bank of Nigeria (CBN) has had to raise the minimum rediscount rate sharply—at the end of September 2001 it stood at 20.5%, compared with 14% at the end of 2000. As donors increase the pressure to meet a stricter inflation target, we expect the CBN to keep rates at around this level for some time despite the domestic criticism this will engender. There will then be scope for a cautious loosening of monetary policy in the second half of 2002 as inflation stabilises, but the CBN is likely to act warily, as a too rapid loosening of monetary policy in 2000 was the main factor behind the current inflationary upsurge. Further loosening in 2003 is also unlikely unless the government acts to control its fiscal expenditure.

Economic forecast

International assumptions The US economy was slowing sharply towards the end of 2000 and into 2001; and the September 11th attacks against the United States and the subsequent military assault on Afghanistan are likely to prolong the slowdown. We now estimate that the rate of world GDP growth will slow from 4.7% in 2000 to 2.2% in 2001, the largest single annual fall since 1974, and that the recovery in 2002 will be gradual with a forecast rate of only 2.9%, which rebounds to 4.2% in 2003. With the global economy slowing, we expect that OPEC will allow oil

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 10 Nigeria

prices to fall back in 2002-03 to support any recovery: dated Brent Blend will average just over US$21.5/barrel in 2002 and US$20.5/b in 2003.

International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.9 4.2 OECD 3.7 1.0 1.5 3.0 EU 3.3 1.6 1.8 2.5 Exchange rates (av) ¥:US$ 107.8 121.2 124.0 121.5 US$:¤ 0.924 0.903 0.968 1.015 SDR:US$ 0.758 0.783 0.766 0.752 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.10 US$ 3-month commercial paper rate 6.32 3.61 2.38 5.13 Commodity prices Oil (Brent; US$/b) 28.5 25.4 21.5 20.5 Gold (US$/troy oz) 279.3 268.8 255.0 250.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 0.8 14.1 10.9 Industrial raw materials (% change in US$ terms) 13.4 –7.5 3.7 12.8 Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates. Economic growth The rate of real GDP growth in Nigeria in 2001 is expected to slow from the 3.8% recorded in 2000, since oil production is being constrained by the country’s OPEC quota (although the quota may be exceeded). Because of the fall in oil production we estimate that real GDP has grown by only 3% in 2001, despite reasonable growth in the agricultural sector, government capital expenditure and construction. However, growth will pick up again in 2002-03, driven by a combination of higher oil production and investment in various offshore oilfields and new gas projects. Agriculture will also continue to grow strongly and, with government expenditure remaining high, real GDP is forecast to grow by 3.5% in 2002 rising to 4.1% in 2003.

However, because real GDP growth will continue to be driven by the energy and government sectors, even at a rate of around 4% it will not lead to a noticeable increase in most people’s living standards or create enough jobs to have any real impact on the twin problem of un- and under-employment. In fact, it will not even lead to a marked rise in GDP per head in Nigeria while the population is growing at 2-3% per year. To have a positive impact of this sort, real GDP growth would need to be 8-10% per year, driven by a similar rate of growth in agriculture.

Inflation Inflation has risen sharply in Nigeria since late 2000: the 12-month moving average, the measure of inflation favoured by the CBN, rose to 18.1% in August 2001. Although it is difficult to predict the peak, there are signs that the rate of increase is now moderating as food price increases slow and the CBN’s tighter monetary policy begins to have an impact. However, without a serious effort to curtail government expenditure, it will be hard to bring inflation back to single

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 11

digits (this is probably not likely until after the forthcoming elections and may not occur even then). We forecast a 12-month moving average rate of 14.9% in 2001, which drops only gradually to 13.3% in 2002 and 11.1% in 2003.

Forecast summary (% unless otherwise indicated) 2000a 2001a 2002b 2003b Real GDP growth 3.8c 3.0 3.5 4.1 Industrial production growth 7.7d 0.3 3.2 3.6 Gross agricultural production growth 5.2 c 4.0 3.5 4.0 Consumer price inflation Average 6.9d 14.9 13.3 11.1 Year-end 11.0d 14.1 12.1 10.8 Short-term interbank rate 21.3d 21.2 21.8 19.1 Government balance (% of GDP) –2.9 c –6.8 –5.6 –5.2 Exports of goods fob (US$ bn) 20.4 20.3 16.6 17.7 Imports of goods fob (US$ bn) 12.4 13.7 14.1 14.5 Current-account balance (US$ bn) 2.0 1.3 –2.8 –2.2 % of GDP 5.8 3.5 –7.4 –5.6 External debt (year-end; US$ bn) 28.7 27.2 27.4 28.0 Exchange rates N:US$ (av) 101.7d 112.4 130.8 141.8 N:¥100 (av) 94.37 92.91 105.91 116.70 N:¤ (year-end) 102.9 109.4 140.4 145.9 N:SDR (year-end) 142.7 151.0 184.3 191.9

a EIU estimates. b EIU forecasts. c Official estimate. d Actual.

Exchange rates Intervention by the CBN in the foreign-exchange markets in mid-2001 caused the naira to appreciate and then stabilise at a new level of around N112:US$1 in recent months. The intervention again clearly illustrates that, although the government is theoretically prepared to allow the value of the naira to fall, it remains beholden to strong vested interests in Nigeria who are opposed to a fall in the value of the currency, which is often mistakenly seen as a symbol of national economic strength. However, because the CBN has intervened to reverse the fall in the naira at various times in the last 18 months, a significant gap has opened up between the rate on the interbank foreign-exchange market (IFEM) and that on the parallel market. Although we expect the naira to average N112.4:US$1 in 2001, the CBN, the IMF and the market are all keen to see the gap between the official and parallel naira rates narrow. In addition, as oil prices slowly fall back, there will be significant downward pressure on the currency in the outlook period. We therefore expect the naira to average N130.8:US$1 in 2002 and N141.8:US$1 in 2003.

External sector Although Nigeria ran a current-account surplus in 2000 estimated at 5.8% of GDP, because of the forecast fall in oil prices in 2001-03—accompanied by rapid growth of imports as a result of the increase in government capital expenditure and investment in offshore oil production—there will be a sharp fall in the trade surplus and a substantial deterioration in the current account. At present we forecast a modest current-account deficit of 3.5% of GDP in

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 12 Nigeria

2001, which widens to 7.4% of GDP in 2002 before falling back marginally to 5.6% of GDP in 2003 as oil production increases.

Although changes in the current account are driven largely by developments in the trade account, they are offset by trends in the invisible trade account. These are forecast to be largely unchanged over 2002-03: Nigeria will continue to run substantial services and income deficits. Though the flow of official multilateral and bilateral credit and aid to Nigeria has increased modestly since the return of civilian rule, we expect assistance to remain low until donors are confident that reforms will be implemented.

The political scene

Independence Day is an On October 1st Nigeria marked its 41st anniversary of independence, with the occasion for reflection nation more divided and uncertain about its future than it was when the UK relinquished power in 1960. There was little or no public celebration, as the nation remained gripped by a worsening cycle of violence, sectarianism and poverty resulting from decades of political and economic mismanagement. In his Independence Day broadcast, President Olusegun Obasanjo told Nigerians there was cause to be thankful, not least of all for the survival of the nation, noting that conditions were improving under his two-year-old administration (although admitting that the administration had failed yet to solve the country’s huge challenges). Coming shortly after yet another spate of ethnic and religious violence, Mr Obasanjo’s optimism did little to reassure Nigerians, who doubt whether their young and fragile democracy can achieve the now frail independence promises of national unity and progress.

Hundreds die in religious According to conservative estimates, at least 5,000 people have died in ethnic clashes and religious conflicts in Nigeria since the restoration of civilian rule in May 1999, including at least 400 (and possibly over 1,000 people) who were killed between August and October 2001, making the death toll from internal conflict in Nigeria one of the highest in the world. Religious tension following

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 13

the introduction of sharia (Islamic law) in northern Nigeria has been a major cause of the communal conflicts that have ravaged different parts of the country. Probably the most serious incident was in Jos, capital of Nigeria’s central Plateau state. A quarrel between Christians and Muslims after Friday Muslim prayers on September 7th degenerated into days of bloodshed which, according to the Red Cross, led to at least 165 deaths, almost 1,000 injuries and over 15,000 people being driven from their homes. The state-owned, Daily Times, newspaper put the death toll at 500. After initial fighting, heightened international religious tension caused by the terrorist attacks in the United States on September 11th sparked further clashes in Jos, which is populated mainly by Christians and animists who have long resented the influence of the wealthier Hausa-Fulani Muslims who came to the area as traders.

The mayhem in Jos had repercussions in different parts of Nigeria. In the predominantly Christian city of Onitsha in Anambra state in the south-east, five Hausa-speaking Muslims were reported killed in reprisal for attacks on southerners in the north. In the mainly Muslim city of Kano in northern Nigeria thousands of rampaging Muslim youths set a church and cars ablaze. A month later Kano was the scene of more serious religious trouble when scores of people died in two days of fighting between Muslims and Christian gangs, following a peaceful protest on October 13th against the US bombing of Afghanistan. The police said that at least 32 people died and 100 buildings were burnt, but local residents put the death toll as high as 200, and hundreds of non-Muslims fled to safety in police and army barracks in a city with a long history of religious troubles which is also the commercial hub of the north.

Violence recurs in Kaduna Violence broke out in neighbouring Kaduna state, which has a Muslim state majority but a large Christian minority, after its governor, Ahmed Makarfi, announced on October 26th that a modified version of sharia would be introduced a week later. Mr Makarfi has continued to stress that Islamic law would apply only in Muslim majority areas and would not be incorporated into the criminal code. However, his assurance did not appease Christian organisations in the area and, following the opening of sharia courts on Friday November 2nd, violent clashes led to at least 10 deaths in the town of Gwantu. The government has arrested two prominent local leaders, one a Christian, the other a Muslim, whom it blames for orchestrating the clashes—and has suggested that they had exploited the religious tensions to pursue a personal dispute over the siting of a new market and office block. In early 2000 moves to introduce sharia in the state triggered clashes between Muslims and Christians which left more than a 1,000 dead, and the government had to send in troops to restore order.

The government is unsure how to deal with religious violence

The government’s prompt use of the army and the arrest of some senior local chiefs in Kaduna, have lead some analysts to argue that at last the government is starting to treat the issue of religious violence more seriously. However, it is still unclear how the government should best approach the issue. So far, President Obasanjo had avoided testing the constitutionality of the decisions to impose sharia, relying mainly on moral appeals for tolerance to overcome

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 14 Nigeria

any problems. There has also been concern that, as he is a Christian from the south, his ability to take a strong position on the issue is compromised, although conversely, if he were a Muslim, his impartiality would be no less in doubt. Moreover, the continuing use of the army to quell violence can create as many problems as it resolves and leaves simmering tensions unresolved.

The main problem facing the government is that the current clashes have deep and complicated roots and are largely due to the long-term distrust and fear of domination between Nigeria’s main ethnic-religious groupings. This cannot be resolved until ordinary Nigerians have faith that their political leaders are acting in their, or the nation’s, best interests, rather than on their own behalf. Unfortunately, this is unlikely to change in the short to medium term, breeding further distrust of the country’s political elite. Support for sharia can also be seen as a reaction by ordinary people to the fact that the economic progress that the restoration of civilian rule was supposed to bring has yet to materialise (which is also reflected in a growing disillusionment with moderni- sation). However, whatever the cause, the introduction of sharia in a dozen northern states has served to accentuate the political and cultural divide in this multi-ethnic and multi-faith society that has never been at ease with itself.

Other clashes have also As well as religious tensions, Nigeria has also been dogged by sporadic occurred communal clashes, often between impoverished peoples fighting for control of, or access to, limited economic resources. In late October at least nine people died in renewed clashes between ethnic Itsekiris and Urhobos over control of a local authority in the oil city of Warri in Delta state in south-eastern Nigeria. The two communities have been in conflict over this since 1997. Local government creation is a sensitive issue as it often involves the distribution of political control and access to scarce federal funds between competing ethnic groups. In recent years more than 2,000 have died in ethnic fighting in the Niger Delta linked to the struggle for power and resources.

Troops raid villages in In the midst of these communal conflicts, Nigerians were shocked when reprisal attacks soldiers were reported to have massacred more than 200 people in several ethnic-Tiv villages in Nigeria’s central Benue state, in an apparent reprisal operation following the killing of 19 soldiers by Tiv militiamen. The soldiers, who were deployed to an area near the border between Benue and Taraba states to end fighting between ethnic Tiv and Jukun, were kidnapped and killed on October 10th. According to eyewitness reports, on October 22nd a group of soldiers visited the area where their colleagues’ bodies were found, gathered men in the main market square and executed them and razed the village. The soldiers carried out similar operations in three other villages. Benue state officials said that at least 130 people were killed, whereas some politicians from the area put the death toll at over 300. The army said the reprisal killings were not ordered, and that the troops were on a mission to disarm the militia and arrest those responsible for killing the 19 soldiers.

President Obasanjo’s In his first public response to the incident, President Obasanjo strongly response is condemned condemned the killing of the soldiers without criticising the army reprisals. Appearing to rationalise the killings, the president, who was a military ruler in the late 1970s, said that soldiers were trained to kill and, if deployed, that is

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 15

what they do. He said that anyone who kills a soldier should be ready for disastrous consequences. The president said that soldiers are used in peacetime operations as a last resort, adding that, if they are put into such a situation and things go wrong, they cannot be blamed. Human rights organisations condemned the president’s insensitive statement and demanded government action to find and punish those responsible for massacring unarmed civilians. Some politicians demanded the resignation of Nigeria’s defence minister and the army chief. The episode has raised already tense ethnic feelings in central Nigeria, and there will be possible repercussions not only for civil society but also for the military, which has a substantial number of recruits from the Tivs. Nigeria’s former army chief, General Victor Malu, who lost three members of his family and had his house destroyed by the army attacks, described the assaults as deliberate genocide by the military against the Tiv people.

Doubts grow over using the The October massacre, and a similar event in 1999 when troops razed Odi army to contain protests town in Bayelsa state after local militants had murdered 12 policemen sent to end unrest, illustrates the danger of using soldiers for domestic policing. As Nigeria’s undermanned and poorly equipped police force has been stretched in trying to stem rising violent crime, particularly armed robbery, the government has relied on the armed forces to restore order in strife-torn areas such as Kaduna and Benue states. It is a role the army does not like to play, even though by late October soldiers were patrolling the streets in at least six states of the federation. Moreover, some commentators have worried that this role could rekindle the army’s political interest. “Employing the army in civil policing holds one danger particularly,” the Lagos-based Punch newspaper said in an editorial on October 29th, “the military could become re-politicised or partisan in the process. ”

The proposed election In October the National Assembly approved the electoral bill submitted by the timetable angers the states Independent National Electoral Commission (INEC), after making changes which sparked a political row that further strained Nigeria’s political stability. The Senate inserted provisions to extend the tenure of local councillors by one year; to reorder the elections in 2003 so that the presidential election are held first, followed by National Assembly, gubernatorial and council elections; and to bar office-holders elected twice previously from seeking a third term (effectively meaning that four governors who briefly served as elected governors under President Ibrahim Babangida’s military administration could not stand again). The House of Representatives endorsed most of the Senate amendments, though called for all the elections to be held on the same day. A joint committee of the two houses is expected to harmonise both positions.

The governors of Nigeria’s 36 states have vehemently opposed the Senate’s amendments to the electoral bill. After a joint meeting in Abuja, the governors threatened to ignore the extension of local council tenure and proceed with elections in April 2002, as required by the military decree under which they were elected in 1999. The governors said that the elections would be conducted by state electoral commissions. In opposing the extension of the current local councils’ tenure, governors are not only driven by concern about constitutional propriety, but possibly also by the desire to influence the

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 16 Nigeria

outcome of council elections in 2002 to strengthen their own chances of re- election the following year. The governors have argued that reordering the elections is not in the interests of democracy, echoing concerns that starting with the presidential election would disadvantage smaller parties because of the likely bandwagon effect. If parliament and the state governors are unable to resolve their differences and the latter carry through their threat to organise council elections in 2002, Nigeria may be thrown into a constitutional crisis that would jeopardise political stability.

Political associations gear The electoral bill, when eventually signed by President Obasanjo, will open the up for party registration way for the registration of new political parties to contest for power in 2003. The prospect of registration has increased activity among the many associations aiming to turn into parties, but tough constitutional requirements about the need to have representation throughout the federation are expected to limit the mushrooming of new parties. The new political associations widely believed to pose the biggest challenge to the ruling People’s Democratic Party (PDP) are ones led by associates of General Babangida, including the United Nigeria Democratic Party, comprising President Babangida’s former deputy, Admiral Augustus Aikhomu, and several ex-ministers. However, the political realignment, partly driven by disgruntled politicians who left existing crisis- ridden parties, especially the PDP, is not expected to have a major impact on the political scene. Most of the new formations are, like the existing parties, lacking in ideological coherence and are mainly vehicles for individuals to vie for power. The PDP has been hit by a struggle within the leadership, largely related to the politics involved in the selection of a presidential candidate for the 2003 election. Although some PDP members fear that Mr Obasanjo, already criticised for his stubbornness, will in a second and last term in office become even less responsive to the demands of the party or powerful elements within it, the general assumption is that the president will be renominated.

Election campaigning An outbreak of violence between parties in early October again raised public sparks violence in Zamfara concern about the increasingly intense competition for power between state Nigeria’s bellicose politicians, and whether this will ultimately undermine democracy. Four people were reported killed in Gusau, capital of Zamfara state, in two days of fighting between supporters of the All People’s Party (APP), which controls the state, and the PDP. Unrest, which left more than 50 houses destroyed and led to the arrest of 68 people, broke out on October 3rd when PDP supporters drove into town in a large convoy of vehicles after a rally on the city outskirts. Following the unrest the police indefinitely suspended a scheduled PDP rally in Sokoto, another APP-controlled state. Besides the bitter rivalry between the PDP and the APP in several northern states, election campaigning could become troublesome in the historically volatile Yoruba- speaking south-west, President Obasanjo’s home region, where politicians from the locally dominant AD party have accused the PDP of planning to rig the 2003 elections in order to seize control of the region.

Rights panel concludes its The Human Rights Violation Investigation Commission, set up to investigate hearings with few abuses in Nigeria during more than 30 years of military rule, ended in mid- revelations October after a year of public hearings which left most Nigerians none the

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 17

wiser about their country’s murky past. The commission, headed by a respected retired Supreme Court judge Chukwudifu Oputa was meant to help heal a traumatised nation, in the same way as South Africa’s Truth and Reconciliation Commission. The Oputa commission travelled around Nigeria and took evidence from some of the 11,000 people who had submitted memoranda alleging human rights abuses, including torture and political assassinations. But, as Mr Oputa noted with disappointment, the evidence given at the televised hearings shed little light on the dark chapters of Nigerian history. “We are nowhere nearer to the truth than we were on October 23rd 2000 when the public hearing started,” he said in September at the start of the commission’s final session. Many Nigerians and human rights organisations were disap-pointed by the refusal of three former military rulers—Generals Babangida, Muhammadu Buhari and Abdulsalami Abubakar—to testify despite being summoned. However, these men may regret not appearing before the panel, as it is expected to publish a report which will contain detailed allegations against them by various petitioners. President Obasanjo was the only former military ruler to appear before the commission. In early September he answered charges by the family of the late Fela Ransome-Kuti, a musician, that as a military ruler he was involved in the 1979 army raid that lead to the death of the musician’s mother. Mr Obasanjo denied any wrong-doing.

Nigeria remains keen to Despite continued criticism of his frequent visits abroad, President Obasanjo’s play an international role administration continued to maintain Nigeria’s high-profile policy of promoting peace and economic development in Africa. (Critics argue that he should spend more time resolving domestic issues.) During the last quarter the there have been two important diplomatic initiatives.

• In early September, following talks in Abuja, President Obasanjo helped to persuade the government of Zimbabwe to sign an agreement to end the land crisis there (the talks, chaired by Nigeria, also involved other members of the special committee of the Commonwealth group). The Abuja deal now seems to have died as President Mugabe appears to be ignoring it, although the Nigerian foreign minister, Sule Lamido, led a Commonwealth delegation to Zimbabwe in late October to push for its implementation and to assess developments on the ground. Whether the Nigerian government can actually make a success of the Abuja agreement remains unclear, and highlights the problem that foreign policy efforts in Africa often take years to have an impact.

• The New Africa Initiative was officially launched by African heads of state at a meeting in Abuja on October 23rd. The plan, which is an ambitious attempt to revitalise African economies, was initially proposed by President Thabo Mkeki of South Africa in the form of the Millennium Africa Plan (MAP) (with the support of President Obasanjo and President Abdelaziz Bouteflika of Algeria). Following the OAU summit in Lusaka in June, the MAP was merged with the Omega Plan of President Abdoulaye Wade of Senegal. The plan is also being examined by the G8, and how they will help its implementation is to be outlined at the next G8 summit in Canada in June 2002.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 18 Nigeria

Economic policy

The IMF urges deeper Despite its general commitment to economic liberalisation, and the fact that reform in Nigeria Nigeria’s relationship with the IMF and World Bank have improved considerably since the restoration of democracy, the Fund and the Bank have failed to get Abuja to adhere to its agreed economic reform programmes. Following its critical Article IV report on Nigeria published in early August, the IMF, in its World Economic Outlook published in October, repeated its concerns about serious macroeconomic imbalances in Nigeria’s economy—in particular sharply higher government spending, especially at state and local levels; rapid monetary expansion and the acceleration of inflation; and disorder in the foreign-exchange markets—stressing that it was essential for the Nigerian authorities to restore economic stability, especially by restraining public spending at all levels and saving a larger portion of oil earnings. It stressed that these measures need to be supported by wide-ranging institutional and structural reforms aimed at improving the environment for private investment and economic diversification. It also called for progress in implementing plans to privatise state-owned enterprises; building the public-sector’s capacity to for- mulate reforms; and maintaining the drive to detect and weed out corruption.

The IMF extends Nigeria’s Despite the concerns of many of their staff about the reform programme in stand-by credit Nigeria and the ability of the government to implement reforms, the Bretton Woods institutions are under considerable political pressure to support President Obasanjo’s administration. Under normal circumstances, Nigeria’s economic performance in the last 12 months would almost certainly have led to the suspension of any deal with the IMF. But, under political pressure, the IMF extended Nigeria’s one-year US$1bn stand-by credit from August to October despite the government’s failure to meet important conditionalities (technically Nigeria has not met the March 2001 performance and policy targets and the IMF has granted it two three-month extensions). The programme was still unfinished in late October, and it looked likely that the Fund would approve a further extension, possibly to December 2001, perhaps in the hope that Mr Obasanjo’s 2002 budget would contain enough concessions on spending to allow a compromise agreement to be reached (certainly the fact that the IMF Article IV team which visited the country in late October extended its stay into early November indicated that it would probably be closely involved with the budget preparations).

Reaching a deal on debt As well as political considerations, the issue of external debt is another factor rescheduling is important favouring an agreement between the IMF and Nigeria. Although Nigeria provisionally agreed a debt rescheduling deal with the Paris Club in late 2000 (February 2001, page 32), its implementation depends on the government reaching an agreement with the IMF. Moreover, members of the Paris Club are acutely aware that if this deal does not go through, there is a chance that Nigeria will simply revert to its old policy of making only minimal debt-service payments—Paris Club members have enjoyed higher levels of servicing since the rescheduling accord. What is very clear at present is that the National Assembly will take a tough attitude over the issue and will not agree to fully

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 19

service Nigeria’s debt obligations, especially as elections are approaching. In the 2002 budget the government proposed a debt-service totalling US$1.7bn and it will seek the “concurrence of the Paris Club in this regard”. However, if no deal is reached it is likely that the National Assembly will cut the figure further before approving the budget. Faced with this possibility, there is a strong case that the Paris Club and the IMF would prefer some deal to be reached, and the payments proposed in the budget adhered to. Meanwhile, the link between Nigeria’s pace of reform and its expectation of reward was perhaps evident in the comment the finance minister, Adamu Ciroma, in August: “Fund staff understand our situation … But is the same members of the IMF board who want us to move more quickly that have failed to meet pledges of support and have failed to help relieve our heavy burden of debt.”

A medium-term Following the extensions that have already been given, the nature of any new programme looks unlikely deal is difficult to predict. However, what is clear is that continued extensions of the programme are unlikely to be acceptable to either party for much longer. As a result, another short-term agreement acceptable to both parties, that will allow the debt rescheduling deal to be passed, is the most likely option. It is especially likely since IMF economists fear that, as Nigeria has been unwilling, or unable, to meet even the mild conditionalities attached to its current standby agreement, the prospects of its implementing a more demanding medium-term reform programme are slim, especially as the 2003 presidential elections approach (even if the government is keen to start an IMF medium- term programme to boost its chances of obtaining substantial debt relief and an increased inflow of new funds).

Certainly a major problem facing the IMF in assessing Nigeria’s progress with reforms, and one that is constantly stressed by Nigerian officials, is the constraints the government encounters in restructuring a badly battered economy and in selling tough reforms to an austerity-wary and cynical population. These problems are compounded by the lack of consensus on the need for structural adjustment in a country, where some powerful elements benefit materially from the prevailing disorder and others are suspicious of policies associated with Western economic agencies, especially the IMF. The finance minister’s comment in early August following the IMF’s Article IV report perhaps reflected these problems when he said “We are making changes because they are right for Nigeria, not because an outside agency has demanded them. But there are still people around … who do not want change. Our systems are weak and run down and will take time to fix.” Though acknowledging the need for tighter fiscal control, Nigerian officials told visiting IMF officials that the administration must spend on critical social services and crumbling infrastructure. The government is in a dilemma over its desire for quick results in its anti-poverty policies and its commitment to tough economic reforms, which in the short term require belt tightening.

Fiscal federalism hinders One of the biggest constraints on Nigeria’s economic policymakers is the spending reform country’s federal structure. Because of strong and independent-minded state administrations and the current method by which finances are allocated, overall government spending is difficult to control Therefore, despite repeated

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 20 Nigeria

claims by the federal government that it will restrain spending, and save its share of the ongoing oil windfall, it has struggled to control expenditure in the states and seems unwilling to mount its own challenge in the courts. Instead, the 36 states have taken the lead in this area, accusing the federal government of not following constitutional provisions in the management of funds accruing to the federation account. In August, Oyo state became the fourth southern state to take the federal government to court over the matter. The state wants the Supreme Court to declare as unconstitutional several federal government fiscal practices, including keeping accounts separate to the Federation Account, making deductions from the Federation Account before sharing revenue among the three tiers of government and withholding proceeds from the Federation Account (other than as permitted by the constitution).

Given the aggressive stance of the states, it was not surprising when on August 21st the National Economic Council, comprising the central and regional governments, decided to release some of the US$1.1bn of excess oil earnings to the three tiers of government, ignoring the warning of the Central Bank of Nigeria (CBN) that this might harm the economy. However, the federal government is clearly frustrated by its inability to curtail what it often sees as frivolous spending by lower tiers of government, although it can use them as a convenient scapegoat for the macroeconomic imbalances in the economy. The vice-president, Atiku Abubakar, told a budget review forum in early August: “As much as the federal government has tried to inculcate fiscal responsibility, we don’t find corresponding responsibility on the part of the other tiers of government.” However, the federal government has not itself provided a shining example of fiscal prudence, having run a budget deficit in the first six months of 2001, nearly one-third greater that its budget target.

Controlling state expenditure

In early September President Obasanjo again announced that his admini- stration would no longer distribute excess oil revenue to the states, but retain it in the Federation Account. Whether this will happen may depend on the president’s ability to resist political pressure from powerful states and any legal challenge. Meanwhile the government is seeking other ways to rein in the states’ high levels of expenditure. One method under consideration is a federal government proposal to submit a fiscal responsibility bill to the National Assembly. This would bind all levels of government to set expenditure targets, although it is unclear whether such a law could impose fiscal discipline upon unco-operative states under Nigeria’s federal constitution (and what sanctions could be imposed on them).

Meanwhile, the actual revenue-sharing formula is under discussion. The report of the Revenue Mobilisation, Allocation and Fiscal Commission, submitted to President Obasanjo on August 16th, recommended that the federal government’s share of revenue should be reduced to 41.3% from 48%, that the allocation to Nigeria’s 36 states should be raised to 31% from 24%, and that the allocation to local government should be reduced to 16% from 20%. The remaining 11.3% is to be shared between the federal capital territory and some special funds, including education, agriculture and ecology. This long-awaited

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 21

report, commissioned by President Obasanjo after complaints that the formula inherited from the military favours the centre and starves lower tiers of funds, has not resolved the long-running dispute in Nigeria over resource sharing in the federation. Sub-federal administrations throughout the country, most almost totally sustained by funding from the national Treasury, have condemned the commission’s proposals, demanding bigger shares for themselves. At a joint meeting in early September, the governors of Nigeria’s 17 southern states, which have from the outset of the Fourth Republic campaigned for greater decentralisation, counter-proposed a revenue formula giving the federal government and the states an equal share of 36%, local government 25%, the federal capital 1% and the environment 2%. Local councils have reacted angrily to the proposed reduction in their share, saying that this would undermine grassroots development and result in salaries not being paid.

The 2002 federal budget is On November 7th President Obasanjo presented the first draft of the 2002 presented to parliament budget to parliament. The four broad pillars of the budget are:

• to alleviate poverty by fostering opportunities for job creation; • to achieve a high growth rate; • to encourage private-sector participation in economic reform; and • to promote good governance.

Central government finances (N bn) 2001 2002a Revenue 1,952 1,156 of which: oil revenueb 1,340 546 non-oil revenue 426 513 Expenditure 2,349 1,136 Recurrent expenditure 662 483 Capital expenditure 835 297 Domestic debt service 100 134 Foreign debt service 221 222c Balance –397 20 Privatisation receiptsd 70 75

a President Obasanjo’s budget speech. b Based on US$22/b in 2001 and US$18/b in 2002. c Based on the US$1.7bn figure quoted in the speech and converted at our estimated exchange rate for 2001. d No privatisation receipts have been earned so far in 2001; those in 2002 are based almost entirely on the sale of Nitel and Nigerdock. Source: IMF; budget statement.

The budget still has to be approved by both houses of the National Assembly, which in the past has taken some time and made extensive revisions. Putting together the data (which are spread around the budget statement), it would seem that the government is trying to present a broadly balanced budget. However, though the revenue figures look reasonable, there are a number of areas were significant overspending is likely to occur, pushing up the deficit

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 22 Nigeria

considerably (the Economist Intelligence Unit now forecasts a deficit of 5.6% of GDP in 2002).

Capital expenditure will First, the budget is based on a sharp cutback in capital expenditure. However, prove difficult to rein in given the many projects already begun in 2001, many of which will have to continue and will overrun in cost terms, the target is likely to be breached. This is especially the case as it is not clear that the ministries have the discipline to halt many projects or will seek ways to start them (they have already submitted budget proposals well above the ceilings agreed when the budget was drawn up).

The saving from payroll The government seems to have placed a considerable amount of faith in its verification is overstated payroll verification scheme which it states in 95% complete. Under this, it is hoped that enough ghost workers will be eliminated from the government payroll to allow it to increase wages without significantly raising the total wage bill. It is estimated that verified personnel costs are currently N225.8bn and personnel costs in the budget are projected at N283bn. Not only do doubts exist over the whole verification exercise and how effectively it will be implemented, but it is unlikely that the financial saving will cover the cost of another major pay award. Already the Nigeria Labour Congress (NLC) and the government have reached an agreement (on September 11th) for the implementation in May 2002 of a 25% wage increase, which had been deferred from 2001 because of the inability of some state governments and some private-sector employers to pay the increases awarded by the May 2000 salary review. It appears that the unions will hold the government to the accord: in early October the president of the NLC, Adams Oshiomhole, warned all levels of government to make adequate budgetary provision for higher salaries if they wanted to avoid strikes and other disturbances. We therefore expect recurrent expenditure also to overshoot its budgeted level.

Fuel subsidies will remain The agreement between the government and the unions also ruled out any in 2002 increase in domestic fuel prices in 2002, though it was agreed that the oil downstream sector should be liberalised to promote competition. The IMF has long pressed Nigeria to end fuel subsidies, which cost the state about US$2bn per year, but the government has buckled under the stiff resistance of the unions from implementing its downstream deregulation policy. Withdrawing the subsidies is an unpopular move in a country where many people see cheap fuel as their only benefit from the nation’s oil wealth.

Privatisation proceeds Delays in implementation continued to affect Nigeria’s ambitious programme slowly of privatisation, making it highly improbable that the three-phased scheme will be completed by its 2003 target. By late October the government had not completed any sales from the second phase of the programme, which should have finished by December 2000 (August 2000, page 21). In mid-October Akin Kekere-Ekun, chairman of the Technical Committee of the National Council on Privatisation (NCP), the body overseeing the programme, told a privatisation seminar that the scheme had so far resulted in the divestment of government holdings in 10 companies, raising N20bn (US$178.6m) from the sales, and that at least 10 more firms would be privatised by the end of the

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 23

second quarter of 2002. According to the 2001 budget, N35bn (US$312m) was to have been raised form privatisation proceeds in the first half of the year, whereas none has actually been received. Mr Kekere-Ekun listed several of the obstacles that have hindered the programme:

• excessive politicisation of the privatisation process; • obstruction by groups seeking to maintain the status quo; • lack of co-ordination between government agencies; • weak legal, regulatory and institutional capacity; and • public apathy.

There is disagreement over The deadline for the sale of Nigerian Telecommunications (Nitel), was shifted Nitel’s value from September to November 22nd, the second postponement this year. Three international consortia (Newtel consortium, which includes Detecon, a subsidiary of Deutsche Telekom; Investors International consortium, which includes Portugal Telecommunication and KPN Royal Dutch Telecom; and Telnet consortium, which includes Korea Telecom, Swedetel and Telnet Nigeria) were shortlisted to purchase a 51% stake in Nitel. The sale of Nitel will be the first sale of a major Nigerian public corporation. However, a row over Nitel’s value and the appropriate price of its shares could affect the sale. In October Nasir el-Rufai, the director-general of the Bureau for Public Enterprise (BPE), the official privatisation implementation agency, denied a claim by Nitel’s management that the BPE had valued Nitel at N25.6bn (US$228.6m), significantly below the US$2bn Mr el-Rufai quoted earlier in the year. Answering questions from journalists, Mr el-Rufai refused to disclose Nitel’s current value, saying that such disclosure would prejudice the bidding process. He suggested, however, that the value was not as high as many Nigerians believed and accused Nitel’s staff and management of expecting unrealistic prices for the utility’s facilities, which he said were originally acquired at inflated costs. Nitel’s management in a letter to the presidency, and quoted in the press, had put the corporation’s value at approximately N263.8bn (US$2.4bn). Telecommunication workers’ unions told a press conference in mid-October that Nitel was worth at least N300bn (US$2.7bn) and cautioned against Nigeria being short-changed in its privatisation. Given the downturn in the global economy and the depressed telecommunications market, the maximum amount investors are prepared to pay for Nitel may prove difficult for President Obasanjo to justify to the electorate and maintain the integrity of the privatisation programme, and it is possible that all three bids will be rejected and that a management contract for Nitel will be awarded instead.

Officials fear impact of Nigerian officials have also been assessing the likely impact of the recent slump global recession on in global business confidence, especially after the September 11th terrorist privatisation attacks in the US, on Nigeria’s divestiture plan, which they had hoped would be a catalyst for major increase in foreign investment in the economy. The BPE’s Mr el-Rufai told a news briefing in mid-October that following a year’s delay in the privatisation of state-owned Nigeria Airways, the national carrier was unlikely to attract foreign buyers in the light of the crisis now facing the

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 24 Nigeria

international airline industry. “A year ago, we would have been able to privatise Nigeria Airways for a lot of money. But look at what is happening today,” he said. He made a similar point about Nitel, which he said now attracted middle-level companies because the major telecom firms who would have been interested in the corporation three years ago were now in serious trouble. Mr el-Rufai probably exaggerated the past value of Nigeria’s state enterprises, but his point that the country is likely to pay a price for its procrastination over their sale is pertinent.

Contract system tightened The government has begun to overhaul its procurement and contract system as to curb corruption part of its anti-corruption drive, which has been widely criticised for being ineffective. In late August, the finance minister, Adamu Ciroma, said that the administration had accepted most of the recommendations of a study group led by the World Bank on achieving international standards in public resources management. Accordingly, a Public Procurement Commission has been established to monitor government projects and curb the malpractices that plague the procurement and contract process. Other measures include the publication of all contracts exceeding N20m (US$200,000) in at least two national dailies and that the auditor-general, or his representatives, must approve contracts above N5m (US$44,643) before final payment. Mr Ciroma said that poor and corrupt contract procedures have contributed to the appalling state of infrastructure in Nigeria. Corruption, including routine contract inflation, has deterred reputable international companies and investors from doing business with Nigeria and led to the wasteful use of scarce resources, which underline concerns about the government’s capacity to handle large increases in capital spending. “The poor international reputation that we have and the horde of abandoned projects littered over the country can be considered as some of the visible negative dividend of poor contract award and tendering, procurement, execution and administrative process,” the minister said. However, Mr Ciroma said that the government rejected the World Bank’s advice that ministers should be insulated from the contract tendering process.

The domestic economy

Economic trends

Economic performance According to the Central Bank of Nigeria (CBN), the performance of the is mixed in the first half economy in the first half of 2001 was mixed, with steady growth in agricultural of 2001 production and a modest increase in industrial output. Total agricultural output grew by an estimated 3.9% year on year, compared with 3.3% in 2000. Capacity utilisation in industry was 35.5%, marginally higher than the 35.2% recorded in the corresponding period in 2000, but below the 35.7% in the second half of 2000. Although high oil prices kept the current account in surplus (see Foreign trade and payments), expansionary fiscal policy and excess liquidity continued to jeopardise macroeconomic stability.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 25

Agricultural and industrial production (1984=100; value of index in Jun) 1996 1997 1998 1999 2000 2001 Agriculture 195.7 200.4 204.4 210.7 217.7 226.2 Industry 131.8 132.6 137.5 131.0 137.0 143.2 Source: Central Bank of Nigeria, Economic Report for the First Half of 2001.

The CBN tries to narrow In early October the CBN introduced new guidelines for foreign-exchange the exchange-rate gap dealing to stamp out malpractices that it said had undermined the naira and perpetuated differentials between the rates quoted on Nigeria’s various currency markets. It also threatened to revoke the licences of banks that practised round-tripping—buying foreign exchange at lower rates in the official market to resell on the parallel market at higher rates—or using customers’ names to acquire foreign exchange without their consent. The CBN also launched a major investigation into banks accused of round-tripping. Its new foreign-exchange guidelines also set new rules covering forward contracts, the format for reporting foreign-exchange transactions, and the time limit that banks may hold hard currency without passing it on to customers or the CBN—all designed to put an end to the apparently rampant foreign-exchange abuses committed by banks.

A variety of exchange rates At present at least four foreign-exchange markets exist in Nigeria: transactions are quoted by the Central Bank with banks; the interbank market between banks—whose rates, particularly the Nigerian interbank foreign-exchange fixing (Nifex) are quoted on the Nigerian inter-bank foreign exchange market (IFEM); the parallel market; and rates quoted at various bureaux de change. In late October the Central Bank maintained an official rate of N111.60:US$1, whereas the IFEM rate ranged between a spot rate of N112.1:US$1 to N124.8:US$1 for 180- day transactions. The parallel market rate was around N132:US$1; and rates in bureaux de change were slightly higher still.

Exchange rates (N:US$ unless otherwise indicated; period average) 2000 2001 Jan-Jun Jul-Dec Jan-Jun Interbank rate (IFEM) 100.1 103.2 111.4 Parallel rate 104.7 117.0 130.0 Bureaux de change 104.9 117.0 130.1 IFEM-parallel rate spread (%) 4.6 13.4 16.7 Source: Central Bank of Nigeria, Economic Report for the First Half of 2001.

More importantly, as the table shows, the gap between the rates has widened substantially since June 2000—from 4.6% in the first six months of 2000 to 16.7% in the first half of 2001—and it is this that has made round-tripping more attractive to the banking industry. In August the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture complained that the attractive premiums available in the various foreign-exchange markets had caused banks to abandon lending in favour of the easier profits to be made from currency speculation. In its Article IV review, the IMF called on the CBN

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 26 Nigeria

to stop using predetermined exchange rates at the daily interbank market and encouraged the government to restore exchange-rate stability through reforms aimed at creating a fully market-determined exchange system. It recommended that the IFEM and open interbank markets should be merged and that the differential between the IFEM and parallel market rates be narrowed to less than 10% by May 2001. Central Bank officials claim that it is difficult to eliminate the gap between the markets because differences in rates partly reflect the premium that unscrupulous businesses are prepared to pay for unrecorded foreign-exchange transactions that enable them to conceal illegal transactions, such as tax and import duty avoidance.

Although the value of the naira started to fall sharply early in 2001 (May 2001, page 24), active intervention by the CBN in the market shored up its value, and the CBN has so far been able to meet in full the growing demand for foreign exchange. The CBN intervened 122 times in the foreign-exchange market in the first six months of 2001, and funding directed to the IFEM totalled US$6.48bn in first seven months of 2001 (almost 80% going to the private sector), up from US$3.87bn in the corresponding period of 2000. However, if world oil prices drop in 2002, there will be substantially less foreign exchange available for the CBN to carry out such extensive market interventions. In addition, there is likely to be increased pressure from the IMF to allow the rate to fall. We therefore expect the value of the naira to fall in 2002 and average N130.8:US$1 for the year.

Inflation, 2001 (%) Jan Feb Mar Apr May Jun Jul Aug 12-month moving average 8.6 10.3 11.9 13.9 15.7 16.6 17.7 18.1 Source: Federal Office of Statistics.

Inflation continues to According to the Federal Office of Statistics, inflation (using the official 12- climb month moving average favoured by the Central Bank) rose to 18.1% in August, up from 17.7% in July and 16.6% in June.

Minimum rediscount rate (%) 2000 2001 Dec Jan Feb Apr Jun Sep End-period 14.0 14.5 15.5 16.5 18.5 20.5 Source: Central Bank of Nigeria.

The rise was attributed largely to increases in food prices, which the Central Bank blames largely on increased costs of transport and farm inputs. However, the country’s loose fiscal policy and excess liquidity have also put pressure on prices. To combat this, the CBN has continued to tighten monetary policy in an effort to mop up some of the excess liquidity. On September 20th the bank raised its minimum rediscount rate to 20.5% from 18.5%, the fifth increase this year, having started the year at 14%. A CBN statement said the latest adjustment was occasioned by the surge in liquidity in the system since the

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 27

start of the third quarter of 2001, which was largely due to expansionary fiscal operations of the three tiers of government. In addition, according to the CBN, credit expansion to non-productive sectors of the economy had raised the stock of base money to a level of concern.

Oil and gas

Oil output was above quota Nigeria’s crude oil output rose in the third quarter of 2001 to well beyond the in the third quarter country’s OPEC quota, which was reduced from 1.993m barrels/day to 1.911m b/d from September. Data from the International Energy Agency show that Nigeria’s oil output rose to 2.13m b/d in September, from 2.07m b/d in August and 1.96m b/d in July. The CBN’s half-year report put Nigeria’s average oil production in the first six months of 2001 at 2.31m b/d, compared with 2.07m b/d in the corresponding period in 2000. It attributed the rise to largely improved production conditions following the return of relative calm to the oil-producing communities and increased production of condensates, which is not within the OPEC quota.

After enjoying high levels of oil earnings, with prices significantly above the US$22/barrel posited in the 2001 budget, government officials closely watched developments in the world oil market after prices fell sharply in late September amid fears of global recession and a drop in oil demand. After initial market reaction to the terrorist attacks in the US took oil prices to a nine-month high on September 11th, when dated Brent Blend reached US$31.05/b, prices fell back dramatically, to US$20.88/b on October 8th and by early November Brent was trading below US$20/b. At present, we are forecasting that oil prices will rebound slightly. However, OPEC will not seek to push up prices significantly with the world economy remaining weak. We therefore forecast an average price of US$21.5/b in 2002, which fell back moderately to US$20.5/b in 2003.

Although action against oil companies by disgruntled local communities in Nigeria’s oil-producing areas has declined in recent months, it remains a problem. Shell, Nigeria’s biggest oil producer responsible for nearly half of the country’s output, has been most hit by community protests, which have involved the kidnapping of company staff, the seizure of installations and the sabotage of oil facilities. In a step unprecedented in Nigeria, Shell is suing two villages for damaging its equipment. In the case brought before the High Court in Benin on October 22nd, Shell is demanding US$25m in damages from the Olomoro and Oleh communities, as well as more than US$800,000 per day in lost production, following an attack by youths from the areas on a flow station on September 27th. Shell said local youths took over the Olomoro station and in trying to shut it down caused an explosion. A senior Shell official, Ife Obuh, told the Delta state governor, James Ibori, that the attack halted 40,000 b/d of production and that to repair the facility would cost more than US$20m and might take about 18 months. Local communities, and militant nationalist and environmentalist groups in the Niger Delta, as well as oil operators and the Nigerian government will follow the case closely, as a verdict either way could set off more trouble in the Niger Delta. Shell officials say that the company is taking legal action to send a signal that this kind of behaviour is unacceptable,

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 28 Nigeria

after suffering constant harassment and destruction of equipment despite its efforts to improve living conditions in the oil-producing areas. The Olomoro incident occurred less than a month after an offshore rig owned by a contractor drilling for Shell was boarded by militant youths, who held the 99- man crew, including 19 foreigners, temporarily hostage on August 27th.

Exxon is threatened with Oil operators in Nigeria have also sometimes been drawn into the bitter local expulsion from Akwa Ibom politics stemming from the rivalry between competing ethnic and regional groups. In early October the Akwa Ibom state assembly threatened to expel ExxonMobil from operating in the state, unless it moved its Nigerian headquarters there. Exxon, whose Qua Iboe export terminal in Eket has a capacity of 600,000 b/d, has in recent months faced unrest from local people who think the relocation of company’s headquarters from Lagos would benefit their communities. However, Exxon said it does not plan to move from Lagos, where it has been based for 32 years, and points out that Mobil Producing Nigeria, one of its three subsidiaries in Nigeria, maintains an office in Akwa Ibom which is bigger then the Lagos headquarters.

Local participation in oil In line with the policies of successive Nigerian governments, President production is encouraged Obasanjo’s administration is trying to boost indigenous participation in Nigeria’s foreign-dominated upstream oil sector. The Nigerian National Petroleum Corporation (NNPC), which has controlling stakes in the six joint- venture oil companies responsible for about 95% of Nigeria’s oil output, has been in talks with foreign oil companies to agree ways to boost domestic involvement in the industry. The NNPC’s director for exploration and production, Andrew Uzoigwe, said in early August that the joint-venture agreements were probably due for review to strengthen its provisions on local content and participation to bring it in tune with the aspirations of the nation. Changes being sought include restricting contracts to local companies where they have the financial and technical capacity to execute them (May 2001, page 27).

The government is also trying to promote local participation by reserving marginal oilfields for indigenous prospecting companies. It plans to reallocate 116 marginal fields from multinational firms to local firms and, as a first step, it has invited bids from local companies for 29 fields (details of this are on www.nigeria-marginalfields.com). The president’s special assistant on energy and gas, Funso Kupolokun, said in October that the administration had received more than 40 applications for the fields on offer and expected many more before the November 2001 deadline. Local business groups have often criticised the Nigerian government for not doing enough to involve local firms in upstream production. Since most indigenous oil companies lack the funds and technical capability to compete with the multinationals, the government has had to balance its nationalist feelings with its aim of boosting Nigerian oil production capacity from roughly 2.3m b/d at present, to 3m b/d by 2003 and 4m b/d by 2010.

Plans for three new LNG Nigeria is making significant advances in exploiting its reserves of natural gas, plants move ahead the tenth biggest in the world. In September the president’s special petroleum

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 29

adviser, Rilwanu Lukman, said that Nigeria aims to have three new liquefied natural gas (LNG) plants by 2003, in addition to the successful multi-billion- dollar plant in Bonny. Mr Lukman was speaking at the signing of a memorandum of understanding (MoU) with Phillips Petroleum and Nigeria Agip for the construction of the country’s third LNG project. The proposed offshore LNG plant, with a capacity of 5m tonnes/year, is scheduled to start production in the Niger Delta near the Brass River crude terminal in 2007. Earlier in the year the government signed a MoU with Chevron, Texaco, ExxonMobil and Conoco for a second LNG project (May 2001, page 28). The government is talking to Norway’s Statoil about a possible fourth LNG plant, to be built in the Delta. In the past quarter two other high-profile gas projects have also moved a step closer to being realised.

• In early October the governor of Akwa Ibom state, Victor Attah, signed a contract with Nigeria-based Danba Energy and Dresser Engineering and Constructors of the US for a 10,000-b/d gas-to-liquid plant projected to cost US$450m to be located in Ikot Abasi.

• Nigeria and Algeria have agreed to study a 4,000-km pipeline project to ferry African gas to the European market. A memorandum was signed in Algiers on September 7th for the Trans-Sahara Gas Pipeline Project, which would cost US$6bn and link Nigeria’s capital Abuja, across Niger to the Mediterranean port city of Beni Saf. The project is expected to utilise some 250,000 b/d of gas equivalent that is currently flared in Nigerian oilfields.

Industry

Bankers set up investment Long criticised by business organisations for being preoccupied with making scheme to fund industries quick profits and showing little interest in lending to industry, Nigeria’s banking industry has established the Small and Medium-Scale Industries Equity Investment Scheme to fund the country’s troubled businesses. Under the scheme, launched on August 21st by President Obasanjo, all banks are required to set aside 10% of their profit before tax annually for equity investment in small and medium-sized industries. CBN officials said that 33 banks had already set aside N4.15bn (US$37m) for the scheme, which is expected to have annual funds of around N5bn. President Obasanjo said that the scheme represents a major effort by the private sector to become the prime engine of growth. The Central Bank governor, Joseph Sanusi, said he first proposed the scheme to banks in 1999, telling them that the health of their industry was dependent on the health of the real economy. Mr Sanusi acknowledged that previous attempts to help small and medium-sized business had failed because of “inefficient infrastructure facilities, overbearing bureaucracy, inefficient administration of fiscal incentives, unstable macroeconomic environment and bad management—financial and technical”.

Government still plans to Although the government, IMF and World Bank still do not agree about the revive ailing industries funding of unviable public companies (August 2001, page 27), the government remains committed to trying to revive them.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 30 Nigeria

• In early September the Lagos-based Guardian newspaper reported that the government plans to spend some US$350m on steel and aluminium plants in the next two years. The minister of state for power and steel, Murtala Aliyu, told the Guardian that the government was committing at least N28bn (US$250m) to a project with its technical partner Tiajprom Export (TPE) of Russia to complete the Ajaokuta steel complex by 2003. TPE was the main contractor that built the giant complex, which was meant to the centrepiece of Nigeria’s industrialisation but has lain idle since 95% of its construction was completed over 15 years ago.

• The minister said that the government would commit US$45m for the revival of the Delta Steel Company in Aladja, through a joint venture partnership with Austria’s Voest Alpine. The Austrians are contributing US$55m and a local investor, Osaka Steel Company, is providing a further US$40m.

• The government has been talking with Glencor about a plan to get the Aluminium Smelter Company operating after it was closed in mid-1999 for lack of working capital. The government was reported to have agreed to provide the US$58m working capital required by the plant on which Nigeria has already spent an estimated US$2.5bn.

Financial services

The NSE stays buoyant In contrast to the trend in most parts of the world, share prices on the Nigerian Stock Exchange (NSE) continued to perform strongly, and reached a new record in October. The NSE all-share index rose from 10,529.6 on August 1st to reach a new record high of 11,358.9 on October 17th before dipping to 11,146.3 on October 10th. The performance of the market has been generally encouraging for investors, who saw the index begin the year at 8,163. Traders say that shares have been spurred by good company results and optimism about the impact of the privatisation programme (despite delays there has been progress in the sale of government shares in listed companies). However, the market capitalisation—which rose from US$5.56bn on August 1st to a peak of US$6bn on October 17th—remains small for an economy the size of Nigeria.

Nigerian Stock Exchange all-share index, 2001

Jan Feb Mar Apr May Jun Jul Aug Sep Oct End-period 8,794.2 9,180.5 9,159.8 9,591.6 10,153.8 10,937.3 10,576.4 10,328.9 10,274.2 11,091.4 Source: Nigerian Stock Exchange.

Infrastructure and other services

NEPA may meet deadline Officials were confident that the much-maligned National Electric Power for stable power supply Authority (NEPA) would meet the end-December 2001 deadline set by President Obasanjo in March for it to boost the electricity supply from about 1,500 mw to 4,000 mw and provide uninterrupted service. Power supplies have improved to the one-third of the population connected to the national grid,

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 31

owing partly to increased government investment and extra electricity generated for NEPA by independent power operators. Nevertheless, achieving a constant supply will be difficult for the notoriously inefficient NEPA. But if success would give a psychological boost to a nation that has been demoralised over the decades by the seemingly intractable problem of unreliable energy supply. Meanwhile, in early October President Obasanjo submitted a long- awaited bill to the Senate for breaking NEPA’s monopoly and splitting it into separate companies in preparation for privatisation. The government aims to privatise NEPA by 2003, but the task of restructuring the giant organisation and the political conflicts the sale is likely to generate may make this deadline difficult to achieve.

Perception of NEPA’s services in the last year (% of respondents in sector) Financiala Manufacturing Services Improved dramatically 0 0 0 Improved slightly 9 6 14 No change 27 29 0 Worsened slightly 27 29 29 Worsened drastically 32 36 57

a Does not add in source. Source: Nigerian Economic Summit Group, Report of Economic Activities, September 2001.

Mobile phone coverage There has been considerable growth in mobile phone use in Nigeria since increases companies licensed to operate the Global System for Mobile Communications (GSM) launched their services in August. By October MTN communications Nigeria and Econet Wireless Nigeria had between them connected 120,000 subscribers. However, the two private companies complained that growth has been hampered by the failure of Nitel to provide adequate interconnectivity. Nitel currently supports only 5,000 lines for each of the operators, meaning that at any one time most GSM users cannot speak to subscribers outside their network. Nitel, itself a GSM licence holder, launched its GSM service in October.

Besides the infrastructure bottlenecks, growth in the mobile phone market is constrained by the high cost of using the service. Subscribers pay at least N30,000 (US$268) for a handset and connection in a country with an average income per head of around US$300. Following public criticism of the rise in its landline tariffs announced in June 2001, Nitel said in late August that it was reverting to its old rates from September 15th. That decision, which brought local calls back to N1.80 per minute from N4.30 per minute, made the cost of mobile phone use, at about N15 per minute, seem even more outrageous to many people. The government, which sees the GSM network as a major means of boosting Nigeria’s very low teledensity, is concerned about the high tariffs but has so far heeded the operators’ request to refrain from intervening and allow market forces to prevail to enable investors to recoup their large investments. Although mobile telephony is helpful in boosting voice communication, it does not support large data transfer needed for an Internet revolution in Nigeria. With less than 500,000 landlines connected for a

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 32 Nigeria

population of roughly 120m, improving fixed-line infrastructure remains the major telecommunications challenge facing the government.

Foreign trade and payments

Nigeria’s current-account According to the Central Bank of Nigeria’s half-year report for 2001, the surplus falls current-account surplus fell in the first six months of the year owing to higher debits on the services account. The deficit in the services and income accounts widened to US$4.6bn in the first six months of 2001 from US$1.95bn in the same period of 2000 and US$2.34 in the last six months of 2000. The Central Bank attributed the rise to increases in spending on travel as well as to cash calls from joint ventures. As a result, the current-account surplus fell in the first six months of the year to US$1.35bn, compared with US$3.2bn in the first half of 2000 and US$4.86bn in the second half of 2000.

Balance of payments (US$ m unless otherwise indicated) 1999 2000 2001 Jan-Jun Jan-Jun Jul-Dec Jan-Jun a Exports 4,862.7 8,564.7 10,480.1 10,937.9 Imports –4,919.7 –3,760.3 –4,530.0 –5,999.3 Trade balance –57.0 4,804.4 5,950.1 4,938.6 Services & income balance –2,731.1 –1,951.5 –2,343.9 –4,632.0 Net current transfers 534.1 352.6 1,254.5 1,044.6 Current account balance –2,254.1 3,205.6 4,860.7 1,351.0 Capital & financial account balance –1,113.2 –2,353.5 –1,842.2 –826.1 Net errors & omissions –35.6 –69.7 –1,182.2 –66.0 Overall balance –3,402.9 782.4 1,836.4 458.9

a Provisional. Source: Central Bank of Nigeria, Economic Report for the First Half of 2001.

On the visible trade front, export earnings totalled US$10.94bn in the first six of 2001 (99.2% from oil shipments), compared with US$8.56bn in the corresponding period in 2000 and US$10.48bn in the second half of 2000 (non-oil exports fell to a paltry US$83.2m in the first half of 2001, from US$148.1m in the first half of 2000 and US$98m in the latter half of 2000 although CBN data do not separate out gas and oil). Central Bank data show that total imports climbed to US$6bn in the first half of 2001 from US$3.76bn in the first half of 2000 and US$4.53bn in the second half of 2000. However, it should be noted that the IMF has argued that the Nigerian authorities have consistently underestimated the value of imports and included some data in the services account. This is partly because of smuggling, the poor quality of, and low response rate to, its statistical surveys, and confusion over its actual external debt repayment (August 2001, page 30).

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 Nigeria 33

FDI falls marginally According to new data from the UN Conference on Trade and Development, according to UNCTAD contained in its World Investment Report 2001, there was only a marginal fall in the level of FDI inflows into Nigeria in 2000, from US$1.01bn in 1999 to US$1bn in 2000. This compares to a large fall in flows to the continent as a whole (from US$7.94bn in 1999 to US$6.46bn in 2000), although this was largely the result of a large decline in inflows into South Africa and Angola rather than a general fall across the continent. As inflows into South Africa fell to under US$1bn in 2000, Nigeria became the second largest recipient of FDI in Africa, behind Angola which recorded inflows of US$1.8bn. However, inflows into both countries, are overwhelmingly dominated by the energy sector.

FDI inflows into Nigeriaa

1989-94 1995 1996 1997 1998 1999 2000 US$ m 1,231 1,079 1,593 1,539 1,051 1,005 1,000b

a The majority of inflows into Nigeria are re-invested oil earnings from oil companies. b This differs marginally from the figure quoted by the Central Bank of Nigeria in its 2000 annual report of US$1,140.7m; though both that and the UNCTAD figure are provisional. Source: UN Conference on Trade and Development, World Investment Report 2001.

Foreign-exchange reserves As the oil price remained strong in the first half of 2001, Nigeria’s foreign- continue to grow exchange reserves also continued to increase, although the rate of increase slowed was substantially lower than in 2000. According to CBN data, reserves stood at US$10.48bn at the end of June 2001. This represented 9.1 months of import cover, according to the Economist Intelligence Unit’s estimate of imports for the year (according to CBN data they would finance 10.5 months of imports). However, we expect the rate of accumulation of reserves to have slowed sharply in the second half of the year, especially in the last three months, in line with the forecast fall in oil prices. We forecast that reserves will fall back slightly in 2002-03, reaching US$9.45bn at the end of 2003, as the price of oil remains low and government expenditure remains high.

Foreign-exchange reserves (end-Jun; US$ m) 1998 1999 2000 2001 7,947.3 4,772.3 7,272.4 10,479.5 Source: Central Bank of Nigeria, Economic Report for the First Half of 2001.

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001