Approaching its 50th anniversary of independence in 2010, Nigeria and its 140 million citizens can put the troubles of the past behind them and look to the future with some optimism. Research from Goldman Sachs suggests that Nigeria could sustain growth rates of between 5% and 7% over the next 40 years, placing it among the world’s top 20 economies by 2025. Yet the beckoning prospect of prosperity is far from assured and could well be dashed unless nascent reforms become ingrained in the economic and political culture.
The first hurdle, the peaceful transfer of power to another civilian administration at forthcoming elections in April, will be critical to the country’s future. Sustaining the momentum of governance and economic reform will be of paramount importance for the incoming government.
Since 1960, Nigeria has enjoyed only three brief periods of civilian rule, with military coups, inter-regional disputes and a civil war peppering the rest. Nonetheless, the most recent period of civilian government has been the longest and most promising in the country’s history. In May 1999, 16 years of brutal military rule was brought to a peaceful end with the swearing in of President Olusegun Obasanjo.
Mr Obasanjo was re-elected for a second term in April 2003, with 62% of the vote in elections that drew a 69% turnout and were broadly seen as democratic, albeit marred by some irregularities. At the same time, his People’s Democratic Party (PDP) won overwhelming majorities in the National Assembly, with 223 seats in the 360-seat House of Representatives and 76 seats in the 109-seat Senate. Parliamentary opposition is led by the All Nigeria People’s Party (ANPP) and the Alliance for Democracy, with a handful of smaller parties making up the balance.
The next presidential and National Assembly elections are scheduled for April 2007. With Mr Obasanjo constitutionally barred from standing for a third term, the elections are widely regarded as a critical juncture, potentially marking the country’s first successful civilian-to-civilian transfer of power since independence.
The PDP’s anointed presidential candidate, Umaru Musa Yar’Adua, the 56-year-old governor of Katsina State, is famous for his modesty and financial prudence. But, although a Muslim himself, he is reportedly not well liked among Hausas, who constitute the bulk of the country’s Muslim population.
Mr Yar’Adua’s main challenger is likely to be whoever is chosen by the ANPP and Action Congress (AC) to head their united, yet fragile, front in the campaign, a race hotly contested by former military ruler Muhammadu Buhari and vice-president Atiku Abubakar, who defected to the AC from the ruling PDP while still in office.
Political tensions
Under the 1999 constitution, the president serves as both head of state and head of government, giving whoever is in the post, in theory, extraordinary influence over affairs of state. The constitution tempers this by providing for the devolution of considerable powers to the 36 state governors and legislatures. This often results in tensions between the centre and periphery, which is exacerbated by the uneven distribution of population and resources and by significant ethnic and religious differences across the country.
Political protests, often degenerating into localised unrest and sometimes more sustained violence, occur throughout the country, often without warning. In the north, the imposition of sharia law in 12 Muslim majority states has been deeply controversial at home and abroad, prompting massive demonstrations for and against it. In some northern states, notably Kano in 2000 and Kaduna in 2002, tensions between the Muslim and Christian communities have spilled over into violent, albeit short-lived, conflict in which thousands of people have been killed.
Likewise, election-related violence has been commonplace in the past, to an extent that the national or state governments have proved powerless to prevent it or, in some cases, are suspected of colluding in it. Electoral violence has recently resumed, notably in some of the Niger Delta states, and more is expected in the run-up to April’s hotly contested elections.
Economic growth
In the five-year period between 2000 and 2005, Nigeria’s gross domestic product (GDP) grew almost three-fold, although the concurrent 30% devaluation in the value of the naira meant that real GDP growth over the period was nearer two-fold. During 2005, real GDP growth was 6.2%, while IMF figures for the year to December 2006 suggest real growth was likely to come in at about 5%. This is despite the exceptionally high global price of crude oil during the year and is, in large part, due to an unexpected oil production shortfall that squeezed export revenues by $4bn.
Assuming that oil production levels are restored by mid-2007, but factoring in projected lower global crude prices, the IMF estimates growth during 2007 is likely to be 7.3%. If, on the other hand, oil production levels are not restored, then the IMF estimates growth will be 6.2%, with an export loss of $4.5bn. Real GDP is likely to continue to grow robustly in 2008 and 2009, with the IMF forecasting figures of 7% and 5.6% respectively. Importantly, non-oil GDP is expected to turn in a consistent year-on-year growth of about 6.5% over the next three years.
The oil and gas industry is the bedrock of Nigeria’s economy, accounting for more than 20% of GDP. About 95% of export income and three-quarters of government revenue is also derived from the sector. Output is forecast to reach four million barrels a day by 2010, making the country the eighth largest exporter in the world and by far the most important in Africa.
Liquefied natural gas (LNG) has recently shown the greater potential for growth, with current production expected to quadruple to 40 million tons per year over the next four years, yielding revenues that could outstrip sales of oil.
Excluding oil and gas, all other industries contribute about 29% of GDP. The country is replete with minerals, including tin, iron ore, coal, lead and zinc, all of which could present solid opportunities for investment with appropriate infrastructural improvements. However, the previous military regime did little to promote sustained investment into these sectors, nor did it have a macroeconomic strategy to diversify the economy effectively into other industrial sectors, instead allowing the booming oil sector to suck in most foreign capital and driving a relative decline elsewhere.
Over a similar timeframe, rapid population growth outstripped production growth in the largely subsistence agricultural sector, shifting the country from being a major net exporter of food to becoming a large net importer. The agricultural sector nevertheless remains the largest in Africa, accounting for about 27% of GDP and much more in terms of employment and typical household incomes. Despite its past stagnation, however, it has significant potential for rejuvenation and growth.
The service sector, although accounting for just under a quarter of GDP and one of the largest in Africa, is hobbled by weak infrastructure, particularly in communications, transport and power. Thus, both inside the country and as an export earner, the sector has so far failed to live up to its significant potential and is likely to continue to do so until infrastructural problems are overcome.
Reform programme
Since May 2004, Mr Obasanjo’s government has been carrying out its ambitious National Economic Empowerment Development Strategy (NEEDS). Modelled on the IMF’s Poverty Reduction and Growth Facility, NEEDS is a Nigerian-designed and managed economic reform programme aimed at raising living standards through interlinked policies on macroeconomic stability, fiscal discipline, deregulation and privatisation. This is coupled with wide-ranging reforms across the civil service, government institutions and banking sector and transparent public procurement processes. Related initiatives are under way at state level.
The strategy, which is to some extent undermined by capacity constraints and a weak statistical system for policy formation, is designed to remedy key infrastructural shortcomings, such as the lack of fresh water for domestic and agricultural use, unreliable power supplies and weak transport and communications infrastructure, as well as to address endemic corruption. It also aims to stimulate investment in the non-energy sectors of the economy, increase industrial output and boost agricultural productivity, in the process creating about seven million new jobs.
NEEDS, which is due to end this year, dovetails with longer-run development objectives articulated under the UN Millennium Development Goals. Interim UN reports have praised the government for improvements in key areas such as environmental protection and universal primary education, but have also pointed out the lack of progress in reducing extreme poverty, hunger, child mortality and disease.
Banking sector reform has been integral to the government’s programme and widely applauded internationally. Driven by past insolvencies, weak capital bases, poor regulatory compliance, insider abuses and lack of competitiveness in the sector, the Central Bank of Nigeria consolidated 89 deposit banks into 25 more reliable and better governed institutions, thereby enhancing the financial sector’s capacity and efficiency in providing credit to enterprises and individuals alike.
Inflation
Last year, core inflation stabilised at 10%, though the headline consumer price inflation (CPI) fell to single digits year-on-year, with the rapid rise in the price of energy more than offset by cheaper food prices. The CPI figure is down from 12% at the end of 2005; single-digit inflation is one of the key objectives of the NEEDS programme. To maintain single-digit inflation during 2007 and beyond, the Central Bank of Nigeria is expected to have to absorb liquidity at similar levels to those it has sustained over recent years.
Public expenditures
The IMF estimates that federal government and extra-budgetary expenditure in 2007 will rise nearly 40% above equivalent expenditure in 2006, of which some is expected to be short-term spending by the government in advance of the forthcoming election and some may be incurred if spending priorities shift after the election.
Accelerations in capital spending in 2006, helped by better budgetary practices, were devoted largely to eliminating infrastructure bottlenecks, particularly in power generation, with the aim of attracting more private investment. However, if the profligate spending fuelled by past oil booms is to be avoided, weak public financial management practices will need further strengthening.
Trade and investment
In 2005, import tariffs were relaxed, reducing the average tariff paid on goods to 12%. Nigeria’s exports of oil and gas and imports of manufactures, machinery, vehicles, chemicals and food and agricultural result in trade with several major partners, including the UK, the US, China, Brazil, India, the Netherlands, Germany, France and Spain. In 2005, exports amounted to $52bn and imports were $26bn, leaving a trade surplus of $26bn – about 20% of GDP. Final figures for 2006 are yet to be published but are expected to show a rise in all three figures, despite lower oil production.
Annual foreign direct investment now outstrips the $1.25bn annual average recorded over the decade to 2003, reaching $2bn in 2005. Backed by a raft of tax incentives and an investment drive, it is believed to have totalled more than $5bn in 2006, with similar or higher levels forecast for 2007. Most investment is directed into the oil and gas sector, with food and drink and banking also attracting significant amounts. US and European companies have historically been the principal investors in Nigeria, although Chinese firms, with tacit state backing, have lately begun to take on a prominent role.
Overseas aid and debt
Despite being a major oil producer, Nigeria’s socio-economic indicators are poor and worsening: in 2005, the country ranked 158th out of 177 countries in the UN’s Human Development Index, down from 151st in 2002, due almost wholly to decades of resource mismanagement, corruption and military misrule.
Although growth in recent years has been consistently good, inflation in the past four decades has left average national income per capita – about $400 – still lower than at independence in 1960. Nearly six in every 10 Nigerians subsist on less than $1 a day, the World Bank’s recognised marker of extreme poverty – a level at which basic water, food, shelter, clothing, sanitation and health needs cannot be met.
Nevertheless, oil wealth has ensured the country has never been dependent on foreign aid. Instead, by 2004, it had run up about $37bn of foreign debt. Shrewdly, and despite difficulties in its relations with the IMF, the government agreed with the Paris Club that it would use much of its windfall from two years of high crude oil prices to pay down or eliminate most of its debt. Having completed the Paris Club debt agreement, in 2006 the government bought back par bonds worth $1.4bn, part of its London Club debt, leaving $3.5bn of foreign debt on the books, a healthy 3% of 2006 GDP.
At the beginning of 2006, Nigeria received its first sovereign credit risk ratings, with both Standard & Poor’s and Fitch ascribing a rating of BB-.
