Nigeria Nigeria at a Glance: 2001-02

COUNTRY REPORT

Nigeria Nigeria at a glance: 2001-02

OVERVIEW President Olusegun Obasanjo’s administration faces a daunting task—to turn around a country paralysed by decades of mismanagement, corruption and ethnic division. The task is the more daunting in the second half of his term of office, which is likely to be increasingly dominated by highly charged and divisive election campaigning for the elections, which are to be held in 2002-03. Moreover, it remains unclear whether Nigeria can survive civilian-managed elections without descending into chaos and an eventual military coup—the fate of previous civilian republics. The government will continue to proclaim its commitment to economic reform, but progress will remain erratic as the election approaches, even if there are some high-profile successes such as the sale of Nitel. Meanwhile, the economy will remain dependent on the energy sector, and efforts to boost non-oil sector output will continue to be frustrated by inadequate infrastructure. Key changes from last month Political outlook • The Supreme Court has ruled that it has the jurisdiction to hear the constitutional case defining who has the right to Nigeria’s natural resources, the states or the federal government. Economic policy outlook • The current stand-by agreement with the IMF expired in early August. The Nigerian government is still hoping to have it extended until February 2002, which will help pave the way for its Paris Club debt rescheduling deal to be implemented. Economic forecast • The Central Bank of Nigeria’s annual report for 2000 and the IMF’s Article IV review of Nigeria’s economic performance have been published. As a result of new data in both these publications, the Economist Intelligence Unit now estimates that in 2000 real GDP growth was 3.8%, the budget deficit was 2.9% of GDP and the current-account surplus was 5.8% of GDP.

August 2001

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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 2001-02 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

17 Economic policy

22 The domestic economy 22 Economic trends 24 Oil and gas 27 Industry 28 Financial services 28 Infrastructure and other services

30 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 23 Real gross domestic product 23 Federal budget 25 Nigeria’s OPEC quota 30 Balance of payments, Central Bank and IMF estimates 32 External debt, Central Bank and IMF estimates, end-2000

List of figures

12 Gross domestic product 12 Real exchange rates 19 Official and parallel exchange rates 24 Exchange rate, 2001 28 Nigerian Stock Exchange, 2001

Nigeria 3

Summary

August 2001

Outlook for 2001-02 The task facing President Olusegun Obasanjo’s administration is to turn around a country paralysed by decades of mismanagement, corruption and ethnic divisions. The task is especially daunting in the second half of its term of office, which is likely to be increasingly dominated by highly charged and divisive election campaigning for the elections taking place in 2002-03. It remains unclear whether Nigeria can survive civilian-managed elections without descending into chaos and an eventual military coup—the fate that befell previous civilian republics. The government will continue to proclaim its commitment to economic reform, but progress will be erratic as the elections approach, even if there are some high-profile successes such as the sale of the state telecommunications company, Nitel. Meanwhile, the economy will remain dependent on the energy sector, and efforts to boost non-oil sector output will continue to be hampered by inadequate infrastructure. Although the Economist Intelligence Unit expects real GDP growth to fall back to 3% in 2001 as a result of lower oil production (from 3.8% in 2000), it is forecast rebound to 4.3% in 2002.

The political scene President Obasanjo sacked four ministers and four senior aides in a move to revamp his administration and counter criticism of its disappointing performance. An outbreak of ethnic fighting in the central state of Nasarawa left at least 200 people dead. The federal and state governments are locked in a legal battle over the sharing of national resources.

Economic policy The administration continues to proclaim its commitment to economic liberalisation, but has made little progress. It is seeking an extension of the stand-by agreement with the IMF, but the Fund has expressed concern over increasing government spending. The administration has pushed ahead with preparations for the sale of Nitel despite union opposition to privatisation.

The domestic economy Data from the Central Bank and the IMF show that GDP grew by 3.8% in 2000 and that the budget deficit was 2.9% of GDP. The naira has appreciated after the Central Bank introduced measures to tighten liquidity and help reverse the rise in inflation rates. Nigeria’s OPEC quota has been reduced. Even though oil producers have faced a series of constraints to production, output has remained above Nigeria’s OPEC quota so far in 2001.

Foreign trade and New data show that the current-account was in surplus in 2000, although the payments size of the surplus is contentious. The main ports in Lagos have become congested after the government ordered a strict inspection of imports to end smuggling. The government estimates Nigeria’s external debt at US$28bn at end-March 2001, more than US$3bn below the IMF’s latest estimate.

Editors: David Cowan (editor); Pratibha Thaker (consulting editor) Editorial closing date: August 6th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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 (legislative and presidential) due in February 2003; municipal elections due in 2002

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 August 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 101.4 103.9 106.4 109.0 111.6 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) 4,076 7,582 7,101 5,451 9,910d Total external debt (US$ bn) 31.4 28.5 30.3 29.4 29.1 Debt-service ratio, paid (%) 14.2 7.9 10.6 6.4 6.0 Exchange rate (av) N:US$f 81.00 83.50 85.25 92.34 101.70a

August 6th 2001 N111.2: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 origins of exports 2000g % of total Main origins of imports 2000g % of total US 46.1 UK 10.9 Spain 10.7 US 9.2 India 6.1 France 8.7 France 5.2 Germany 7.4 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.

Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Output Industrial production index (1995=100) 102.6 98.2 99.5 105.8 105.8 108.7 111.4 n/a % change, year on year –4.6 –2.4 –2.5 4.9 3.1 10.7 12.0 n/a Prices Consumer pricesa (1995=100) 168.8 163.7 160.4 162.2 173.3 182.8 185.5 n/a % change, year on year 10.4 2.4 0.5 –1.9 2.7 11.7 15.6 n/a Petroleum spot price Bonny Light 37° (US$/barrel) 15.8 20.8 24.3 27.2 30.1 29.6 29.6 25.8 Financial indicators Exchange rateb N:US$ (av) 92.990 94.406 96.022 99.575 100.451 103.025 103.738 110.122 N:US$ (end-period) 94.406 94.406 97.950 100.120 101.700 101.750 109.550 110.200 Discount rate (end-period) 20.0 20.0 18.0 18.0 17.0 16.0 14.0 n/a M1 (end-period; N bn) 376.60 360.61 400.83 487.95 519.68 556.39 649.68 n/a % change, year on year 32.2 16.7 22.5 28.9 38.0 54.3 62.1 n/a M2 (end-period; N bn) 634.94 655.62 699.73 795.53 904.15 962.74 1,016.48 n/a % change, year on year 33.0 24.4 33.1 30.6 42.4 46.8 45.3 n/a Stockmarket index (NSE all share; end-period; Jan 3rd 1984=100) 5,978 4,891 5,240 5,998 6,467 7,299 8,111 9,160 % change, year on year 1.5 –14.2 –7.6 9.9 8.2 49.2 54.8 52.7 Sectoral trends Crude oil productionc (m barrels/day) 2.01 1.88 1.95 1.95 2.01 2.04 2.15 2.15 % change, year on year –8.2 –6.9 –0.5 –3.0 0.0 8.5 10.3 10.3 Foreign traded (US$ m) Exports fob 2,884 3,124 3,332 4,142 4,795 5,580 5,893 n/a Imports cif –1,811 –1,984 –1,841 –1,981 –2,065 –2,171 –2,352 n/a Trade balance 1,073 1,140 1,491 2,161 2,730 3,409 3,541 n/a Foreign reservese (US$ m) Reserves excl gold (end-period) 4,350 4,650 5,500 5,893 6,336 8,118 9,910 n/a 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; International Energy Agency, Monthly Oil Market Report; Energy Intelligence Group, Oil Market Intelligence.

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

Outlook for 2001-02

Political outlook

Domestic politics Political stability in Nigeria over the next 12-18 months will depend largely on the government’s ability to press ahead with economic and political reforms. Although elections for municipal governments, the National Assembly and the presidency are not due until late 2002 and early 2003, there are already signs that political campaigning has started, and this is set to pick up in earnest in early 2002. This leaves President Olusegun Obasanjo’s administration only a narrow window of opportunity to push through difficult reforms, if there is to be any chance of these reforms bearing fruit before the political process is overtaken by electioneering, campaigning and excessive partisanship.

The main indicators of the government’s commitment to reform will be budgetary management, privatisation and domestic fuel price liberalisation, as well as the issue of law and order. The implications of the first go well beyond simply improving economic performance and living standards. Lax fiscal management will raise concern that corruption will increase significantly in the run-up to the elections. Meanwhile further delays in the privatisation programme and lack of progress with fuel price deregulation during the next 12 months will increase doubts about the reform process in Nigeria and delay further significant changes until mid-2003, assuming the elections are held successfully. As for law and order, the run-up to the elections 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. This is likely to give rise to violent clashes between religious, ethnic and—possibly—political groups.

The government’s chances of success on these issues are mixed. High oil prices have already caused government expenditure to surge, and often on projects that seem to have little economic rationale given the high level of poverty within the country. Meanwhile, although some sales of state enterprises, such as that of the state telecommunications company, Nitel, may go ahead, there is unlikely to be major progress on privatisation. Instead, this and other key reforms, such as domestic petroleum price liberalisation, will be hampered by the disagreement over the need for reform both within the government and between it and the ruling elite, and by the inability of the executive and legislature to work together to produce effective government. In addition, the president has little room to manoeuvre on potentially explosive issues such as the introduction of sharia (Islamic law) in northern, Muslim-majority states, because he is constrained by the fact that he is a practising Christian from the south. He is also constrained by 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.

The elections are therefore approaching against a background of mounting criticism of a self-serving political elite, the slow pace of reform and the failure to improve the country’s basic infrastructure and continuing popular

frustration with the lack of improvement in living standards. In such a climate there is a chance that a crisis might erupt, 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 always create opportunities for ambitious elements of the armed forces to consider intervening in the political process.

Election watch The president has consistently argued that it will take many years to establish genuine democracy in Nigeria. However, even if one accepts this argument, 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 elections in 2002-03. 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; and signs of this have begun to emerge. It is also likely that politicians will resort to fraud and vote-rigging to ensure re- election. This may increase tension and discredit the electoral system, but 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. However, because of Nigeria’s history of military intervention, popular support for a coup is unlikely, despite the weakness of the civilian government, and senior officers will probably be reluctant to return to the political fray. That said, junior officers are more unpredictable, and may act opportunistically.

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. The government is keen to play a more active role in African economic and political affairs outside West Africa, as highlighted by the efforts of President Obasanjo (along with the presidents of South Africa and Algeria) to promote the so-called Millennium Africa Plan, an ambitious attempt to promote economic recovery in Africa. He has also become involved in the Commonwealth’s efforts to resolve the land issue in Zimbabwe. Success in these ventures may help offset his unpopularity at home, since many Nigerians like to perceive their country as a regional superpower.

Economic policy outlook

Policy trends To date the administration has made only hesitant moves towards economic reform. Although given a high profile, the privatisation process 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, while the budget process has been drawn out for months by political wrangling.

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

Although the IMF agreed a 12-month US$1bn stand-by credit in August 2000, the government failed to meet the negotiated performance targets. This delayed a Paris Club debt-rescheduling deal which, although agreed in December 2000, was supposed to come into effect in mid-April 2001 if various reform and macroeconomic targets were met and outstanding debt stocks reconciled. While in normal circumstances the poor level of compliance might 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 be continuing to hold sway, and the IMF, is keen to extend the stand-by credit to February 2002, although it will attempt to be stricter about compliance. But, should there be an abrupt fall in oil prices, the government’s failure to press ahead with reforms is likely to be exposed, and the resulting economic pressure may generate a major political crisis. At that point, donors would have to decide whether to continue to support limited reforms or to demand a fundamental programme of change and debt restructuring.

Fiscal policy The 2001 budget was set in the context of the 2001-03 macroeconomic framework. It aims to boost the non-energy sectors of the economy and to address the twin issues of income inequality and poverty, in particular by increasing expenditure on infrastructure (which is also set to be a theme of the 2002 budget). However, as many commentators predicted, such a large increase in capital expenditure has now become a major problem owing to its inflationary impact, its impact on the exchange rate by boosting liquidity in the foreign-exchange market and the opportunities for corruption that such a large spending spree has created. The government, under pressure from the IMF, is trying to rein expenditure in, although this is not likely to be successful and the Economist Intelligence Unit forecasts a deficit of 4.3% of GDP in 2001 (compared with 2.9% in 2000). Although the approach of the elections in 2002 rules out a cut-back in expenditure, intense donor pressure will ensure that the most profligate expenditure is avoided, and we forecast a deficit of 3.9% of GDP in 2002. The 2000 deficit was financed entirely by issuing domestic Treasury bills, but in 2001-02 the Ministry of Finance may support this by running down foreign-exchange reserves.

Monetary policy The gradual loosening of monetary policy throughout 2000, coupled with rapid money supply growth and a large increase in public-sector wages, against the background of rising food prices, led to a swift rise in inflation in the final quarter of 2000 and into 2001. Because of this, and the volatility of the naira, the Central Bank of Nigeria (CBN) has had to sharply raise the minimum rediscount rate—at the end of June 2001 it stood at 18.5% compared with 14% at the end of 2000. With growing donor pressure to meet a stricter inflation target, unless there is an unexpected fall-off in the inflation rate we expect the CBN to raise interest rates further in 2001, despite the domestic criticism this will cause. Interest rates are expected to stabilise towards the end of 2001, and there may be scope for loosening monetary policy in 2002 as inflation stabilises, although inflation will remain in double digits unless the government acts to control its fiscal expenditure.

Economic forecast

International assumptions The latest data show that the US economy began to slow sharply towards the end of 2000 and into 2001. As a result, we now estimate that the rate of world GDP growth will slow from 4.9% in 2000 to 2.7% in 2001, the largest single annual fall since 1974. However, we still expect the US economy to rebound quite quickly. If there is no global recession, world GDP growth should pick up to 3.7% in 2002, although the possibility of a more prolonged recession in the US cannot be ruled out and is a major downside risk to the forecast. Oil prices averaged US$28.5/barrel in 2000 and, despite the slowdown in the world economy, they have not fallen significantly in the first half of 2001. However, we still expect OPEC’s attempts to manage oil supply, coupled with the forecast slowdown in the world economy, to lead to an easing of oil prices in 2001 and into 2002. This will only be gradual, however, and Brent crude is forecast to average around US$26.8/b in 2001 and US$25.5/b in 2002.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.7 3.7 OECD 3.1 4.0 1.4 2.4 EU 2.5 3.4 2.0 2.5 Exchange rates (av) ¥:US$ 113.9 107.8 122.7 123.5 US$:¤ 1.07 0.92 0.88 0.96 US$:SDR 1.37 1.32 1.26 1.30 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.04 4.75 Commodity prices Oil (Brent; US$/b) 17.9 28.5 26.8 25.5 Gold (US$/troy oz) 278.8 279.3 263.0 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 1.2 15.0 Industrial raw materials (% change in US$ terms) –4.6 13.4 –3.5 3.8 Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates. Economic growth Data from the National Planning Comission (NPC) have now been accepted by the government as the best estimate of real GDP growth in 2000. NPC data show that the economy expanded by 3.8% in 2000, a sharp increase on 1999, driven by the agricultural sector and construction activities. However, with oil production constrained by the country’s OPEC quota in 2001 and despite strong growth in the non-oil sector led by increased government capital expenditure, real GDP will increase by only 3% in 2001. With offshore oil production and various new gas projects coming into play in 2002, coupled with ongoing strong growth in the agriculture sector and high levels of government expenditure, real GDP is forecast to grow by 4.3% in 2002.

However, real GDP growth rates of 3-5% a year will not lead to a marked rise in GDP per head in Nigeria while the population is growing at 2-3% per year. In

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

addition, because growth is driven mainly by developments in the energy and government sectors it will not reach rates high enough to create jobs or reduce poverty significantly—two pressing issues the government needs to address, especially in the run-up to elections. To do so would require real GDP growth of 8-10% per year, driven by a similar rate of growth in agriculture.

Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 1.0 3.8d 3.0 4.3 Industrial production growth –3.6 7.7a –0.3 4.1 Consumer price inflation Average 6.7 6.9a 14.7 13.0 Year-end 6.8 15.9 a 10.9 10.8 Short-term interbank rate 20.3 21.3 a 21.7 21.5 Government balance (% of GDP) –8.9 –2.9d –4.3 –3.9 Exports of goods fob (US$ bn) 11.9 20.4 18.6 19.7 Imports of goods fob (US$ bn) 10.5 12.4 13.3 14.9 Current-account balance (US$ bn) –3.3 2.0 –0.4 –0.8 % of GDP –9.4 5.8 –1.0 –2.1 External debt (year-end; US$ bn) 29.4 29.1 28.4 29.9 Exchange rates N:US$ (av) 92.34 101.70 a 115.61 133.50 N:¥100 (av) 81.06 94.37 95.19 108.10 N:¤ (year-end) 98.40 102.86 113.13 140.39 N:SDR (year-end) 134.4 142.7 158.7 184.8

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

Inflation Helped by stable food prices, inflation averaged 6.9% in 2000. Although inflation followed a downward trend in the first five months of 2000, there was a sharp rise in the year-on-year rate towards the end of 2000 and into 2001. This was caused by a loosening of monetary policy and an increase in government spending, which significantly boosted domestic demand and money supply growth at a time when the exchange rate was falling and imports were becoming more expensive. Food prices have also started to rise rapidly. As a result, the 12-month moving average, the rate favoured by the CBN, had increased to 15.7% by May 2001. However, we expect inflation to peak in the next few months, as food price increases moderate, the government seeks to rein in its capital expenditure and the Central Bank tightens monetary policy. But it will remain in double digits, and we forecast a 12-month moving average rate of 14.7% in 2001 and 13% in 2002.

Exchange rates The government and the monetary authorities have stated that they are aiming for a stable exchange rate and, unlike past regimes, the present government seems prepared to allow the naira to depreciate (although only gradually). However, there are strong vested interests in Nigeria opposed to a fall in the value of the naira, which have come to the fore during the current volatility in the naira—the currency has experienced sharp downward falls in the past nine months owing to the lumpy nature of foreign-exchange flows on the interbank foreign-exchange market (IFEM), arbitrage between the official

and parallel rates, and changes to trading rules and regulations by the CBN. Because the Central Bank has intervened to reverse these falls, a significant gap has opened up between the IFEM rate and the parallel market rate since the final quarter of 2000. Although the CBN is concerned about this, the gap will persist until the official naira rate is allowed to fall further, especially as inflows of foreign exchange will fall because of lower oil prices. We currently forecast that the naira will fall to an average of N115.6:US$1 in 2001 and N133.5:US$1 in 2002.

New data from the IMF and the CBN have led us to substantially revise our External sector estimates of Nigeria’s current account. Although the two sources differ in their data, it is clear that, owing to high oil prices and the constraint on import growth caused by the delay in passing the budget, Nigeria ran a current- account surplus in 2000, which we estimate at 5.8% of GDP. However, because of the forecast fall in oil prices in 2001 and 2002, we expect the value of oil exports to fall back in both years. Moreover, this will be accompanied by the rapid growth of imports, driven by the combination of the upturn in the economy, the increase in government capital expenditure and investment in offshore oil production. The result will be a sharp fall in the current-account surplus.

While changes in the current account are driven largely by developments in the trade account, with relatively high oil prices and rising production, the large deficit on the income account will tend to increase as oil company earnings increase. Moreover, though the flow of official multilateral and bilateral credit and aid into Nigeria has increased modestly since the return of civilian rule, we expect levels of assistance to remain relatively low until donors are confident that reforms will be implemented. As a result, we forecast that the current account will show modest deficits of 1% of GDP in 2001 and 2.1% of GDP in 2002.

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

The political scene

The president sacks two On June 12th President Obasanjo sacked two ministers, two ministers of state ministers and four aides and four advisers, in what was widely seen as an effort to revamp his administration in the face of mounting public criticism of its performance which has been well below public expectations. The ministers who left office were Mohammed Arzika (minister of communications), Mohammadu Bello Kaliel (minister of water resources), Solomon Ewuga (minister of state, Federal Capital Territory) and Danjuma Goje (minister of state, power and steel). The other resignations were from Chief Philip Asiodu (chief economic adviser), Patrick Dele Cole (special adviser, international relations), Ibrahim Lame (special assistant, drugs and financial crime) and Bukola Saraki (special assistant, budget). Mr Obasanjo later told reporters he had made the changes because of poor performance, and certainly what all four ministers have in common is that they held an infrastructure portfolio where the government has made little progress with reform. This has given rise to the rumour that they had been deliberately delaying Nigeria’s already slow privatisation programme. Also, and unsurprisingly in Nigeria, there have been allegations of corruption. Pressure on the president to make changes had also been growing, as the delays in privatisation are occurring at a time when donors are increasingly concerned about the slow pace of reform and the government is trying to renegotiate the 12-month stand-by agreement that it concluded with the IMF in August 2000. Those dismissed can thus also be seen as the government’s scapegoats for its lack of progress with reform, and the president probably hopes that with new ministers in place he can convince the IMF and other donors that the reform process will speed up and that they should retain their faith in both his administration and its commitment to change. Certainly, progress with the privatisation of Nitel is likely to be a key performance criterion.

The reshuffle is unlikely to However, Mr Obasanjo’s choice of replacements for the sacked ministers seems promote reform to have been inspired as much by political expediency as by the need to put together a competent team able to push through reform. This is most obviously the case with the appointment of Muktari Shagari, the son of a civilian president of the second republic, Shehu Shagari, who has been critical of Mr Obasanjo. The Economist Intelligence Unit expects that economic reform will remain beset by controversy and that there will be little sustained progress.

There are fresh outbursts Nigeria continues to be dogged by outbreaks of ethnic violence that have of ethnic fighting wrecked lives and property and highlighted the fragility of its polyethnic make- up. Although the violence is often sparked off by some local incident or issue, the growth in ethnic intolerance also has more general causes such as the unleashing of pent-up frustration after years of army repression; poverty; disenchantment with the new civilian government; and the rivalry between different groups for access to dwindling national resources. • Fighting between ethnic Tivs and Hausa-speaking Azeri people in the central state of Nasarawa also spread to neighbouring Taraba state and left at

least 200 people dead and an additional 50,000 displaced. The fighting erupted after Tivs were blamed for the killing of a Hausa Azeri traditional leader on June 12th and most of the dead were Tiv members of an ethnic group seen by other groups in the ethnically complex region as “settlers” who originate from outside Nigeria.

• A new outbreak of fighting between ethnic Urhobo and Itsekiri communities in Warri in south-eastern Nigeria’s Delta state led to several deaths. The fighting erupted on May 25th over a proposal to create a new local council in a Urhobo-majority area of Warri said to be dominated by Itsekiris. Local government creation is a sensitive issue as it often involves the distribution of political control and access to scarce federal funds among competing ethnic groups. In recent years more than 2,000 have died in various clashes involving the Ijaw, Urhobo and Itsekiri ethnic groups, linked to the struggle for power and resources.

• In an unrelated conflict, also in Delta state, nine people died in clashes between members of the Odimodi and Ogulagha communities in early July. The communities have been feuding over the ownership of an oilfield operated by a multinational oil firm.

Religious tension remains As well as ethnic friction, Nigeria has continued to be disturbed by religious high intolerance. On May 22nd several people were injured in fighting between Christians and Muslims in the northern state of Gombe. The trouble began after Muslims confronted three Christians carrying a placard denouncing the introduction of sharia (Islamic law) in predominantly Muslim northern states of the federation. On June 21st Muslim youths, angered by the publication of a book written by a Christian deemed to be blasphemous of Islam, set four Christian churches on fire in Dutse, capital of northern Jigawa state.

Religious unrest has increased in Nigeria since sharia was first adopted by the northern state of Zamfara in late 1999 and, with some dozen northern states now operating the strict Islamic code, which include physical punishments such as the amputation of limbs and public flogging and is associated with illiberal cultural practices such as sexual segregation and the prohibition of alcohol, tension is unlikely to die down. In fact, in May Ahmed Sani, governor of Zamfara state, said his government would legislate against the wearing of skirts by women; while two state lawmakers were suspended for three months from the state legislature after being accused of violating the Islamic legal system by opposing a bill for the mandatory closure of all businesses, schools, offices and hospitals in the state during prayer times. Such developments are likely to deepen the cultural schism between the north and the Westernised south, and the sharia controversy will remain a major challenge for President Obasanjo—whereas the introduction of Islamic law is clearly popular among ordinary Muslims disillusioned with Western culture, Christians fervently oppose what they believe as an attempt to islamise Nigeria.

The southern states suffer a The ethnic, religious and regional divisions currently coming to the surface in setback over resources Nigeria also reflect a growing scramble for control of the country’s economic resources. This has been driven by the mainly Christian southern states, which

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are generally more economically developed than the northern states and want greater devolution of power to enable them to assume control of their natural resources (they argue that “their” oil wealth has been squandered by northern leaders who ruled Nigeria for most of the years since independence). As part of this struggle over resources, earlier this year the federal government filed a suit against all 36 states, asking the Supreme Court to interpret a clause in the constitution defining who has the right to Nigeria’s natural resources. The unprecedented action was mainly directed against the oil-producing states that are clamouring for control of oil resources, including a share of revenue from offshore oil production (at present the government allocates 13% of oil revenue to oil-producing states according to the derivation principle). On July 11th the Supreme Court ruled that it has the jurisdiction to hear the case, rejecting the objection of 12 southern states to the court hearing the case at all. The Obasanjo administration is hoping that the case, adjourned until October 29th, will clearly determine the federation’s rights over national revenue, although some political leaders and militant organisations in the Niger Delta have vowed to continue fighting for control of oil resources, even threatening to go to war over the issue.

Ethnic politics will shape In addition to the growing ethnic, religious and regional tensions, the political the run-up to the elections environment is also being increasingly shaped by the preparations for state, national and presidential elections in 2002 and early 2003. Given the sectarian undertone of recent politics, it is unsurprising that manoeuvring ahead of full- blown campaigning has been marked by ethnic and regional divisions, arguably to a greater extent than before previous elections in Nigeria. Politicians and organisations in the main ethno-political regions are blatantly positioning themselves for an ethnic bid for power and influence, with the main focus being the presidential election in 2003.

• In mid-May the South-East Caucus of Elected and Appointed Political Office Holders threw its weight behind the clamour for an Igbo president of Nigeria in 2003. Its leaders, including state governors and senior legislators, contended that having only once briefly held the presidency, they have remained sidelined in Nigeria’s power structure since the 1966-70 civil war the next president should be an Igbo (the Igbo are Nigeria’s third largest ethnic group after the Hausa/Fulani and Yoruba).

• The Arewa Consultative Forum, which includes many conservative northern politicians and former military officers, wants the north to contest the presidency, arguing that the zoning formula which ceded power to the south applied for only one term and the continued northern exclusion from the presidential race would place limits on Nigerian democracy. “There must be a level playing field for all”, the ACF’s secretary-general Lieutenant-Colonel Hammed Ali told the Sunday Vanguard newspaper in early July, while dismissing the advice of the finance minister, Adamu Ciroma, a northerner, that the north should allow the presidency to remain in the south until 2007.

• Further indication that the consensus among northern politicians over the zoning formula, which specifies that successive presidents should come from different regions, has broken down came in mid July, when Abubakar Rimi, a

member of the ruling party, the People’s Democratic Party (PDP) and a prominent northern politician, declared his candidacy for the 2003 presidential election. Mr Rimi, a former governor of Kano state and a minister under General Sani Abacha’s military administration, told a rally in Kano city that the zoning formula was unconstitutional and undemocratic.

Mr Babangida denies Though Mr Rimi is popular in parts of the north, President Obasanjo’s presidential ambitions supporters are probably more worried by media speculation that the former military ruler, Ibrahim Babangida, plans to contest the 2003 presidential election, especially after his associates formed the National Solidarity Association as an aspiring party to challenge Mr Obasanjo’s presidency (May 2001, page 14). Although he has denied all reports that he intends to stand— and newspapers reported in early May that during a visit to the presidential villa in Abuja the general reassured President Obasanjo he did not intent to challenge him in 2003—he will remain an important political player. This is because given his wealth and connections within Nigerian political circles, he will be influential in determining who the leading presidential candidates will be. His influence was highlighted at the last election as his backing was a key factor in returning Mr Obasanjo to power.

Meanwhile, despite media speculation about Mr Obasanjo’s political future, the president has not announced his intention to run in the election (although comments by his aides suggest that he will seek re-election). Mr Obasanjo’s fate may depend on whether he can retain the backing of key northern politicians who were crucial to his success in 1999. Probably the most concerted expression of support for the re-election of President Obasanjo has come from his Yoruba kinsmen in the south-west, although the region is dominated by the Alliance for Democracy (AD), a rival party to Mr Obasanjo’s PDP. In early July the Yoruba Council of Elders formed a nine-member committee to support Mr Obasanjo's re-election. Several Yoruba leaders in the AD, which dominates the south-west but is weak elsewhere, have publicly backed Mr Obasanjo’s re-election.

Politicians prepare for Allegations of plans to rig the coming elections have already surfaced. In June, fierce elections AD state governors in the south-west, warned that any attempt by the PDP to rig the elections could break up Nigeria—election rigging by the federal ruling party trying to capture Yoruba nationalist-dominated south-western states was responsible for national political crises in both the first and second republics. Lamidi Adesina, governor of Oyo state, warned that in the event of a repeat of such a crisis in 2003, politically motivated violence could easily spiral out of control and it was not certain that the army had the desire to intervene to restore order. Though Mr Adesina probably overestimates the reluctance of Nigeria’s dejected military to return to power if given the chance by short- sighted politicians, there is little doubt that the prospect of political chaos spilling over into violence during the elections is growing. Capturing the mood of the nation in his Guardian newspaper column in May, the political commentator, Reuben Abati, noted: “the passion, and animosity, with which the politicians are preparing for re-election is scary” while “the desperation with which they are amassing wealth can only mean that, individually, they

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have resolved to do maximum damage in 2003 should anyone attempt to take them out of office.”

Nigeria is seen as a key President Obasanjo and the US president, George Bush, appeared to have African peacekeeper established good personal relations during their meeting in Washington on May 11th. Although there were fears that the Bush administration would consider Africa a low foreign policy concern, under the guidance of the new secretary of state, Colin Powell, it is building on many themes developed under the Clinton administration, including developing trade links with market- reforming nations though the Africa Growth and Opportunities Act (AGOA) and in addressing the AIDS crisis facing the continent. In the specific case of Nigeria, the US is also keen to help make Nigeria a continent-wide force for stability. While US-Nigeria military co-operation will still remain controversial (May 2001, page 18) the US ambassador to Nigeria, Howard Jeter, has stated that the US will start training three battalions of the Nigerian army in September under a peacekeeping training programme in which two battalions were trained in 2000.

Meanwhile, President Obasanjo has been keen to maintain Nigeria’s high- profile policy of promoting peace in Africa, in which peacekeeping operations play a central role. Recent initiatives include:

• the promotion of a plan for a ministerial mission from seven Commonwealth states to help ease the conflict between Zimbabwe and Britain over the land issue;

• an agreement to contribute troops to the United Nations Mission in the Democratic Republic of Congo, if peace is reached there;

• an undertaking to send peacekeeping troops to Burundi after a ceasefire in its five-year-old ethnic war.

President Obasanjo has, however, continued to face a constant barrage of criticism over his frequent visits abroad: his critics repeat the argument that his time could be better used staying at home and focusing on the problems crippling his country.

Economic policy

Reform efforts are viewed Despite erratic progress with economic reform and with little hope of the positively by the World Bank government meeting the targets it set itself in its main policy document, Nigerian Economic Policy 1999-2003 (November 2000, page 19), it can be argued that at least the Obasanjo administration has shown more seriousness and sincerity in pursuing reform than its military predecessors. The World Bank certainly seems to have partly accepted this argument, when it praised the achievements of the Obasanjo administration. “The new government has made a very promising start,” the World Bank’s country director for Nigeria, Mark Tomlinson, told reporters at a briefing in Lagos in May, adding: “much more has happened for the good in the past two years than happened in the

previous 10 years or so.” Mr Tomlinson also argued that it was unrealistic to expect a quick turnaround in an economy that had been so run down by decades of mismanagement. However, he stressed that the present government needed to pursue macroeconomic stability more vigorously: “macroeconomic stability is a prerequisite, otherwise hard-won gains can be wiped off by excessive spending and inflation”—an obvious reference to the fact that both are now apparently spiralling out of control and will be difficult to rein in.

Nigeria seeks to extend its In late July the finance minister, Adamu Ciroma, stated that the government IMF stand-by agreement was seeking to extend its one-year $1bn stand-by agreement with the International Monetary Fund until the end of 2001—the agreement was for 12 months and expired in early August. The government hopes to follow the stand-by facility with a medium-term agreement with the Fund. However, the view of the IMF. as clearly outlined in its recent Article IV report on Nigeria, is that the government has failed to meet many of the performance criteria set out in the stand-by accord, which were generally considered to be relatively easy to achieve. In addition, the report highlights the IMF’s concern about the rapid growth in the money supply and inflation and the sharp rise in government spending in the 2000 and 2001 budgets—and, more worryingly, about President Obasanjo’s ability to restore fiscal discipline in the run-up to the 2002-03 elections. So far, the president has relied on the fact that political considerations weigh more heavily with the IMF than economic considerations in determining its approval of Nigeria’s programme of economic reform, and this seems set to continue. Following the Article IV consultations, the stand-by facility will be extended until October to allow Nigeria to meet a number of revised targets. If this is successfully completed, the facility will be renewed until February 2001. If progress is then considered satisfactory, the IMF and government may start negotiating a medium-term lending programme, such as a poverty reduction and growth facility. This timetable would allow the Paris Club debt rescheduling package to go ahead, which is essential if Nigeria is to move ahead with debt relief, as the president believes the country must. The problem is whether Nigeria can get close enough to meet the targets agreed with the Fund to ensure that the above timetable is not significantly delayed.

National Assembly approves As if to highlight the IMF’s concerns about unsustainable fiscal trends, in early a supplementary budget July the House of Representatives approved a supplementary budget for 2001 of N146.8bn (US$1.3bn), N13.1bn (US$117m) above the N133.68bn (US$1.2bn) requested by President Obasanjo in early June. This was also slightly more than the sum passed by the Senate a week earlier, thereby requiring the two chambers to reconcile the difference. The supplementary budget passed by the House comprised N26.7bn of recurrent expenditure and N120bn for capital projects, including provisions for the state electricity utility, NEPA, and the poverty eradication programme (PEP). The finance minister, Adamu Ciroma, defended the request for additional spending, saying that extra government revenue from crude oil exports, the sale of GSM licences, open acreage fees and exchange-rate depreciation totalled more than the requested extra spending. However, the minister’s justification of why spending can, or should, be increased, ignores the central issue: has the government the capacity effectively to monitor increased expenditure or will it

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just be lost to corruption and projects which are never completed (or even started) and drive an inflationary bubble which will be painful to deflate.

The Central Bank tries to Meanwhile, in an effort to help to control public spending, the Central Bank of curb lending to states Nigeria (CBN) has informed commercial banks that they must attach stiffer provisions to credit extended to all tiers of government and their agencies. A CBN circular dated July 10th notified banks that, from the end of July, lending to all tiers of government would require a 50% provision, while non-active loans would need a 100% provision. The new guidelines were clearly meant to deter banks from lending to state and local governments, some of which have built up considerable debts. The CBN circular noted that unrestricted lending to governments and their agencies had recently been on the increase in spite of the substantial revenue accruing to these bodies from statutory provisions. It cautioned against the repeat of the “ugly experiences of the past”, an obvious reference to the crisis in the financial system in the 1990s caused by mismanagement, under-capitalisation and mountains of bad debts, much of it incurred by profligate states.

The government tries to Although the government undoubtedly wants Nigeria to benefit from discourage imports economic reform and greater openness of the economy, it is also clear that many of the old themes of economic policy, notably protectionism and the need to support the naira, are starting to re-emerge in the run-up to the elections. In late June, the information minister, Jerry Gana, indicated that, as part of a new drive for economic recovery through the agricultural and industrial sectors, the government was considering introducing higher tariffs on imported goods that can be produced locally as well as measures to boost agricultural and industrial output. Meanwhile, in mid-July the Senate considered a bill to restrict non-essential imports, including textiles and juice drinks. The government has also introduced a 100% destination inspection on goods being imported into Nigeria, which it justifies on the grounds that it is clamping down on smuggling and tax evasion, but can also be seen as part of its growing anti-import rhetoric. This has, not surprisingly, led to a huge backlog of containerised imports at the country’s two main ports in Lagos, Tin Can Island and Apapa (see Foreign trade and payments).

CBN seeks to narrow gap The growing anti-import sentiment also stems from the belief within the Obasanjo administration that the high demand for hard currency, which is driving the fall in the naira, is partly due to excessive imports of unessential goods. In addition, like previous Nigerian governments, the administration blames the naira’s weakness on the speculative activities of banks, especially round-tripping—whereby banks purchase foreign exchange from the Central Bank at relatively low rates and sell it at higher rates in the parallel market. In an attempt to end the profiteering and unify Nigeria’s various foreign- exchange markets, in early June the CBN ordered banks to keep the differential between their deal rates to no more than 0.5% of the CBN offer rate on the previous day, irrespective of the source of the foreign exchange involved. Bankers were unhappy with this, saying it amounted to the re-regulation of the financial sector. The monetary authorities have also intensified surveillance of the foreign-exchange market to check malpractices, imposing stringent

penalties on offenders: in June ten companies were barred from the interbank foreign-exchange market (IFEM) for flouting exchange rules. But, the Central Bank’s effort to narrow the gap between Nigeria’s different foreign-exchange markets has so far had little success: at end-July the parallel market rate was little changed at around N134:US$1, compared with N112:US$1 at IFEM. This is unlikely to change until the government is prepared to allow the naira to fall substantially to a new more realistic level in line with demand for foreign currency—a key demand of the IMF which was highly critical of exchange-rate policy in its Article IV report. Alternatively, the government must hope that the difficult task it has set itself of persuading Nigerians to change their consumption habits away from buying imports has some success.

Government moves to curb On a more positive note, the administration also appears to have at least partly foreign-exchange demand accepted the view long held by bankers, that government overspending and poor financial management have also undermined the value of the naira. In mid-May the administration barred all its officers from using the parallel foreign-exchange market, and ruled that all official transactions should be carried out through the Central Bank. The information minister, Jerry Gana, said the new policy followed the discovery that transactions by public officials in the parallel market had been undermining the naira.

Nigeria’s first major After more than a decade of hesitation and prevarication over the privatisation privatisation is imminent of inefficient major state enterprises, the government does seem committed to meet its September 2001 deadline to sell Nigerian Telecommunications (Nitel). If this goes ahead, then it will be the first offloading of a major Nigerian public corporation. Nasir El-Rufia, director-general of the Bureau of Public Enterprises (BPE), the state agency handling Nigeria’s privatisation programme, said in early July that the much-awaited sale of Nitel would begin in August and that by the July 2nd deadline 16 companies had indicated an interest in buying the 51% stake on offer to core investors. The deadline, originally set at June 11th, was extended because of the lack of interest initially shown (interested companies included France Telecom, Korea Telecom, Orascom of Egypt, Telecom Malaysia, MSI of the Netherlands). The government hopes to earn at least US$2bn from the sale of Nitel, which has fewer than 500,000 connected lines in a nation of some 120m. The Economist Intelligence Unit feels that this figure is overoptimistic given the state of the company and the current depressed global telecommunications market; nevertheless, BPE officials continue to maintain that Nitel’s real value lie in the access it provides to one of Africa’s biggest telecommunications markets. Although the sale of Nitel will provide an important boost to the country’s faltering privatisation programme, the programme is still behind schedule (Nitel should have been sold by the end of March 2001) and the government has not yet clarified how it will progress from here (May 2001, page 23).

Union opposition to An important factor slowing the pace of privatisation to date has been privatisation grows opposition, from both within and outside the administration, to the loss of sources of patronage. However, opposition is increasingly coming from the trade unions who believe the sales will lead to redundancies and increased prices—although many ordinary Nigerians would be happy to pay more for the

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delivery of services as they currently have to buy them on the private market or invest in their own equipment (such as electricity generators). The union of senior government workers recently condemned privatisation, proposing that the government should reform state enterprises by giving them autonomy. Meanwhile, the Senior Staff Association Statutory Corporations and Government Owned Companies (SSASCGOC) has warned that transforming public utilities into private monopolies will lead to further economic collapse and fuel an industrial crisis in the country. In early July the SSASCGOC’s secretary-general, Chubby Nwagbara, said that his union was mobilising its members for a strike against the sale of Nitel, and that its sale to foreigners would constitute a security risk. Following the announcement in June of the government’s decision to privatise the Nigeria Port Authority, the Nigeria Labour Congress (NLC), the umbrella union organisation that is generally opposed to the privatisation programme, vowed to stop the sale by occupying the ports and chasing away any core investor.

Nigeria’s corruption rating Given President Obasanjo’s limited efforts to clean up the system, it is perhaps remains high not surprising that Nigeria is still perceived as one of the most corrupt places to do business in the world. In the 2001 Corruption Perceptions Index published by the Berlin-based organisation Transparency International (TI) in June, Nigeria was ranked second to Bangladesh as the most corrupt nation in a survey of 91 countries. Though this was an improvement on 2000, when Nigeria was bottom of the index of 90 countries, which is based on a survey of investors and analysts, Nigeria’s score in 2001 was actually lower than in 2000, suggesting that corruption had worsened. In its commentary, the TI said that Nigeria’s low score was not a judgement on the government’s efforts to combat corruption, and arguing that it had inherited a situation that could not be overturned quickly.

Though President Obasanjo, a former chairman of TI, has retained his reputation for personal honesty, many of his aides and public functionaries at all tiers of government are believed to have enriched themselves. Before the cabinet changes in June, there were reports of a flurry of petitions to the presidency concerning the fraudulent activities of some ministers, including the placing of capital allocations with commercial banks. Meanwhile, in late June President Obasanjo, speaking in Abuja at the end of a national retreat for state governors and co-ordinators of the National Poverty Eradication Programme, angrily admonished state governors for corruption, accusing some of them of using public funds for lavish spending abroad, including using state funds to party in London, and claimed that such display of waste and affluence had contributed to the reluctance of Nigeria’s creditors to grant the country’s request for debt relief.

Federal officials say the administration is limited in its ability to combat official corruption because it lacks control over state and local governments, some of which have clearly abused their Treasuries. The problem is compounded by the low salaries paid in the public sector, and the view that, because everyone is cheating the system, then it would be excessively virtuous not to be doing it as well. In addition, it is clear that the punishment for corruption, if caught, is inadequate. Although the government’s anti-corruption commission began its

first hearing of a corruption case—involving four officials accused of offering a bribe of US$30,000 to influence the work of a commission of inquiry into the national airline—it is widely seen as lacking sufficient powers to tackle the corruption ingrained in the Nigerian system.

The authorities struggle to In addition to corruption, business leaders are also concerned that rising crime contain violent crime has deterred local and foreign investors from putting money into Nigeria. Ndi Okereke-Onyiuke, the director-general of the Nigerian Stock Exchange, said in mid July while presenting the first half-year report of the bourse that the increase in violent crime helped to weaken the enabling environment, and urged the government to address the problem. Federal and state governments have struggled to stem the rise in violent crime, especially armed robbery (including raids on banks), which have increased insecurity in urban centres throughout the country. An official report in June claimed that 300 people had been killed by armed bandits during the previous three months, 21 of which were policemen and the rest civilians. In early July Lagos police statistics showed that criminals killed 273 civilians and 84 policemen between August 2000 and May 2001 in Nigeria's commercial capital. What is clear is that Nigeria’s understaffed and ill-equipped police force cannot cope with the growing crime wave. Lagos with a population of some 12m has fewer than 12,000 police officers. Faced with such a problem, the governor of Lagos state, Bola Tinubu, said in June that he was considering recruiting the Oodua People’s Congress (OPC), a Yoruba nationalist militia, to fight crime in the city. Members of the OPC have acted effectively but illegally as vigilantes against criminals in Lagos and other urban centres in the south-west. The federal government, which banned the OPC in October 2000 after blaming it for bloody ethnic riots in Lagos, condemned Mr Tinubu’s proposal, saying it would create more problems than it solved.

The domestic economy

Economic trends

Real GDP grows by 3.8% According to data from the Federal Office of Statistics and the Nigeria Planning in 2000 Commission, published in the Central Bank of Nigeria’s Annual Report and Statement of Accounts 2000, real GDP by output is provisionally estimated to have grown by 3.8% in 2000, compared with 2.8% in 1999 (GDP grew by only 3.3% when measured by expenditure, compared with an earlier CBN provisional estimate of 2.8%). However, the data and the text in the report are contradictory. The text notes that the services sector had driven growth in 2000, while agriculture recorded growth of only 2.6% and industry only managed a 0.7% increase. On the other hand, the data in the back tables shows that the agricultural sector grew strongly, supported by construction and services, while industry only expanded by 1.8%.

Measurement of GDP by expenditure makes clear that a combination of private consumption, investment and exports has driven growth. However,

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government consumption contracted by 1.3%. Yet, the budget data clearly show that although government capital expenditure, which is investment, contracted, recurrent expenditure actually rose. It is also surprising that gross capital formation increased to the extent indicated by the data, when government capital expenditure was half that in 1999, even if there has been considerable investment in the energy sector. Finally, it is also not clear how imports of goods and services increased as rapidly as shown in the data, as this seems at odds with the balance-of-payments data elsewhere in the report (see Foreign trade and payments).

Real gross domestic product (N bn at 1984 prices unless otherwise indicated) 1999 2000 % change By sector Agriculture 47.59 50.08 5.2 Industry 19.77 20.13 1.8 Building & construction 2.46 2.55 3.7 Wholesale & retail trade 13.62 13.96 2.5 Services 32.69 33.87 3.6 GDP 116.13 120.59 3.8 By expenditure Private consumption 73.08 76.90 5.2 Government consumption 30.45 30.05 –1.3 Gross capital formation 6.30 9.65 53.2 Exports of goods & services 12.66 20.14 59.1 Imports of goods & services –5.75 –16.16 181.0 GDP 116.74 120.58 3.3 Source: Central Bank of Nigeria.

The budget deficit falls The Central Bank’s annual report also contained the government’s budget data in 2000 for 1999-2000. These shows that after the huge budget deficit incurred in 1999 in the transfer to civilian rule, the deficit was reduced substantially in 2000— from 8.4% of GDP to 2.9% of GDP. As had been expected, the delays in passing the budget caused a sharp fall in expenditure, notably capital expenditure.

Federal budget (N bn unless otherwise indicated) 1998 1999 2000 Federal government retained revenue 353.7 662.6 597.3 of which: share of federation account 124.6 218.9 502.3 first charge deductions 110.9 358.4 0.0 Total expenditure 487.1 947.7 701.1 Recurrent expenditure 178.1 449.6 461.6 Capital & net lending 309.0 498.0 239.5 Deficit 133.4 285.1 103.8 % of GDP –4.7 –8.4 –2.9 Financing Net foreign 16.6 21.0 0.0 Net domestic 116.8 264.1 103.8 Source: Central Bank of Nigeria.

The fall in revenue in 2000 is a little more puzzling given the high oil price and the fact that the government also earned some privatisation receipts in 2000, of N18.1bn (US$177m). However, it seems to reflect the sharp fall-off in “first charge deductions”, which it had previously held as revenue, although they were supposed to have been spent to fund the Nigerian National Petroleum Corporation’s joint-venture projects, priority national projects and external debt service. However, now that these are now funded on time, the federal government does not have the surplus revenue accruing to its accounts boosting total revenue. The deficit in 2000 was financed entirely from domestic sources, mainly by issuing Treasury bills. In 2001, with capital expenditure picking up sharply and oil prices falling back marginally, the deficit is forecast to increase to 4.4% of GDP, financed by a combination of domestic borrowing and a limited drawdown of foreign-exchange reserves.

The naira appreciates After the fall in the naira earlier on this year, the currency has strengthened following steps taken by the Central Bank to tighten liquidity in the system— these included a series of increases in the cash reserve requirements (CRR) and the minimum rediscount rate (MRR). The MRR was 14% at the end of 2000, but has been raised four times during 2001. The last of these increases was on June 29th, when the Central Bank raised the minimum rediscount rate from 16.5% to 18.5%, claiming that the increase would reduce pressure on domestic prices and the naira caused by the large budgetary spending by all tiers of government, following the injection of excess crude oil earnings in 2000 into the system, which had fuelled excess liquidity in the system. According to Reuters closing interbank foreign-exchange market (IFEM) rates, the naira recovered from a low of N127.2:US$1 on April 19th to N115.9:US$1 on May 8th and N111.8:US$1 on July 23rd, and has been relatively stable in May, June and July, compared with the preceding three months. The impact of this can also be seen on the money supply: the stock of broad money (M2), which rose by 43.5% in 2000, had increased by 27% by May 2001, against a target of 12.5% for the entire year. The Central Bank claimed that its measures to tighten liquidity were responsible for the fall in foreign-exchange demand to an average of around US$30m per day in mid-June from a high of US$170m per day in mid-May.

Oil and gas

Nigerian oil output hit by At its extraordinary meeting on July 25th, OPEC agreed to cuts its total output unrest and spills by 1m barrels/day to 23.3m b/d, effective from September 1st. The reduction, the third this year, is intended to halt the slide in world oil prices in the face of weakening demand caused by the slowing of the world economy and a build- up in oil stocks. Nigeria’s quota was reduced by 82,000 b/d to 1.911m b/d. In addition to the constraint imposed by the OPEC quota, Nigeria’s crude output in the second quarter of 2001 was constrained by various disruptions to production, including civil unrest and oil spills (see below), dropping from 2.15m b/d in the first quarter to 2.01m b/d. However, this was above the country’s 1.993m b/d quota set from April 1st.

Nigeria’s OPEC quota

Effective from m barrels/day 1999 Apr 1st 1.885 2000 Apr 1st 2.033 Jul 1st 2.091 Oct 1st 2.160 Oct 31st 2.198 2001 Feb 1st 2.075 Apr 1st 1.993 Sep 1st 1.911 Source: OPEC.

Oil production targets and Although the government and oil majors are pushing ahead with boosting OPEC quotas Nigeria’s offshore oil production capacity, how this very large increase in production will be reconciled with the country’s OPEC quota remains unresolved (May 2001, page 27). President Obasanjo was evidently unhappy with the latest cut in Nigeria’s OPEC quota, and two days after OPEC announced the cut the president told an oil and gas forum that Nigeria had the potential to produce much more than its OPEC allocation and that this would grow rapidly in the coming years—he stated that the government and its joint- venture oil partners planned to spend US$50bn in developing the oil sector over the next 10 years, which would boost oil reserves to 30bn barrels by 2003 and 40bn barrels by 2010. Before July’s OPEC meeting Nigeria was reportedly preparing to persuade the oil cartel to raise its quota, by arguing that its increased proven reserves and population should entitle it to a higher allocation. Operators involved in Nigeria’s deepwater development have also argued that the government will need to raise their production allocations to levels that will enable them recoup their investment within a reasonable time. Indeed, without a substantial increase in its OPEC quota, it is difficult to see how Nigeria can exploit its new deepwater discoveries without reducing its onshore output.

Shell makes another Nigeria’s potential for large increases in deep offshore oil production was oil find illustrated in May, when, Shell, Nigeria’s biggest oil producer, announced another major oil find, some 10 km south-west of its Bongo discovery (referred to as Bongo-SW). Shell gave no estimates for the new find’s size, but is fast- tracking its appraisal, which may support the views of local officials that indicated it could double Bonga’s current confirmed reserves of 1.15bn barrels. In addition, TotalFinaElf, is set to appraise its UKOT field which has already tested positively and is likely to be commercially viable.

The terms of PSCs are still While the government is moving ahead with deciding which areas will be under negotiation included in its next offshore licensing round, there is still disagreement between the government and firms that were awarded exploration licences in December 2000 (February 2001, page 25) over the terms of the production sharing contracts (PSCs) that will be signed. This threatens to delay the start of

work on the eight, mainly deep offshore blocks. In mid-June newspapers said that some of the 14 firms that won licences were demanding that the government, as joint-venture partners, should agree to treat all expenses, including interest on loans, as “cost oil”, to be recouped during the “capital recovery” stage. This however, is opposed by the Nigerian National Petroleum Corporation (NNPC).

Onshore production faces The desire to move to offshore production in Nigeria is partly driven by the numerous constraints many problems of operating onshore. These were again highlighted during the last quarter.

• On May 10th ExxonMobil temporarily shut its 600,000-b/d Qua Iboe oil export terminal in south-eastern Nigeria and declared force majeure after militant youths stormed the facility in a demonstration to demand jobs and other benefits from the company for their communities. Production resumed that evening after police removed the youths.

• Chevron reported on May 10th that a faulty valve on one of its gathering pipelines caused the spill of about 140 barrels of crude near its offshore Escravos base. The company said the leak was contained but it declared force majeure on crude export from the terminal after shutting the pipeline to repair the leak. Six days later Chevron said its had completed the repairs, resumed full production and lifted the force majeure.

• Shell blamed sabotage for a major oil spill in late April at one of some 60 oil wells it abandoned in Ogoniland after it hurriedly withdrew from the area in 1993 following violent local protests. A team of experts sent by Shell to contain the leak was briefly detained by protesting villagers. Shell engineers said there was evidence that pipes at the well had been tampered with, but the Movement for the Survival of Ogoni People (Mosop), the militant group that drove Shell out of Ogoniland, denied responsibility.

• In late June a two-week-long strike by Nigerian white collar oil workers demanding improved pay and conditions forced Shell to cut production to 400,000 b/d from its normal level of around 900,000 b/d.

• An oil pipeline fire broke out near Shell’s Bonny export terminal in mid- July, which caused the loss of 50,000-70,000 b/d of crude. The combination of the strike and the fire forced the company to declare force majeure for cargo between July 3rd and August 31st. A Shell spokesperson said the fire started after barges tried to illegally lift oil from the pipeline near the terminal. Illegal lifting of crude oil, sometimes involving highly placed people, is a major problem facing the petroleum industry in Nigeria.

The Senate is to investigate The Senate said in early July that it planned to investigate mounting discrimination by oil firms complaints by local communities and oil workers’ unions that the foreign operators which dominate Nigeria’s upstream oil sector discriminate against Nigerians in their employment practice. Victor Oyofo, chairman of the Senate committee on the Niger Delta told reporters that heads of the oil companies would be asked to explain their employment and remuneration policies. Senator Oyofo said that the Senate was also concerned by the oil

multinationals’ apparent preference for foreign companies when awarding oil service contracts. Local unions and companies have long complained that the government has not done enough to boost indigenous participation in the oil sector, which is dominated by six joint-venture oil companies.

Nigeria LNG signs up In a demonstration of commitment to an ambitious programme to expand its buyers for future output liquefied natural gas (LNG) production, Nigeria LNG (NLNG) has signed two memorandums of understanding (MoUs) with buyers for the sale of future output from its plant on Bonny Island. NLNG announced on July 11th that it had agreed to deliver 1bn cu metres/year of LNG to the US-based power company Enron when the fourth and fifth trains start production in 2005. In a later statement NLNG said a second MoU had been signed with SNAM, the gas division of the Italian oil company ENI, to supply another 1bn cu metres/year of LNG from the fourth and fifth trains. NLNG currently operates a US$3.8bn two-train plant with capacity of 7.15bn cu metres/year of LNG, which came on stream in late 1999. Construction of a third train, to raise capacity to 10.85bn cu metres/year is scheduled for completion in late 2002. Trains 4 and 5 will each have a capacity of 2m tonnes/year of LNG and up to 0.5m tonnes/year of liquefied petroleum gas (LPG), according to the NLNG statement. The final investment decision for the additional trains is planned for early next year. In its report for 2000 Shell, the technical adviser to NLNG, said the plant had produced in excess of its rated capacity during 2000. NLNG officials explained in July that uncommitted LNG resulting from above-capacity production, which continued into 2001, had been sold on the spot market in the US.

Progress has also been made on another project to utilise Nigeria’s abundant natural gas reserves to help meet the government’s target of eliminating gas flaring by 2008 (May 2001,page 27). The NNPC’s group managing director, Jackson Gaius-Obaseki, told the News Agency of Nigeria that engineering work had began on the gas-to-liquid joint-venture project involving the NNPC, Chevron and Sasol of South Africa. The project, due to come on stream in 2005, is expected to cost US$2bn.

Industry

Government plans to revive President Obasanjo’s administration has continued to push ahead with various ailing state industries plans to resuscitate ailing or abandoned state-owned industries, although whether it will be more successful than past governments in reviving the country’s industrial sector is far from certain. Differences over price between the government and a Russian company, Tyazhpromexport, have held up negotiations on a contract for the completion of the unfinished Ajaokuta steel complex. The government offered Tyazhpromexport US$400m to finish work, while the Russian firm, which has handled the construction of the complex to date, demanded US$560m. Nigerian officials said they expected a compromise to be reached soon, although it may be delayed as the IMF is not keen on the input of further public funds until the privatisation option has been fully explored (the IMF would prefer the plant to be sold “as is”). Nigeria has already spent an estimated US$4bn on the plant, meant to be the centrepiece of the

country’s industrialisation programme, but it has remained almost complete, but still unfinished, since the early 1990s.

The government’s plans to privatise the other companies in Nigeria’s steel sector, which have proved a colossal waste with very little steel output to show for around US$8bn invested since the 1970s, involve less financial cost. An official advertisement in June invited expressions of interest from core/strategic investors in 51% equity in four steel companies—the Delta steel company and three rolling mills—by July 27th. The remaining 49% will be sold to the public through the stock exchange.

A new aluminium plant There have also been reports that the federal government is considering may be built building a second aluminium plant in the country, despite the fact that it is still struggling to resuscitate its existing smelter. Ministry of power and steel officials have opened talks with the Australian-South African steel company, BHP-Billiton, to work out the modalities for building the plant. The government already needs to provide US$150m for the completion of the aluminium plant in Ikot Abasi, Akwa Ibom state, under a memorandum of understanding signed late last year with Ferrostaal of Germany, a minority partner in the Aluminium Smelter Company of Nigeria (Alscon). Before the plant closed in mid-1999—owing to lack of working capital less than two years after it was commissioned—Nigeria had sunk an estimated US$2.5bn into the project, which was plagued by high-level corruption. The administration plans to privatise Alscon once regular production has begun.

Financial services

The NSE remains buoyant The Nigerian Stock Exchange (NSE) has been buoyant in the first seven months of 2001, spurred on by good company results and optimism about the impact of the on-going privatisation programme. In particular, the first quarter results of many companies quoted on the NSE showed improved performance on 2000. As a result, the NSE all-share index reached a new record high of 11,094 on June 27th, after starting the year at 8,163. The index dipped to 10,368 on July 11th, but regained some of the loss to stand at 10,643 on July 24th. The NSE’s director-general, Ndi Okereke-Onyiuke, was optimistic in July that businesses would continue to grow in the second half of 2001. She said that significant progress was expected in the new issue sector of the market as more state governments sought financing through bond issues for their development projects. The planned privatisation of Nigerian Telecommunications in September should also give the market a boost.

Infrastructure and other services

NEPA is confident about a The administration’s efforts to improve the performance of the chronically December deadline inefficient state-run National Electric Power Authority (NEPA) suffered a setback in June when 13 states in eastern Nigeria went without power for a week. NEPA blamed the blackout, affecting one-third of the country, on vandals who had damaged a vital power line serving the east, including major

industrial and commercial centres. Despite the setback, NEPA was optimistic in July that it would meet the December 2001 deadline set by President Obasanjo in March for the authority to boost power generation from about 1,500 mw to 4,000 mw. In a message to a business group meeting in London, NEPA’s managing director, Joe Makoju, said that the authority, with installed capacity of 5,888 mw, was producing 2,500 mw. He explained that contracts for the rehabilitation and refurbishing of power stations had been awarded and more than 4,000 transformers would be purchased before the end of the year. Mr Makoju announced that a 50% tariff rise would come into force by the end of July, and there would be another rise before the end of the year to cover NEPA’s increased operational costs. A World Bank loan of US$120m will also be used to improve the transmission network.

NEPA offers a near- In late July NEPA announced that a scheme to provide industry in Lagos state continuous power supply with a guaranteed power supply for an unprecedented 22 hours per day would begin on August 1st. The scheme, initially involving 50 manufacturers, will use power generated by the Nigerian subsidiary of a US energy group, AES Corporation, as part of an independent power project to produce 270 mw for Lagos from power-generating barges. There is also a 15-mw project for Abuja. By supplying the electricity to a limited range of customers and charging them a surcharge—N4.50 per kwh in Lagos and N8 per kwh in Abuja, on top of the regular N5 per kwh—NEPA is avoiding having to make wider pricing reforms but still raising extra revenue. AES power-generating barges began feeding electricity into the national grid in June, after more than six months’ delay to the emergency power project initiated by the Lagos state government.

Mobile phone operators are Companies licensed to operate the Global System for Mobile Communications set to launch in August (GSM) network appeared set to meet the government’s August 9th deadline to start the service. However, the indications are that this will not have as big an initial impact on Nigeria’s inadequate telephone network as previously expected. The state telecom utility, Nigerian Telecommunications (Nitel), announced in July that it only had the capacity to support 5,000 lines for each of the two private-sector GSM licence operators—Zimbabwe’s Econet Wireless and South Africa’s Mobile Telephone Networks (MTN). It is unclear how many GSM lines Nitel itself, as a GSM licence holder, will offer the public. Although the three GSM licences were granted in January, the infrastructure for the system remains inadequate, and it was only in July that the government awarded contracts for the expansion of Nitel’s facilities—a three-part contract signed with Siemens and a second with Alcatel for the supply of GSM equipment for Nitel.

Though Nitel’s backbone capacity is limited, GSM operators aim to launch their services with additional lines which will enable subscribers to connect with other GSM lines, or subscribers of other private telecommunications operators. Consequently, MTN is aiming to make over 100,000 lines available in August and plans to raise the number to 500,000 within 18 months of take- off. As well as the limited number of lines, the high cost of GSM services is likely to confine them to businesses and wealthy individuals. The tariff charges being proposed are N20-24 per minute for off-peak calls; N30 to N35 per

minute for peak-time calls; and about N125 for international calls. The Lagos- based Guardian newspaper estimates that subscribers are also likely to pay an average of N30,000 (US$268) per line, including an N11,500 connection fee. In a nation with income per head of around $300, these prices are well beyond the reach of all but a few.

Nitel increases its tariffs In setting their tariffs, the two private GSM operators were partly influenced by Nitel’s decision to double its phone charges for fixed lines. On June 1st Nitel announced that the cost of a local call would rise from N1.90 per minute to N4.30 per minute and trunk calls from N19 per minute to N42.90 per minute. The line rental charges rose from N50 to N500 per month. However, it cut connection fees from N15,000 per line to N9,000 per line, while international call rates were reduced from N165 per minute to N99 per minute. Nitel said it was restructuring its fees in preparation for privatisation. It probably also wanted to position itself to benefit from the expected growth in traffic following the expansion of the system.

Foreign trade and payments

Balance of payments, Central Bank and IMF estimates (US$ m unless otherwise indicated) 1999 2000 CBN IMF CBN IMF Exports 12,876 11,927 19,141 20,441 Imports –8,588 –10,531 –8,721 –12,372 Trade balance 4,288 1,396 10,420 8,068 Net services & income –5,074 –6,331 –5,033 –7,789 Net current transfers 1,231 1,645 1,568 1,724 Current account balance 445 –3,289 6,955 2,003 % of GDP 1.2 –9.9 18.1 4.9 Capital & financial account balance –3,915 –559 –3,761 167 Net errors & omissions –67 –243 –104 136 Overall balance –3,537 –4,091 3,090 2,307 Financing Deferred debt service 1,887 2,425 1,370 1,653 Reserves 1,650 1,666 –4,460 –3,959 Foreign reserves 5,450 5,441 9,910 9,400 Months of import cover 7.6 4.5 13.6 6.7 Sources: Central Bank of Nigeria; IMF.

Nigeria runs a current- Data from the IMF and the Central Bank of Nigeria (CBN) show very different account surplus in 2000 pictures of Nigeria’s external position. Whereas the CBN data show that the country ran a current-account surplus of 18.1% of GDP in 2000 (using its own GDP data), the IMF estimates that the surplus was only 4.9% of GDP (using its own GDP data). Although the impact of the high oil price and the pick-up in gas exports was similar in both cases, their data differ over the value of imports

and the of service and income deficits. The IMF argues that the Nigerian authorities have consistently underestimated the value of imports (partly because of smuggling and poor statistical surveys) and various services and income payments (because of poor response to its surveys and the general confusion over its actual external debt repayments). The Central Bank has also misclassified flows on the capital and current accounts. Using a combination of all the data available, the Economist Intelligence Unit estimates that the current-account showed a deficit of 9.4% of GDP in 1999 and a surplus of 5.8% of GDP in 2000.

However, in both sets of data 2000 represents a marked shift in the overall trend. Whereas the overall balance of payments is traditionally in deficit and financed by withholding scheduled debt repayments and drawing down reserves, with the current-account in surplus in 2000 the overall balance was also in surplus. Because debt repayments were missed, there was a substantial build-up in reserves during the year. This trend has continued into 2001— reserves having reached more than US$10bn in April according to a statement by the Central Bank governor, Joseph Sanusi, on May 25th. However, a modest fall is still likely as the government seeks to finance its growing fiscal deficit.

The government cracks Since export earnings are likely to remain buoyant in 2001, as oil prices and down on smuggling production have fallen only marginally, the key to forecasting the current- account deficit is to determine the level of imports. Whereas the government is committed to large increases in capital expenditure, which are likely to boost imports, it has adopted an increasingly anti-import rhetoric. However, the decision to conduct 100% inspection of incoming cargoes is likely to have more effect. As soon as the authorities at Nigeria’s poorly equipped main seaports in Lagos began complying with a government order, a backlog of uncleared imports quickly grew, resulting in serious port congestion. It was estimated that by mid-June there was a backlog of some 40,000 containers and dozens of ships at sea waiting to offload, forcing the government to extend by 30 days the deadline of June 15th set for importers to clear their goods at the ports. The government also refused the pleas of importers to reduce the 50% surcharge it imposed on falsely declared goods. There has been widespread criticism in the business community of the government’s policy: importers have complained about the extra costs they incur due to the congestion at the ports, including demurrage charges and a surcharge imposed by foreign shipping lines on containers bound for Lagos. The restriction on the inflow of goods into import-dependent Nigeria is also likely to contribute to a rise in inflation. Government officials say drastic action has long been called for to clean up the notoriously murky operations at the ports. Besides the problem of large-scale contraband imports, including illicit arms, the state has for decades lost huge sums of revenue because of routine under-declaring of imports, often involving both unscrupulous importers and corrupt customs officials.

The size of Nigeria’s debt Although President Obasanjo’s government has continued to press for remains unclear substantial debt relief for Nigeria and a Paris Club rescheduling deal is close to agreement, the exact size of Nigeria’s debt stock remains unclear. Data reconciled by the Debt Management Office put total debt at the end of March

2001 at US$28bn, of which US$21.6bn is owed to the Paris Club; US$3bn owed to multilateral lenders; and US$3.3bn is made up of promissory notes and non- Paris Club debt. However, an IMF official told a two day conference organised by the Nigerian Debt Management Office in Abuja on Nigeria’s debt problems, that Nigeria’s debt was US$32.3bn, contradicting figures given by Nigerian officials at the meeting.

Despite these differences, we still expect that the level of debt will be reconciled between donors and the government once the IMF agreement has been renewed (even if one side makes a compromise on the values outstanding). An important way of keeping donors sweet in order to encourage them to give ground on this, especially with oil prices being so high, is for the Nigerian government to keep relatively up to date with debt repayments. Therefore, although the National Assembly initially opposed President Obasanjo’s request for an extra US$500m for debt servicing, in July it reluctantly granted the money additional to the US$1.5bn allocated in the 2001 budget. The Assembly had initially contended that the money should be invested in the domestic economy, and many legislators would still prefer Nigeria to take tougher stance on debt relief. In early June the Senate opposed the government’s rescheduling agreement with the Paris Club. Yushau Mohammed Anka, chairman of the Senate Committee on Local and Foreign Debt, called for the outright cancellation of Nigeria’s debt, arguing that rescheduling only postponed the inevitable pain: “If Nigeria continues to service its debt at the [annual] rate of US$1.5bn or US$2bn, there would hardly be any margin to spare for the much-needed development in the areas of infrastructure.”

External debt, Central Bank and IMF estimates, end-2000 (US$ m) IMFa CBN Difference Multilateral 3,778 3,460 318 Paris Club 24,435 21,480 3,138 Par bonds (London Club) 2,043 2,043 0 Promissory notes 1,541 1,447 94 Others 138 66 72 Total 31,935 28,496 3,439

a Article IV data. Sources : IMF; Central Bank of Nigeria.

The Organisation of African Unity becomes the African Union

The 37th annual assembly of heads of state and government of the Organisation of African Unity (OAU) was held in the Zambian capital, Lusaka, on July 2nd-11th 2001. The Zambian president, Frederick Chiluba, took over the chairmanship of the organisation from President Gnassingbé Eyadéma of Togo. The assembly formally implemented the Constitutive Act of the African Union (AU), following Nigeria’s ratification of the Act on April 26th, allowing the Act to enter into force 30 days after the deposit of the instruments of ratification. The formation of the AU had been agreed at the 36th annual assembly of the OAU, held in Togo in July 2000, and the AU was to replace the OAU following ratification of the Act by the parliaments of two-thirds of the member states.

The OAU’s secretary-general, Salim Ahmed Salim, has said that there will be a transitional period of around one year to allow the AU to become fully operational. Amara Essy, Côte d’Ivoire’s foreign minister for most of the 1990s, will replace Mr Salim in September, having been elected interim secretary-general, but he is mandated to serve only until May 2002. The AU is expected to have an executive Council of Ministers and an assembly comprising the heads of member states, and it is to remain headquartered in Addis Ababa, the Ethiopian capital. The creation of the AU will lead eventually to the formation of:

• a pan-African parliament;

• a Union Court of Justice:

• an African central bank;

• an African monetary fund; and

• an African investment bank.

In addition to closer economic ties, common defence, foreign and communications policies will also be established, based loosely on those of the EU. However, the AU’s founding statements stopped short of ending the OAU principle of non-interference, which has been a major hindrance in the resolution of conflicts on the continent. Like some members of the EU, some African states are wary of losing their sovereignty to a super-state.

The OAU was criticised as being ineffectual—little real action resulted from its policy decisions—and for years it was hampered by severe budgetary difficulties. These problems are likely to continue under the AU, and (change of name notwithstanding) it is unclear how the AU’s institutions will be any more effective than those of the OAU.