[Back to index] [To Volume13#1 -- full graphics] [Download PDF version]

From Africa Recovery, Vol.13#1 (June 1999), page 8

Nigeria's economy at the crossroads

New government faces a legacy of mismanagement and decay

Nigeria's newly elected government presides over an economy with vast oil wealth and plentiful labour and skills. But it also inherits a stricken giant. For Africa's second largest economy to realize its full potential, its new leaders need to tackle a host of difficult and complex challenges: encouraging broader-based wealth creation, improving basic infrastructure and services, combating corruption, and avoiding crippling sectarian political disputes. Besides more efficient domestic resource mobilization, they also must secure greater external financing and debt relief and attract more foreign investment to sectors other than oil.

By Tunde Obadina

After a decade and a half of military rule, Nigerians are embarking on their third effort since independence in 1960 to achieve the twin goals of sustainable democracy and economic prosperity, both of which have proved elusive for Africa's most populous nation. But the new civilian government of President Olusegun Obasanjo, inaugurated on 29 May 1999, faces a tough job in turning around an ailing economy crippled by decades of mismanagement, corruption and political instability. Nigeria's economy, moreover, is burdened by the biggest external debt in Africa, while its heavy dependence on oil revenue left it vulnerable to the plummeting prices of the past two years.

Ranked for a time as a middle-income country, Nigeria rejoined the category of low-income countries from the mid-1980s. According to the World Bank, its per capita gross national product (GNP) was $260 in 1997, compared with an average of $500 for sub-Saharan Africa as a whole and $350 for low-income countries. Nigeria's per capita income in 1997 was below the 1960 level in real terms. In recent years economic growth has barely kept pace with population growth, estimated at 2.8 per cent per annum. Despite the country's immense human and natural resources, little social progress has been made. Two-thirds of a population of more than 100 million live below the poverty line, and one-third survive on less than a dollar a day. Over 40 per cent of the adult population is illiterate. Life expectancy is 53 years, a decade below the average for developing nations, and less than half the population has access to safe water and adequate sanitation.

Many ordinary Nigerians blame the military for this state of affairs. "Military rule over the past 15 years has left the nation in ruins," Mr. Gbenga Adefaye, editor of the independent Lagos-based Vanguard newspaper, told Africa Recovery. "The soldiers cannibalized the economy and they ruined us politically and psychologically. We are hoping to sort out our lives after they leave."

Oil price shock

Circumstances have been worsened by the collapse of world oil prices, knocking the bottom out of government revenue and leaving the economy in its worst crisis since independence. In January, the military administration projected that there would be an overall budget deficit of N34 bn ($395 mn) by the end of 1999, but the deficit had already reached N38 bn ($442 mn) during the first quarter of the year. During the first quarter, external reserves had fallen from $7.1 bn to $4.2 bn, equivalent to about four months of imports; by the time of President Obasanjo's inauguration on 29 May, reserves had fallen further, to $3.3 bn. Although the world price for Nigerian crude oil climbed up to $15 per barrel in May, higher than the $9 per barrel on which Nigeria's budget was based, the increase in export earnings is unlikely to be sufficient to prevent a current account deficit at the end of 1999.

In these conditions, it will be difficult for the country's gross domestic product (GDP) to grow in 1999 by 3 per cent, the official target. Assuming an average $11 per barrel oil price in 1999, the International Monetary Fund (IMF) in January projected that Nigeria's GDP would fall by 1.6 per cent, after modest growth of 2.4 per cent in 1998. However, with the oil sector accounting for about 40 per cent of Nigeria's GDP, sustained improvement in world oil prices could bring positive growth in 1999, although probably not in per capita terms.

Some analysts fear that the difficult conditions bequeathed by the military could undermine the new democracy led by President Obasanjo, himself a former military ruler. Certainly, there is likely to be little money in the state coffers to give the new government much room for manoeuvre.

"It is an inheritance which is scary, in terms of magnitude and complexity," Professor Adebayo Adedeji, former Executive Secretary of the UN Economic Commission for Africa, told a press conference in February 1999. "Indeed, without doubt, Nigeria's political well-being will for some years be haunted by the state of its economy, unless immediate corrective measures are taken to arrest and reverse the steep downward slope," he said.

Given the sheer size of Nigeria's economy, how it fares in this effort will have repercussions far beyond the country's own borders. The conclusion of a 1996 World Bank report on poverty in Nigeria still rings true: "How Nigeria now addresses its economic and social problems will not only determine its own fate but will also have a major impact on the success or failure of the region."

Mixed record of reform

Since embarking on an IMF-style structural adjustment programme (SAP) in 1986, after decades of economic regulation, Nigeria has had a mixed experience with market reforms. Lack of national consensus on the need for extensive liberalization made governments often circumspect and hesitant in carrying out tough reform policies. Poor implementation or the failure to observe conditionalities in the adjustment programmes led to a deterioration in relations with multilateral financial institutions, particularly the IMF and World Bank, from the early 1990s.

Opinion in Nigeria is divided on whether the failure of the reform process to turn the economy around was due to weak implementation or the inappropriateness of the policies, which included currency devaluation, the abolition of import licensing, dismantling of commodity boards and deregulation of banking.

"SAP was designed to free us from the tyranny of bureaucracy," said Mr. Olu Falae, who, as Secretary to the Federal Government in 1986, was closely associated with the introduction of the programme and who was Mr. Obasanjo's main rival in the 1999 presidential election. Mr. Falae blamed the failure of the adjustment programme on mismanagement, stemming from incompetence and corruption.

By contrast, others blame the IMF and World Bank prescriptions for Nigeria's current ailments. "They [the international financial institutions] said we should open up our markets and that investments would come in immediately. We opened up our markets, investments stopped coming in," former justice minister Chief Richard Akinjide said at a public lecture in Lagos in late January.

"We foolishly listened to them when they asked us to devalue the naira. Now, we don't have a middle class. What we have are the very rich and the very, very poor. No nation can develop without a middle class," said Mr. Akinjide. It is a common belief among ordinary Nigerians that structural adjustment has worsened poverty. However, the 1996 World Bank poverty study said that the percentage of the population in poverty in fact declined between 1985 and 1992, from 43 per cent to 34 per cent. But the report also noted that poverty worsened for people with the lowest 20 per cent of incomes.

Macroeconomic achievements

Despite the difficulties and hesitancy in implementation, there has been movement on the policy front. Trade liberalization undertaken from the mid-1980s, particularly since 1995, has significantly reduced tariff rates and reliance on import quotas. The economy has been opened up to foreign investors. Laws that conferred monopolies on public enterprises in important sectors, such as petroleum, power and telecommunications, have also been scrapped.

World Bank officials distinguish between the early years of adjustment, when the government made an effort to implement the programme with some positive results, and the period after 1990, when it began raising public spending to unsustainable levels following a mini-oil boom brought on by the Persian Gulf crisis. During 1987-92, Nigeria's annual GDP growth averaged about 5 per cent, well above an average decline of 2 per cent during 1980-86 and also double the average 2.5 per cent growth rate during 1993-97.

Although the growth rate has been mediocre in recent years, other macroeconomic indicators have demonstrated a degree of stability since 1995. Inflation fell to 10-15 per cent in 1998 (according to varying estimates) from 72.8 per cent in 1995. The naira, Nigeria's currency, has been relatively stable since 1995, trading between N80-86 to the US dollar at the "autonomous" (market-influenced) rate for most of the time, in contrast to previous turbulent years. However, pressure on the naira increased in early 1999, in tandem with increased demand for foreign exchange, resulting in the currency's devaluation in March from N86 to N90 to the dollar. Until last year, when the unexpected slump in oil prices slashed government income, Nigeria ran budget surpluses, ending an era of deficits before 1995.

However, some analysts have argued that this macroeconomic stability came with a price: low growth in the non-oil economy, from which demand and liquidity had been squeezed by fiscal contraction imposed by the federal government.

Others believe that economic policy changes in Nigeria have not translated into much higher economic growth because the country has not really shifted to a market-based economy. "Nigeria is currently at a crossroads in its economic and trade policies," concluded the World Trade Organization's 1998 trade policy review of Nigeria. "While steps have been taken towards trade and investment liberalization and macroeconomic stabilization, policy priorities remain divided between dependence on the public sector and import substitution strategies on the one hand, and greater reliance on the private sector and market-based reforms on the other," said the report.

Relations between Nigeria and the international financial institutions have slowly improved since 1995, when the government announced its strategy of "guided deregulation," which included the introduction of a more market-based system for foreign exchange allocation for all transactions except those of the government. Since then the authorities tightened fiscal and monetary policy and declared support for private sector-led growth. In January 1999, the IMF agreed to a "staff monitored programme" for Nigeria. This came after the government of General Abdulsalami Abubakar, which came to power in June 1998, had abolished the dual exchange rate, deregulated the domestic fuel market and promised speedy privatization.

Ambitious privatization programme

In October 1998, Gen. Abubakar's government launched a wide-ranging privatization programme (see Africa Recovery, December 1998). If fully implemented by the new civilian government, it will be one of the biggest sell-offs of state assets in Africa. Over three dozen enterprises, including some of Nigeria's largest public corporations, such as the telecommunications company, electric power utility, a fertilizer company, an aluminium smelter and four oil refineries are up for sale in the multi-billion dollar plan.

Under the programme, 40 per cent of government equity will be sold to "strategic investors" (foreign companies) which will then manage the privatized enterprises. A further 20 per cent will later be sold to the Nigerian public, leaving the state with a 40 per cent stake. In early 1999, the government appointed foreign and local technical and financial advisers to help it prepare 37 public enterprises for privatization.

Poor performance by the public sector was the major reason given for the privatization drive. According to the government, inefficient state enterprises cost the country about N200 bn ($2.3 bn) annually in subventions, transfer waivers, tax exemptions and other subsidies.

As with the broader structural adjustment reforms, however, opinion is sharply divided in Nigeria over the presumed virtues and shortcomings of privatization, and it is unclear whether the new administration will be keen to implement a sweeping divestment programme. "I believe in privatization," Mr. Obasanjo told trade unions some days before the 27 February presidential elections, "but I don't believe in privatization as the solution to all our problems."

Pervasive corruption

Whatever direction the new government takes, the greatest threat to the success of public policy is likely to be corruption. Nigeria has been dogged by corruption since before independence, but the abuse of power and lack of transparency reached mind-boggling proportions in the 1990s. An official probe ordered by Gen. Sani Abacha soon after coming to power in 1993 reported that $12.2 bn of oil revenue placed in special accounts between 1988 and 1994 was spent on non-priority items and without proper accounting, in what the report described as "a gross abuse of public trust."

Similarly, soon after assuming power following President Abacha's death in June 1998, Gen. Abubakar ordered an investigation of the alleged theft under his predecessor's administration of some $2.3 bn from the central bank. In November 1998, the government announced it had recovered more than $750 mn from the family and close aides of Gen. Abacha, shortly after former finance minister Anthony Ani publicly charged that $1.3 bn had been irregularly withdrawn from state coffers between January 1997 and May 1998. In another stunning disclosure, a government spokesman said in December that the administration was investigating an alleged $2 bn fraud by some members of the previous regime. This involved the withdrawal in 1996 of $2.5 bn of public funds to settle debts owed to Russia for the construction of the Ajaokuta steel plant, but which in reality had been discounted to only $500 mn in a secretly negotiated debt buy-back deal. Local and foreign media reports have speculated that Gen. Abacha may have had more than $3 bn stashed away in overseas banks.

Corruption, however, is not found only at the apex of government, but permeates every level of the state. The culture of kickbacks, bribery and embezzlement has encouraged mismanagement and wasted huge amounts of limited national resources. It also has fuelled political instability by placing a high premium on the control of state office. President Obasanjo, one of the few Nigerian leaders to leave office with a reputation untainted by corruption scandals, has vowed to set up an agency to combat corruption and recover stolen public funds. "You cannot have the type of investment [needed] to lift ourselves up economically in an atmosphere of corruption," Mr. Obasanjo declared a few days before his election.

Just two days after his inauguration, President Obasanjo froze all government contracts -- worth hundreds of millions of dollars -- signed since the beginning of the year. He said a panel would be set up to review their "propriety and relevance."

Controlling ethnic tensions

Nigeria, like most countries in Africa, is an amalgamation of some 250 different ethnic groups with varying cultures. Competition for power and resources between the three main ethnic groupings -- the Hausa-Fulani in the north, the Yoruba in the southwest and the Igbo in the southeast -- has contributed to a turbulent political history that has helped to stall national economic development.

In recent years, a fourth dimension has been added to Nigeria's tripartite competition. Smaller ethnic groups in the Niger Delta, where most of the country's oil reserves lie, have become increasingly restive, demanding political self-determination and a greater share of Nigeria's oil revenue. Despite the billions of petrodollars collected by governments over the past decades, little has been done to improve living conditions in the oil-producing areas, where inhabitants are among the poorest people in Nigeria. Angry at their neglect and the environmental degradation of their land, growing numbers of communities in the Niger Delta have attacked the installations of multinational oil firms operating in their midst, causing serious and costly disruption to oil production (see "Delta communities protest neglect").

At a time when the new government needs to concentrate its attention on the economy, there is a danger that it could become bogged down in complicated and divisive debates over equitable revenue allocation among competing ethnic interests. "Every day you have the proliferation of ethnic groups demanding the devolution of power, the decentralization of the control of natural resources and an end to tokenism," notes Mr. Adefaye, the Vanguard editor. "The new government will have to address these issues."

It will not be easy producing a formula for sharing shrinking state income in a way that can support national economic development, address glaring regional disparities and satisfy disgruntled communities, especially in the Niger Delta.

Infrastructure in decay

Views may differ on the value of market-oriented reforms, but everyone agrees that the deterioration of services provided by badly managed and corruption-ridden public enterprises is a major obstacle to economic recovery. Vital state-run facilities, such as the electrical utility and public roads, have been decaying for years, causing billions of dollars in economic losses.

The state-run National Electric Power Authority (NEPA) now produces below half its generating capacity of nearly 6,000 megawatts. Years of neglect have pushed the power supply system to the verge of collapse, resulting in frequent and long power outages that have made NEPA the butt of jokes by its frustrated and angry customers -- the authority is commonly referred to as "Never Enough Power Available" or "No Electric Power At all." But NEPA officials say the problem is not simply one of incompetence, but mainly the lack of funds, running into billions of dollars, needed to repair faulty and ageing facilities, especially the utility's four thermal power plants.

Private companies spend huge sums to install and maintain private electric generating plants, but this does not guarantee power either, since fuel supplies have been perennially short since 1994. Nigeria's four state oil refineries, with a combined capacity of 445,000 barrels per day, have in recent years produced less than half that amount due to constant breakdowns.

Royal Dutch/Shell is planning $8.5 bn in new investments in the energy sector both to increase production and reduce environmental degradation. The project, to be financed by Shell and its joint venture partners in Nigeria, will boost oil output by around one-third and shift activity from the Niger Delta to far less politically sensitive offshore enclave development, thus avoiding the worsening of relations with disaffected communities in the Delta. The investment will also enable Royal Dutch/Shell to end the wasteful flaring of gas by converting it to liquefied natural gas for export (see "Harnessing abundant gas reserves").

Shrinking industrial job market

Nigeria's failure to diversify its economy stems in part from weaknesses in the nation's small and insular private sector. Few local entrepreneurs have drawn on the international market in ways producers in some other developing countries, including Kenya, have done. At less than 1 per cent, the share of manufacturing in Nigeria's exports is minuscule.

Most industries are struggling to survive, with capacity utilization in manufacturing down from 34 per cent in December 1997 to about 28 per cent in the first half of 1998. Industries using local inputs, such as breweries, cement, soap and textiles, tend to perform better than those highly dependent on imports, like radio and vehicle assembly. But the manufacturing sector as a whole has been in decline in recent years, marked by an average growth rate in 1993-97 of minus 1.2 per cent.

According to Nigeria's Federal Office of Statistics, the national unemployment rate rose from an average of 1.9 per cent in 1995 to an estimated 4.5 per cent at end-1997. However, these figures grossly understate the slack in the labour market in a country where there are few, if any, incentives for jobless people to register with the authorities. With a workforce estimated at 800,000, Nigeria's bloated public sector is in no position to accommodate more workers. On the contrary, the new administration is likely to come under pressure from the IMF to implement a retrenchment programme following the previous government's decision to raise the minimum monthly wage for federal government workers to N3,500 and for state and local council employees to N3,000 from N800.

Stimulating small-scale business

With hundreds of small companies forced to close in recent years by the deterioration in economic conditions, especially inadequate credit, rising production costs and diminishing consumer demand, the capacity of the economy to provide full-time employment has diminished. One vital challenge facing the new government, therefore, will be to stimulate new businesses and support the development of the many small enterprises that exist in the informal sector, which accounts for most employment but lacks capital investment.

It is difficult to estimate the size of Nigeria's informal sector, since virtually all of its activities are unrecorded, but a walk through the streets of any Nigerian city reveals people busy scratching a livelihood from micro- and small-scale enterprises. The apparent resilience of this sector, which provides a wide range of services and goods for the poor and the pauperized middle classes, sharply contrasts with the fragility of the formal sector. According to the International Labour Organization, small- and medium-scale enterprises and particularly informal sector undertakings account for over 60 per cent of economic activities in Nigeria and over 35 per cent of urban employment.

In addition to technical and other forms of assistance, such businesses will need access to appropriate sources of credit. Though interest rates have stabilized in recent years, with lending rates ranging between 18 and 21 per cent in 1998, many banks are still reluctant to extend credit to small- and medium-scale producers and prefer to lend to big businesses and engage in foreign-exchange related transactions. The Central Bank of Nigeria has said that the large spread between bank deposits and average lending rates has discouraged savings and borrowing to the detriment of the economy. Moreover, few banks operate in the rural areas, with most concentrating their activities in Lagos and other urban centres. In 1997, three-quarters of the 2,472 branches of commercial and merchant banks in Nigeria were in the cities and towns.

In addition to the mainstream banks, community banks operate throughout the country. But many of these small institutions -- set up under licence from the government to provide limited financial services to the rural poor -- have run into trouble recently, with 353 losing their licences in 1997, bringing the total number of community banks down to 1,015.

International financing needed

With limited domestic opportunities to generate the enormous funds needed to reinvigorate the economy, President Obasanjo's administration will seek to increase the flow of foreign capital into Nigeria and reduce the country's debt service payments. Foreign direct investment in Nigeria has been running at about $1.3 bn a year, small for a country of Nigeria's size. Foreign portfolio investment is minuscule, standing at $49.7 mn in 1998, although up from $9.4 mn the year before. Nigerian leaders expect that after years of international isolation, the return to democracy will be amply rewarded by the industrial powers with increased investment.

The Lagos-based Newswatch magazine quoted a close ally of Mr. Obasanjo as saying that the new leader aimed to attract at least $10 bn in foreign investment to Nigeria in his first year in office. Government officials and some bankers also hope that Western governments, which account for most of Nigeria's roughly $29 bn foreign debt, will write off about half of the country's debt.

President Obasanjo's government may face some disappointments. The experience of other indebted poor nations shows that obtaining debt relief is a long process, taking several years. During his visit to Nigeria in March, IMF Managing Director Michel Camdessus said that if Nigeria adhered to the "staff monitored programme," the Fund would transform it into a three-year loan arrangement, which would pave the way for the Paris Club to consider debt relief for Nigeria. Nigerian officials expect to reach agreement with the IMF on a three-year economic strategy during the second half of 1999.

Nigeria's economy also could gain substantially if the government is able to persuade Nigerians with funds abroad to repatriate their capital to boost investment and demonstrate confidence in the new order. Nigerian capital flight is estimated at around $2 bn a year, especially since the eruption of the 1993 political crisis. As two senior World Bank officials, Mr. Thomas Hutcheson and Mr. Gianni Zanini, told a conference in Abuja in 1995: "Only when Nigerians themselves begin voting for Nigeria with their foreign chequebooks can new foreign investors in substantial numbers be lured to the country."

[Back to index] [To Volume13#1 -- full graphics] [Download PDF version]

Material from this article may be freely reproduced, with attribution to "Africa Recovery, United Nations".
We would appreciate a copy of the reproduction.

Africa Recovery
Room S-931
United Nations
New York, NY 10017 USA

Tel: (212) 963-6857
Fax: (212) 963-4556
Email: africa_recovery@un.org

Website: www.africarecovery.org
Contact us by email: africa_recovery@un.org