Report No. 13053-UNI N igeria Structural Adjustment Program Policies, Implementation, and Impact May 13, 1994 Western Africa Department Country Operations Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization CUuuECY EQUYVALXm Cunaamy unt - maira (N) NAaS SNam - (Pgdod &imps) - 1936 1.755 0.570 19J7 4.016 0.249 1933 4.537 0.220 1989 7.365 0.136 1990 8.033 0.124 1991 9.909 0.101 1992 17.298 0.053 1999 21.336 0.046 ASSREVIL77ONS AND ACRNYbL AWP - AaUW. D.w_eopma PrO.a OP - bam of paymeW cBN . Cal uk of Nigerk caw cat* Umom micomadum CIP * Coe. _h awamd fM ClP - ooanmt r igm inde DOS doy draw _m DDA . ddi md dbe mrwlo uducts DRI Developueai Flame.hbiuon DID - D.pibic Hoo ldSiavey ICDWAS - hmaom Codausky of Wa Afflas BMW xaws.s - Piw, Oweun=M of NiSCIIA p_i Fod=u Mwpp Dai of Nigwi PON - F_pob- ODP gro doafs - zVWc - aW DW. C.d S _ ZDMC lhpou Dwy Mmiui Co_mm Wm bmw _chlpJlpMM SP *1uJ - _F d LNO - UkfAd mal p W.T - _ism Mi dg esWm AM - m_ hmdd of ,mi - NiuiDoaIriasC_ n NDIC - Nhk0fDVwitlmwmC4 NtWA PNIg Mwls PoW APodi N3IC - Ntgm Un homi m Colma NITEL Pr Niit ' Lbkiu NNPC Nlpdn- Pl Nul _ Pms C operuh OCkA * r*s-' dwslpmentakMos OPEC O,gaimi. of Smxom Ixeriag Camahe fir . u'm."s pow u SAP - 8 4SM, Adja hog.. S J/ I - _od4in hp m - so maR * w soma. stme 1NW TaC Tomb" Cea.ma *a hivadmsm d 1_ 13- Twailr.'w NDamnqP UflhCNP - UabgdNW H la. memaoad Cliom.e I.um.y Fud Fin" Ts"R Jim 1- D_ ubW3 FOR OFFICIAL USE ONLY FOREWORD Under the Structural Adjustment Program (SAP) introduced in 1986, Nigeria reformed its foreign exchange system, trade policies, and business and agricultural regulations. These changes brought economic incentives more into line with the country's underlying comparative advantage. Under the new policies, gross domestic product broke a six-year pattern of decline to grow by 5 percent a year throughout the six-year 1986-92 period. This success notwithstanding, per capita income is still only US$320 and consumption and income are little higher (in real per capita terms) than they were in the early 1970s before the oil boom. Because over 90 percent of Nigeria's export earnings are from oil, growth in agriculture and manufacturing could offset little of the large drop in purchasing power that resulted from the collapse of oil export revenues that had prompted the adoption of the SAP. With the country's population growing by 3 percent per year, 5 percent economic growth translates into per capita income growth of only 2 percent per year. At this rate, it would have taken about 30 years for Nigeria to recover its peak standard of living (achieved in 1981) from its low point at the start of the SAP. The loss of oil revenues and its implications for economic activity and living standards hit Nigeria's urban middle class particularly hard. Partly reflecting the fact that the SAP was adopted so soon after the collapse of oil prices in 1986, it came to be identified with the negative impact of the oil price collapse itself. Along with the fact that small farmers were the primary beneficiaries of the SAP, this helps to explain the fundamental SAP paradox-that it was unpopular with many in Nigeria despite its success in turning around the economy. In turn, these political economy issues help to explain why the SAP was implemented erratically-further reducing support-and increasingly went off-track. Another factor undermining domestic support for the SAP was debt. The debt stock jumped in the early days of the SAP era, as trade arrears from the 1982-83 period were reconciled, and recognized as public and publicly guaranteed debt; in addition, some of Nigeria's debt is denominated in European and Japanese currencies, which appreciated vis-a-vis the U.S. dollar during the period. Meanwhile, during the SAP era Nigeria's net transfers to external creditors absorbed 5 percent of GDP. Nigeria ultimately secured debt reduction from its commercial bank creditors, but its debt to the Paris Club remains large. Its outstanding stock of public and publicly guaranteed debt stands at US$29 billion-roughly US$300 per capita, only slightly less than per capita income. The experience of other developing countries (some of them also heavily-indebted oil exporters) confirms the importance of instituting (and sticking to) macroeconomic strategies that promote financial stability, private-sector delivery of public services, and investment in human capital. Asian countries, for instance, have unilaterally and consistently implemented these policies and have achieved very rapid growth with low inflation. Latin American countries that began adjustment programs in the 1980s have emerged with vibrant economies. They are benefitting from the return of flight capital and substantial direct foreign investment; their focus on improving basic social services promises to speed the reduction of poverty. For Nigeria to break its vicious circle of excessive public spending, inflation, and exchange rate depreciation, and to reach the virtuous circle achieved by these other developing countries, it will need to adopt a package of stabilization and structural measures that ensures the efficient use of resources (by both the public and private sectors) and the provision of basic social services. If Nigeria effectively implements such a package, donors should be prepared to support its effort with debt relief. This path offers Nigeria the best prospects for sustaining economic growth and poverty reduction. |This docment has a restricted distribution and may be used by recipients only in the performance d |official duties. Its contents may not otherwise be disclosed without World Bank: authorization.l iii Contents CONTENTS ExECUrrH E SUMMARY ...................................... vii I. INTRODUCTION ..1 PART 1. POLICIES II. CHANGES UNDER THE STRUCTURAL ADJUSTMENT PROGRAM .... 9 A. Exchange Rate Policy .9 B. Trade Policy .11 C. Taxation and Regulatory Policy. 15 m. FISCAL AND PUBUC SECTOR POLICY .......... ............ 17 A. Federal Programs .................................... 17 B. State and Local Programs ........... ................... 28 C. Public Enterprises .................................... 30 IV. MONETARY AND FINANCIAL POLICIES ....... .. ............ 35 A. Monetary Policy . ................................... 35 B. Financial Sector Policies ............ ................... 42 PART 2. PERFORMANCE V. THE SUPPLY RESPONSE ................................. 53 A. Oil and Gas ........................................ 54 B. Manufacturing Sector .................................. 8 C. Agriculture ....................................... 66 D. Services ........................................ 68 VI. THE MACROECONOMIC RESPONSE ....... ................. 71 A. Oil Market Context . ................................. 72 B. Income and Production ............. ................... 72 C. Expenditures ...................................... 73 D. Savings and Investment ............ ................... 76 E. Inflation ........................................ 78 F. Labor Markets ..................................... 80 VI. BALANCE OF PAYMENTS AND DEBT ....... ................. 85 A. Current Account: Trade ............ ................... 86 B. Current Account: Services and Transfers .................... 89 C. CApital Account .................................... 89 D. Rescheduling, Arrears, and Reserves ....................... 90 E. External Debt ..................................... 91 Contents iv F. Agreements with Creditors ............................ 91 STATISTICAL ANNEX . .............................. 95 Table 1: Nominal GDP by Source and Use .97 Table 2: Real GDP by Source and Use .98 Table 3: Balance of Payments .................................. 99 Table 4: Exports by Commodities .100 Table 5: Imports CIF by End-Use .101 Table 6: Long-term Debt .102 Table 6a: Long-term Debt .103 Table 7: Summary Budget of the Federal Government .104 Table 8: Money Supply and Its Determinants .105 Table 9: Selected Prices, Exchange Rates and Interest Rates .106 Table 10: Implicit GDP Deflators by Source and Use .107 BIBLIOGRAPHY ............ 109 MAP FIGURES: 1.1 Indices of Per Capita Income (GDY) and Consumption, 1971 to 1992 .... ... 4 2.1 Real Effective Exchange Rate ................................ 10 2.2 Exchange Rate Spread ..................................... 10 3.1 Federal Budgetary Trends, 1986 to 1992 ......................... 17 4.1 Selected Interest Rates, 1986 to 1992 ........................... 38 5.1 Sectoral Performance, 1977 to 1992 ............................ 53 6.1 Crude Oil Price, 1971 to 1992 ............................... 72 6.2 Per Capita Income (GDY) and Per Capita GDP, 1971 to 1992 .... ........ 73 6.3 Per Capita Consumption, 1971 to 1992 .......................... 75 6.4 Inflation: Percentage Rates of Change of CPI, 1978 to 1992 ............ 78 6.5 Fiscal Deficit and Money Creation, 1986 to 1992 .................... 79 6.6 Inflation, Money Supply, and Exchange Rate, 1980 to 1992 .... ......... 80 7.1 Evolution of Debt Outstanding, 1980 to 1992 ...................... 93 7.2 The Secondary-Market Price for Nigeria's External Debt, 1986 to 1994 ... ... 94 TABLES: 1.1 Social Indicators, 1960 to 1990 ............................... 1 2.1 Exchange Rate Averages and Indices, 1981 to 1992 .................. 9 3.1 Summary Budget of the Federal Government, 1986 to 1992 .... ......... 18 3.2 Federally Collected Revenues by Source, 1986 to 1992 ................ 18 3.3 Domestic Price of Petroleum Products, 1987 to 1992 ................. 20 3.4 Distribution of Federally Collected Revenues, 1986 to 1992 .... ......... 21 3.5 Federation Account Shares, 1986 to 1992 ......................... 21 3.6 Federally Retained Revenue, 1986 to 1992 ........................ 22 v Contents 3.7 Federal Expenditures by Economic Classification, 1986 to 1992 .... ....... 23 3.8 Federal Expenditures by Function, 1986 to 1992 .................... 24 3.9 Financing the Federal Deficit, 1986 to 1992 ....................... 29 3.10 State and Local Fiscal Trends, 1986 to 1992 ....... . . . . . . . . . . . . . . . . 29 3.11 Fiscal Trends of the Consolidated Budget, 1986 to 1992 ...... . . . . . . . . . 30 4.1 Monetary Survey, 1986 to 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.2 Selected Interest Rates, 1986 to 1992 ........ . . . . . . . . . . . . . . . . . . . 38 4.3 Structure of the Financial System, 1985 to 1992 ....... . . . . . . . . . . . . . 42 4.4 Assets of the Financial System, 1986 to 1992 ....... . . . . . . . . . . . . . . . 43 4.5 Financial Savings at Banks and Nonbank Financial Institutions ..... . . . . . 43 4.6 Indicators of Banking Distress ......... .. . . . . . .. . . . . . . .. . . . . . . 47 5.1 Economic Performance Before and After the Introduction of the SAP ..... . . 54 5.2 Crude and Condensate Production and Exports, 1987 to 1992 .5.6... . . . . . . . 56 5.3 Index of Gas Production, 1986 to 1992 ........ . . . . . . . . . . . . . . . . . . 58 5.4 Public Enterprises Originally Scheduled for Privatization ...... . . . . . . . . . 60 5.5 Capacity Utilization Rates in Core Industrial Projects, 1986 to 1991 ..... . . . 62 5.6 Index of Manufacturing Production, 1985 to 1992 ...... . . . . . . . . . . . . . 63 5.7 Local Sourcing in Nigerian Industry, 1987 to 1992 ...... . . . . . . . . . . . . . 65 5.8 Agriculture Production, 1982 to 1992 ........ . . . . . . . . . . . . . . . . . . . 66 5.9 Service Sector Growth ........... . .. .. . .. . .. . .. . .. . .. . .. . . 69 5.10 Service Sector Performance in Ghana and Nigeria ........ . . . . . . . . . . . 69 6.1 Structure of Unemployment, 1986 to 1992 ....... . . . . . . . . . . . . . . . . . 82 6.2 Index of Real Household Incomes of Key Groups, 1980/81 to 1986/87 ..... . 82 7.1 Balance of Payments, 1986 to 1992 ........ . . . . . . . . . . . . . . . . . . . . 85 7.2 Exports and Imports-Values and Volumes, 1986 to 1992 ...... . . . . . . . . 87 7.3 Rescheduling and Arrears, 1986 to 1992 ....... . . . . . . . . . . . . . . . . . . 90 7.4 Total External Debt Outstanding and Disbursed, 1986 to 1992 ...... . . . . . . 92 7.5 Net Transfers, 1986 to 1992 ......... .. . . . .. . . . . . .. . . . . .. . . . . 94 BOXES: 3.1 Exchange Rate Movements and Budgetary Revenues from Petroleum ..... . . 19 3.2 Spending on the Social Sectors ............................... 26 3.3 The Onosode Report and After-Nigerian Views on Capital Budgeting ... ... 27 5.1 A Tale of Two Sectors .................................... 64 5.2 Better To Be a Farmer in Nigeria ............................. 68 6.1 SAP Impact-Robust Conclusions Despite Data Problems ............... 71 6.2 What Would Have Happened without the SAP? ..................... 74 6.3 Investment Quality ............ ........................... 77 6.4 Real Federal Wages, 1980 to 1993 ............................. 83 6.5 Evolution of Minimum Wages and Poverty, 1984 to 1992 .............. 84 7.1 The Impact of the SAP on Imports and the Balance of Payments .... ...... 88 EXECUTIVE SUMMARY 1. In the early 1970s, sharp increases in oil revenues enabled Nigeria to embark on an ambitious public investment program, aimed at extending and improving infrastructure and social services. The expansion of Government changed the structure of relative prices and wages. Rising wages and an appreciating currency squeezed the profitability of non-oil exports and undermined their competitive position internationally, while cheap food imports competed with domestic food production. In a classic case of the Dutch disease, Nigeria's resources shifted from the production of non-oil traded goods (mostly agricultural) to that of non-traded goods (mostly public services). The impact on the agricultural sector-Nigeria's major source of GDP and export revenues before oil-was especially pronounced. In the manufacturing sector, import duties and prohibitions favored imports of intermediate goods and parts for assembly into consumer durables and capital goods. 2. Then, in the early 1980s, the international price of oil fell sharply. Nigeria's export revenues and budgetary receipts fell with it. It took some time for public spending to slow down, and during that time, Nigeria built up large fiscal and external deficits. To finance its domestic deficits, Government relied on borrowing from the banking system and money creation. To finance its foreign deficits, it drew down international reserves; the decreasing availability of foreign exchange caused the private sector to incur arrears with suppliers abroad. In 1984, in an attempt to reduce the country's financial imbalances, Nigeria introduced budget-tightening measures. Economic activity and employment contracted. But rather than allowing the exchange rate to depreciate as a way of stimulating the economy, the Government focused on maintaining the artificially high value of its currency in an effort to contain inflation. Despite these efforts, inflation increased. Drought raised local food prices, while decreased availability of foreign exchange boosted import prices and domestic costs. The competitiveness of non-oil exports fell. The Govermment's elaborate system of foreign exchange controls and import licenses supported the increasingly overvalued exchange rate, which in turn intensified rent-seeking activities. 3. When world oil markets contracted once again in late 1985 and early 1986, Nigeria's economy was already on the verge of crisis. The Government introduced the Structural Adjustment Program (SAP) to address the underlying malaise and the new challenges posed by the further collapse of oil revenues. The objective was to help promote economic efficiency and private sector development as a basis for improving prospects for long-term growth. Nigeria's SAP combined exchange rate and trade policy reform (aimed at revitalizing the non-oil economy) with stabilization policies (designed to restore equilibrium to the balance of payments and to make prices more stable). The program included efforts to downsize the public sector and improve the management of publicly owned assets. Under the SAP, Nigeria eliminated import licenses and agricultural marketing boards, lifted price controls, launched a program of privatization, and took steps toward the deregulation of the banking system. A. Implemnentation 4. Stance of Macroeconomic Policy. Although some reforms were sustained during the 1986-92 period, which this report refers to as the SAP era, others were implemented unevenly. All suffered from the vagaries of an increasingly erratic macroeconomic environment. Successive cycles of contractionary and expansionary policies-with their attendant affect on prices and activity levels-rocked the economy. From late-1986 to end-1987, macroeconomic policy was reasonably tight. But responding to criticism that the SAP was too harsh, it turned expansionary in 1988-only to reverse itself a year later when the inflationary consequences of more liberal viii policies became painfully evident. In 1990, increased international oil prices (associated with the Gulf crisis) once again fueled higher spending, which-once again-continued after world oil prices had subsequently collapsed. Mirroring earlier periods, Nigeria built up large fiscal deficits in 1990-92 (which, by 1992, amounted to 10 percent of GDP). Driven by the need to finance the fiscal deficit, monetary policy also vacillated, and became increasingly expansionary (and inflationary) as the deficit went out of control. 5. Exchange and Trade Reforms. Exchange rate reform was at the core of the SAP. Although the specific modalities and the effectiveness of implementation varied over the SAP era, the foreign exchange reform facilitated a cumulative depreciation in the real effective exchange rate of about 80 percent between September 1986 and the end of 1992. (With foreign exchange reserves nearly depleted in early 1993, Nigeria's authorities switched back to a nonprice system of foreign exchange allocations, and the premium on free-market Bureaux-de-Change sales rose to 100 percent above the official exchange rate. The 1994 Budget formalized this approach to foreign exchange allocations and prohibited free-market transactions at the Bureaux de Change.) Although initial SAP trade reforms reduced the cascading of protection that had encouraged assembly operations based on imported inputs, some of the SAP's first-round tariff reductions-and the pruning of the import prohibition list-were later rolled back. 6. Private Investment. Under the SAP, the Government encouraged private sector development by simplifying the regulatory environment, reducing limitations on foreign investment, reducing corporate tax rates, and introducing a debt-equity conversion program. Yet, private sector development still faces cumbersome regulations and approval processes that raise the cost of doing business in Nigeria. Ongoing difficulties with the management of public utilities has made the provision of critical infrastructure services (such as power and telecommunications) erratic, hindering private sector activity. Most critical, Nigeria's unstable macroeconomic and exchange rate policies and political uncertainty increasingly discouraged investors. 7. Financial Sector. Much-needed financial-sector and monetary-policy reform began under the SAP. But interest rates and spreads deregulated under the SAP were periodically subjected to moral suasion by the authorities in the face of upward pressure on interest rates. (They have been reregulated under the 1994 Budget.) Financial sector reforms included new legislation, which embraced international (Basle) standards for evaluating the health of the banking system, and there has been considerable progress in meeting the 1991 Banking Act's stricter supervision and provisioning requirements. Within the banking system, new entrants aiming to secure foreign exchange allocations mushroomed, and serious financial distress has emerged in established financial institutions; classified loans now account for one third of total bank credit. While the CBN and National Deposit Insurance Corporation have begun to address the difficult task of restructuring banks with nonperforming loans, the eventual disposition of some of these banks and sources of financing for the restructurings remain unclear. There has been a proliferation of 'sectoral bankss and other nonbank financial institutions that fall outside the purview of Central Bank of Nigeria (CBN) supervision and regulation. 8. Public Enterprise Management. The SAP included public enterprise reform. Some 58 small enterprises have been privatized-mostly through public offers, or deferred public offers- on the Nigerian Stock Exchange. Although this is an achievement, the planned privatization of several large enterprises has been delayed. Even less success has been achieved with the commercialization program. Eleven parastatals were slated for full commercialization, and in some cases, performance contracts (including a 10-year corporate plan) have been signed. Only limited progress has been made with the partial commercialization of the Nigerian Electric Power Authority (NEPA), however, and the commercialization of Nigerian Telecommunications Limited ix (NITEL). Institution-building efforts and the creation of appropriate regulatory frameworks have stalled while service delivery remains intermittent, raising operating costs for both public and private sector users. 9. Public Expenditure Management. To improve public procedures for expenditure and budgetary planning, the SAP instituted a rolling-plan process. In the event, this process could not compensate for deep-rooted weaknesses in public expenditure management. For example, the temporary revenue windfall accruing from the jump in international oil prices in 1990 led to the re-emergence of large-scale government spending through so-called dedication accounts (and other devices outside the purview of the statutory budgetary and accounting framework). Increased off-budget spending and continued financing of nonviable investment projects have been major contributors to the erosion of fiscal and monetary discipline. Nor were these expenditures directed toward the provision of basic social services or infrastructure projects designed to build human and physical capability and to meet the needs of a majority of the people. During the pre- SAP period, spending (in real terms) on the social sectors had contracted sharply; the lower spending levels were maintained (in per capita terms) throughout the SAP era. C. Economic Performance During the SAP 10. Despite difficulties in implementation and overspending, the policies incorporated in the SAP-particularly the large depreciation of the real effective exchange rate-produced results. In contrast to an average decline of 2-3 percent per annum between 1980 and 1986, Nigeria's real GDP grew by about 5 percent per annum between 1986 and 1992, primarily reflecting a recovery in agriculture and manufacturing. Consistent with Nigeria's comparative advantage, the agricultural sector experienced a long-awaited comeback. Some of Nigeria's earlier anti-export bias in manufacturing disappeared under the SAP, and producers switched from imported to local inputs. Particularly in agro-processing and textile manufacturing, there is now greater use of locally produced materials. The assembly-based manufacturing sector, which depends on imported inputs and had been shielded from competition and market signals, contracted during the SAP era. Following a SAP-related shift in relative prices in favor of the rural sector, the production of traditional food crops and cash-crops increased, and agricultural output grew at an average rate of 4 percent per annum. Today, Nigeria spends one fifth of what it spent in 1986 on food imports. 11. Inflation. Since 1986, the rate of inflation has fluctuated widely, reflecting variations in the stance of macroeconomic policy. In 1986, despite a 70 percent depreciation of the exchange rate, satisfactory monetary performance kept inflation to 16 percent. And while inflation decelerated in 1987, the expansionary 1988 budget boosted prices by 55 percent. Inflation rates moderated once again, as tight fiscal and monetary policies were implemented in 1989, actually falling below 7 percent in 1990. Recent expansionary fiscal and monetary policies caused inflation to rebound. By end-1992, it was approaching 50 percent and exceeded that level in 1993 and 1994. 12. Living Standards. Although the SAP revived Nigeria's economic growth, that growth could not compensate for the huge drop in purchasing power associated with the collapse of international oil prices. With GDP growing at 5 percent per year and population at 3 percent, per capita income grew at 2 percent per annum. At that rate, it would have taken about 30 years for Nigeria to recover its peak living standard (achieved in 1981) from its low point at the start of the SAP. In real per capita terms, consumption and income are now little higher than they were in the early 1970s, before the oil boom. The urban middle class-primarily civil servants and workers in import-substituting industries-bore the cost of adjusting to the downturn in oil x markets and the collapse of foreign exchange earnings. Small farmers were the primary beneficiaries of the SAP. 13. Balance of Payments and Debt. Throughout the SAP era, Nigeria ran a large trade surplus, but-with the exception of 1990-a current account deficit (reflecting its large payments for interest and other services). The SAP had a small impact on non-oil exports, but a much larger impact on import substitutes. Nigeria's net transfer position was persistently negative throughout the SAP era, averaging 5 percent of GDP per year. Over the 1985-92 period, Nigeria's stock of public and publicly guaranteed long-term external debt increased from US$19.2 billion at end-1985 to US$29.3 billion by end-1992. This 50-percent increase occurred mostly between 1985 and 1987, and was principally due to cross-currency revaluations, whicb boosted the value of non-dollar-denominated debt, and the reconciliation and recognition as public debt of a large stock of trade arrears from the 1982-83 period. D. Political Economy 14. At the inception of the SAP, Nigeria undertook challenging and important reforms. Many of these, however, were only partially implemented. Stop-go fiscal policies undermined the stabilization objectives and introduced uncertainty about the sustainability of the reforms, and the large debt overhang discouraged savers and investors. Nevertheless, the SAP was able to reduce key economic distortions associated with the pricing and availability of foreign exchange, and the growth response during the SAP era was good. More recently, however, accelerating macroeconomic instability has undermined the climate for private investment and choked off the supply response. The earlier gains from the SAP-including the improved competitiveness of the naira and several years of economic growth-are increasingly at risk. 15. Looking Back. Nigeria's fluctuating fiscal policies reflect the underlying political economy. The downturn in the oil market that immediately preceded the adoption of the SAP made it all the more necessary. But many Nigerians blamed the SAP for the economic downturn caused by the collapse of world oil prices and their economy's dependence on oil. During the early part of the SAP era, this view weakened political support for the SAP's stabilization policies, leading to their erratic implementation. During the later part of the period, macroeconomic stability eroded dramatically, largely due to extrabudgetary spending, which reflected the political response to special-interest pressures and Nigeria's very expensive electoral process. The resulting acceleration of the rate of inflation further reduced Nigerians' purchasing power and exacerbated their dissatisfaction with the policy regime, which they associated with the SAP. 16. Looking Ahead. The central economic challenge facing Nigeria today is to bring its macroeconomic situation back under control. But this first step toward sustained growth and poverty reduction will require many politically difficult measures-expenditure restraint, revenue mobilization, and the return to a market-determined exchange rate system. Because these measures require public backing to be politically sustainable, popular support must be enlisted from the outset. To this end, the Nigerian people must be fully informed about the losses they suffered from the collapse of world oil prices. They must also be informed about the policy choices they face, including the sacrifices the various choices will entail. Finally, Nigeria's budgetary process must be made fully transparent, so that the people can judge current macroeconomic policies for themselves. Only if an informed Nigerian people agrees to support reform will it be sustainable over the long run. Should such a consensus emerge, external donors and creditors should be prepared to support the effort with external assistance and debt relief. I. INTRODUCTION 1.1 It has been over five years since the last Gray Cover Country Economic Memorandum (CEM) on Nigeria provided a progress report on the Structural Adjustment Program (SAP) introduced in 1986. Various SAP policies have now worked their way through the economy, providing a more extensive basis for analysis. But there have also been considerable backsliding, and an increasingly unstable macroeconomic environment. Most significantly, the recently adopted 1994 Budget constitutes a major reversal of the SAP. 1.2 Country Characteristics. Nigeria was one of the world's poorest countries until, in the 1970s, sharply rising oil export revenues improved the country's prospects. By 1980, the value of exports had risen to USS26 billion and per capita GNP to more than US$1,000. As the oil market weakened in the 1980s, however, this process was reversed. 1.3 Currently, per capita GNP is estimated at US$340, and Nigeria's social indicators place it among the poorest countries in sub-Saharan Africa. Infant mortality is about 90 per 1,000 live births (Table 1.1). Life expectancy is a meager 49 years for men and 53 years for women. Half of IDA-eligible African countries have a higher per capita calorie intake than Nigeria, and most offer better access to safe water in both the city and the countryside. Population-estimated at almost 100 million-is rising at a rate of 2.9 percent a year. Table 1.1: Social Indicators, 1960 to 1990 1960 1965 1970 1975 1980 1985 1990^ lnfant mortalityW 189 162 139 128 113 109 91 Frtility 6.3 6.9 6.9 6.9 6.9 6.4 6.0 Population growth 2.5% 2.5% 2.5% 2.4% 2.8% 3.2% 2.9% Prinary enrollment' 36% 32% 37% 51% 104% 82% 76% Life expecta 40 42 44 46 48 S0 52 ' Infant mortality ad primary enrollments for 1990 ame takaz from Social Sectors Strategy Review (SSSR). ' Per thousand live births. * Averge number of childten a woman would give birth to between age 1549. ' a a percent of acbool-age group. * Life axpectancy at birth, in year. Source: Sodal Indcators of Dewlhpmav and World Dewlopna Repor, 1993. 1.4 In addition to (and as an indirect consequence of) the economic dislocations caused by the drop in world oil prices, Nigeria is now saddled'with a major debt burden. At the end of 1992, external public and publicly guaranteed debt totalled US$28.4 billion, equal to more than 225 percent of exports of goods and services and 93 percent of GDP. Of the total debt stock, 6 percent is owed to London Club oommercial banks, 54 percent to the Paris Club (and creditors guaranteed by Paris Club participants), 15 percent to promissory note holders, 10 percent to the World Bank, and 15 percent to other creditors. 1.5 Since 1986, Nigeria has been involved in major debt rescheduling exercises with the London and Paris Clubs, the promissory note holders, and other creditors. In 1992, it concluded a debt-reduction agreement with the London Club. Yet despite these exercises, Nigeria has made 2 net transfers to external creditors and donors throughout the period averaging 5 percent of GDP and awarded very large arrears to Paris Club creditors. 1.6 Economic Profile. Nigeria is a major oil producer, and petroleum production accounts for 25 percent of total GDP, 90 percent of foreign exchange receipts, and 70 percent of budgetary revenues. Given the large swings in world oil prices, this dependency on oil subjects the Nigerian economy to recurring external shocks, which in turn complicate macroeconomic management. 1.7 Nigeria also has considerable potential for diversified development. It has vast reserves of natural gas, which are only beginning to be exploited. Agriculture (over 85 percent yams, cassava, and grains) employs over two thirds of the labor force and generates 35 percent of GDP. Cocoa, oil palm, rubber, groundnuts, and cotton-the principal cash crops-account for less than 10 percent of crop-based GDP. Although productivity is low, it could be improved with more small-scale irrigation, better technology, and-to a lesser degree-expansion of the cultivated area. 1.8 Manufacturing production increased rapidly during the 1970s, and now accounts for 10 percent of total GDP and employment. Services account for over 25 percent of GDP and are dominated by wholesale and retail trade. 1.9 Private Versus Public. The private sector in Nigeria is vibrant, entrepreneurial, and rent-seeking when circumstances permit. Trading activities abound, and when price controls are imposed, parallel markets circumvent their effect. Owing in part to the geographical mobility of unskilled workers, who move between agricultural work in the villages and construction work in the cities, Nigeria's labor market is also highly flexible, and by African standards, financial markets are well developed. 1.10 The public sector includes the federal, state, and local governments and parastatals. Oil revenues are allocated across these three tiers of government, complicating the country's macroeconomic management. Despite an important privatization program carried out under the SAP, moreover, the public sector still owns a significant share of the manufacturing and financial sectors, and provides both infrastructure and social services. With rare exceptions, the public sector is badly managed. 1.11 Before Structural Adjustment. Buoyant oil revenues throughout the 1970s encouraged Government to spend largely to expand the country's infrastructure and non-oil productive capacity. More money in the economy also helped to heal wounds inflicted during the civil war, which ended in 1969. But although Government had some important successes, public investment projects were undertaken without attention to their economic viability or the public sector's capacity to implement them. 1.12 Meanwhile, increased spending on construction and urban services boosted the relative prices of nontraded goods and services, undermining the traded sector. As the real exchange rate appreciated, traditional agricultural exports were particularly hard hit. Import-competing production was affected less, protected by Nigeria's elaborate import restrictions and price controls, which allowed the prices of local goods to be maintained despite the fact that they were well above world levels. Import-based assembly industries prospered, but they contributed little to domestic value-added. 3 1.13 The oil market in the early 1980s caused sizeable imbalances in Nigeria. In 1983-when oil export revenues fell to US$10 billion as compared with US$26 billion in 1980-the external current account deficit reached 6 percent and the fiscal deficit 12 percent of GDP. To finance these deficits Government increased public sector borrowing, ran down the country's international reserves, and accumulated large-scale payments arrears on external trade credits. 1.14 Then in 1984, the authorities implemented strict austerity measures. Budgetary expenditures were slashed, and administrative controls over imports (import licenses and prohibitions against certain imports) were tightened, multiplying inefficiencies developed during the period of strong oil revenues. As a result, non-oil GDP fell sharply. 1.15 Structural Adjustment and After. Upon taking office in August 1985, the new Government recognized the need to approach the problem through structural adjustment, and initiated measures to arrest the deterioration of the economy. The halving of world oil prices in early 1986 caused Nigeria's oil export revenues to drop to US$6 billion, increasing the country's urgency for reform. The Government responded with the first Structural Adjustment Program (SAP), intended to last from July 1986 to June 1988. This program, however, has come to be associated with the period of July 1986 through December 1992. 1.16 The SAP combined exchange rate and trade policy reforms with overall macroeconomic restraint. The goal was to increase the competitiveness of the non-oil sector. Considerable emphasis was placed on improving the efficiency of the public sector and reducing its size. Adjustment strategy was predicated on the assumption that external financing would be forthcoming in sufficient quantities to permit Nigeria to run current account deficits while reforms were taking place, thereby achieving higher import levels and growth rates than would otherwise be possible. It included a plan for selective external borrowing-with some increase in indebtedness at a lower rate than that projected for export growth. Nigeria's creditworthiness was to be restored over time. 1.17 But actuality did not exactly follow this plan. From 1987 to 1990, Govermment's stop- and-go fiscal policies undermined the SAP's stabilization objectives. Subsequently, runaway extrabudgetary expenditures caused skyrocketing inflation. Yet, despite these reversals, overall growth performance under the SAP was good. 1.18 The economy shifted from a GDP declining at 2 percent a year in 1980-86 to positive growth of 5 percent a year in 1986-92-a turnaround of some 7 percentage points a year. The turnaround reflects the fact that the SAP was able to reduce distortions associated with the pricing and availability of foreign exchange in the economy considerably-reforms essential to the framework of incentives for both agriculture and manufacturing. The recovery associated with the SAP notwithstanding, real per capita income and consumption were barely higher in 1992 than they had been in 1971 prior to the oil boom (see Figure 1.1.). 1.19 Political Economy. The 1986 collapse in world oil prices, which made the SAP so necessary economically, also made its sustained implementation politically quite difficult. For while the adjustment program was being introduced, purchasing power and consumption were dropping. The urban middle class, whose consumption basket contained many imported items, suffered especially from the reduced availability of foreign exchange associated with the drop in oil revenues. 1.20 Counterfactual analysis suggests that incomes would have fallen further without the SAP policies, especially the depreciation of the real exchange rate. It was the collapse of oil prices 4 Figure 1.1: Indices of Per Capita Income (GDY) and Consumption, 1971 to 1992 220 210 200 190g7 I-417i17D1i0n@2;4;B 9s 90n9 170 140 130 120- 110 100 so s 19'71 '1973 j 19-75 -19'77 -1979 1 -991-1 19983 1 -9915 199le7 j 19e9 1991g 1972 '1Q74 1Q76 1979 '1980 19932 1Q94 1996 1999 1Q90 '1992 0 GDY 4+ Come uqot I on at the beginning of 1986 that caused the economy to go into a free fall, which the SAP arrested. Still, not surprisingly, given the coincidence of timing between the introduction of the SAP and the sharp contraction in living standards in 1986/87 that the collapse of oil revenues precipitated, many Nigerians are convinced that the SAP depressed the country's economy. This belief eroded political support for adjustment (and especially for stabilization policies), which was, therefore, erratically implemented. 1.21 Subsequently, extrabudgetary expenditures-reflecting special interests and political programs associated with Nigeria's very expensive electoral process-further undermnined the fiscal position. In turn this led to rapid monetary growth, accelerating inflation, and continuing downward pressure on the naira. Many in Nigeria saw the vicious circle of exchange rate depreciation and rapid price increases as central to the SAP, which became even more unpopular as a result. 1.22 With the adoption of the 1994 Budget in mid-January, Nigeria's Government repudiated the key SAP policy that had remained more or less intact: a market-determined exchange rate system. It also peged interest rates far below market-clearing levels. Coupled with accelerating macroeconomic instability, these policies are undermining the gains that were won under the SAP when it was being implemented in the late 1980s. 1.23 Looking Ahead. To bring the macroeconomic situation back under control-the first step toward ustained economic growth and poverty reduction, Nigeria must deregulate foreign exchange nd credit markets. But this will require many measures that are politically difficult- expenditure restaint, revenue mobilization, and return to a market-determined exchange rate. 5 1.24 To avoid a repetition of the stop-and-go implementation style of the past, popular support for these reforms must be enlisted from the outset. The Nigerian people will have to understand the sacrifices they will have to make and why they are necessary. This will require education about the oil revenue losses Nigeria suffered during the 1980s, and the importance of sound macroeconomic policies. 1.25 Nigeria's people will then be able to judge the Government's macroeconomic policy for themselves and to assess its implications for their future. To help them in this effort, this report sets forth what structural adjustment achieved in Nigeria and what prevented it from achieving more. 7 Part 1. Policies In September 1986-as the centerpiece of the SAP-Nigeria adopted a market- determined exchange rate and eliminated its longstanding system of import licensing. These steps broke with a tradition of administrative controls that had led to corruption and rent-seeking behavior at the expense ofproductive activity. A second priority was to reform tariffs and export policies. In addition-to forestall excessive pressure on prices and the exchange rate-Government was to exercise monetary and fiscal restraint. In the event, such restraint proved difficult to maintain. The evolution of these policies-and their implementation-is discussed in Chapters II, III, and IV. 9 II. CHANGES UNDER THE STRUCTURAL ADJUSTMENT PROGRAM 2.1 The SAP introduced sweeping policy changes in Nigeria. The aims were: to restructure and diversify the country's productive base in order to increase efficiency and reduce dependence on the oil sector; to achieve fiscal and balance-of-payments viability; to improve the efficiency of public sector investments; and to concentrate government efforts on creating an enabling environment for growth in the private sector. The SAP sought to achieve these aims through: adoption of a market-determined exchange rate (supported by prudent fiscal and monetary policies); liberalization of trade policy and prices and markets; and liberalization of private investment regulations. A. Exchange Rate Policy 2.2 Prior to the inception of the SAP, the naira was overvalued and-with foreign exchange outstripping supply-foreign exchange was rationed. In 1985, the spread between the official and parallel markets exceeded 300 percent. Import licenses, moreover, were issued in accordance with an arbitrary foreign-exchange budget allocation system. Those who managed to get import licenses benefitted while exporters and producers of import substitutes lost out. 2.3 Realignment. By eliminating the over-valuation of the naira, exchange rate realignment was expected to restrain imports and stimulate non-oil exports. Realignment would mean that imports cost more and that exports earned more. The difference between the official and parallel exchange rates would also disappear. Indeed, Nigeria's parallel market rate had already adjusted to falling oil prices before the introduction of the SAP (see Table 2.1). Table 2.1: Exchange Rate Averages and Indices, 1981 to 1992 1981 1984 1986 1987 1988 1989 1990 1991 1992 (Naui per US dollar) Official 0.618 0.767 1.755 4.016 4.537 7.365 8.038 9.909 17.298 Paralel 0.925 3.250 4.020 4.730 6.870 10.517 9.596 13.285 21.070 (Index numbers, 1985 = 100) Nominal effective 93.7 109.1 55.8 16.8 13.8 9.2 9.4 7.7 5.0 Real effective 65.7 109.7 54.9 17.7 20.4 18.2 16.8 14.2 11.8 Note: All figures are period avcrages. Source: Inttrenaonoal Finncial Statistics, and World Bank staff estimates. 2.4 The large official devaluation of the naira in 1986 was sustained in real terms over the subsequent six years and even enlarged, despite the periodic reemergence of sizeable parallel market premiums. In real effective terms-that is, taking account of intervening price changes in Nigeria and in its major trading partners-the official exchange rate depreciated very sharply in 1986 and 1987, fluctuated through 1990, and then depreciated again in 1991 and 1992 (see Figure 2.1). 2.5 Foreign Exichange Markets. According to the SAP plan, the Second-tier Foreign Exchange Market (SFEM), guided by the market forces of supply and demand, would ration foreign exchange more efficiently and productively than the administrative controls Nigeria had 10 used heretofore. Nor would import licenses limit access to foreign exchange, and exporters would be allowed to keep their earnings in foreign-exchange denominated domiciliary accounts. 2.6 After its creation on September 26, 1986, the SFEM was administered by the CBN and funded from the proceeds of oil exports and external financing. Alongside the SFEM was an officially recognized interbank (or autonomous market) that purchased funds from holders of non- oil export earnings and sold them to importers and other users of foreign exchange. The parallel market continued to operate as an unsanctioned barometer of market forces. 2.7 The first auction in September 1986 produced an immediate depreciation of the naira, from N1.33 per US$1 to N4.6 per US$1. The official first-tier rate (reserved for debt service and other official transactions) was also adjusted downward gradually until it merged with the SFEM rate in July 1987-a devaluation of about 66 percent. At the time of the unification of the official and SFEM rates, the spread between the parallel market rate and official exchange rate reached an all-time low of 3.6 percent (see Figures 2.1 and 2.2). Figure 2.1: Real Effective Exchange Rate Figure 2.2: Exchange Rate Spread ii:S am- nm 40 an unutinal high levladi tte expns of prgamme Ietsriepyetnh accumulation of reserves. The authorities' ability to sustain auction fimding at these high levrels, furthermore, was undermined by the diversion of foreign exchange to fund extrabudgetary public investment projects. In still another type of diversion, the Nigeria National Petroleum Company (NNPC) later opened several new accounts so that earnings from condensate (and late from Petroleum) production would go to find priority gas projects. As a result of wsuh tactics, Nigeria's freedy usable reserves were almost entirely depleted by the end of 1987. 2.9 Although the exchange rates on the auction, interbanlc, and parallel m2 moved together in 1987, early in 1988 the differential betwveen the official auction rate on the one hand and the interbaolc and parallel markret rates on the other widened. This was largely attnbutable to the 1988 budget's expansionary fiscal policies, which put downward pre8sure on the official exchange rat (as reflected in the interbankt rate). Meanwhile, the auction rate reflected the authorities' messae that banks bid responsibly-a message that was reinforced by opeamtn procedures virtually assuring each participating bank: a specific quota of foreigen exchange at the 11 auction. But with the auction rate failing to keep pace with the interbank market, the spread between them widened to 60 percent. Once again, in mid-1988, the Government implemented measures to restore fiscal balance. The exchange rate depreciated and by November 1988, the spread had been reduced to 30 percent. 2.10 Interbank Market and Bureaux de Change. In January 1989, the CBN introduced the Interbank Foreign Exchange Market (IFEM). But while the official exchange rate depreciated sharply with its introduction, the parallel market rate also depreciated. Throughout 1989 and 1990 the spread between official and interbank rates fluctuated between 20 and 30 percent. 2.11 But the effectiveness of the IFEM was constrained from the beginning by its institutionalized lack of competition and a limited supply of foreign exchange that could be used to fund the new market. Banks were essentially guaranteed a fixed share of foreign exchange regardless of their bids and their quotas became the basis for the daily rate which failed, therefore, to reflect true market conditions. 2.12 In September 1989, the Government opened a new window for legal market-based transactions. It authorized bureaux de change to transact business in foreign currency notes and travellers checks at rates negotiated with buyers and with sellers. 2.13 After 1989-as rising inflation produced exchange-rate pressures in conflict with political objectives-regulations guiding the operation of the foreign exchange market were changed several times. In December 1990, the authorities reintroduced an auction system, which narrowed the spread between the official and parallel rates, but did not yield sufficient competition for a market-clearing rate to emerge. The authorities heavily influenced the official exchange rate, even as during the next two years, inflationary pressures depreciated the parallel market and bureaux de change rates. Once again the spread widened; from 16 percent in 1990, it went to 83 percent in March 1992. 2.14 On March 5, 1992, a new interbank system replaced the auction system. The CBN bought and sold foreign exchange to licensed dealers at market-determined rates, and the spread narrowed to 10 percent. By December 1992, however, it had widened to 20 percent and foreign exchange reserves were precipitously low, with demand continuing to outstrip supply. 2.15 FUal and Monetary Policy. The avoidance of a vicious circle of inflation and exchange rate depreciation depended critically upon the implementation of supportive fiscal and monetary policy. To this end, the SAP recommended budgetary restraint, including wage increases lower than the rate of inflation; expenditures for maintenance over new capital investment; reduced government support for parastatals, which would be commercialized and, whenever possible privatized; curtailed spending on all but the most important uncompleted projects. The improved budgetary position would make monetary policy easier to execute, as growth of net domestic credit to the government, and to the private sector would have to be slowed. When excess liquidity occurred, a combination of blocked accounts and the sale of stabilization securities would help to mop it up. (See Chapters III and IV). B. Trade Policy 2.16 Imports. Prior to the introduction of the SAP, imports were subject to quantitative controls implemented through a combination of outright bans on agricultural and mamufcuring goods and a comprehensive licensing system. In January 1986, a 30-percent surcharge was imposed on all imports. The effect of foreign-exchange rationing and import licensing, however, 12 was to insulate relative prices in Nigeria from those on world markets. While customs and excise duties played a relatively small role in shaping the incentive environment, their net effect was to relieve pressure on the foreign exchange market and provide a revenue stream to the Government. 2.17 Under the SAP. Between 1986 and 1988, import and export licensing was eliminated, the list of prohibited imports was shortened, and price and distribution controls on agricultural exports were removed. These measures stimulated domestic production of cocoa, cotton, rubber, groundnuts, and grains. 2.18 Realizing that the impact of customs and excise duties would increase as controls on imports and foreign exchange were eliminated, Government reformed its duty schedules as part of its adjustment program. Interim import-duty and excise schedules were implemented in October 1986. 2.19 The interim tariff reduced the dispersion of tariff rates, reducing the trade-weighted, average nominal tariff from 33 percent to 23 percent. In addition, most duty rates fell between 10 percent and 30 percent. Some agricultural and industrial import products (which competed with major domestic producers) remained subject to higher nominal rates of up to 60 percent, and some luxury goods (such as motor vehicles) were subject to rates of 100 percent or more. 2.20 Shortly after adopting the interim tariff, the Government made two further adjustments to tariffs and excises. The 1987 budget reduced tariffs on eighteen items, and one month later, tariffs and excises covering an additional 24 product groups were adjusted-effectively increasing protection for certain lines of production. (Wider changes, sought by domestic industries, were postponed until completion of a major tariff review.) 2.21 The 1988 budget introduced a new tariff regime, The Customs wad Ecise Tariff Consolidation Decree, based on a comprehensive tariff structure. As the foundation for a more permanent set of customs and excise duties, the Decree sought to bring greater stability and predictability to the incentive system and was stated to be in effect from 1988 through 1994. Reflecting the concern that the interim tariff had gone too far too fast, seriously undermining the financial viability of much of the manufacturing sector, the new, unweighted, average nominal tariff schedule was set at 28 percent. This was above that of the 1986 interim schedule and was coupled with stricter customs procedures (including preshipment inspection) to help increase duty collections. 2.22 Policy Changes and Reversals. As it transpired, the SAP's attempts to achieve transparency and stability in the incentive system were overtaken by events. The list of banned imports was once again extended so that by 1991, about 20 percent of industrial imports and 30 percent of agricultural imports were affected. About 1,000 of the harmonized system of 5,000 six-digit import items, &frthermore, remained subject to conditional import prohibitions, which could be invoked on the basis of balance-of-payments considerations. 2.23 Every year from 1989 to 1991, tariffs, too, were raised on a variety of products. Tariff rates of 100 to 300 percent were applied to foodstuffs, footwear, transport equipment, and chemical products. Under a 1992 economic relief package, however, many of these items were given substantial duty rebates. 2.24 Changes in excise duties significantly altered the effect of tariffs on protection. Since excise duties apply only to domestic goods and not to comparable imports, raising them (as was 13 done selectively in 1989) reduced tariff protection for those goods. Similarly, the 1993 suspension of excise duties across the board helped make domestic production of import substitutes more viable. (In the past, the notion of a "landing charge" was often cited as an implicit excise tax on imports, levied as part of the customs duty. In practice, however, changes in the excise tax have not generally been accompanied by equivalent changes in landing charges and in turn in import duties.) 2.25 Throughout the SAP era, considerable inequalities of protection remained, with-according to Government studies-effective rates ranging from negative values to more than 1,000 percent of nominal rates of protection. This high variability reflects different industries' ability to lobby for rate changes rather than any particular comparative advantage. Prohibitions and high rates of duties affected products unevenly, lowering the level of some imports and increasing the quantity (through smuggling) of others. Trade barriers had such unintended side-effects, moreover, as poultry shortages, which resulted from the import-ban on maize. 2.26 In retrospect, it appears that few SAP goals for trade policy were achieved. Nigeria still places quantitative restrictions on external trade, and the transparency and predictability of the incentive system has not improved. Both tariff and nontariff barriers were changed frequently. Nigeria's revenues from trade-related (customs and excise) taxes, moreover, declined from about 3.2 percent of GDP in 1987 to 2.4 percent in 1992. Today, the import regime involves high transaction costs and stands in stark contrast to the relative ease with which unofficial and irregular import transactions occur. Meanwhile, the import system, therefore, penalizes businesses that abide by the rules. The costliness (in time and otherwise) of using official channels provides a clear incentive for business to circumvent official procedures. 2.27 Institutional Framework. In 1988, the Government established an independent Tariff Review Board (CRB), attached to the Office of the President. This Board, which included representatives from both the public and private sectors, was created to provide a central source of impartial and technically proficient advice on all aspects of Nigeria's protection policy. A Technical Secretariat (consisting of government representatives and private companies) provided analytical support. As it turned out, however, Government's many decrees and policy amendments undermined the stability and predictability of the trade incentive system. Trade policy became highly politicized, and vested interests were able to secure changes in the rules favorable to themselves. More often than not, the professional advice of the TRB was ignored. 2.28 With the 1988 Tariff Decree due to expire in 1994, the TRB is preparing a new, comprehensive tariff structure to be introduced with the 1995 budget. This could provide an opportunity to revitalize initiatves begun under the SAP; to integrate into Nigeria's tariff structure the 1993 framework agreed upon by the General Agreements on Trade and Tariffs (GATT); and to introduce MVAT as an explicit, nondiscriminatory tax on goods and services. 2.29 During the SAP era, the Government also introduced a new import-duty assessment and collection system that relies on offshore, preshipment inspection of imports and assessment of duties. This system was supposed to improve collections, but initial efforts have so far not translated into higher revenue streams. An institutional framework for dealing with this issue was introduced with the establishment of the interdepartmental Import Duty Monitoring Committee ([DMC), in which the Budget Office, Department of Customs, CBN, and Treasury took part. While the IDMC has brought about some improvement in duty collection, it lacms trained technical staff with access to computing facilities to ensure compliance and match of data from various sources electronically. 14 1. Exports 2.30 To promote exports, all requirements for the surrender of foreign exchange from non-oil exports were abolished under the SAP, and such earnings were allowed to be kept in foreign currencies in domiciliary accounts. This provision permitted exporters to convert foreign currency into naira as they saw fit. (he use of foreign exchange, however, remained subject to the same restrictions that applied to funds purchased in the foreign exchange auction.) 2.31 Although Government initially abolished most export prohibitions under the SAP, selected prohibitions were later reinstituted. The poor harvest of 1987, for instance, led to bans on grain exports.' Prohibitions have since been extended to cover raw palm kernels, cassava, maize, yam, rice, beans, timber, and raw hides. 2.32 The SAP eliminated all export licensing (except for reasons of health, national security, nature conservation, or the preservation of national cultural heritage). All export duties were abolished, and export procedures and documentation were simplified. After a government study, the Nigerian Export Promotion Council (NEPC) was reorganized with enhanced private-sector participation, so that it could be more responsive to exporters. The establishment of a refinancing and rediscounting facility (under which the CBN provided banks with more than N500 million in 1988) mostly benefitted cocoa exporters. Export insurance, financing guarantee arrangements, and the dissolution of state-owned trading companies were other notable changes in export policy. 2.33 Duty Drawback Scheme. At the outset of the SAP era, the Government approved guidelines for a revised Duty Drawback Scheme (DDS),2 with streamlined administrative procedures and an emphasizing transparency, reliability, and efficiency. After lengthy delays, the scheme nominally came into operation at the end of July 1987. It faced numerous administrative problems, including difficulties in verifying import and export transactions. 2.34 Because the Department of Customs resisted verifying import and export transactions, by mid-1989, only twelve rebates had been processed through the DDS. Government, therefore, issued revised operational guidelines in December 1989, and the DDS Committee indicated that it would strive for a six-week turnaround between application and rebate. The Budget Office played a guiding role, and in 1992, refunds amounting to US$36 million were provided to forty one companies. Nevertheless, many exporters still do not use the facility. 2.35 In anticipation of increasing export diversification and decreasing reliance on oil exports, the Government set a target of US$1 billion per annum in non-oil exports. Official export statistics show that this target has not yet been met. Substantial unofficial exports particularly of textiles and soaps to neighboring countries have been observed, however, suggesting dtat official channels are being circumvented. 2.36 The limited effectiveness of SAP export promotion efforts led to an increase of funding for the DDS and provision for a new manufacturing-in-bond scheme (to encourage importers of raw materials to produce exportable products) in the 1991 budget. In November 1991, an export- This ban wu inuod to preve a hnage in th domesic markct and promom ocal procssn of poduc*, so that higher valuodded ks would be exported. 2 The 1959 egulations required drwback appliations (including the deterin*aion of input-output oefficimt scheduls) to be processed on a casby-ae buis which was adminiivly _mbome ad csused substanial deays. 15 processing zone was established in the southeastern port of Calabar. Government has provided domestic and foreign firms operating there such export incentives as exemption from all duties, levies, taxes, and foreign-exchange restrictions. 2.37 ECOWAS. The 16 members of the Economic Community of West African States (ECOWAS) are working to reduce tariff and nontariff barriers to trade. The objective is to establish ECOWAS as a customs union with a common external tariff and to develop a common monetary system. 2.38 To date, the impact of these efforts has been modest. Nigeria's trade with its neighbors increased from less than 2 percent in 1980 to more than 5 percent in 1989. Its persistent problems with currency inconvertibility and foreign exchange shortages have been barriers to more vibrant trade. In 1990, member countries agreed to a Trade Liberalization Scheme that would allow for the free movement of goods within ECOWAS-but Nigeria has yet to simplify the issuing of the certificates-of-deposit exporters need to be able to benefit from the scheme. 2. Agricultural Marketing Boards 2.39 In December 1986, Government abolished the six commodity boards that had held a monopoly on the pricing, subsidization, purchase, and marketing of oil palm, cocoa, rubber, cotton, groundnuts, and grains. Prices had generally been set below world prices (at the parallel exchange rate), and market competitors were not available to bid prices up to realistic levels. At the same time, the boards were creating losses by borrowing from the CBN to make purchases in excess of their marketing earnings. C. Taxation and Regulatory Policy 2.40 SAP initiatives to improve the regulatory climate for the private sector represent a major step forward. Implementation, however, sometimes falls short of govermnent reform policy, and special attention needs to focus on the DCC. Meanwhile, by extending the incentives under the Nigerian Enterprise Promotion Decree (NEPD) only to new enterprises, firms already operating in Nigeria failed to benefit. Finally, under current policies' foreign participation in insurance, banking, mining, and petroleum prospecting cannot be increased. 2.41 Amendments to the Nigerian Enterprise Promotion Decree allowed for 100 percent foreign ownership in most lines of production (although this provision was applied only to new ventures). Ceilings on royalty payments and profits declared as dividends have been increased. To encourage firms to locate in disadvantaged geographic areas, the old system of locational approval has been replaced by income tax concessions and higher depreciation rates. 2.42 The Industrial Development Coordinating Committee (IDCC), a one-stop agency for initial investment approvals, has eliminated long delays in obtaining business permits. The Committee's mandate is to process new enterprise applications within 60 days and provide help for firms seeking to qualify for industrial incentives and expatriate quotas. (An alternative to expatriate quotas-a graduated tax on employment of expatriates-is now under consideration.) The Government has directed banks to establish designated departments to assist small- and medium-sized enterprises with credit transactions, and in March 1992, all restrictions on nonresidents' capital account transactions were lifted. 2.43 To encourage investment and provide incentives for certain types of activities, the SAP introduced several tax changes. In 1987, the corporate income tax rate was reduced from 45 to 16 40 percent. For small firms engaged in manufacttring, mining, or agriculture, the tax rate was reduced to 20 percent for the first three years of operation. Capital allowances were increased for plants and machinery used in manufacturing, construction, agriculture, and transport, and special incentives were provided for expenditures on long-term research. 17 III. FISCAL AND PUBLIC SECTOR POLICY 3.1 To promote fiscal viability, the SAP included measures to hold down the public sector wage bill, rationalize public spending programs, and reduce subsidies and subventions to public enterprises. Civil service employment was to be frozen and public salaries were to rise at a rate lower than that of inflation. The SAP also sought to promote economic growth by recommending greater public investments in human resources development, infrastructure, and maintenance and away from loss-making industrial projects. It gave priority to projects with proven financial viability and low completion costs. To reduce the public sector commitment to inefficient enterprises, it recommended privatization, commercialization, and the eventual elimination of transfers to commercially oriented parastatals. A. Federal Programs 3.2 In 1986, the federal deficit started out at 3 percent of GDP. But as revenues fell, the deficit rose to 5 percent in 1987 and to 10 percent in 1988. It contracted in 1989 to 4 percent of GDP, and during the 1990 Middle East crisis, fell again to 3 percent as oil revenues rose. When international oil prices returned to pre-Gulf crisis levels, Nigeria's deficit climbed to 7 percent of GDP in 1991 and 9 percent in 1992 (see Figure 3.1 and Table 3.1). Figure 3.1: Federal Budgetary Trends, 1986 to 1992 a am cm -1mm~~~~~~~~~~~~~~~~~~~~~~~~~~s- D REVENUE &XVC0P.JDITLURES ODewI CIr 1. Total Revenues 3.3 Federation Account Revenues. Nigeria's federally collected revenues derive mainly from petroleum receipts-which account for 75 to 85 percent-customs and excise taxes (see Table 3.2). The 78-percent devaluation of the currency between 1986 and 1987 increased the naira value of oil exports from N 11.8 billion to N20.5 billion. From 1988 to 1990, a further 50 percent exchange-rate depreciation-coupled with the temporary increase in production and export prices associated with 1990 Middle East crisis-caused oil revenues to triple (see Box 3.1). 3.4 Oil revehues' elasticity greatly increased Nigeria's exposure to price risk. The new Memorandum of Understanding signed with the joint-venture oil companies in 1991, for example, 18 Table 3.1: Summary Budget of the Federal Government, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 Revenues (Naira billions) Federally collectod 16.0 26.6 29.5 58.2 92.3 117.0 168.4 Federally retained 11.3 16.6 16.4 35.1 54.0 68.8 90.2 Expenditures Total' 13.7 22.4 30.2 44.8 61.6 90.9 138.0 Recurrent 7.9 15.5 20.9 31.6 44.6 54.8 79.7 Intermst payments 3.6 12.3 15.4 23.9 33.7 38.1 55.8 External' 1.0 8.4 10.4 16.7 21.3 23.1 35.9 Domestic 2.6 3.9 5.1 7.1 12.3 15.0 19.9 Other 4.4 3.2 5.5 7.7 11.0 16.7 23.9 Capital 5.7 5.4 8.3 11.3 15.5 34.4 55.1 Exchange rate gurantet 0.0 1.5 1.0 1.9 1.5 1.7 3.2 Balan&c -2.4 -5.9 -13.8 -9.7 -7.7 -22.1 -47.8 Memorandum item (Percentage of GDP) Retined revewue 15.5 15.2 11.3 15.3 18.9 20.3 17.0 Expenditurer 18.7 20.6 20.8 19.5 21.6 26.9 26.1 Deficit -3.2 -5.4 -9.5 -4.2 -2.7 -6.5 -9.0 Note: Audited accounts have not been available since 1982. The 1992 data are preliminary estimates. ' Expenditurec ar derived as the difference betwoen revenues and financing. After the reschoduling agremcnts Lha began in 1986, the Federal Government auumed responsibility for most debt service. Tis and the exchange rate devaluation in 1987 is the cause of the large increae in payments due. * Obligations incurred prior to the establishment of the foreign exchange market in 1986J87. Source: Ministry of Finance, Central Bank of Nigeria, and World Bank aff estmates. Table 3.2: Federally Collected Revenues by Source, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Nair billions) Total revenues 16.0 26.6 29.5 58.2 92.3 117.0 168.4 (Percentage of total) Petroleum 73.8 77.2 78.4 84.8 83.0 83.3 81.2 Customs and exciu 10.8 13.3 14.4 10.2 9.4 10.6 7.8 Compcny icome tax 6.9 4.6 5.3 3.4 3.7 3.3 3.0 Indepedent rcvenues 2.7 1.5 1.8 1.6 3.8 2.7 8.0 (Pereiitge of GDP) Total revenues 21.9 24.4 20.3 25.3 32.4 34.6 31.8 Petrolum revenues 16.2 18.9 15.9 21.4 26.9 28.8 25.3 Note: Official data have been adjusted to achieve consistency with balance-of-payments and monctary dat. Source: Ministry of Finance, Cental Bank of Nigeria, and World Bank saff atimatce. linked the Govermnent's share of revenue to incremental additions to reserves, production costs, and export prices. But for prices below US$24 per barrel, the elasticity of revenues-to-price 19 Box 3.1: Exchange Rate Movements and Budgetary Revenues from Petroleum On averagc, S0 percent of NigeriA's federally collected revenues derive from petroleum receipts, most of which come from cxports. The annual razte of change in nominal revenues, therefore, can be divided into three main parts: exchange rate, oil price, and volume movcment. For example, at 1992 export volumcs, a USSI change in export prices would be worth M5.9 billion, while a movement in the exchange rate of N1i per dollar would bc worth N6.7 billion. (A fourth category captures such residual factors a changes in government agreements with joint-venture oil companies, efficiency of revenue collection, and cross-ffects.) The table below shows that exchange rate depreciation was essential to the growth of petrolcum revenues in 1986 and 1987. Without the devaluation, revenues would have fallen by 88 percent in 1986 (rather than rising 8 percent) and 55 percent in 1987 (rather than rising 74 percent), owing to declining oil volumes and prices in those ycan. Likcwisc, revenucs in 1992 would have fallen by 34 percent (instead of rising 40 percnt), if not for the exchange rate depreciation that year. Derivation of Federaly Collected Petroleum Revenues 1986 1987 1988 1989 1990 1991 1992 (Nominal percentage ratc of increase) Petroleum revenue 8 74 13 113 56 27 40 Equals the sum of: Exchange rate 96 128 13 62 9 23 75 Export price -48 22 -13 24 31 -17 -3 Volume 0 -10 6 18 10 3 2 Other facton -40 -68 7 9 6 17 -33 Memorandum iten: (Naim per US dollar) Exchange rate 1.8 4.0 4.5 7.4 8.0 9.9 17.3 Source: World Bank staff estimates. movement increases to well above one. For example, suppose the dollar-price per barrel of oil fell 20 percent from USS21 per barrel in one year to US$17 in the next year. At current production levels, this would reduce annual revenues from US$9.5 billion to US$7.1 billion or a 25 percent loss in revenue implying an elasticity of 1.25. This volatility, moreover, increases the lower the price drops. 3.5 Because Nigeria has priced domestic petroleum products cheaply, revenues from them have been accordingly low (see Table 3.3). In 1987, Nigerian gasoline was priced at 39.5 kobo per liter, or about 10 cents per liter, compared with an average European price of 22 cents per liter (excduding taxes). In 1989, when the Government increased the price to 60 kobo per liter, concurrent exchange-rate movement reduced the dollar price to 9 cents per liter. Prices were raised again in 1990 to 70 kobo per liter, but again the dollar equivalent was only 7 cents per liter. With the devaluation of 1992, Nigeria had the least expensive gasoline in the world-4 cents versus the European average of 30 cents per liter. 3.6 Over the past few years, customs and excise revenues have risen consistently: from N 1.7 billion in 1986 to N3.5 billion in 1987 to N8.7 billion in 1990, and to -N13.1 billion in 1992. Almost all of this increase was attributable to exchange rate movement, with a real 13-percent (increase in import volume in 1990). Averaging 3.2 percent a year, independent revenue varied 20 Table 3.3: Domestic Price of Petroleum Products, 1987 to 1992 1987 1988 1989 1990 1991 1992 Nigerian gasoline, excluding taxes (Unitu per liter) Kobo per liter 39.5 39.5 60.0 60.0 70.0 70.0 Cents per liter 9.8 8.7 8.1 7.5 7.1 4.0 International gasoline, excluding taxes (Cents per liter) Europe 22.4 21.5 23.5 29.5 29.8 29.5 United States 20.9 20.9 23.2 26.2 24.0 24.0 Price differential (Percentage of international price) Europe 56.1 59.5 63.3 74.7 76.3 86.3 United Stats 52.9 58.3 65.0 71.5 70.6 83.2 (Naira per dollar) Official exchange rate 4.02 4.54 7.36 8.04 9.91 17.3 France, Germany, Italy, Netherlands, and the United Kingdom. Source: Nigerian National Petroleum Corporation, International Energy Agency, and Middle East Petrolewn and Economic Sadssdcs. from a low of 1.5 percent of total federally collected revenues in 1987 to 8 percent in 1992. The sharp increase in 1992 revenues derives primarily from N7.3 billion in loan recoveries and N 1.65 billion in proceeds from privatization. 3.7 By law, most federally collected revenues are deposited into the Federation Account for distribution to the three levels of government and to several special funds. The exception is oil revenues earmarked for priority projects, which are deposited into special, extrabudgetary dedication accounts. Prior to distribution, however, a deduction is made for stabilization fund deposits.' Approximately half of the remaining Federation Account proceeds are allocated to the Federal Government, with the rest dividend among 30 state governments, 589 local governments, and 5 special funds (see Table 3.4). A small portion of federally collected revenues, called 'independent revenues,' are allocated only to the Federal Government. 3.8 Since the introduction of the SAP in 1986, the formula for the allocation of federation- account revenue has been changed three times (see Table 3.5). In 1989, the federal share was decreased from 55 percent to 50 percent and the state share was reduced from 32.5 percent to 30 percent, with part of the released revenues going to fund an additional 5 percent allocation to local government and the remaining 2.5 percent used for three new funds: the Federal Capital Territory Fund, the Mineral Derivation Fund (for mineral-producing states), and the Stabilization Fund. In early 1992, the distribution was changed again to allow local government to take on additional responsibilities for roads, primary education, and primary health care-financed by a reduction in the state share from 30 percent to 25 percent. In June 1992, the federal share was decreased by 1.5 percent and the state share by 1 percent to boost the share for mineral-producing areas by 1.5 percent and the ecology share by 1 percent. There ar two stabiliation finds in opeation. Mem first, sct up in 1989,1i an extr-conuional system mt up by the Fedeal Militry Govemment. No formal rules have becn documented for deposits or withdwas from this hnd. The second wu specified in the 1989 Constituion and bepn opeation in 1990. Deposits into this fund ar st at 0.5 prcent of all Federtion Account rvenuc . No formal proedures have becn pztted for withwals from this fund. 21 Table 3.4: Distribution of Federally Collected Revenues, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Naira billions) Federally collected revenue 16.0 26.6 29.5 58.2 92.3 117.0 168.4 (Percentage of total) Federation account 74.2 92.8 90.6 84.7 72.4 72.8 79.4 Stabilization account 0.0 0.0 0.0 26.2 20.4 24.5 32.7 Distributed 74.2 92.8 90.6 58.5 52.0 48.3 46.7 Federal share 47.1 59.1 50.9 32.2 26.0 24.1 22.3 Federal claimse 23.5 3.2 4.4 9.3 22.3 22.4 15.2 Dedication account funds, NNPC 2.4 4.0 4.9 6.0 5.3 4.8 5.4 Independent federal revenues and non-NNPC dedication account funds. Source: Ministry of Finance, Central Bank of Nigeria, and World Bank staff estimate. Table 3.5: Federation Account Shares, 1986 to 1992 Jan. June 1986 1987 1988 1989 1990 1991 1992 1992 (Percentages) Federal 55.0 55.0 55.0 55.0 50.0 50.0 50.0 48.5 State 32.5 32.5 32.5 32.5 30.0 30.0 25.0 24.0 Local 10.0 10.0 10.0 10.0 15.0 15.0 20.0 20.0 Special fund. 2.5 2.5 2.5 2.5 5.0 5.0 5.0 7.5 General ecology 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2.0 Mineral producing area 1.5 1.5 1.5 1.5 1.5 1.5 1.5 3.0 Federl capital territory 1.0 1.0 1.0 1.0 Derivation 1.0 1.0 1.0 1.0 Stabilization 0.5 0.5 0.5 0.5 Total Federation Account distributed 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Sourmc: Minjiry of Finance. -3.9 Federally Retained Revenues. Federally retained revenues accrue only to the Federal Government and are the sum of the federal share of distributed Federation Account revenues, independent revenues, dedication account funds, and the federal share of transfers to the stabilization account (see Table 3.6). Federation Account contributions declined from a peak of 95 percent of all federally retained revenues in 1987 to 42 percent in 1992. In compensation, the contribution from stabilization and dedication account revenues has risen from 3 percent in 1987 to 43 percent in 1992. 3.10 Federal independent revenues come from a variety of sources (including proceeds from privatization, loan repayments from state governments, dividends or profits from public enterprises, the recovery of domestic debt service from the states, and taxation). These revenues increased from 4 percent of the total in 1986 to 15 percent in 1992. 3.11 Budgetary revenue estimates routinely exclude dedication account revenues and, until 1993, stabilization account drawings. Thus (as Table 3.6 illustrates), actual federal revenues regularly exceeded budgetary targets. Between 1989 and 1992, for example, actual revenues 22 Table 3.6: Federally Retained Revenue, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 Federally retained revenucs (Naims Bailions) Approved budget 10.5 11.0 15.7 17.7 25.4 38.8 54.0 Actual revenues 11.3 16.6 16.4 35.1 54.0 638. 90.2 Shares of total revenues of which: (Percentages) Federation acount share 66.7 94.8 92.0 53.4 44.5 41.1 41.7 Independentrevenues 3.8 2.5 3.3 2.7 6.5 4.6 15.0 Dedicaion account funds 29.4 2.7 4.7 12.7 31.6 33.5 13.4 Stabilization A/C drawings 0.0 0.0 0.0 31.2 17.5 20.3 30.0 Shares of GDP of which: Federally retained revenues 15.5 15.2 11.3 15.3 18.9 20.3 17.0 Federation account share 10.3 14.4 10.4 8.1 8.4 8.4 7.1 Retained reveaues in approved budget Budgeted as percent of actual 92.6 66.2 96.0 50.4 47.1 56.4 59.9 Budgeted as percent of GDP 14.3 10.1 10.3 7.7 8.9 11.5 10.2 Sourmc Miniaty of Finance, Central Bank of Nigeria, and World Bank taff estime. were almost double the budgeted targets, showing the need for a more comprehensive and transparent system of budgeting. As shown below, extrabudgetary revenues can be converted all too easily into extrabudgetary spending. 2. Ependitures 3.12 Since 1982, Nigeria has not published audited, final, budgetary accounts. Budget targets, moreover, (specified in annual budget speeches) fail to include all revenues and expenditures. Data shown in Table 3.6 were derived from the difference between total revenues and financing, with additional adjustments for external loan drawings and such extrabudgetary items as dedication and stabilization account funds. 3.13 In 1986, Nigeria's primary expenditures (exclusive of interest payments) started out at 14 percent of GDP (see Table 3.7). In 1987, they dipped to a low of 8 percent but rose to 10 percent owing to the expansionary 1988 budget. In 1989, primary expenditures returned briefly to 8 percent of GDP before accelerating to 15 percent in 1991 and 1992. 3.14 Recurrent, non-debt expenditures dropped from 6 percent of GDP in 1986 to 3 percent in 1987, 4 percent in 1988, and 3 percent in 1989. They peaked at 5 percent in 1991 before declining to 4.5 percent in 1992. In 1992 and 1993, significant increase in recurrent spending is expected, reflecting the 45-percent public-sector wage increase negotiated in 1992. 3.15 Capital expenditures started at 8 percent of GDP in 1986, held steady at 5 percent in 1987, 1989, and 1990 (with a rise to 6 in 1988), then jumped 10 percent in 1991/92 despite the decision not to release the 1992 fourth-quarter capital warrants. 3.16 Interest expenditures due were 5 percent of GDP in 1986 but jumped to an average of 11 percent of GDP, when Federal Government assumed state and local government's external debt-service obligations. From 1986 to 1992, this equalled approximately 60 percent of federally retained revenues. 23 Table 3.7: Federal Expenditures by Economic Classification, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Naira billions) Federal expenditures 13.7 22.4 30.2 44.8 61.6 90.9 138.0 Of which extrabudgetary spending 3.0 5.9 6.4 15.9 23.6 55.6 90.0 As percent of toEal (Percentages) Primary 73.8 38.6 45.5 42.5 43.0 56.3 57.2 Recurrent 31.9 14.4 18.1 17.2 17.8 18.4 17.3 Capital 41.9 24.2 27.4 25.3 25.2 37.8 39.9 Intere,t due 26.2 54.7 51.2 53.3 54.6 41.9 40.4 Exchange rae guarantees 0.0 6.7 3.3 4.3 2.4 1.8 2.3 As percent of GDP Federal expenditures 18.7 20.6 20.8 19.5 21.6 26.9 26.1 Primay 13.8 7.9 9.5 8.3 9.3 15.1 14.9 Recurrent 6.0 3.0 3.8 3.3 3.9 4.9 4.5 Capital 7.8 5.0 5.7 4.9 5.4 10.2 10.4 Interet due 4.9 11.3 10.6 10.4 11.8 11.3 10.5 Exchange rate guarantee 0.0 1.4 0.7 0.8 0.5 0.5 0.6 Extrabudgeuary spending As a percent of total expenditures 22.1 26.2 21.2 35.5 38.3 61.2 65.2 As a percent of GDP 4.1 5.4 4.4 6.9 8.3 16.4 17.0 lntereat due as percent of revenue 31.6 74.1 94.4 67.9 62.3 55.4 61.8 Note: Total expenditures are estimate baed on documented expenditure warrants and estimated exurabudgeuLry expenditures. The 1992 data are prelimiry. Source: Ministry of Fuiance, Central Bank of Nigeria, and World Bank staff estimates. 3.17 Finally, from 1987 onward, an average of 3 percent of total expenditures has been devoted to exchange rate guarantees on so-called presecondary foreign exchange market (SFEM) obligations. On selected external obligations (incurred just prior to the establishment of the SFEM), the Government and the Central Bank agreed to split the difference between the current exchange rate and N 1.57 to the dollar on selected external obligations incurred just prior to the establishment of the SFEM. (Tre size of the total original obligation, however, and amount currently outstanding is not well documented). 3.18 As a percentage of GDP the contrast between budgeted and extrabudgetary spending is extraordinary (see Table 3.7). If budgeted federal expenditures had been adhered to, their GDP share would have declined from 16 percent of GDP in 1988 to 9 percent of GDP in 1992, which suggests significant underbudgeting. Not surprisingly, therefore, extrabudgetary spending increased from 4 percent of GDP in 1986 (22 percent of total spending) to 17 percent of GDP in 1992 (65 percent of total spending). Although little information is available, some extrabudgetary spending went to establish facilities for nine new states created in 1991, to costs associated with the political transition and accelerated spending on the new capital at Abuja, to the Organization of African Unity(OAU) Conference, to participation in ECOMOG activities in Liberia, and to governments attempting to complete most of the major outstanding investment projects by 1992. 24 3.19 The increase in extrabudgetary spending in recent years was facilitated by the rapid growth of extrabudgetary spending mechanisms. The largest of these are the stabilization-account drawings, ways and means, and various dedication accounts. Table 3.6 shows the magnitude of extrabudgetary sources. The contribution from stabilization account drawings and dedication account revenues, for instance, rose from 3 percent of total revenues in 1987 to 43 percent in 1992. 3.20 Spending Priorities. As indicated above, in 1986/87, after the Federal Government assumed state and local external debt obligations, interest expenditures took on a much higher priority and all other expenditure shares had to adjust as a result. Economic services dropped from 15 percent in 1986 to 11 percent of the total for 1988-92; social services fell from 14 percent in 1986 to an average of 12 percent; and other primary expenditures fell (administration, defense, pensions, subventions to parastatals, and on-lending) fell from 44 percent of the total in 1986 to an average of 26 percent (see Table 3.8). Table 3.8: Federal Expenditures by Function, 1986 to 1992 1986 1987 1983 1989 1990 1991 1992 (Percentage of total) Economic services 15 9 10 11 10 13 12 Agricultureand watr 4 1 2 4 4 4 3 Trnuport and communications 4 2 2 2 1 2 2 Otber economic erviccs 8 5 5 5 5 7 7 Social services 14 3 11 12 11 12 13 Education a I S 7 6 4 6 Health 3 1 2 2 2 2 3 Other 3 1 4 4 4 5 4 Other primary expenditure 44 26 25 20 22 32 32 Defemne nd rcurity 12 9 8 6 8 13 12 neral adminitron 16 12 14 11 11 16 17 Penions NdW gtuitie 6 0 3 1 2 2 2 OLbes 11 4 0 1 1 1 1 Interco due 26 55 51 53 55 42 40 Exchange ratguarantees 0 7 3 4 2 2 2 Total expenditurem 100 100 100 100 100 100 100 Primary expenditum shre' Economic ervies 21 23 21 25 24 22 20 Social 19 9 24 2S 26 21 24 Otber primary expenditure. 60 68 55 47 50 57 56 Total 100 1o0 1o0 100 100 100 l00 Now: Includes eaarbudgetary qeoding. ' Include grt, subventioas, and lending to public enterprise and ate. b Exdude. interert and exchang.rate guarant. Source: Cetral Bak of Nigeria, and World Dank saff e ,atm. 25 3.21 Contrary to SAP objectives which specified a permanent shift toward infrastructure and social spending, Nigeria's allocation of primary (non-interest) expenditures has not, in fact, changed much. (See Box 3.2). On average, economic activities (such as agriculture or construction) have accounted for 22 percent of noninterest expenditures, while spending on the social sectors accounted for another 22 percent. The temporary increase in social spending in 1988-90 excluded the health sector and, in 1991/92 was edged out by increased spending on administration and security. Administration, security, pension, and on-lending have consumed an average of 56 percent of total non-interest spending. 3.22 Public Investment. A substantial portion of the capital expenditure program has been uneconomic and could have been eliminated if greater attention had been paid to the operation and maintenance of existing projects. For example, with the completion in 1990 of two new plants-Shiroro Hydro and Delta IV, NEPA's installed generating capacity stands at 5,988 MW yet available capacity in 1990 was only about 2,700 MW owing to the breakdown of units in existing plants. Peak demand, furthermore, was only 2,219 MW. 3.23 A large number of projects are also far from least cost-either because of inappropriate choices of technology or location or because of padding by foreign suppliers introduced to cover commissions and the costs of doing business in Nigeria. Again in the power sector, the proposed Zungeru hydroelectric plant and Oji River coal-fired units are about US$1.2 billion more expensive than equivalent gas turbines. In the steel sector, the Ajaokuta Steel Project will add more than 2 million tonnes annual capacity, even though the existing Delta Steel Complex is already capable of meeting current total demand for steel at 50 percent capacity. Even if only the first phase of the project is completed, capital costs will be about US$4,000 per tonne as compared with US$1,000 per tonne at competitive plants elsewhere. The complex and oversized Petrochemicals Phase II Project will cost US$1.14 billion, and at best, may be economical only on a sunk-cost basis. Even if capital costs are ignored, the Ajaokuta Steel Complex will be a net loser of foreign exchange (see Box 3.3). 3.24 On the other hand, essentially commercial projects should have been left for the private sector to pursue. For example, minimal private equity was mobilized to run the aluminum smelter at Ikot Abasi, which (at some US$1.4 billion for 180,000 tonnes capacity) has capital costs of approximately US$8,000 per tonne in 1991 dollars (as compared with US$5,000 per tonne for competitive green-field plants in other countries). 3.25 A number of projects-particularly in the manufacturing sector-were initiated and then left uncompleted for long periods owing to a lack of funds. Examples include the Iwopin Paper Mills and Oshogbo Machine Tools. Widespread delays add greatly to the economic cost of projects. In addition to the costs of demobilizing and remobilizing contractors and escalations as contracts are renegotiated, equipment deteriorates or is stolen, technology becomes outdated, and warranties expire. 3.26 These kinds of problems are not limited to the industrial sector. The National Agricultural Land Authority, set up in 1991, takes a dedicated but expensive approach to the development of land for relatively small groups of beneficiaries. Budget allocations in the 1992- 94 Rolling Plan were N300 billion annually as compared to N120 million for existing Agricultural Development Projects (ADPs) which are more cost effective. 3.27 Nigeria continues to neglect its recurrent expenditure needs, particularly for operations and maintenance (O&M) expenditures. In the power and petroleum sectors, neglect of O&M has had disastrous effects on performance. Owing to inadequate resources for maintenance and spare 26 Box 3.2: Spending on the Social Sectors There has ben a arked dwcline in real per capita expenditurs on health and education rince 1981. Th pr-SAP fall in oil price had an adver impct on public rvenues, nd in tum on spending. Total fedea cpwniur fell frm 25 pcent of GDP in 1981 to 17 percent of GDP by 1985. Spending on heah and education fell an well. Thus, real federal expenditures on health feU from N9.4 per capita in 1981 to N3.1 by 1985, while educational expenditu fell from N29.1 per capita to N 11.6 per capita in 1985. Under the SAP, federal halth expenditures iritially recovered slightly in 1986 and 1987, but dropped to a low of N2.3 per capita in 1989. Ther has been an increase in rel per capita health expenditures since 1990, maching N3.9 per capita in 1991. This im in conrat to federal expenditures on education, which have been highly variable, but recovered their pre-SAP level befoe the tunafer of reponaibility for primary education to state and local levels in 1991. Tl shaup increan observed in 1988 was due to a combinaton of incred alkoctio under the inatonary budget no lge -budgetay expendituri. Thin level of spending was sustained in 1989 and 1990 through the Fedeal Govermuent's contribution of N800 million each year for primary oducation. Health Education (N M) (N) (NM) (M) (1987 Naira) 1951 692.2 9.4 2,137.9 29.1 1982 658.1 8.7 2,017.3 26.6 1953 476.0 6.1 763.1 9.3 1914 266.6 3.3 926.1 11.5 1935 261.8 3.1 968.7 11.6 1956 419.6 4.9 974.6 11.4 1937 354.7 4.0 443.6 5.1 1938 321.6 3.5 1,156.4 12.7 1989 215.1 2.3 1,462.6 15.6 1990 362.5 3.8 1,129.9 11.7 1991 385.6 3.9 550.3' 5.6' 1992 - 505.0' 5.0' 'Primuy eduation expenditure were trsfered to state and local governments in theae yar. Sowe: Federal Miniaty of Heath and Human Service CBN Annual Repors and S_oemfanofAccounts, 1931-91 and World Brk Staff Estimates. HealtL In Nigerian federal mysem of gvernn, heth expenditu ae provided by the feda, st, ad loW governnu.tn. Over 50 penreat of public healh expenditiu occr at the ste level, 15-23 pnmeant at the lcal level, andabout 33 pe t ocour at the fedel vel. Therwe hug invemna in hesh-cm infruatuctui in the wake of the oil boomx of the 1970r, with the constuction of many hospitals, the purchae of medioal equipmemt ad dngs, and fte taining of heath-ca penonnel. Durig the first half of tho 19850, rml fedmi govem_ t heh expendi declined rapidly in re tem reaching a pm-P low in 19t5 (at 1937 pric). Tle shar of hekh ependiture in total fedeal eenditur wan about the m in 1990 a it in - 19t1, yet the a value of halth expenditu wa only about half of that in 1981. Including expenditur at all lbvde of govennnt, rel per capita expenditures on health during the SAP ea maintained their 195 level. Educa he tho tiu m of govenment also contribute to the funnig of educati, wih the Fedal Gvaermet akg primy resosbily for teriay education, stat Sovwnmeru for soo,dary education an heal0gavenusenforprimayeducation. Expndeturoneducatonaccountedforabout 1i 8per-oftoafedea expendiu in 197S376. Thin shar delined cosiderably during the !980r. Education expeditur rprsed an averg of 5.1 pIrent of total fedml govenmentxpenditur over dt past 10 yea, fing a low a 2 percent in 19t7, end r1ing a high a 3.3 percent in 1989. Parll to lk expendiur during the oIl boom, prima (and to a l_e dere seoonday) enrollment aio inread rapidly during the 1970.. Mme drma ir haled in 1983; in the neat four yea pfimay and soondady enrolnt dopped by 20 peroent and 10 peroentI,rspectvely. Although the wan a rvival in primauy erUmuts fnxn 1987 onward, eoonday enomllne stagnated. EnroUments in t y institution contnued to incwa rapidly throughout the 1930o. at n aveage arumal raa of 3.4p t 27 Box 3.3: The Onosode Report and After-Nigerian Views on Capital Budgeting In the first half of 1984, the FederalMilitary Governmentappointed a ProjectsReviewCommittee chaired by Gamaliel 0. Onosode, which also included the Permanent Secretaries of Finance and National Planning and the Governor of the Central Bank. According to the Onosode Report issued by the Committee in 1984, assessment for viability was lacking at every stage of Nigerian Government projects' implementation cycle-largely because of the ineptitude and indifference of those in charge. From the paucity of data projects could supply, the Committee concluded that many had never undergone feasibility studies, that existing studies were weak, and that they were misused as rigid guides for project implementation. Although virtually all public capital projects were supported by technical justifications, furthermore, no attempt was being made to evaluate return on investment, either for the project itself or for the country as a whole. Finally, alternativeprojects or options (different designs, plant locations, size, capacity) had generally not been costed and evaluated in economic terms, making it impossible for authorities to evaluate the economic consequences of their decisions. The Onosode Reporn also concluded that-given the rate at which project costs oealated- feasibility sAudies (where they existed) were faulty, or that there were gross inefficiencies in contract negotiations and management. The report further cited the untimely release of project funds, inadequate supervision and monitoring of projects to ensure that solutions to problems were timely, and lack of accountability. Government functionaries lacked commitment to the job, and quite often failed to process requests for permits, licenses, or approvals promptly. Project delays led to still higher costs. Given its findings that Government failed to coordinate spending on ongoing programs properly and that everal now projects had been started outside the approved development plan, the Committee frankly concluded that Government had a craze to sart projects and award contracts, and an aversion to pursuing them to completion. In its own words, the Projects Review Committee 'bent over backwards' to promote the completion of existing projects. Yet despite this generous posture, they were forced to recommend that 'all posible pending should be stopped' on such major projects as Iwopin Pulp and Paper, Savannah Sugar, Ajaokuta Steel, Delta Steel, the Metallurgical Rsearch and Training Institute at Jos and Onitaha, Itakpo Iron Ore Mining, and PetrochemicalPhaso . In mot cases, they also recommendedfuture studies regarding the economic viability and desirability of these projects. Today, eight years after the submission of the Onosode Report to the Cabinet, little has changed. In May 1992, a Presidential Monitoring Task Force was created to inspect federal government projects. In an impressive effort, the Task Force inspected nearly 2,000 projects, including many not listed in the National Rolling Plan. At current rates of administrative capacity and invement, completing all outsanding projects would, the Task Forc econcluded, cost well over N300 billion and take over 20 years. They found that all of the projects blacklisted by the Onosode Report in 1984 were still reeiving funding, and that the (plus the other heavy industrial projects) took up one third of the total cost. The Task Force also noted that these projects had incurred substantial internal and external debts. Once again, ministries were cited for preading resources thinly among a burgeoning number of projects rather than concentrating on a few viable ones. Projects were budgeted with little co rn for cost and changing economic circumstance, and extrabudgetary funding was especially troublesome. The Task Force noted procurement and maintenance as problem areas, with ministries frequently purchasing the machinery before the buildings had been erected to house it and existing equipment and facilities abandoned or neglected due to inadequate funding. Like the earlier Onosode Report, the Task Force's October 1992 report urged the Government to reduce and consolidate its list of projects, to limit now projects, to mbject new proposals to rigorous evaluation, and to monitor ongoing projects at every stage. parts, three of the four refineries run by the NNPC now need major rehabilitation expenditures. Gross underperformance in power generation is also largely attributable to similar neglect, while in the transport sector, inadequate attention to road maintenance threatens the whole road network. The share of federal roads classified as in poor condition increased from 23 percent 28 in 1985 to 30 percent in 1990. These poor roads moreover, cost vehicle operators some US$200 million (in 1990) annually in terms of higher maintenance cost and delays. In the health and education sectors, personnel costs consume an increasing share of a relatively static budget, and the absence of funding for drugs and medical and teaching supplies drastically undercuts the systems' ability to deliver services. 3. Financing 3.28 Since the introduction of the SAP, the sources of external financing have been quite volatile, primarily because of on-off external rescheduling agreements. In the years prior to 1990, external financing made a net positive contribution to the Government's financing needs. Net flows became negative, however, when subsequent external financing failed to keep pace with debt service. This transition was further complicated by the absence of rescheduling agreements in 1988, 1990, and 1992-years when net external flows were considerably smaller. The Government has now accumulated significant arrears to make up for this shortfall. Finally, in 1992, external payments included an additional US$1.7 billion under the London Club Debt and Debt Service Reduction Agreement, which will save Nigeria approximately US$500 million annually (see Chapter V). 3.29 In accordance with rescheduling agreements, the Federal Government began servicing all federally guaranteed debts incurred by federal and state governments and by public enterprises. But as the federal share of revenues moved downward and debt-service requirements increased, Government found traditional sources of financing increasingly inadequate. In 1989, therefore, Government began taking a portion of the state and local share of Federation Account receipts to cover its losses, usually by diverting funds from the state and local share of the Stabilization Account. As shown in Table 3.9, these extrabudgetary flows have been as low as 1 percent and as high as 3 percent of GDP. There are as yet no formal procedures for calculating state external obligations or the size of the revenue recoveries which appear under Net Financing in Table 3.9 as transfers. 3.30 Demands on domestic financing reflect the volatility of external financing. In 1986, for example, nonbank sources (primarily government trust funds, which supplied N3.4 billion in credit) offset net negative foreign financing, of which the banking sector absorbed N1800 million. From 1987 to 1988-when the first Paris Club agreement expired and an expansionary budget was introduced-net bank credit to the Government jumped from N12.4 billion to N6.1 billion and was supplemented by an additional N2.3 billion from nonbank sources. It was 1989 when the second Paris Club agreement became effective that Government became a net creditor to the banking system, after it increased it net liability by M2.8 billion. In 1990, when that agreement ended, nonbank borrowing continued at N3.4 billion. In both years, net credit from the banking sector increased to N112.8 billion (1991) to N44.1 billion and (1992) as net external flows became ever more negative. B. State and Laca Programs 3.31 Although fiscal information is even less reliable at the state and local level than at the federal level, a few trends can be identified. Through 1988, Nigeria's state budgets were all running small deficits. Today, state surpluses average 1.5 percent of GDP (see Table 3.10). 3.32 An estimated 90 percent of state government finances derive from the Federation Account. The remainder comes from personal income and sales taxes. Local governments, too, rely almost exclusively on Federation Account revenues, although some obtain modest revenues 29 Table 3.9: Flnancng the Federal Defidt, J986 to 1992 1986 1987 1988 1989 1990 1991 199?2 (Naira billions) Net financing 2.4 5.9 13.8 9.7 7.7 22.1 47.8 External' -0.3 3.5 5.4 8.2 -0.3 -0.5 -12.4 Net domestic 2.6 2.4 8.4 1.5 7.9 22.6 60.2 Banking ystem -0.8 2.4 6.1 -9.3 2.8 12.8 44.1 Nonbank creditu 3.4 0.0 2.3 3.4 3.4 1.0 0.0 Transfers 0.0 0.0 0.0 7.3 1.8 S.7 16.1 As percent of total (Percentage) Exteral -10.8 59.5 39.3 85.0 -3.3 -2.1 -26.1 Not domestic 110.8 40.5 60.7 15.0 103.3 102.1 126.1 Banking systm -34.2 40.3 44.4 -95.8 36.1 58.1 92.4 Nonbank credits 145.0 0.2 16.3 35.5 43.9 4.5 0.0 Transfers 0.0 0.0 0.0 75.3 23.2 39.5 33.7 As percent of GDP 3.2 5.4 9.5 4.2 2.7 6.5 9.0 Exteral -0.3 3.2 3.7 3.6 -0.1 -0. 1 -2.4 Net domestic 3.6 2.2 5.8 0.6 2.8 6.7 11.4 Banking syKen -1. 1 2.2 4.2 -4.0 1.0 3.8 3.3 Nonbank credits 4.7 0.0 1.6 1.5 1.2 0.3 0.0 Transfers 0.0 0.0 0.0 3.2 0.6 2.6 3.0 L Large positive fuiancing in 1987 and 1989 resulted from significant Paris Club rescheduling credits. Not transfen from the state and local governments and special fund shares of the Federation Account. * 1992 data are preliminary and subject to revision. Source: Ministry of Finance, Central Bank of Nigeria, and World Bank staff estimate. Table 3.10: State and Local Fiscal Trends, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 State governments (Percentage of GDP) Revenue 6.4 7.5 7.1 7.2 7.8 8.4 7.0 Expenditure 7.9 7.6 7.4 5.6 6.2 6.6 5.9 Deficitor surplus -I.5 -0. 1 -0.3 1.5 1.6 1.8 1.2 Local governments Revenue 1.6 1.9 1.3 2.1 3.2 4.3 5.0 Expenditure 1.8 2.2 2.1 1.8 2.8 3.6 3.2 Deficit or surplus -0.3 -0.2 -0.3 , 0.3 0.4 0.6 1.8 Note: Because ound budgetary data is limited, this table illustrates general budgetary trends only. Source: Ministry of Fnance, Centrl Bank of Nigeria, and World Bank Staff Estima. from fees and municipal taxes. State and local revenue generation contributes an estimated 10 percent to national revenues (state revenue averaged 7.3 percent of GDP in 1986-92 with very little variation, despite losses in Federation Account shares in 1990 and 1992). Local government revenues averaged 1.9 percent of GDP through 1989 and then rose to an average of 5.0 percent of GDP after 1990-92, when the local share of the Federation Account was raised 5 points. 30 3.33 From 1986 to 1989, state expenditures averaged 8 percent of GDP. When Federal Government (and then local) government assumed more responsibility for primary education, however, they fell to an average of 6 percent of GDP. Local expenditures rose from an average of 2 percent of GDP from 1986 to 1989 to 3 percent of GDP from 1990 to 1992, as local responsibility for education increased. 3.34 Consolidated figures for total federal, state, and local revenue and expenditures show that-both during the SAP and post-SAP period-Nigeria's fiscal deficit has been variable (increasing from 6 percent of GDP in 1986 to 14 percent in 1988, as revenues fell and expenditures failed to adjust.) In 1989, when oil prices were high, the total deficit fell to 5 percent of GDP then to seven tenths of 1 percent. In 1991/92 the deficit increased to 4 percent of GDP and then to 6 percent when revenues once again fell and extrabudgetary spending increased (see Table 3.11). Table 3.11: Flscal Trends of the Consolidated Budget, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Percentage of GDP) Revenue 23.9 25.3 20.8 24.5 31.7 33.9 31.0 Primary expenditurms 25.2 21.9 24.3 19.1 20.6 26.8 26.5 Primary balance -1.2 3.3 -3.4 5.3 11.1 7.1 4.5 Interest due 4.9 11.3 10.6 10.4 11.8 11.3 10.5 Deficit -6.1 -7.9 -14.1 -5.1 -0.7 -4.1 -6.0 Memorandum itan Total expenditure. 30.1 33.2 34.9 29.5 32.4 38.0 37.0 Note: Because sound budgctary data is limited, this table illutra general budgetary trends only. Source: Ministry of Finance, Ccntrl Bank of Nigeria, and World Bank staff estimate. C. Public Enterprises 3.35 By 1990, Nigeria's public enterprise sector (at both the federal and the state levels) accounted for 30 to 35 percent of GDP (excluding petroleum-related parastatals, which accounted for 15 percent and one fifth of modern sector employment). Before the privatization program, the total number of parastatals ranged from 1,600 to 1,700, of which 450 were wholly or partially owned by the FGN, with an estimated book value of N36.5 billion. Approximately 140 federal parastatals were revenue earning. The remainder were charged with the provision of noncommercial services. A 1988 assessment of federally owned parastatals indicated that roughly one half of the equity was concentrated in just seven major parastatals: Nigerian National Petroleum Corporation (NNPC), two steel companies (Ajaokuta and Delta), the Nigerian Airports Authority (NAA), the National Electric Power Authority (NEPA), the National Ports Authority (NPA), and the Nigerian Railway Authority (NRA). Although no accurate breakdown of state- level parastatal holdings is available, state investment in 1990 was estimated to be about 40 percent of that of the Federal Government. 3.36 In terms of direct return on investment and impact on the overall economy (most notably in its failure to deliver adequate public services and its displacement of the private sector from profitable activities), sector performance has been uniformly poor. Most of the Govermnent's large-scale capital projects have not proved cost effective: they use inappropriate technologies, 31 are built in the wrong locations, have long completion delays, and are overcharged by foreign suppliers. In the 1980s, most import-intensive manufacturing parastatals (protected by tariffs and subsidized access to foreign exchange) became increasingly uncompetitive. Large parastatals, furthermore, typically focused on new capital investment rather than the improvement of existing capital stock and long-term neglect of maintenance and operating-cost requirements further depressed plant efficiency. With the SAP trade liberalization and successive devaluations of the naira, therefore, people ceased purchasing substandard parastatal services. For example, vehicle assembly-plant production fell to below 10 percent of capacity. By comparison, small- and medium-sized parastatals-which were better positioned to switch to domestic input suppliers and develop new regional trade links-fared much better. 1. Budgetary Impact 3.37 One of the objectives of the SAP was to reduce the budgetary burden of public enterprises. At the start of the program in 1986, the Government estimated that support to public enterprises consumed 40 percent of the nonsalary recurrent budget and 30 percent of the capital budget. By the end of the program, transfers to commercially oriented parastatals were to be eliminated, while transfers to the remainder were to be set at one half their 1985 levels. Specific goals under the SAP included reduction in steel-sector spending and a review of opportunities for more private sector participation in the petroleum, gas, pulp and paper, and sugar industries. 3.38 To date, the overall budgetary impact of the Public Enterprise Reform Program has been small. A 1990 World Bank review of public expenditures found that success in reducing support to public enterprises was mixed. Parastatal support from the capital budget decreased from NO.6 billion in 1984 to NO.3 billion in 1989, but recurrent support increased from NO.6 billion to N 1.4 billion. Contrary to the objectives of the SAP, furthermore, steel production was still supported at high levels, as were commercially viable industries in the agro-processing, petroleum, and transportation sectors. Finally, the Government is now heavily supporting projects to build an aluminum smelter and a plant for liquified natural gas-both of which could, and should, be financed by the private sector. 3.39 Federal government divestiture of equity in public enterprises under the privatization program has been negligible. Considering that the capital gains from the sale of government equity amounted to N1.2 billion, original shareholding (estimated at N36.5 billion at historic book value) has as yet been reduced by only NO.4 billion and will be reduced by no more than NO.8 billion once the privatization program is completed. 3.40 In addition, the Technical Committee on Privatization and Commercialization (TCPC) focused its privatization efforts exclusively on the Federal Government, even though most parastatals, mostly of small to medium size, are owned by states. In many cases, moreover, privatizations have been merely to shift ownership from federal to state government. For this reason, the privatization of 58 federal parastatals did little to decrease the size of the government portfolio. At the same time, the Federal Government considerably increased its PE portfolio through recapitalization (Savannah Sugar) and additional capital investment (in Ajaokuta, Aluminum Smelter, Nafcon, and Nigerian Machine Tools), such that Government has increased rather than decreased its exposure in the PE sector. 2. Reform Program Objectives and Institutions 3.41 After 1986 when public enterprise reform figured prominently on the Federal Government's agenda, it embarked on the structural adjustment program. In July 1988, following 32 extensive preparation, the Nigerian Government issued Decree No. 25, listing some 145 federal parastatals for privatization or commercialization under the supervision of the TCPC until October 1992. The primary objectives of the program are: * To restructure and rationalize the public enterprise sector * To ensure positive returns on investment in enterprises to be retained in the public domain * To reduce commercially viable parastatals' dependence on the federal budget and encourage their entry into the Nigerian capital market * To reduce the size of the public sector through the sale of public enterprises that can be operated better by the private sector. 3.42 Implementation of the entire privatization and commercialization program was overseen by a small and well-qualified in-house group that drew selectively on outside experts (mostly from the private sector) in preparing detailed elements of the reform program. The chairman of the TCPC reported directly to the President's Office and was independent of the ministries. The reform effort was hindered by considerable overlap in the oversight responsibility given to the line ministries, the Ministry of Finance, and the TCPC. After October 1992, the TCPC was to be succeeded by the Bureau of Public Enterprises, in the monitoring of public enterprise performance. 3. The Privatization Program 3.43 Originally, some 110 enterprises were targeted for privatization by the end of 1991. Of these, one was split into two stages and 18 were rescheduled before 1989 when the TCPC was established. This left a total of 92 enterprises to be privatized under the TCPC. Distinguishing full from partial privatization, a total of 67 enterprises (usually profitable activities such as hotels, textiles, food and beverages, and insurance) were slated for full privatization. Another 25 enterprises (mostly heavy industries or industries of strategic importance such as steel mills, cement, oil marketing, fertilizers, and Nigerian Airways) were scheduled for partial privatization, meaning that government equity was to be reduced to no more than 40 percent. 3.44 By March 1992, the TCPC had privatized 40 parastatais. Adding the 18 pre-TCPC privatizations brings the total to 58. The gross value of funds raised from the privatization program was N 1.65 billion. Nine companies were reclassified for commercialization, another 16 remain under consideration for privatization, and 28-classified for 'no further action'-were removed from the list. (This last category included 12 government-owned commercial and merchant banks in which sale of equity was never intended and several companies tumed out to be nonoperational or nonexistent.) 3.45 The preferred mechanism for privatization involved the flotation of shares on the Nigerian Stock Exchange. In total, 27 enterprises (mostly insurance, textile, and food companies) were sold for N562 million by public offer through the issuance of some 432 million shares. Under what is called deferred public offer, the Govemment privatized five parastatals by selling 100 percent of the equity to a group of private investors on the condition that 40 percent will, in turn, be sold to the Nigerian public within five years-with the expectation that the company will have been turned around by then. A third method of privatization (chosen for seven loss-making parastatals) was to sell the enterprise's assets by public tender to pay off debts or, where feasible, to put the restructured company on the market as a going concern. Finally, the Government sold off its minority share in a textile mill through private placement. 33 4. The Commercialization Program 3.46 Originally, Government listed 11 parastatals for full commercialization and another 24 for partial commercialization. With full commercialization the enterprise would be expected to operate profitably on a commercial basis, raising its fixed investment and working-capital funds on the market without government guarantee. With partial commercialization, the enterprise would be expected to generate sufficient revenue to cover operating expenditures. 3.47 On paper the commercialization process is essentially complete. In 1991, following extensive consultations with the supervising ministries and the private sector, the TCPC obtained approval from the Council of Ministers for the signing of performance agreements between individual enterprises and the Government. The first agreement, involving the 11 River Basin Development Authorities, was signed in April 1992. Each performance contract includes a 10- year corporate plan, which specifies measures of financial performance, capacity utilization, productivity, and service objectives. Management and staff will receive a pay bonus for meeting or exceeding these targets. 3.48 During this transition stage, a number of other enterprise reforms were implemented, including analysis of capital needs measures to reduce bureaucratization and the introduction of reporting and auditing systems. Some enterprises (in particular Nigerian Railways) began to shed surplus staff though others (NEPA) did not. Since Government had decided to commercialize on an 'as is' basis, however, enterprises were not able to undertake extensive rehabilitation and repair programs at this stage. Debts between Government and parastatals and among individual public enterprises were largely reconciled. In the event, however, some N21 billion in capital loans from the Government remained on the public enterprises' books. 35 IV. MONETARY AND FINANCIAL POLICIES 4.1 Under the SAP, financial policy played a dual role. Monetary policy was to remain tight in order to contain demand for foreign exchange and to avoid inflationary pressures. Financial- sector policies were to have a structural component (involving movement toward a more market- oriented financial system) designed to facilitate the mobilization of financial savings and to encourage a more efficient allocation of financial resources. A. Monetary Policy 4.2 Fiscal policy, external developments related to oil market fluctuations, external debt- service requirements, and exchange market policy provide the starting point for the operation of Nigerian monetary policy, which continues to be conducted mostly through direct credit controls. The evolution of the monetary aggregates and interest rates are discussed below. 1. The Monetary Aggregates 4.3 From December 1985 to 1992, broad money more than quintupled (see Table 4.1). Fueled by the increase in credit to the public sector-which rose by more than 150 percent in 1992 and by more than 340 percent since 1986-half of the increase occurred in 1992. Credit to the private sector increased less rapidly-by 33 percent in 1992 and by over 200 percent since 1986. Over most of the period, accumulation of foreign reserves (to the extent that it was not explicitly or implicitly sterilized) added to money growth. In 1992, however, a reserve drawdown of almost US$4 billion effectively wiped out the accumulation of the previous six years. 4.4 In real terms-deflating nominal values by the end-of-period consumer price index (CPI)-broad money has remained almost constant since 1986. The.37 percent increase in real GDP over the period points to a rise in velocity of about one third. At the same time, narrow money increased by 15 percent and quasi-money decreased by 6 percent. Credit to the public sector expanded by 73 percent in real terms; credit to the private sector declined by almost 10 percent. 2. Year-to-Year Developments 4.5 1986. Under the SAP, monetary growth was initially strictly contained. Broad money increased by less than 3 percent and credit to the Federal Government contracted. By contrast, net credit to the private sector increased by 29 percent. In part, this reflected the creation of the second-tier foreign-exchange market and the associated increase in demand for foreign trade finance. State and local administrations also contributed to the overall credit expansion, increasing their net liabilities to the financial sector by 25 percent. Meanwhile, the rate of inflation fell to 13.5 percent, compared with an average of 17 percent from 1980 to 1985. 4.6 1987. In 1987, however, fiscal and monetary restraint began to weaken. Credit to the Federal Government increased by 12 percent-partly at the expense of the state and local authorities, whose net claims on the financial system increased by 65 percent. But although net foreign assets fell by 39 percent, net credit to the private sector remained relatively strong-all of which fueled a 23 percent surge in broad money. 36 Table 4.1: Monetary Survey, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Nairn millions) Net formign aswu 1,839 1,129 10,220 23,120 44,790 58,753 38,522 Net domecnic credit 36,767 41,867 52,742 45,998 53,301 73,980 137,316 Public Sector 18,067 19,784 25,195 17,496 19,007 31,419 80,704 Private wctor 18,700 22,083 27,547 28,502 34,294 42.516 56,612 Other Items (net) (14,255) (13,117) (23,084) (24,862) (35,930) (49,878) (45,773) Broad money 24,351 29,879 39,879 44,256 62,161 82,855 130,066 Narrow money 11,754 13,612 20,089 24,326 34,918 46,615 79,532 Quasi-money 12,597 16,267 19,789 19,930 27,243 36,240 50,533 (Percentage rate of incease) Net foreignaeu 1.0 -38.6 805.2 126.2 93.7 31.2 -34.4 Net domnetic credit 11.1 13.9 26.0 -12.8 15.9 38.8 85.6 Public Sector -2.6 9.5 27.4 -30.6 8.6 65.3 156.9 Private sector 28.7 18.1 24.7 3.5 20.3 24.0 33.2 Broad money 2.7 22.7 33.5 11.0 40.5 33.3 57.0 Narrow money -6.0 15.8 47.6 21.1 43.5 33.5 70.6 Quasi-money 12.5 29.1 21.7 0.7 36.7 33.0 39.4 (Percentage rte of incrase in broad money) Net formign ats 2.8 -12.8 90.9 294.7 121.0 67.5 -42.9 Net domestic credit 568.8 92.3 101.7 -154.1 40.3 99.9 134.2 Public sctr -74.7 31.1 54.1 -175.9 3.4 60.0 104.4 Private ector 643.5 61.2 54.6 21.8 32.3 39.7 29.9 Broad tmoxney 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Cental Bank of Nigeria. 4.7 While the inflation rate at the end of December 1987 was still moderate Oess than 10 percent), these monetary developments began to affect inflation in the first quarter of 1988, when it jumped to 22 percent a year. During 1987, real interest rates remained positive, which may in part explain the 29 percent growth rate of quasi-money and 16 percent growth rate of narrow money. 4.8 1988. The expansionary budget of 1988 signalled continued monetary relaxation that had begun in 1987. But while the higher credit to the Federal Government was driven by commercial and merchant banks in 1987, in 1988, the bulk of it originated in the Central Bank. In 1988, the Central Bank increased its net lending to the Federal Government by 53 percent, leading to an overall credit increase to the Federal Government of 29 percent. This expansion was partly at the expense of credit to the state and local authorities, which increased their net claims on the financial system by 44 percent. 4.9 As with the Federal Government, net credit to the private sector went up markedly, by 24 percent. Total net domestic credit expanded by more than 25 percent in 1988. Calculated on a year-to-year basis, this led to a 33 percent expansion of broad money by the end of December. These developments were clearly reflected in the rate of inflation, which reached 49 percent by the end of the year. (Most of the large increase in net foreign assets, however, was due to a reclassification of the CBN's net liabilities; it thus had no monetary impact.) 4.10 1989. Given the 1988 policy slippage and the resultant increases in the budget deficit, monetary aggregates, and inflation rates, the Nigerian authorities introduced a drastic monetary package in 1989. The main features of that package included an increase of the rediscount rate to commercial banks from 12.75 percent to 18.5 percent, a rise in the liquidity ratio of 37 commercial banks from 2.5 percent to 22.5 percent and of merchant banks from 2.5 to 30 percent, an adjustment of capital adequacy ratios from 1:12 to 1:10, the transfer of public-sector deposits in commercial and merchant banks to the CBN, and the introduction of an auction system for treasury bills and treasury certificates. 4.11 The contractionary effects of these measures quickly began to be felt by economic agents. Nevertheless, in the short run, they were not reflected in either the narrow monetary aggregate or the rate of inflation. Although quasi money grew by less than 1 percent in 1989, MI expanded by 21 percent, and the inflation rate averaged 34 percent over the course of the year. The transfer of public-sector deposits from savings accounts at commercial and merchant banks to the CBN contributed to the slow growth of broad money as banks restricted their balance sheet growth in response to the decline in their reserve base. Meanwhile, to the extent the transferred deposits were included in Ml, narrow money expanded. 4.12 1990. The monetary contraction in 1989 worked. The year-to-year inflation rate steadily declined through 1990, and by the end of December 1990, prices had increased by only 3.5 percent compared to December 1989. Thanks to the recovery of world oil prices and oil exports in 1990, during the Gulf War, furthermore, international reserves at the CBN (which had grown steadily in 1988), kept increasing during 1990. 4.13 This expansion, however, was not translated into higher monetary aggregates owing to the sterilization policy carried out through the second quarter of 1990. Between the last quarter of 1988 and the second quarter of 1990, while the CBN's foreign assets jumped from N 10.2 billion to N33.2 billion, the CBN's net credit to the Federal Government declined from N21.8 billion to N7.7 billion. In the first half of 1990, moreover, although the total foreign assets of the financial sector increased by 40 percent, overall net credit increased by only 16 percent. 4.14 This sterilization was made possible by the creation of several stabilization and oil windfall accounts. Loosely instituted, these accounts initially proved effective in insulating the economy from external disturbances. But foreshadowing the policy reversal that was to come in the second half of the year, the Federal Government initially replaced lower borrowing from the CBN with higher borrowing from commercial and merchant banks during the first part of 1990. Relative to the beginning of the year, credit from commercial and merchant banks had increased by 70 percent and 100 percent, respectively, by the end of June. 4.15 But in the second half of the year-in an unfortunate move for the longer-term health of the economy-the authorities started to draw down rapidly the 1989 and 1990 stabilization accounts. In the third quarter of 1990, the CBN's net domestic credit to the Federal Government (which should have kept falling as reserves increased during the Middle East crisis) began to increase. Over the course of the year, CBN credit to the Federal Government rose from N7.7 billion to N13.7 billion. Credit from commercial and merchant banks to the Federal Government also continued to rise, so that overall, financial sector credit to the Federal Government had increased by 15 percent by the end of 1990. Meanwhile, the rest of the public sector massively reduced its net claims on the financial sector, and the private sector increased its indebtedness to the financial system by 20 percent. These developments resulted in an expansion of broad money of 40 percent in 1990, most of which was generated in the second half of the year. 4.16 In an effort to contain the expansion of private credit, the CBN adopted a policy of mandatory holdings of non-marketable interest-bearing stabilization securities. While nominal 38 interest rates did not change significantly from the previous year, the inflation rate declined markedly, effectively raising real rates. In addition, the spread between the average savings deposit rate and the prime rate (about 7.3 percent in January 1990) rose gradually to more than 8 percent after June. 4.17 1991. Monetary events were heavily determined by the foreign assets situation and net credit to the Federal Government. While foreign assets increased during the first half of the year by 25 percent, and net credit to the Federal Government increased by 28 percent, broad money expanded by less than 20 percent-suggesting that net credit to the private sector and the rest of the public sector was severely restricted. 4.18 In the second half of the year, foreign reserves levelled off but net credit to the Federal Government rocketed upward. At the end of December 1991, CBN net credit to the Federal Government had increased by 100 percent, figured on a year-to-year basis. Over the same period, credit to the private sector had increased by 26 percent, while net credit to the states and local authorities had fallen by 20 percent. The combined effect of these events expanded both narrow and broad money by 33 percent in 1991-a rate lower than that for 1990. 4.19 1992. By all measures, monetary developments in 1992 were extraordinary. On the one hand, the cash cost of the January London Club debt-reduction operation4 and the increase in foreign-exchange market funding, (given lower-than-expected export earnings), contributed to a reduction in the net volume of foreign assets equivalent to a money supply contraction of N58 billion. On the other hand, both private and public credit rose to record levels, with credit to the Federal Government increasing by almost 160 percent over the 12 months from December to December. In particular, N 15 billion was extended to the Federal Government during the third quarter (in large part to finance public sector wage increases and relief measures stemming from the March devaluation package). Despite original policy guidelines limiting bank credit growth to 16 percent and repeated CBN attempts to tighten liquidity at commercial and merchant banks, credit to the private sector rose 33 percent. 3. Interest Rates 4.20 Interest rates, like the exchange rate, were to have been deregulated by the SAP. As with the exchange rate, however, progress toward deregulation to market-determined levels was intermittent. As Figure 4.1 and Table 4.2 illustrate, nominal interest rates did not keep up with inflation and (except during two brief periods-in 1987 and 1990, when the rate of inflation was low) real interest rates were negative. 4.21 On August 1, 1987-in the spirit of deregulation-floors and ceilings for deposit and lending rates were removed. In the latter part of the year, the discount and treasury bill rates were increased, permissible credit growth was reduced to 7.5 percent, and the liquidity ratio was increased from 25 percent to 30 percent. The impact of these measures on deregulated interest rates was quickly felt: deposits and lending rates rose above the average level of inflation for the year, yielding positive real rates. Soc Chpte VU. 39 Table 4.2: Selected Interest Rates, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Percentage) Treasury Bille 8.5 11.5 11.8 13.3 17.3 14.5 18.6 Minimum Rediscount tc' 10.0 12.8 12.8 18.5 18.5 15.5 17.5 Deposit Rates (3 months) Commercial Banks 9.2 13.1 13.1 15.6 19.7 15.2 18.5 Merchant Banks 0 0 14.5 20.4 22.9 17.6 29.9 Landing Rates (Prime)' Comnmercial Banks 10.5 17.5 16.3 20.8 25.6 19.9 25.8 Merchant Banks 0 0 16.5 23.5 28.8 20.6 37.1 Real T-Bil rat' -4.5 1.6 -32.1 -21.7 13.3 -6.9 -20.3 Avenge isue ate. ' End of period. Average rates. 'Computed with curmit end-of-period CPI inflation rate. Source: Centrl Bank of Nigeria Annual Report, vaxious isues. Figure 4.1: Selected Interest Rates, 1986 to 1992 40 30- 20 - 10 0 - 10 -20 - - 30- -40- -50 -50 - 70 Dec 1987 | Dec 1989 | Dec 1991 Dec 1988 Dec 1990 Dec 1992 0 DeposIt Rate + Real Deposit"Rate 0 Lending Rate L Real Lending Rate Note: These rates are *nd of month commercial bank rates. 40 4.22 But during the first part of 1988 (in line with the government's expansionary budget stance) monetary policy was relaxed and. despite rising inflation. nominal interest rates started to decline. In early August, when mazroeconomic policies were tightened across the board, nominal interest rates increasec agair but the rate of inflation (as measured by the 12-month change in the CPUj reached 55 perzent Rea interest rates, tnerefore, reached record negative levels in 1988. W'hiie it is unzllar wh\ suc.r a discrepancy arose between nominal interest rates and inflation rates in a dereguiLted environment, moral suasion and the pressure of public expectations could help to explain it. 4.23 In 1989, the evolution of nominal and real interest rates was similar to that in 1988. Although Nigeria's monetary authorities partially succeeded in controlling monetary expansion, the inflation rate remained high. Tl,e increase of nominal rates notwithstanding, real rates remained substantially negative. 4.24 But 1990 reflected the lagged effect of monetary restraint in 1989, showing a rate of inflation of less than 5 percent. In 1990, monetary policy remained tight until the middle of the year, when expansion resumed. Throughout the year, therefore, although nominal interest fates remained unchanged, real interest rates were positive, with the real T-bill rate exceeding 13 percent. 4.25 These developments contributed to the perception in Nigeria that nominal lending rates are not responsive to market fundamentals and created public pressure to reinstate interest rates caps. From January to December 1991, therefore, the CBN set a maximum ceiling of 21 percent on the prime lending rates of commercial and merchant banks, with a 4 percent maximum spread between average funding costs and lending rates, and the entire structure of interest rates was artificially reduced. As inflation rates began to rise (albeit slowly, given the pace of money expansion), real interest rates became negative again. In 1992, the CBN removed the cap on lending rates but maintained and modified the restriction on interest rate spreads at 5 percent above average funding costs. As the inflation rate exceeded 40 percent, and money-supply growth was above 65 percent, lending rates were adjusted upward. By December, they had reached 54 percent. Deposit rates increased more slowly. 4. Instruments of Monetary Policy 4.26 In addition to the purely macroeconomic goal of achieving monetary and price stability, the SAP sought to make economic policy making more market-oriented in Nigeria, supported by financial sector institutional and regulatory reforms. But while the CBN had often reiterated its intention to move toward market-based indirect monetary policy instruments since 1986, neither the country's macroeconomic outlook nor its institutional environment favored such a system. Although the official credit control system was somewhat streamlined following the introduction of the SAP, commercial credit remained subject to control mainly by direct measures. 4.27 The Central Bank Decree of 1991 gave the CBN greater nominal control over the conduct of monetary and banking policy. But although Federal Government access to ways and means advances was to be reduced from 25 percent to 12.5 percent, government borrowing continued unabated. Because the CBN monetary authorities have been hampered by the absence of timely information and lags of up to several weeks in bank reporting, the decree also reinforced its authority over banking institutions with respect to financial reporting and the issuance of policy directives. 41 4.28 Credit Ceilings. In Nigeria, individual bank-credit ceilings have been the major instrument of commercial credit control. The CBN indicates, at the beginning of each year, allowed growth of individual bank credit as a percentage of loans and advances outstanding-or, since 1990, of total credit to the domestic economy. Until August 1988, the ceiling for merchant banks was set as a percentage of total assets, which contributed to the relative rise in the share of merchant banks in total bank credit from 1986 to 1988. This was subsequently redefined, however, to conform with the commercial bank-ceiling definition. 4.29 Before 1986, credit ceilings took the form of complex, multisector credit guidelines. The system was simplified under the SAP with a view to eventually eliminating it. In addition to overall growth targets, the current system of credit guidelines now prescribes sectoral targets in a simplified, two-tier system, with a priority sector, (agriculture and manufacturing) to receive at least 50 percent of total new credit and other sectors to receive at most 50 percent. Some sectoral-lending requirements such as the requirement that credit to rural clients reach a certain minimum fraction-45 percent until 1990, 50 percent from 1991-of deposits collected from rural areas remained in place. 4.30 Ceilings and minimum requirements were largely ignored. Penalties for excess or insufficient credit included the deposit of amounts equal to the excess (or the shortfall) in noninterest-bearing CBN accounts or the on-lending of funds to specialized credit institutions. In general, commercial and merchant bankers found it less costly to incur the penalties, which were often imperfectly implemented. To the extent that these penalties were collected, they had little impact on bank profitability. In 1991, for example, excess credit-growth penalties reached N671 million which-at 1991 nominal interest rates-amounted to an opportunity loss of little more than N 130 million. 4.31 Cash and Liquidity Requirements. Commercial banks were subject to reserve requirements in the form of cash ratios and to liquidity requirements in the form of a liquidity ratio. Until 1990, cash ratios (determined by a bank's size) were applicable to commercial banks only and had remained unchanged from 1980 to 1988. Since 1990, they have been used repeatedly in an effort to control bank liquidity. Cash ratios were raised in August 1988 from a range of 2 percent to 5 percent of demand deposits to a range of 4 percent to 7 percent. In January 1989, they were raised to 5 to 8 percent of demand deposits and then again, in April 1989, to a range of 6 percent to 9 percent. In January 1990, merchant banks were subject to a cash ratio of 5 percent, and in January 1991, the system was unified and extended. Both commercial and merchant banks were subject to a cash ratio of 3 percent of total monetary liabilities. Finally, in September 1992, the ratio was doubled to 6 percent to contain the rise in liquidity. 4.32 Although liquidity ratios are not, strictly speaking, monetary policy instruments, they played an important monetary role when the Central Bank tried to absorb excess liquidity directly. In 1986, the CBN recalled from importers the naira counterpart of external trade obligations in arrears. Although the CBN extended some liquidity assistance to the banks, liquidity withdrawal forced Nigeria's commercial banks to cut back on lending and to mobilize new deposits in order to meet their required liquidity ratio. In 1989, when the CBN took over all federal government deposits from commercial and merchant banks, the CBN forced another liquidity shock on Nigeria's commercial banms. 4.33 In 1990, the CBN attempted to eliminate some excess liquidity by issuing stabilization securities for N800 million (in August), N 1.7 billion (in September), and N 1.1 billion (in the last quarter of the year). In 1991, total issues reached almost N7 billion-equivalent to 15 42 percent of the banks' total deposits. In September 1992, along with cash ratio requirements, the CBN issued another N3.3 billion of stabilization securities. These securities are nonmarketable, 90 day instruments that pay an interest rate, at issue, equal to the treasury bill rate plus a 1 percent margin. 4.34 Results. From available data, it is difficult to assess the impact of these measures. The tightening of commercial bank liquidity in 1991 and 1992 could not compensate for the CBN's contribution to the system's liquidity through quasi-automatic credit extensions to the Federal Government and other public sector entities. At best, it partially checked the banking system's money multiplication. Within the banking system itself, furthermore, policy tightening had an uneven impact, with banks better placed than other economic actors to cushion liquidity shocks (as in the case of those that have privileged relations with public entities). 4.35 In July 1993, the CBN announced that it would start implementing indirect monetary policy procedures and eliminate individual bank credit ceilings for eligible banks. It is not clear at this stage whether these procedures will be little more than a relabelling of current liquidity- control practices or whether they will, indeed, clear the way for open-market operations. B. Filnancial Sector Polices 4.36 Nigeria's financial system is one of the most complex and diverse in sub-Saharan Africa. The value-added from the finance and insurance sector as a share of GDP, increased from 3.9 percent in 1986 to 8.7 percent in 1992, creating new employment opportuities-particularly in urban areas. Since 1986, moreover, the number of financial institutions and the scope of fimancial services they offer have increased dramatically, creating a need for major policy reform to promote sound and efficient financial intermediation. 4.37 At the end of 1992, the formal financial sector in Nigeria included the CBN, the Nigeria Deposit Insurance Company (NDIC), 66 commercial banks, 54 merchant banks, several development banks, 401 community banks, 228 People's Banks, more than 600 finance companies, 132 foreign exchange bureaux, some 200 mortgage and insurance companies, the stock market, and several other institutions specializing in the mobilization of medium- to long- term capital (Table 4.3.). One indicator of the rapid growth in the banking system is the decline in the number of persons per bank branch from 57,000 (in 1986) to around 29,000 (in 1992, including the Community and People's Bank). Despite this increasing institutional depth, however, it is estimated that roughly one-third of the economy-broadly equivalent to agriculture's share of the GDP-is not monetized. 4.38 The Central Bank's share of total assets in the financial system increased from 33.4 percent in 1986 to 52 percent in 1991-before declining to 47.9 percent in 1992 (see Table 4.4). This expansion-which was accompanied by a decrease in the banking system's share of assets- reflected the CBN's underwriting of government domestic debt through the issuance of Treasury bills and certificates. The 1992 decline resulted from a significant drop in foreign ssets. 4.39 Despite the institutional deepening in the financial sector, the composition of financial savings through banks and nonbank financial institutions remained fairly stable (see Table 4.5). Commercial banks continued to maintain a dominant position in mobilizing financial sving, while the role of merchant banks decreased in terms of share of total asets, deposit liabilities, and aregate credit. Although data for nonbank financial institutions remain incomplete, their relative share in total financal ssets was not likely to exceed S to 8 percent. 43 Table 4.3: Structure of the Flnancial System, 1985 to 1992 1985 1986 1987 1988 1989 1990 1991 1992 Total deposiu-taking banks 40 41 50 66 81 107 185 523 Commercial banks 28 29 34 42 47 58 65 66 Merchant banks 12 12 16 24 34 49 54 54 Community banks - - - - 1 66 401 Foreign exchange buaus - - - - 52 a8 102 132 Fuiance companies - - - - a ma 553 666 People's banke - - - - na na 200 228 Deposit insurnce corporation - - - - I I I I Unit trim - . - - - 1 9 0 SLockbvkern 19 23 33 43 61 80 110 140 Mortgage banks - - - - - 1 23 145 Discount houses - - - - - - - 3 Memorandum items Total bank brachee 1,323 1,394 1,516 1,711 1,912 2,013 2,107 2,385 Comaercial bank bmaches 1,297 1,367 1,483 1,665 1,856 1,939 2,023 2,269 Merchantbankbrancbes 26 27 33 46 56 74 84 116 ' Tbe first People's Bank was cmased in October 1989. b Of tbse, 48 finane comnies were liceed at the ed of 1992, and the et have only provisional licenss. * Excluding Comunity Bank and People's Banks. Sourme: Central Bank of Nigeia, and Nigria Deposit Innuace Coqxpotion. 4.40 New Commerial Banks. Encouraged by a liberal licensing policy, the number of commercial and merchant banks tripled over the past seven years, slowing only after late 1991, when the authority to grant new banking licenses was transferred from the Ministry of Finance to the Central Bank. While it is too early to assess the impact of this expansion in the banking system, a few points are noteworthy. 4.41 There is general agreement that the primary motive for the creation of most new banks was to gain access to the official foreign exchange market and to engage in profitable arbitrage activities between the official and the parallel foreign exchange markets. New banks, therefore, remain vulnerable to changes in the foreign exchange regime and frequently lack a stable deposit base. But because new banks are not burdened by longstanding loan portfolio problems, they tend to be more innovative in offering new financial services. While the competition from new banks is significant, therefore, not all new entrants will be commercially viable over the medium term. 4.42 Increasing competition between commercial and merchant banks has moved Nigeria toward a more unified banking sector. Differences between the two in terms of capital requirements, authorized activities, and branch networks have begun to disappear. Commercial banks can now engage in leasing (previously the exclusive domain of merchant banks). By some token, a number of merchant banks have applied to be reclassified as commercial banks. Although merchant banks still face higher cost of funds and remain excluded from the clearinghouse system, this is partially offset by the lower noninterest expenses generated by much smaller branch networms. 44 Table 4.4: Assets or the Financial System, 1986 to 1992 Millions of naira 1986 1987 1988 1989 1990 1991 1992 (Naira millions) TOTAL ASSETS 79,380 108,799 145,204 185,039 256,629 352,642 439,063 Centnrl Bank of Nigeria 26,541 41,326 61,522 S7,650 133,359 183,265 234,255 BankingSystem 48,024 62,108 76,430 37,641 111,551 155,457 232,273 Commercial Banks 39,579 49,828 59,226 65,524 82,958 117,512 181,736 Merchant Banks 8,445 12,280 17,204 22,117 28,593 37,945 50,542 Othen 4,815 5,365 7,252 9.749 11,719 13,921 22,530 Development Banke 1,529 1,727 2,071 2.132 2,559 3,071 3,635 Insurance Companies 2,647 3,162 4,472 6,741 8,060 9,323 10,458 Mortgage Banks' 639 477 709 845 1,100 1,400 1,667 Conununity Banks - - - - - 127 392 People'ranka - - - 30 Da na 435 Fuance Companies' Ds ns na na na Da 5,393 (Percentage share) TOTAL ASSErS 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Central Bank of Nigeria 33.4 38.0 42.4 47.4 52.0 52.0 47.9 Banking Sysem 60.5 57.1 52.6 47.4 43.5 44.1 47.5 Commercial Banks 49.9 45.3 40.3 35.4 32.3 33.3 37.2 MerchantBanks 10.6 11.3 11.3 12.0 11.1 10.3 103 Othen 6.1 4.9 5.0 5.3 4.6 3.9 4.6 (PercenLage rate of growth) Total Awets 37.1 33.5 27.4 38.7 37.4 33.7 Banking Sytem 29.3 23.1 14.7 27.3 39.4 49.4 Commercial Banks 25.9 18.9 10.6 26.6 41.7 54.7 terchant Banks 45.4 40.1 28.6 29.3 32.7 33.2 ' NIDB, NACB, and NBCI; data for 1990-92 are etimates. Damt for 1990 nd 1991 a stimstes. * Baed on narna from 297 of 402 licened Community Banks. ' 1992 data reflet reuwm fiom 207 of 666 opeating finace companies. Sour: Cental Bank of Nigra. Table 4.5: Financial Savings at Banks and Nonbank Financial Institutions, 1986 to 1992 Avg. % 1956 1937 195 1939 1990 1991 1992 191 F2 (Nmi MwiiAm) TOTAL FINANCIAL SAVINGS 13,930 13,660 23,226 23,763 29,651 37,738 54,019 20 Savus and Tame Depoi i) at Commercial Banks 11,48 15J,0S9 1,3.97 17.313 23.137 30,360 42.439 19 (u) at Mechant Bfanks 1,740 2,323 3,933 3,971 4,349 5,007 1,342 22 NatioalPfovidentFund Sa 614 651 699 723 650 756 4 1Mo10111 Instinatiom 121 134 195 213 305 434 729 25 Lif Ins ncime Punds - - n 1,067 1,137 1,242 1,411 - Otwr Depaosuy InsAiOe s u - _ 46 342 - (Perentag dha-) 5v. and Toe Deps. () at Comm=rcisl lB 52.5 10.9 79.2 75.0 73.0 30.4 75.6 (i) a Merchant Banb 12S 15.1 17.1 16.7 14.7 13.3 15.4 Al otbr inatntioi 5.0 4.0 3.6 8.3 7.3 6.3 6.0 ' Time and Saviqp Deposit at Coammnity Banb d Savingp Deposts at Peopl's Dank. Sore: Ceal Bank of Niygeia. 45 4.43 Ownership. Deregulation and privatization had a marked impact on ownership distribution in the banking sector. By the end of 1992, the private sector's share in paid-up equity capital had increased to 72 percent, with the remainder being distributed among state governments (11 percent), Federal Government (9 percent), and foreign equity holders (8 percent). As discussed beiow, a large number of state government-owned commercial banks now face technical insolvency. 4.44 In late 1992, with the commencement of the privatization program for 14 federally owned banks (including the three largest commercial banks), the Federal Government's direct participation in the banking sector has largely disappeared. To ensure equal regional representation in the ownership of the privatized banks, shares were sold to individuals and institutions on a strictly state-proportional basis. The 40-percent limit on foreign shareholding in any type of bank, introduced in the late 1960s, remains a major disincentive to foreign banking. A revision of this policy could be instrumental in raising Nigerian banking standards as it has been in other African countries. Foreign ownership of commercial banks in Nigeria fell, in fact, from 12.3 percent in 1991 to 8.6 percent in 1992. 4.45 Liberalization of Nigeria's financial system also entailed the gradual shift from direct to indirect monetary control. In 1992, therefore, three discount houses were licensed by the CBN to underwrite money market instruments and to help establish secondary markets for such instruments. 4.46 Regulatory Refonn and the NDIC. Nigeria's Government initiated a fairly comprehensive program of reform aimed at reducing direct controls on competition and promoting more efficient intermediation. Financial deregulation has encompassed interest rates, the licensing of new banks, sectoral credit allocation, the withdrawal of public sector deposits, and the recent phasing-in of open-market operations. Beginning in 1989, there were important institutional and regulatory changes, including the establishment of a deposit insurance system (1989), the introduction of new prudential guidelines and accounting standards (1990), the adoption of a new legal framework for banks and other financial institutions (1991), and enhanced autonomy and supervisory responsibilities for the Central Bank (1991). 4.47 The Nigeria Deposit Insurance Corporation (NDIC) insures individual bank deposits up to N50,000 and, with the CBN, is responsible for promoting the soundness of the banking sector. The NDIC's authorized share capital is N100 million. The deposit insurance fund is funded through an insurance fee equivalent to 15/16 of 1 percent of total deposits, which is collected from insured banks. 4.48 Past reviews of the NDIC's status and operations noted that it is underfunded owing to its very small initial capital base, that high insurance premiums on banking deposits add to the high cost of transaction within the financial system, and that the banking system does not have sufficient confidence in NDIC's ability to act. Four years into operation, the NDIC is established as a supervisory authority, a role largely complementary to that of the CBN. Both the NDIC and the CBN, however, were overwhelmed by the rapid expansion of financial institutions, which undermined efforts to improve supervisory standards. 4.49 Bank Supervision. In principle, Nigeria adopted the US approach to banking supervision, relying primarily on on-site examination of banks to determine their safety, soundness and compliance with banking law. The CBN and the NDIC focused their joint supervisory efforts primarily on problem banks to determine the extent of insolvency and devise methods for dealing with them. Overall, these special examinations appeared comprehensive in 46 scope and helped clarify banks' financial position. They emphasized the need to address the growing problem of financial distress among banks. Examinations were less effective, however, in developing scenarios for future action, and consistently underestimated the overall cost of recapitalization. 4.50 In contrast to Nigeria's progress in on-site bank examination, little headway was made in off-site-supervision, the other key component of bank supervision. Off-site supervision relies on the periodic submission of financial data to the Central Bank. This information would allow the CBN to establish an early warning system for capital adequacy, asset quality, profitability, and liquidity, both for individual banks and the system as a whole. Given that Nigeria's banking system has grown to 120 banks, the absence of an accurate and timely off-site monitoring system seriously compromises the overall effectiveness of bank supervision and monetary policy. 4.51 1990 Prudential Guidelines and Accounting Standards. Under the new guidelines, banks are required to classify credit facilities as "performing" or "nonperforming' based on the payment of both principal and interest. 4.52 The guidelines also introduced international (Basle) standards for the treatment of interest accrual on problem credits-which can no longer be realized as income-and call for mandatory provisioning for nonperforming credits based on quantitative indicators. With respect to payment of interest on facilities classified as substandard, doubtful, or losses, interest overdue by more than 90 days is to be suspended and recognized only on a cash basis. In addition, principal repayments more than 90 days overdue should be fully provided-for and recognized on a cash basis only. Regarding outstanding loan balances, the guidelines call for mandatory specific provisioning of 10 percent for substandard credits, 50 percent for doubtful credits, and 100 percent for losses. 4.53 The same provisioning criteria and time frames also apply to the 'other assets" category, which are often used to hide substantial losses. 'Other assets" include checks purchased and uncleared after the permissible clearing period, fraud cases, interbranch items, and all other intangible suspense items. 4.54 In addition, there are limitations on the extent to which security can be taken into account. When a credit is in arrears for more than six months, the outstanding unprovided-for principal should not exceed 50 percent of the estimated net realizable value of the collateral. When arrears reach one year, there should be no outstanding, unprovided-for portion of the credit facility-irrespective of the estimated net realizable value of the collateral. 4.55 Aside from these specific provisioning requirements, each bank is required to make a general provision of at least 1 percent of risk assets not specifically provided for. Although no up-to-date picture on the status of provisioning requirements is available, it should be noted that, upon introduction of the guidelines in 1990, cumulative provisions with respect to doubtful debts increased from N4. 1 billion in 1989 to N7.7 billion. Although the guidelines are intended to reduce banks' reluctance to recognize and deal with problem credits, their enforcement depends on the quality of external auditors. Under the new Banking and Other Financial Institutions Decree (BOFI), the CBN is entitled to issue a list of acceptable extenal bank auditors and to incorporate assessment of the degree to which a bank adheres to the prudential guidelines into its on-site examinations. 4.56 Capital Adequacy. In late 1990, the CBN announced that commercial and merchant banks had until June 1992 to comply with higher requirements for minimum paid-up share 47 capital. For commercial banks, the minimum was increased from N20 million to N50 million, and for merchant banks from N 12 million to N40 million. 4.57 The CBN's intention in raising requirements was to force banks to maintain a larger cushion of capital to support their activities and protect depositors. At the end of 1992, at least 10 insured banks (notably state government-owned commercial banks) were still seriously undercapitalized-a problem made worse by the considerable number nonperforming loans eroding many banks' capital bases. 4.58 In 1992, banks needed an additional N5.6 billion to meet the minimum statutory capital funds requirement for the banking system as a whole, in addition to adequate capital to cover their risk assets. In 1992, moreover, the minimum ratio of capital to total risk-weighted assets was increased from 7.5 percent in 1991 to 8 percent with at least half of that being first-tier capital, or paid-up share capital and reserves. 4.59 Two decrees, which replaced the Central Bank of Nigeria Act of 1958 (as amended) and the 1969 Banking Act (as amended), formed the centerpiece of the banking reforms in 1991. These decrees provided an updated legal framework for the regulation of banking and nonbank financial institutions. 4.60 The Central Bank of Nigeria Decree (No. 24, of 1991) gave greater authority and autonomy to the CBN with respect to the conduct of monetary and banking policy, and reduced Federal Government access to ways-and-means advances from 25 to 12.5 percent of current-year revenues. According to the decree, the CBN is answerable only to the President. In practice, however, the CBN has not achieved autonomy in monetary matters or been able to restrict government access to deficit financing through the Central Bank. 4.61 The Banks and Other Financial Institutions (BOFI) Decree (No. 25, of 1991) provided basic operating guidelines for banks and other financial institutions and incorporated changes designed to liberalize the competitive market environment. The decree broadened the CBN's regulatory reach to cover financial institutions with activities in the informal sector (such as community banks, finance companies, and the foreign exchange bureaus) whose influence on the Nigerian economy is growing rapidly. 4.62 Portfolio Quality and Financial Distress. Technical insolvency and financial distress in Nigeria appear to be pervasive and increasing (see Table 4.6). This deterioration of the financial system stems from macroeconomic instability, distortions in the real sector, political interference in credit decisions, poor supervision, management deficiencies, and the rapid proliferation of financial institutions. With the country's capacity for supervision overstretched, fraud and wasteful overheads are on the increase, while credit skills are on the decline. A large number of financial institutions, furthermore, would not be viable without rents obtained through foreign exchange transactions or the use of finance companies to circumvent banking regulations. Based on NDIC data, by the end of 1992, classified loans in Nigeria made up about 45 percent of the banking system's total outstanding loans. This was up from 39 percent in 1991. 4.63 The number of banks classified as technically insolvent increased from 8 at the end of 1991 to 16 at the end of 1992. Dominated by state-owned banks-and in increasing numbers- private commercial banks, these distressed banks represented more than one third of all deposits. Nonperforming loans, furthermore, amounted to 67 percent of total loans. In 1992, with the number of distressed banks increasing, adjusted shareholder funds deteriorated to a negative position of N4.6 billion-grossly inadequate to cover classified loans. A large number of banks, 48 moreover, have yet to undergo banrk Table 4.6: Indicators of Banking Distress examination and audit, so that the number of insolven: Nigerian banks and the extent 1991 1992 of their distress is, in fact, likely to be Distresse, banai 8 16 much higher. State-owned 7 8 Clauified loans (Naira billions) All banks 12.6 18.S 4.64 Bank Restructuring. As of late In distreased banks 4.1 7.7 1993, 16 banks judgedi te be in distress in R ntio of cl uified to tol loans 39 45 1992 were still open for business and the Percentage in ditresaed banks 77 67 CBN and NDIC have not been able to take Capital requiremnent All banks -1.9 -5.6 the necessary steps toward their closure, Stste-owne,d -2.2 4.8 merger, or recapitalization. This poses Private commercial 0.2 -0.3 considerable threat to the soundness of the Merchant 0.1 -0.5 Distmassd -2.4 -6.1 banking system, but power to initiate Uquidity ratio (Percenuge) remedial action rests with the President. Comrercial banks 58 31 Merchant banks 30 25 Distressed banks 13 4.65 In their 1991 progress report on distressed banks, the CBN and NDIC Shortfall -, surplus + observed that the Government has yet tO Source: 1992 NDIC Annual Report. appreciate the implications of delay and advanced the following recommendations: to amend operating laws to enable effective regulation and restructuring of banks; to review and strengthen the supervisory framework of the CBN and NDIC; and to strengthen powers of administrative enforcement of the regulatory authorities. 4.66 Until early 1993, the only tangible measure was the 1990 expulsion of the insolvent National Bank of Nigeria (NBN) from the clearing system and its subsequent take-over by the joint CBN-NDIC restructuring committee. Yet, the NBN remains partially operational, with losses continuing to mount. With presidential approval, the CBN and the NDIC have now embarked on a joint restructuring effort. In May 1993, they took over the management of five more distressed banks, all majority-owned by state governments. 4.67 Finance Companies. Finance companies constitute the most significant group of Nonbank Financial Institutions (NBFIs), accounting for an estimated 15 to 25 percent share in the banking system's credit operations. Yet, until 1991, finance houses were only required to register as limited companies under the Companies and Allied Matters Decree (1990) or-if they operated as investment advisers, issuing houses, brokers or dealers-with the SEC. Finance companies have not, therefore, been subject to any capital, liquidity, or reserve requirements, or to on-site inspections. 4.68 In January 1991, when the CBN imposed interest rate ceilings on banks, regulatory oversight of NBFIs became even more difficult. Because interest rate restrictions did not apply to finance companies, banks that did not already own finance companies sought close affiliation with them in order to circumvent the CBN guidelines. But with the issuance of the BOFI Decree in 1991, finance companies, too, were required to apply for licenses by the CBN. 4.69 A sizable number of finance companies were forced into liquidation in recent months, reflecting the considerable financial distress of highly leveraged nonbank financial institutions. Because of Nigeria's inadequate supervision of finance houses, moreover, depositors attracted by their extremely high interest rates run considerable risk of bearing the entire cost of failure, which could spill over into the banking system. Most depositors have now flown to better-quality 49 institutions, but these developments underline the need for better assessment of the extent and causes of distress, closer supervision and more timely failure resolution. 4.70 Mortgage Institutions. In 1987 the Federal Mortgage Bank of Nigeria (FMBN) was established as part of the new National Housing Policy to mobilize funds for mortgages and to license and supervise secondary mortgage banks. By mid-1993, Nigeria had licensed more than 200 secondary mortgage banks. 4.71 As originally envisaged, merchant and commercial banks would deposit 10 percent of their total loan portfolio in a Housing Fund at concessional interest rates. At the same time, workers with annual earnings of more than N3,000 would deposit 2.5 percent of their salaries with mortgage banks at nominal interest rates of 4 percent. Opposition from banks and contractual savings institutions, however, against mandatory deposits at below-market rates is strong and has prevented secondary mortgage banks from operating in any substantial way. 4.72 Development Finance Institutions (DFIs). The Nigerian Industrial Development Bank, the Nigerian Bank for Commerce and Industry, and National Agriculture and Cooperative Bank are largely funded through CBN credit lines and from penalty deposits received from banks that fail to meet sectoral-lending targets. The quality of these DFIs' financial portfolio, however, is among the worst for all financial institutions. 4.73 Over the past two years, the Government has set up a number of sectoral DFIs to finance projects in the areas of tourism, transport, urban development, and education. The majority equity in these institutions arises from the Government and is supplemented by various levies on the private sector. Sectoral DFIs typically lend at subsidized interest rates and operate under the supervision of the relevant sectoral ministries rather than the Central Bank. The Central Bank is also excluded from the licensing, regulation, and supervision of insurance companies and pension schemes. (As of now, aggregate accounts for these institutions are not available.) 4.74 Rural Credit. Most rural Nigerians have little access to formal banking services which has resulted in a dual system of formal and informal credit markets with different prevailing credit costs. Nigerians living in rural areas rely generally on such informal credit sources as traditional Esusu credit or private (mostly family) loan assistance. Today, a wide variety of (mostly urban-based) financial intermediaries caters to the credit needs of large- and medium- sized rural enterprises, but for small-scale enterprises and individual entrepreneurs in the countryside a credit gap still exists. 4.75 In 1990, the Government sponsored the introduction of community banks to provide self- sustaining, grassroots financial services similar to those provided by a credit union. The community banking scheme targets rural areas that traditionally had few formal financial services, and was accorded legal status in 1992 by Community Bank Decree No. 46. 4.76 Under CBN, a National Board for Community Banks will license and supervise community banks. As of the end of 1992, returns for 297 of the 401 registered community banks showed total assets of about N895 million, of which credit facilities accounted for about N140 million. These 297 community banks had total deposits of N580 million and a paid-up capital share of N215 million. The system reported problems associated with inadequate bookkeeping and inordinate delays in the clearing of checks through correspondent commercial banks. 4.77 The People's Bank of Nigeria (PBN) commenced operations in 1989 with the aim of extending credit facilities to both rural and urban low-income traders, craftsmen, and 50 microenterprises. PBN loans are usually granted at below-market interest rates on the basis of group membership in cooperatives or trade associations. At the end of 1992, the asset base of the PBN was N435 million, with total loan disbursements of N270 million to some 1.6 million beneficiaries. Its key problems are dependence on government donations, very high administrative costs, management deficiencies, and negligible savings mobilization owing to low interest rates. 4.78 According to a joint CBN-NISER survey, however, the public response to both the community banks and to the PBN has so far been muted. It remains to ensure an adequate and equitable distribution of credit, therefore, by integration of the formal and informal audit markets. 4.79 Capital Market. The capital market has yet to benefit fully from Nigeria's financial reforms. At the apex of the capital market, the SEC regulates the stock exchange and other participating institutions and has the power to approve and regulate mergers and acquisitions. The SEC fixes the prices of all new stock issues (including those for quoted companies) but routinely sets them at low levels. (For this reason, jurisdiction over price setting was partially removed from the SEC in early 1993 and transferred to issuing houses.) Together with high transaction costs, inordinately low prices have dampened activity in the stock market in recent years. 4.80 As a result, total market capitalization is now only about 6 percent of GDP, and from 1989 to 1991, the total value of shares traded on declined from N610 million to N242 million before recovering to N491 million in 1992. Over the past five years, government stocks, industrial-loan stocks, and preference shares have remained depressed. Traditionally the most active segment in the secondary market, equities, accounted for 80 percent of overall trading value in 1992. The increased pace of privatization, coupled with a reduction in withholding tax on dividend payments, expectations that investment returns will stay ahead of inflation, and moves to deregulate the capital market resulted in a recent surge in Nigeria's capital market. 51 Part 2. Perfonnance From 1980 to 1986, Nigeria 's real GDP declined 2 to 3 percent a year. By contrast, for six years following the introduction of the SAP, real GDP grew by some S percent a year. Under SAP policies, both agriculture and manufacturing showed signs of recovery and nontraditional exports experienced modest growth. Despite these successes, SAP could provide only a partial offset to the colossal drop in Nigerian buying power brought about by the collapse of the international oil market. Today Nigenan consumption and income are little higher than they were in the early 1970s, before the oil boom. The supply response to the SAP and the irnpact on national income, living standards, and the balance of payments are discussed in Chapters V, VI, and VII. 53 V. THE SUPPLY RESPONSE 5.1 After the SAP was adopted. Nig.ri2's a-ricultu-z!. iidustrial and service sectors began to revive (see Figure 5. 1). The recovery of tne non-oil sectors started somewhat earlier than that of the oil sector (minini) and co::inued loncer. Thc upturn in the oil sector did not get under way until 1988; but once starve< it showed 2,nsiderahle vigor. Overall economic growth averaged close to 5 percent per annum durinc '986-92. as compared to a decline of nearly 2 percent in the preceding six years (see Table 5 1). Although the SAP era's recorded growth of 5 percent per annum may not be exceptional by international standards, a robust, sustained growth turnaround of 7 percentage points Der annum is quite creditable. Figure 5.1: Sectoral Performance, 1977 to 1992 so 1 .40C 30 20 10~~~~~~~ Note: Billions of naira in 1987 factor costs. Soumce: Federal Office of Statistics. 5.2 To a large extent, Nigeria's economic recovery reflects a strong supply response to improved economic incentives. Under the SAP, for instance, the exchange rate policies resulted in higher prices and profits for non-oil export production and import substitutes, and output accordingly expanded. But policy change was not the whole story. The post-SAP period coincided with the return of normal rainfalls after an extended and devastating drought. In 1988, two years after the adoption of the SAP, oil prices stabilized, although at relatively low levels. Furthermore, the upgrading and rehabilitation of rural infrastructure begun before 1986 was taking effect. 5.3 Nor did all policies implemented after 1986 promote growth. Export bans were expanded in the late 1980s, depressing certain dynamic segments of agriculture, while import restrictions continued to hamper a number of manufacturing industries. Furthermore, many adjustment policies were only partially implemented or were abandoned mid-stream. Little progress was made in the restoration of fiscal discipline, and the resultant monetary expansion exerted strong upward pressure on prices and downward pressure on the naira. This in turn led to extensive 54 Table 5.1: Economic Performance Before and After the Introduction of the SAP Annual rates of growth 1980-86 1986-92 (Percentage) Agriculture 0.5 3.8 Industry -5.1 4.5 Mining -5.9 4.3 Manufacturing -1.8 4.9 Services 0.2 6.3 GDP -1.7 4.7 Oil-based value-added -5.3 4.5 Non-oil value-added -0.2 4.9 Note: Compound growth rates based on value-added at factor cost in constant 1987 prices. Source: Federal Office of Statistics. government intervention in the foreign exchange market. In addition, substantial subsidies on petroleum products and fertilizers (financed at considerable expense to the Federal Government) remained throughout the adjustment period, resulting in the misallocation and inefficient use of resources. 5.4 On balance, however, under the SAP, the economic environment became more conducive to growth during the SAP era. As is evident from Figure 5.1 and Table 5.1, the recovery was sustained and broadly based. Post-SAP expansion, furthermore, was well in excess of population growth, thus permitting an increase in per capita income. Nonetheless, by the end of 1992 (and in spite of the recovery) Nigeria's per capita income remained well below its 1980 level, reflecting the intervening sharp decline of world oil prices and deterioration in Nigeria's terms of trade. (See Chapter VI.) 5.5 In a period of adjustment, it is unrealistic to expect that all sectors and firms will prosper. Changes in the structure of incentives will inevitably affect certain activities adversely, especially in the short run. In the case of Nigeria, import-intensive industries (including vehicle assembly and electronics) were severely hit by the rising costs of inputs and the limited pricing flexibility among public enterprises, particularly for utility services. Beer manufacturers also suffered from the ban on imported raw materials. Industries that relied primarily on local supplies and exporters, on the other hand (such as the textile industry, tire production, and a variety of agricultural cash crops), expanded rapidly. The agricultural sector also grew much faster than in the earlier period. A. Oil and Gas 5.6 Petroleum dominates the Nigerian economy. Oil exports provide over 95 percent of total export earnings (Chapter VI) and over 80 percent of government revenues (Chapter IE). In 1992, the real value added (measured at 1987 prices) of Nigeria's production of crude oil (that is, the upstream oil sector) accounted for about 25 percent of real GDP on oil permeates all aspects of economic policymaking and defines Nigeria's political economy. 55 5.7 Nigeria is also endowed with very large resources of natural gas, which is mostly produced in association with oil. To date, however, the high cost of extracting associated gas from crude oil has made it uneconomic for commercial exploitation. In addition to primary exploitation of oil and gas resources, the country has tried to develop a downstream oil sector self-sufficient in the production of final petroleum products, which could turn out an exportable surplus of petrochemicals and fertilizer. In this respect, however, Nigeria has largely failed, as evidenced by the frequent shortages in its own domestic supply. 5.8 In the oil and gas sector, government control is exercised by the Nigerian National Petroleum Corporation (NNPC) and, to a lesser extent, by the Ministry of Petroleum and Mineral Resources. In the upstream oil sector, this means that exploration, development and production are carried out as joint ventures by the NNPC and foreign oil companies, which act as operators. The most important foreign partners are Shell, Chevron, Mobil, and AGIP. NNPC's equity in such ventures has typically been 60 percent, but the Government has recently started to sell parts of its equity in some ventures, reducing its own representation to 55 percent. The objective of these sales is to gain funds to finance NNPC's share in investment expenditures. NNPC also owns and operates the entire refinery sector (four refinery complexes and an extensive infrastructure for oil storage and distribution). The Nigerian Gas Company Ltd (NGC), a subsidiary of NNPC, is in charge of the purchase, transportation, and sale of natural gas, and controls most of the transactions in the sector. 5.9 Upstream Oil. Since the discovery of Nigerian oil in 1956, Nigeria has become one of the world's major exporters. In 1991, it ranked ninth in world oil production. Proven recoverable reserves amount to about 17 billion barrels, or 2 percent of proven world oil reserves. Industry experts estimate that Nigeria has the potential to fully replace its present oil- reserve base by adding 15 to 20 billion barrels to its recoverable reserves. About 70 percent of Nigeria's oil production is onshore in the southeastern states of the Niger delta; the remaining 30 percent is offshore. 5.10 In 1979, Nigeria's oil production (mainly of high-value, light, sweet crudes) reached its peak of 2.3 million barrels per day (mb/d). Production broadly declined throughout the 1980s, responding to OPEC pricing guidelines and quotas, variations in world demand, and the declining productivity of mature fields. In 1981, although international crude prices increased by over 12 percent, Nigeria's oil sales fell by 30 percent-in part prompted by an across-the-board reduction in OPEC's global production ceiling. The sales collapse was also prompted by the Nigerian oil ministry's attempt to overprice its crude and the Government's 1980 shift to the spot market. In 1981, when the price differential reversed in favor of contract prices, the oil companies opted to conclude their purchase contracts with Nigeria at the lower spot price. 5.11 From 1981 to 1986, although productive capacity declined, Nigeria's oil production hovered around 1.3 mb/d. It reached a low of 1.235 mb/d in 1983 and recovered to 1.491 md/d in 1985, with the recovery of the world economy. In 1987, as a consequence of the severe glut that the world oil market faced, OPEC reduced quotas and Nigerian production fell by more than 6 percent. Since then, production has steadily increased. It reached 1.956 mb/d in 1992, slightly below the level of 1980 (see Table 5.2). 5.12 As a member of the Organization of Petroleum Exporting Countries (OPEC), Nigeria has been influenced by its crude-oil production ceilings in making its own extraction decisions. Available data, however, show that Nigeria's crude oil production was consistently 3 to S percent above its quota from 1982 to mid-1990 despite intermittent production cuts introduced to meet 56 Table 5.2: Crude and Condensate Production and Exports, 1987 to 1992 1987 1988 1989 1990 1991 1992 (Percentage) Domestic production' 1,300 1,420 1,670 1,760 1,900 1,956 Domestic consumption 8 9 11 13 12 12 Exports 92 91 89 87 88 88 Exports (percentage of total) (Percentage of total) European Union 37 37 35 35 38 Scandinavia 1 - - I 1 United States 45 47 54 51 41 Canada 3 4 4 3 3 Others 14 12 7 10 17 Total 100 100 100 100 100 Includes condensate. In thousands of barrels per day. Source: Petroleum Economics Limited. OPEC price targets. After the Middle East crisis in late 1990, Nigerian crude oil production remained significantly in excess of its quota. During the fourth quarter of 1992, for instance, Nigeria's crude oil output averaged 1.967 mb/d, although its OPEC production quota was 1.71 mb/d. Its current quota is 1.865 mb/d, almost 20 percent below estimated actual production (although the latter includes condensates to which OPEC quotas do not apply). 5.13 Much of the oil sector's growth in the SAR era was due to sustained Government effort to increase exploration and add to reserves. To support this effort, in a January 1986 Memorandum of Understanding (MOU), the Government introduced more attractive terms for oil exploration and development including a guarantee of a US$2.0 profit margin in exchange for certain exploration and enhanced-recovery commitments. 5.14 In July 1991, new MOUs were signed to encourage foreign partners to expand their investment, including an increase in the guaranteed profit margin from US$2.0 to US$2.5, a revision of the formula determining realizable prices (the price at which the Nigerian Government deems companies can sell their crude), and such performance-related profit incentives as bonuses for net additions to proven reserves. Originally, the Government's objective was to increase crude oil reserves to 20 billion barrels and productive capacity of 2.5 mb/d by the mid-1990s, but the target date has since been postponed to 1998. 5.15 In trying to increase Nigeria's oil production rapidly, the Government's major obstacle has been the inability of the NNPC to mobilize funds for investment over and above the US$1.5 to US$2.0 billion per year currently committed for reserves replacement. In the last few years, NNPC has accumulated arrears to its joint-venture partners ranging, in 1993, between US$500 and US$750 million. Nigeria's oil investment program could be threatened if the Government does not move rapidly to clear these arrears, either through sales of equity or production-sharing agreements (under which the NNPC joint-venture partners front exploration and development costs). In recent months, a number of production-sharing agreements have been signed, but are not yet effective. 57 5.16 Downstream Oil Sector. Unlike the upstream sector, which has performed relatively well under the operational management of foreign companies, the government-owned downstream sector is plagued by massive inefficiencies. Nigeria has three operating refineries (plus a nonoperating refinery shut down in 1989 and still under repair). Its total installed capacity is 445,000 barrels per day-well in excess of the 300,000 barrels per day allocated to domestic consumption. As a result of mismanagement, structural bottlenecks, and accidents, however, actual capacity utilization has fluctuated between 50 and 65 percent. By comparison, well- managed refineries operate at capacity-utilization rates of 90 to 95 percent. Nigeria's downstream oil sector is a lesson in political intervention in investment strategies and company management; delayed maintenance resulting in costly shutdowns; government-mandated overstaffing and a policy of inadequate compensation; and inadequate regulation of final prices, intermediary margins, and transfer charges between NNPC's downstream units and the Government. 5.17 The Nigerian Government has indicated its willingness to tackle these problems at their root. In March 1988, it announced a program to commercialize NNPC over a three-year period. Government-owned NNPC was to 'be operated as a profit-making commercial venture and without subventions from the Federal Military Government." But performance contract negotiations dragged on, and the sector's overall performance remained well below target. Refineries have performed so poorly that Nigeria has had to import final petroleum products, despite its capacity to produce 30 percent more than was consumed in 1992. The only exception is the new Port Harcourt refinery-operated under a management contract with a foreign company-which has generally operated at capacity. 5.18 Inadequate policies have also hindered the transport and distribution of petroleum products. Lack of maintenance and poor pipeline and depot system performance caused supplies to be erratic. Most depots had to ration products. Marketers, in turn, fell back on Nigeria's dilapidated road tanker fleet to move products from refineries to, and between, depots, incurring additional transportation costs and risking road accidents. 5.19 Meanwhile, many Nigerians thought of petroleum as a "free gift' to the country. The Government mandated petroleum product prices that averaged, before November 1993, only 11 percent of world market prices. But this policy made margins too low to cover costs, including the operation and maintenance of the refineries and distribution infrastructure. Intended as a subsidy, the net effect of this policy was to make official supplies unreliable and necessitate severe rationing in some areas of the country. Low official prices engendered a parallel domestic market where petroleum products were sold at premiums (often 200 to 400 percent above their posted prices), and smuggling to neighboring countries (see below). In terms of forgone government revenues, the total cost of the subsidy and refinery, depot, and marketing operating losses, was estimated at around 8 percent of GDP in 1992. 5.20 Smuggling of petroleum products to higher-priced markets abroad was motivated by the sharp difference in Nigeria's subsidized oil product prices and those of its neighbors, particularly Benin (625 percent of the Nigerian price in 1991) and Chad (1,480 percent in 1991). One estimate puts the gap between official statistics for bona fide consumption and reported refinery production at 20,000 to 25,000 bbl/d, or about 7.5 percent of domestic consumption, suggesting a loss of US$200 million per year in forgone government revenue; other estimates of smuggling go as high as 70,000 barrels per day. 5.21 In November 1993, petroleum product prices were increased across the board. Gasoline prices were raised from 70 kobo to N3.5 per liter. Even at their new level, however, they fall short of international parity, but they now largely cover the cost of exploration, production, and 58 refining at the current official exchange rate. As in the past, however, the increase was a one- time discretionary adjustment. The lack of automatic adjustment in the pricing formula and the large spread between the official and the parallel market exchange rates suggest that a one-time adjustment in petroleum prices will be insufficient to correct resource misallocation, cover operating cost, and stem smuggling. 5.22 Gas. Nigeria's gas production increased significantly during the SAP era. Production increased by 67 percent between 1986 and 1992, to reach a level of more than 31,950 million cubic meters (see Table 5.3), primarily from associated gas, a byproduct of crude oil extraction. Nigeria's natural gas reserves are estimated at about 73 trillion cubic feet (tcf), and its probable gas reserves may be as high as 106 tdf. Nearly two thirds of the gas reserves are in the Niger delta, the heart of the oil fields, and roughly half of the known reserves are associated gas. Table 53: Index of Gas Production, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 100 91 106 130 143 173 167 ' 100 =1986. Source: Cental Bank of Nigeria. 5.23 While associated gas is more expensive to produce than nonassociated gas, the development of gas reserves is particularly expensive, involving huge capital costs to develop infrastructure for transport. For most countries, in addition, gas must be sold in intenal markets. Nigeria's local market for gas is very thin, and domestic prices are fixed at artificially low levels, factors that have discouraged international companies from the development of gas reserves. Attempting to offset these hindrances, the Government introduced significant tax incentives for the investment in and development of natural gas resources. B. Manufacturing Sector 5.24 Adjustment helped the manufacturing sector reverse the decline that had brought it, by 1986, to 51 percent of its 1982 peak. From 1986 to 1992, under the SAP, manufacturing value- added increased by 33 percent in real terms, or about 5 percent per annum, with most growth occurring between 1987 and 1990. 5.25 Under the SAP, manufacturing growth was about equal to overall GDP growth, and the share of manufacturing in total output remaining roughly constant at 8 percent. In nominal terms, however, the share of manufacturing in Nigeria's non-oil GDP fell from 14 to 12 perceat, indicating a 13-percent fall in the price of goods relative to the overall price of non-oil outputs. In the early years of the SAP era, relative prices fell by over 25 percent, then recovered thereafter. 5.26 Despite its relatively small size, manufacturing is important to the Nigerian economy. During the SAP era, little growth was recorded in publicly owned commercial enterprises or in parastatals (which still handle much of Nigeria's industry). Manufacturing, furthermore, had long been protected in one form or another, and many structural impediments to growth remained in place. Growth in the sector, therefore, must be attributed to a very strong response to trade 59 liberalization and exchange rate adjustment by a relatively small part of the sector. In view of the sector's structure in Nigeria, the magnitude of the turnaround since 1986 is noteworthy. 5.27 Nigerian economic statistics must be used with caution. The most recent survey of the industrial sector, for example, the Industrial Census of 1988, produced usable results for only 37 percent of all registered firms (the register of business reported 20,000 industrial establishments in 1988-in itself probably a gross understatement). There is also ample evidence of a large and active informal sector (mostly small scale), which escapes official statistics, taxation, and regulations, but contributes to employment, investment, and exports. Finally, statistics on capacity utilization rates grossly overestimate installed capacity and the amount of slack in the sector. By showing design rather than economic capacity, these numbers fail to reflect how capital adjustments affected the manufacturing sector throughout the 1980s. 5.28 Structure. Nigeria's manufacturing sector contains several 100-percent government- owned and operated Core Industrial Projects (CIPs), a few of which were recently privatized and a few others operate under commercial contracts. CIPs were initiated by the Government as part of an industrialization strategy that spanned the 1970s and most of the 1980s and is still active today at a somewhat slower pace. As a group, they were poorly conceived and planned and are now operating inefficiently, with a good deal of political interference in management. 5.29 Medium to large private and public manufacturing groups are generally owned and run by long-established business groups that originated as subsidiaries of foreign companies. In the 1970s, Nigeria reduced these multinational groups' equity share in Nigerian affiliates as part of its indigenization policies. But though equity was sold to private Nigerians, in many cases the Federal Government acquired a controlling share or bought out companies altogether, building up a portfolio of ownership in virtually all large sectors of industry and finance. Expatriate quotas and restrictions on profit repatriation were established at the same time. Under the SAP, some of the most stringent foreign ownership restrictions were relaxed (see Chapter II), and the Government launched a privatization program (see Chapter III). Table 5.4, which lists public enterprises originally scheduled for privatization, illustrates the extent of Federal Government involvement in commercial activities. 5.30 Small- to medium-sized firms-undoubtedly the most active segment of the manufacturing sector-are also the least well documented. Although government ownership is not entirely absent, at the state and local govermnent level, these firms are mostly private and Nigerian owned. The Industrial Census of 1988 revealed that 85 percent of all businesses were owned by a single proprietor and employed from 5 to 20 people (in such diverse sectors as textiles, wood products, food processing, metal products, chemicals, dyes and paints, paper, and printing). Many of these firms, furthermore, operate in the informal market (in such activities as carpentry, building and construction, repair and maintenance, and tailoring). 5.31 SAP. In the manufacturing sector, the SAP strove to stimulate some subsectors and divert resources away from others to produce a structural shift toward export-oriented production and the domestic sourcing of inputs. To enhance the private sector's role in resource allocation, there were also measures to eliminate or lower market distortions and unnecessary public interference. 5.32 The most important effect of adjustment for the manufacturing sector was the realignment of relative prices induced by the devaluation of the naira. The SAP's initial fiscal and monetary policies helped control inflation and ensured flexibility in the determination of the exchange rate, so that, in real terms, the devaluation was successful. A new auction-based foreign exchange 60 Table 5.4: Public Enterprises Originally Scheduled for Privatization Partial privsziz7Lion No. Full privatization No. Development banks 4 Hotels & tourism 3 Commercial and merchant banks 12 Textiles 3 Oil marketing 3 Agro-procesing 1I Steel rolling mills 3 Salt manufacture 2 Air and a travel 2 Wood & furniture 2 Fertilizer manufacture 2 Insurance 14 Vehicle assembly 6 Film industry 2 Paper mills 3 Flour milling I Sugar mills 3 Catle ranching 2 Cement manufacure 5 Construction and engineering 4 Dairying 2 Transport 4 Food & beverages 6 Other 4 Totl 43 67 Soure: Technical Commimee on Privatization and Commercialization, Annual Report, 1990. allocation system helped to ensure that foreign exchange (whose availability had been dramatically curtailed by falling oil prices) would be allocated among sectors on the basis of market incentives rather than government fiat. The SAP also included the removal of import licenses, the simplification of the tariff protection system, and the adoption of various export promotion schemes. Trade liberalization was not complete, however, and some import and export bans remined. (In 1992, it was estimated that import bans protected as much as 20 percent of Nigeria's industrial activity.) 5.33 To encourage investment and provide incentives for certain types of activities, the SAP also introduced several tax changes. In 1987, the corporate income tax rate was reduced from 45 to 40 percent. In 1988, the Federal Ministry of Industries published its new Industrial Policy, which formalized the Government's deregulation stance and included a broad incentive package for new domestic and foreign investment. Capital allowances were increased for plant and machinery. Special tax incentives were provided for long-term R&D expenditures. To promote the development of local raw materials, exports, increases in domestic value-added, and investment in economically disadvantaged areas, special five-year tax holidays, and extra concessions were granted. To allow exporters to retain their earnings, domiciliary accounts (bank accounts denominated in foreign currency) were established where exporters could deposit their exchange earnings and from which they were free to draw for import purposes. 5.34 Although the SAP reduced the number of licenses required to oper manuung enterprises, however, Nigeria's licensing requirements still cumbersome. Companies need separate licenses to operate power, water supply, and telecommunications activities not related to their primary production operations. In some sectors, firms also need special licenses to advertise. 61 5.35 Impact of the SAP. Under the SAP, the devaluation and trade liberalization directly affected private manufacturers' incentives. Other adjustments affected the entire economy, and only indirectly affected manufacturing through their impact on sectors. Although essential, the SAP's indirect impact is difficult to measure. Other economic sectors (agriculture, mining, services) and the three levels of government administration all competed with manufacturing for labor and capital resources. The economy-wide shifts in relative prices induced by the SAP in urn affected the allocation of resources among these sectors depending (among other things) on the degree of mobility of these resources. The flexibility of Nigeria's labor markets, for example, was a key factor in the SAP's initial success in stimulating the agricultural sector. (See Chapter VI.) 5.36 The reallocation of resources changed the relative composition of Nigeria's economy. Expanding sectors (within or outside manufacturing) draw resources not only from losing sectors but also from the pool of the unemployed and from the informal sector. Since sectors expand when they are free (not bound by regulations) to respond efficiently to a new configuration of incentives, the manufacturing sector's low level of unemployment and quick resumption of growth suggest that in Nigeria the resource shift that followed the SAP was relatively efficient. 5.37 The reallocation of resources also changes consumption patterns by changing the level, composition, and distribution of income. The boost agriculture received from the SAP, for example, may have directed overall private consumption away from luxury goods and imports (often the same) and toward domestically produced goods and necessities. 5.38 Finally, certain governmnent failures have affected the manufacturing sector's response to the SAP. The policy uncertainty and reversals that have characterized the post-adjustment years have undermined the long-term investment needed for manufacturing growth. (In the World Bank 1990 Industry Sector Report, policy uncertainty was cited as a major reason for the lack of industrial investment.) The poor performance of public infrastructure has also caused substantial problems for the Nigerian private industrial sector. Because government-run utilities are often unreliable, for example, local producers suffer high efficiency losses and incur high extra costs. 5.39 Public Sector. As long as industrial enterprises remained in the public sector, little response from them could be expected. For this reason-and the heavy fiscal burden many parastatals imposed on the public sector-public enterprise reform was initially high on the agenda of Nigeria's policymakers. In 1988, the Government published a list of 90 businesses (later increased to 110) to be privatized and 35 to be commercialized. In January 1989, it established the Technical Committee on Privatization and Commercialization (TCPC). Yet from 1988 to 1992, only small firms and no major parastatals were privatized. As a consequence, most of Nigeria's manufacturing sector has been largely unresponsive to the new incentive environment. 5.40 In manufacturing, the best indicator of performance is the rate of capacity utilization (see Table 5.5). The figures show that Nigeria's manufacturers (such as its oil refineries) have extremely low levels of capacity utilization and that most CIPs did not improve. Of all the CIPs, only some of the cement companies, the NAFCON fertilizer plant, and one of the refineries show above-average capacity-use rates. In all these examples, furthermore, either privatization has proceeded, private sector management assistance is supporting operations, or management has been passed over to contractors under commercial incentives. Their relatively better performance argues for a deepening of the privatization and commercialization process, and a further opening to foreign investment. 62 Table 5.5: Capacity Utilization Rates in Core Industrial Projects, 1986 to 1991 1986 1987 1938 1919 1990 1991 Steel plants (Percentage) Ajaokuta Delta 13.4 14.0 13.9 - 18.9 11.3 NaiionaJ Iron Ore MC - - - - - JOB - - 11.1 12.0 14.0 7.3 Kazaina - 17.9 15.0 - 9.1 7.8 Oahogbo - 16.5 8.0 9.6 7.7 9.5 Paper plnu Nigeria Newsprint Manufacturing Co. - 21.2 26.7 28.9 37.5 21.1 NiSerian Paper Mill 66.0 38.0 47.0 25.3 19.2 11.9 Nigarian National Pawr Mnufacuring - - - - - - Fe zer plants Naioal Featiizar at Onne - 100.0 92.0 95.0 104.4 96.0 Federal Superphosphaze - 7.5 11.2 - 3.2 25.0 Perochemcak Warri Refining and Petrochemicals Polypropylene - - 15.0 1.8 0.0 0.0 Carbon black - - 12.9 9.0 2.2 1.0 Kaduna Refurwy Perhemical Co. - - 11.2 - - 52.1 New Port Hacourt - - - - 93.0 92.8 Old PortnHwru - - - - 0.0 0.0 Warri - - 68.5 58.3 14.8 48.0 Kaduna - 92.5 63.9 54.6 69.3 66.8 Cemen Co. of Nonhern Nigeria - - - - 41.0 48.0 Wea Africa PorLand Cement - - - - 70.0 69.0 Nigerian Cemt Co. - - - - 21.0 23.0 Abalm Cemen Co. - - - - - - CalabrC Cmn Co. - - - - I18S 10.1 UkpiLa Cement Co. - - - 55.0 36.0 llene Cement Co. - - - - 0.0 50.0 Nigerian Machine Tools - - 40.0 - - - Nigerian Marble Mining - 60.0 25.0 20.4 - 25.0 - -nt available. Source: Central Bank of Nigeria, and Manufacturers' Association of Nigeria. 5.41 Private Sector. Under the SAP's trade and exchange rate policies, industries that were heavily dependent on imports (and especially those protected by tariff barriers) were most adversely affected by the devaluation. Industries that relied on imports as intermediary inputs 63 or equipment (such as vehicle assembly and brewing) faced large increases in input prices. Only companies that were able to improve the efficiency of their operations rapidly or to reduce their dependence on imports (which many did) were able to withstand the shock. Local producers of import substitutes, whether final or intermediary goods, on the other hand, received a positive boost from the SAP, as did exporters. With the large reduction in the degree of exchange rate overevaluation, a huge burden was lifted from exporters. 5.42 In 1986, although a large fraction of transactions were carried out at the official exchange rate (especially large firms' purchases of capital goods and intermediary inputs, the largest group of imports) a substantial number of imported goods were purchased at parallel market rates. After the 1986 devaluation, rates on the parallel market declined by more than 20 percent, and most of the rents traders and other intermediaries had collected were eliminated. 5.43 Because enforcement of policy in Nigeria was lax and firms followed official regulations only intermittently, the policy change may not have been very pronounced. Thus, the SAP's more liberal tax, price, and regulatory policies may have improved the business environment for manufacturers less than other policy measures undertaken as part of the SAP. In some cases, furthermore (as with interest-rate policy), government pressure on certain sectors contributed to the reinstitution of price controls. 5.44 Table 5.6 illustrates the manufacturing subsectors' different responses to the SAP. According to the data of the CBN, 9 of the 13 subsectors for which we have data recorded an increase in output from 1985 to 1992. By far the most impressive result was in synthetic fabrics, whose production was 18 times greater than in 1986 than in 1992. Sugar and confectionery, soft drinks, cotton textiles and soap and detergent also experienced significant growth (see Box 5.1). By contrast, vehicle assembly declined dramatically, as incentives were brought into line with underlying resource costs. Bank estimates put effective rates of protection for this sector at close to 700 percent, and showed that before the SAP value added for some cars was negative at world prices. Table 5.6: Index of Manufacturing Production, 1985 to 1992 SoaP & Refined Supr Becr Roof- Vchicle Radio Yar\ deer- petol confec- Soft & Coto Synthetic Foo- Co- ing ahsem- & qtr. ga mum tione drinnks ou texls fabrics wear Paintrs mt sets bly TV Total 19S5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1936 493 503 71.3 71.2 125.5 37.9 196.1 75.4 79.1 108.1 134.5 46.3 1S4.3 73.2 1917 135.5 74.0 136.0 121.1 U3.4 120.6 1,125.7 93.9 39.1 92.0 54.7 27.0 45.3 130.3 1933 104.6 14.6 190.1 135.5 76.0 123.6 1,318.6 73.3 98.7 119.9 50.6 4.4 14.7 135.2 1939 157.8 110.1 97.4 222.5 101.6 104.1 1,3093 41.5 £2.7 126.2 149.0 15.7 12.5 154.3 1990 153.0 108.3 93.4 364.4 97.8 113.0 1,501.6 45.3 62.7 38.7 79.6 24.1 12.2 162.9 1991 153.9 116.0 129.1 243.5 100.7 147.5 1,921.1 85.9 93.0 93.7 57.9 17.1 11.3 173.1 1992 153.9 113.7 176.7 136.5 104.5 151.1 1,891.6 92.0 99.7 100.3 41.2 18.3 11.6 132.7 Note: 1935 quarely veragp - 100. Sauce: Czal BDnk of Nipria. 64 Box 5.1: A Tale of Two Sectors Structural adjustment meant very different things to Nigeria's textile and automobile sectors. 12 1 6 1. 5 141 C 3 13 .6 0.89 0 7 CL~ ~ ~ ~ Z VEIL SE3Y o OTNTXIE 0 0 Ln ~~0.4 LU 0 3 9 0 2 0 1 F 19-79 1921' 1983 -199S5 I198ii7 "1999S 1 991I 190 1982 1984 1985 1988 1990 1992 Source~ CBN Annual R0ports 0 SYNTHETIC FABRICS + VEHICLE ASSEMBLY COTTON TEXTILIES Before the oil boom, textile production in Nigeria was a traditional craft, theoreticaUy shielded from international competition by import laws. After 1973, importers evaded theae laws, cheap imports became common, and local dyers, weavers, cap-makers, and tailors went out of busines. Domestic textles could not compete with imported fabrics. By 1986, local synthetic fabrics were only 53 percent and cotton textiles only 16 percent of their 1980 production levels. Within one year of the introduction of the SAP, however, the production of Nigerian cotton goods increased to more than three times its 1986 level, while synthetic fabrics production increasod to almost six times its 1986 level. Deopite this immense progres, to ensure consistent growth, further measures will be needed to increase access to financing and improve management and engineering capacity. For the vehicle asembly industry, the 32 percent increate in production it had experiencod in 1982 was short-lived. The folowing year, oil revenues dropped, the cost of imported parts became prohibitive, and production foll by 38 percent-a negative trend that continues to today. Vehicle assmbly is now one fifth its size in 1985. A positive development of this adjustment, however, is the active informal sctor production of spare parts. Source: Central Bank of Nigeria Annual Reports, 1979-92; World Bank, 'Nigeria: Private Sector Aessment," Report No. 11873-UNI, June 1993; Deborah Brautigam, Regiona Indaswia&atiom in EaFem Mgmna, Washington, D.C.: World Bank, AF4CO, July 1992; Aan Prishman, The SurWival and Disappearance f&,SaJl-Scak Enterprises in Urban Kano, 1973-1980, Geneva, NY: Hobard and Wllam Smith College, Dcepanment of Economics, 1990. 5.45 As for the SAP's effect on small business, a 1991 study of small-scale industries in the eatern region of Nigeria showed that almost half the enterprises had doubled their number of employees since 1984, although-according to a 1989 World Bank survey-total employmeat (in the enterprises sampled) declined by an estimated 4 percent between 1986 and 1988. More 65 recently, a Bank survey conducted in September-November 1992 confirmed that overall employment declined about 1 percent from 1986 to 1992, and identified several companies that had shed as much as 25 percent of their labor force. 5.46 This evidence suggests that after the SAP, the reallocation of resources across sectors and the reconversion of the manufacturing sector took place as expected. Despite the many structural impediments that still exist and the lack of a supportive macroeconomic environment, apparently the growth of 'winning" subsectors far more than compensated for the decline in 'losing" ones, as reflected in the data summarized in Table 5.1. 5.47 Under the SAP, the price of imported inputs relative to domestic inputs increased considerably in 1986 and 1987 (the two years when the naira depreciated most in real value). The sectors that benefitted most from the SAP, therefore, were those that depended on local inputs or were able to shift to local sourcing. Although information on this subject is not complete, Table 5.7 shows the estimated share of local inputs each manufacturing subsector used during the SAP. Table 5.7: Local Sourcing in Nigerian Industry, 1987 to 1992 1987 1988 1989 1990 1991 1992 (Percentage) Food, bevemges & tobacco 65 63 70 79 65 65 Textl & leasher, apprel, shoes & rugs 52 55 31 60 67 66 Wood & furniture 78 70 70 74 80 82 Paper & printing 14 29 40 42 39 33 Cheicals & phrmaccuticals 32 36 38 50 42 44 Non.etallc minzeml 77 87 79 80 83 86 Plastic & rubber 21 51 28 28 37 46 Elkctric goods 19 20 32 28 36 5B Basic metals, iron & stee, & fabricsted metal S0 35 42 19 25 47 Motor vehicle & misc. assembly 22 '30 39 46 26 37 All ecton 43 43 42 51 47 53 Note: Value of local inputs as a percntage of sa. Source: Manufacturr' Association of Nigeria. 5.48 In a few product groups (particularly leather and textile products), manufactured exports also showed growth, but as recorded, manufactured goods remained below 2 percent of total exports. Actual exports, however, may have far exceeded what is officially recorded. It is believed that small traders smuggled large amounts of Nigerian goods across the country's borders. Nigerian textiles, for example, could be found throughout West Africa, in addition to petroleum products and fertilizer (attractive to smugglers because of their artificially low government-set prices), soap, cement, processed food, electrical goods, and consumer products. Estimates for unofficial, non-oil exports of manufactured products have been in the rone of US$400-500 million per year; however, the recent devaluation of the CFA currencies is likely to shift the direction of the trade. 5.49 Even after the SAP, several trade restrictions remained in place or were introduced later, and some of these depressed manufacturing output. For example, the ban on wheat imports 66 virtually eliminated flour production. Garment production-a potential export item-suffered from a ban on imported textiles. In a similar vein, buyers regularly bypass legal dry-cell batteries made expensive by high tariffs, and an estimated two thirds of the market is served by smuggled imports. 5.50 Despite Nigeria's efforts to improve its environment climate for investment, the response by foreign investors has been muted. Debt conversion, for instance, allowed conversion of dollar-denominated promissory notes at a favorable discount as compared to market discount in naira terms. To some extent, this lukewarm response can be attributed to the fact that investment incentives provided under the Nigerian Enterprise Promotion Decree (NEPD) applied only to new investments and excluded existing ventures by foreign companies. By 1990, 113 debt conversion projects worth US$1.1 billion had taken place. Of these, 62 were in manufacturing. C. Agriculture 5.51 In Nigeria today, agriculture accounts for one third of GDP and employs about two thirds of the labor force. It provides raw materials for industry and accounts for the bulk of non-oil exports. 5.52 Prior to adjustnent, agricultural production was stagnant, constrained by low producer prices, restrictions on marketing, and the drought of the early 1980s. During the adjustment period, the real depreciation of the naira improved producer prices, while the elimination of marketing boards and liberalization of trading had a very positive impact on a variety of cash crops, particularly cocoa. Beginning in the mid-1980s, agricultural production expanded. The sector's real value added increased more than 25 percent between 1986 and 1992, which meant an average annual growth rate (with significant differences across subsectors) of 3.8 percent (see Table 5.8). Table 5.8: Agriculture Production, 1982 to 1992 Palm Oround Sor- Year Cocoa kene Rubber Couon nutz Casva Yams Rice Maiwe Millet ghum 1982 16 89 U3 127 72 38 103 75 57 65 68 1953 140 89 75 400 62 33 78 51 44 68 60 1934 150 97 97 360 92 77 a8 55 81 as 1985 110 103 100 380 97 88 91 69 90 90 92 1986 100 100 100 100 100 100 100 100 100 100 100 1987 105 101 U5 107 103 92 94 105 90 95 95 198 253 156 352 647 159 202 175 735 394 125 95 1989 256 268 220 623 182 238 14 1,167 375 116 133 1990 221 342 245 920 161 235 262. 883 432 125 77 1991 180 344 358 997 205 247 307 1,125 435 100 98 1992 167 376 223 1,127 220 263 357 1,036 418 97 95 Note: 1936 - 100. Soum: Ceetal Bank of Nigeria, and Nigerian Ianitut for Social and Economic Riamcb. 5.53 Cocoa. Cocoa production, about 139,000 tons in the pre-SAP period (1982 to 1985) increased by almost 100,000 tons through 1990. This large increase in a relatively short time was attributable to improved care of existing stock, and a reduction in smugling and unrecorded 67 exports, rather than to new plantings. After 1989, however, the sector's output fell drastically, with production levels down from 256,000 in 1989 to 167,000 in 1992. 5.54 Rubber. During the SAP, production increased significantly from 51,300 tons to above 200,000 tons in 1991. Although production declined in 1992, it remained more than twice the 1986 level. 5.55 Food Crop Production. Cassava production showed the largest increase, from an average of 923,000 tons in the pre-SAP period to 2,139,000 tons in 1986-89, reaching a level in 1992 that was 160 percent higher than that of 1986. Maize production grew from an average of 902,000 tons in the pre-SAP period to 1,311,500 tons in the years immediately after the SAP was introduced. It reached even higher levels in 1991-92, with production more than 300 percent the 1986 level. 5.56 Impact of SAP. Prior to the SAP, domestic food production had grown at only 1 percent per year. In 1984, Nigeria imported some US$2 billion worth of food. Under the SAP, Nigeria improved its food self-sufficiency. By 1992, Nigerians were importing only a fifth as much food as they had in 1986. The SAP helped resuscitate Nigerian agriculture because: • The SAP altered farmers' incentives. As a direct effect of the real exchange-rate depreciation of 1986-87, international competitiveness of Nigeria's tradable cash crops was strengthened. Indirectly, devaluation discouraged production in less-competitive manufacturing subsectors, thereby releasing resources that then became available to agriculture. * During the oil boom, many young men left the rural areas for employment in the rapidly expanding and well-paying nonagricultural sectors. As the boom subsided, many retrned to farming. Since the mid-1980s, therefore, more labor was available to the agricultural sector (when public expenditure on labor-intensive construction works was cut dramatically. * After 1986, the agricultural sector benefited from the economy's overall growth and higher reliance on domestic sourcing and inputs. * In the mid-1980s a sustained drought ended and rainfall improved significantly throughout Western Africa. * Beginning in 1980, the northern states established state-wide Agricultural Development Projects (ADPs), with a smallholder orientation and a focus on extension, input distribution, and rural infrastructure development. By the mid-1980s, these efforts were beginning to bear fruit, spreading improved agricultural technology, inputs, and rura infrastructure, improving labor productivity and access to markets. In the north, rapidly expanding use of both ancient and modern Fadama irrigation technique made it possible for farmers to water during dry seasons (see Box 5.2). 5.57 In Nigeria, the public sector is responsible for supplying farmers with key inputs-notably fertilizers. The SAP was unable to reduce fertilizer subsidies, which account for half of total recurrent and capital expenditures budgeted by both federal and state governments for agricultural development. These subsidies are provided, furthermore, at the expense of agricultural infastructure, research, and extension svices. In 1992, it was estimated that 80 percent of sales to end-users moved through the parallel market. 68 Box 5.2: Better To Be a Farmer in Nigeria Although Ghana is often regarded as having made the most progress of any adjusting country in Sub-Sahsaran Africa, its performance in the agricultural sector has lagged behind that of others. Whereas Ghana's agricultural sector grew about 2 percent a year in 1987-91, Nigeria's grew about 4 percent a year, with the net real return to farmers increasing fourfold over the same period. Compare the two: * Almost overnight, as a part of the SAP, Nigeria eliminated its export crop marketing boards. Nigeria's farmers could thus garner a larger share of export prices. In Ghana, the Cocoa Board and the Ghana Cotton Company continued to influence prices during the adjustment era. * In Nigeria, rural infrastructure is more extensive than it is in Ghana, which is largely a 'footpath' economy. Poor rural infrastructure significantly reduces labor productivity and raises production and marketing costs-which translates into reduced profits and fewer production incentives for the farmer. * Cocoa, Ghana's main crop, has suffered an extended period of depresed world prices. Although cocoa is also a major crop in Nigeria, agricultural production there is more diversified. Terms-of-trade effects on Nigeria's other export crops have been less severe. * Investment in research and extension services has provided Nigeria's farmers with the technical know-how to switch to improved varieties (especially cassava), utilize small-scale irrigation and -manae soil fertility. - * Although Ghana implemented its overall adjustment policies earlier than Nigeria, Ghana's agricultural reforms did not get under way until the late 1980s. Nigeria proceeded with agricultural reform in 1986 at the outset of the SAP. 5.58 To some degree Nigeria's progress in implementing its 1986 trade reforms was offset by its expansion of export and import prohibitions. Prohibitions were reinstituted for some primary and processed agricultural products (including timber and wood, maize, rice, cassava, yam, beans, raw hides and skins, and unprocessed palm kernels). Export bans led to excess supplies and then to reduced farmgate prices, farmer incomes, and production incentives. 5.59 Some import restrictions were repealed in 1986-88. But import bans remained or were soon imposed on a variety of commodities, most important among them virtually all grains. In 1989, new import bans were introduced (to cover meat, poultry, fish, vegetable juices and oils, beer, and other products). Tariff rates also increased on a number of goods. Meanwhile, the import bans on the livestock feed and poultry industries led to a severe contraction in production and a dramatic increase in smuggling from abroad. D. Services 5.60 Before the SAP, Nigeria's service sector had shown little growth, although its share of GDP expanded from 25 percent in 1980 to 28 percent in 1986 because GDP itself was falling. Within the service sector, most activities (except for government services, which showed moderate growth) declined. 5.61 In the year following the introduction of the SAP, growth in the service sector rebounded. In 1986-92, the growth rate for total services was about 6.3 percent per year, somewhat higher th the rate of GDP growth (see Table 5.9). The share of the service sector in the GDP, therefore, rose to 31 percent in 1992, once again, with government services in the lead. Excluding government services, service sector growth was comparable to that of GDP. 69 Table 5.9: Service Sector Growth Annual rates of growth 1980-86 1986-92 (Percentage) Total services 0.2 6.3 Government services 4.7 10.1 Non-government -0.4 5.4 GDP -2.2 5.1 Source: Nigerian Federal Bureau of Statistics, and World Bank staff estimates. 5.62 Within the service sector, the pattern of change was somewhat unexpected. Apart from finance and government services, which grew rapidly, there was little growth elsewhere. Transport and commerce, in particular, which normally expand in tandem with the overall economy, were sluggish in Nigeria. (In Ghana's service sector the pattern of post-adjustment changes was very different.) (See Table 5.10.) Table 5.10: Service Sector Performance in Ghana and Nigeria Annual rates of growth Nigeria Ghaa Service 1986-92 1984-90 (Pertage) Transport 1.9 9.2 Wholesale & retail -0.0 11.3 Finance 23.3 5.6 Govenmmn 9.9 4.4 Othen 2.3 13.4 ToUl services 6.3 7.6 Soumre: Nigerian Fedeal Bureau of Statistics, and Ghana Statistical Services. 5.63 The opposite held true with finance and government services, which were relatively sugish in Ghana but robust in Nigeria. At the same time, Ghana's transport and commerce were strong while Nigeria's were anemic. Overall service-sector growth, however, in the two countries was similar, reaching 6.3 percent in Nigeria and 7.6 percent in Ghana. 5.64 Dramatic growth in Nigeria's financial sector reflects, in part, the SAP liberaization meur, which raised profitability (Chapter IV). Legalization of the foreign exchange bureau, libemized bank licening policies, and incenives for accessing the foreign exchage market also =nibUte to the gvowth of the sector. Ihe expansion of government services was the result of ooi fisca decnalition, which involved the establishment of local jurisdictiou u:om &a oMY. For this ro, the mmber of st rose from 21 in the early l9SOs to 30 in 1992, 70 while local governments expanded in number from 301 to 589, with a corresponding increase in staffing. 5.65 By contrast, the limited growth of the transport and wholesales sectors stemmed from relatively modest change in Nigeria's trade policies. Import bans on major commodities continued and tariffs were frequently increased. In the telecommunications subsector, restrictive regulations and NITEL's monopoly status precluded new entries and growth of services, despite considerable pent-up demand. Political interference and inadequate management further reduced NITEL's capacity to provide reliable services and expand capacity. 71 VI. THE MACROECONOMIC RESPONSE 6.1 The SAP reversed the pronounced economic decline experienced during the first half of the 1980s. Between 1980 and 1986, per capita GDP fell by 30 percent; between 1986 and 1992, it grew by 17 percent. Per capita consumption-which in 1987 was only half of its 1981 peak-expanded by more than 15 percent between 1987 and 1992, and per capita investment grew by more than 35 percent. Also during the SAP era, Nigeria generated higher growth with smaller investments, suggesting improved efficiency, a better incentive regime, and the correction of the market distortions that had characterized the high oil-price era. Finally, during the SAP era, Nigeria's savings were consistently greater than its investment, as reflected in the continuous trade surplus between 1987 and 1992, despite the fact that investment expansion was constrained by large debt-service payments (see Box 6.1). Box 6.1: SAP Impact-Robust Conclusions Despite Data Problems Data Limitations notwithstanding,' the main features of the evolution of output and expenditures in the SAP era clearly stand out. As in the case of sectoral production, they are in sharp contrast to the first part of the 1980s. Total expenditures, which had fallen on average by 5.5 percent between 1980 and 1986, grew by 3.7 percent per annum between 1986 and 1992. Private consumption moved from a decline of 3.7 percent per annum to an increase of 4 percent. Total investment, which had declined by about 12 percent per year in the first six years of the decade, resumed growth at a rate slightly above 1 percent on average. Annual rates of growth 1980-86 1987-92 Per Per Total annum Total annum (Percentage increases) GDP at market prices -12.6 -2.2 34.9 5.1 Gross domestic income -48.1 -10.4 35.4 5.2 Expenditurs -28.9 -5.5 24.0 3.7 Conaumption -17.8 -3.2 27.6 4.1 Investment -55.2 -12.5 8.8 1.4 Per capita GDP -27.4 -5.2 13.5 2.1 Per capita income -56.9 -13.1 13.9 2.2 Per capita consumption -31.8 -6.2 7.3 1.2 'lhere am acute data poblema in the Nigerian National Accounts atiatics, and in panicular in the expeaditum accounta. An analysis of major exogenous shocks or policy reforms mum proceed witfi virally no data on the detils of tbir inyact at even a mildly disaggregate level. For examyte, fiscl behavior at the sub-federal level is amost unknown; there s no infomion an the brekdown of invesment between public and private sectors, by type of ast, or by ctor of desintio0 a;d data on private conumptionby caegorie of goods, or by aociocconomic groups (such as nual and urban sroup.), do not exist on a sytematic basis in a National Accouns famework. 72 A. Oil Market Context 6.2 In 1973, real world oil prices' increased by 20 percent, and in 1974 they more than quadrupled the 1971-72 level (see Figure 6.1). They climbed further during the late 1970s and peaaked in 1981; they were thus 600 percent higher than in 1971-72. (In nominal terms, the price of a barrel of crude oil or OPEC basket, increased from US$1.7 in 1971 to US$34.3 in 1981.) Although prices declined somewhat from 1982 to 1985, they remained historically high. Then in 1986, world oil prices dropped to US$13.6 per barrel-half of the 1985 price and one third of the 1981 peak. Flgure 6.1: Crude Oil Price, 1971 to 1992 4 5 .40 35 30 25- 20- 'is 10 4971 47~ 497 l 497 4979 994 I192,8 ti 499 497 I 499 409194 16 1972 19-74 1373 1973 1990 1302 1354 ISUS IUEa _13 1 6.3 This marked the end of the high oil-price era. Since 1986, oil prices-nd Nigeu's terms of tradt-have remained depressed (wift the exception of 1990, when the iddle Eas crisis led to a temporary increase in real world oil prices of more thun 25 percent). By 1992, world oil and Nigeria's terms of trade were once again at 1986 levels, the same a when the SAP was introduced. B. incme and Production 6.4 Paralleling the collapse of oil prices between 1980 and 1986, Nigrla's gro nao income fell by almost half in real terms over the Nme period. he lagest frcti of h Sull (85 percent) can be attributed to the worsening of Nigeria's tem of trade, And th rmainder to the dedine in oil production. Over the Same period, non-oil GDP fell abou 20 pert in per capita terms. Total GDP (the sum of oil and son-oil production) fell by AlMOSt 13 paece, nd per capita income dropped by a dramatic 60 percent (see Figure 6.2). Te ad oil price is defind u Xth price of =d oil (OpEC baska. U&SSbl) Mdod by an Wm of icnfMio inulaion a gSive by the MUV with 1987- 100. 73 Flgure 6.2: Per Capita Income (GDY) and Per Capita GDP, 1971 to 1992 Per Capita GDY Per Capita GDP 2.3 3... . O * .... .. ", .jX .94.. 2.72 2. S 23 ~~~~~~~~~~~~~~~~1.7 2.4~~~~~~~~~~~~~~~~~. 2.3 1~~~~~~~~~~~~~~~~.3 Tbc difference between GDY and GDP retlecu the effect changes jr] terms of trade bave on the purchasing powve of export income. As a comquence of eirt' large share in GDP (39 percent in 1992), ev1n a .1 variation in the price of oiJ (which acc-ounts for more than 95 percent of Nigeria's exports) produces signiricant variations in real income. For exmple, an increan in the oil priec of US$ I would increae Nigeria's oil ravenues by approximately USS630 million, or 2.1 percent of GDP. By estimatng value added at constant prices (including for oil) GDP fads to retlect thewe pronounced terms-of-ur de effeeu on purcbasing power. Note: bwumnse of 1987 naim. 6.5 In contrast, from 1986 (when the SAP was introduced) to 1992, real income and GDP g>rew by 35 percent (and in per capita terms, by 14 percent). For the first time since the early 1970s and despite wide fluctuations in crude oil prices-including a 30-percent price hilce in 1990--terms-of-trade gains contributed nothing to the increase in income. Fully 70 percent of the income growth derived from non-oil production, and-despite large cutbacks in imports-non-oil GDP grew by 34 percent, or an average of 5 percent a year. Meanwhile, the analytic evidence suggests that the economy would have continued to deteriorate were it not for the SAP (see Box 6.2). 6.6 Despite the favorable evolution of real income since the mid-1980s, however, real per capita income in Nigeria has hardly improved at all since the first oil boom 20 years ago. Measured by real per-cDita GDP, in fct, the economy is in worse condition now, after two decades of producing oil. In 1992, real per-capita GDP was 10 percent lower than in 1971. C. Excpenditures 6.7 Since the early 1970s, total expenditures have closely traclced the path of real income, with oil generating an xtsaordinary rise through 1981 Ngr an equally dramatic contraction in the 1980i. From 1971 to 1980, absorption per capita, the Num of consumption anp investment expenditures, hadp risen by almost p0 percent. From 1980 to 1986, it fell by 40 percethe, more than wiping out the gains of the entire previous decade. 74 Box 6.2: What Would Have Happened without the SAP? Many Nigerians believe that the SAP is responsible for the country's collapse of living standards in the late 1980s, failing to take into account the fall in price and production of crude oil and the inadequate government policy response. In 1986, Nigeria did take the necessary step of devaluing it currency and letting it float, and the economy recovered. But what would have happened if it had maintained its old exchange- rate, import-licensing, and foreign exchange policies? Although hypothetical, regression estimates of the historical relationship between the performance of the economy and the major policy variables suggest the following scenario. t.4 I 2 I.0 0.9a o. i9b7aI1 'st7 ig'77 197 Iss 1991 I 1993 I '19-5 J 1997 '10 I@ iS>@l I 19'4 1'976 5;076 Is0 19la 1 9!ae1966 196; 109 uIa - ACTUAL 0 COLNJIDP^CrU^L Without the SAP, no recovery would have take place in 1986-92. Without adjust of e re ed hn rafte, the non-oil ecomy would have continued on its downward pah, flling by 2.7 percet a yer rater than tie 1.9 pert per capita rinse that actually took place. 6.8 Though income started to fall in 1981, expenditures at first did not adjust. By 1983, whie income per capita had already fallen by more than 40 percent, expenditures per capita had declined by 16 percent only. As a consequence, Nigeria's total external debt had more than doubled to $18.5 bilion from its 1980 level of $8.9 billion. From 1983 to 1985, while income stabilized, expenditures continued to fall, as the Federal Government slashed consumption and investment expenditures. 6.9 But the contraction did not end in 1986, when the sharpest annual fall in total consumption (more than 18 percent according to official statistics) took place. This drop in consumption was a direct consequence of the sharp contraction in income, which in turn reflected Nigeria's deterioradng terms of trade. Because these phenomena occurred at the ume time that SAP policies were instituted, the country's reduction in standard of living came to be attributed to structural adjustment by many Nigerians (see Figure 6.3). 75 Flgure 6.3: Per Capita Consumption, 1971 to 1992 'I 7 1. 2 0.9 1971 '18973 1 94'75 l '19 77 191079 181 19183 1985I 19a87 I91 ei I 10'11 1 1972 1974 1978 1978 1980 1982 1984 19866 1908 1990 1992 Note: Thousands of 1987 naim. 6.10 In fact, the 1986 fall in private consumption was primarily a result of the second oil shock. With oil prices at half their 1985 level, and exports revenues down 48 percent, real imports were cut by 28 percent. As Nigeria's access to external borrowing had been severely curtailed, a contraction in expenditures was an inevitable consequence of the huge income fall. Private consumption took the largest part of the adjustment, with per capita private consumption falling by 21 percent. 6.11 Yet despite the large loss of dollar-denominated export revenues, the Govermment devalued the naira in September 1986 and its naira-denominated income increased by 25 percent. In real terms, government consumption grew by over 12 percent. Thus, by spending rather than saving the naira windfall, the Government compounded the impact of falling income on Nigerian standards of living by partially crowding out private consumption and investment expenditures. 6.12 In 1987, crude oil prices recovered somewhat, yet Nigeria's real oil exports fell as OPEC market discipline tightened. The naira devaluations of 1986 and 1987 induced a 30 percent real contraction of imports, despite the removal of import licensing, high tariffs, and quantitative restrictions. Real domestic production, on the other hand, remained unchanged-clear evidence that Nigeria is not totally dependent on imports for economic growth. In total, the supply of goods-domestically produced and imported-decreased by about 8 percent. Total expenditure also decreased, with investment falling by 30 percent and consumption by only 2 percent. The Government, moreover, reduced its real spending on consumption and investment goods, allowing private consumption to increase slightly. 6.13 The sharp fall in investment in the initial phase of the SAP may be attributable to the SAP itself. Nigeria's trade and exchange rate regime before the SAP favored investment in the 76 manufacturing sector (especially of import substitutes) and infrastructure (especially within the public sector). The SAP removed these inefficient subsidies to investment. 6.14 If Nigeria's plummeting expenditures hit bottom in 1987, since then, their recovery has been strong. From 1987 to 1992, total consumption has grown a total of 30 percent (5.4 percent a year on average) and total investment by 55 percent (9.1 percent a year). Such a high growth was achieved despite the massive transfers abroad required to service Nigeria's external debt (see Chapter VII). It is likely, furthermore, that this is an underestimate, because much of Nigeria's productive growth took place in rural areas, and rural subsistence consumption is difficult to estimate.6 D. Savings and Investment 6.15 High oil-prices in the 1970s generated massive savings and created investment booms. But when oil prices collapsed in the 1980s, both savings and investment collapsed. In 1981-83, the economy was unable to finance the diminishing investment, which called for foreign savings in the form of current account (and budget) deficits. In the early 1990s, although Nigeria barely reached the investment rates achieved in the first half of the 1970s, this was largely compensated for by gains in the overall efficiency of investment. 6.16 Between 1987 and 1992, Nigerians' real per capita investment expanded by more than 35 percent. With consumption slowing, savings grew an impressive 57 percent. In 1990-in response to the favorable terms of trade brought about by the Gulf crisis-gross per capita savings increased by almost 140 percent. Since then, savings have declined, although in 1992 they were still larger than investment. The period since 1986, then, has been characterized by a strong savings effort, which was in turn reflected in continuous trade balance surpluses. Further investment expansion may have been constrained by Nigeria's need to service its external obligations. For while the balance of trade has been consistently in surplus since 1987, the current-account balance of payments was in deficit in every year except for 1990. (See Chapter VII.) 6.17 During the SAP era, the quality of investment in Nigeria improved (see Box 6.3). Using threyear moving averages, it is possible to see that Nigeria's GDP growth decelerated steadily from 1973 to 1983, until-in the early 1980s-it turned negative. Aggregate investment, on the other hand, increased dramatically in the 1970s, to peak in 1977-78 at more than 50 percent of GDP. For the next decade, the ratio between the two fell continuously. In 1989, it was 14 percent of GDP. After the mid-1980s, when SAP policies began to take effect, positive growth resumed. By the early 1990s, Nigeria had sustained GDP growth above 5 percent and an investment/GDP ratio of more than 15 percent. 6.18 Two indicators of the capital stock in Nigeria not only illustrate the massive investment expansion that characterized the oil boom, but they also show how Nigeria managed to resume economic growth with significantly lower capital stock in the second half of the 1980s. Between 1981 and 1991, Nigeria's capital stock fell almost 45 percent, from N4.8 thousand to N2.7 thousand per capita. Meanwhile, between 1982 and 1991, the ratio of capital stock to GDP contracted from 3.2 to 1.9, consistent with the drastic incentive regime changes brought about by the SAP. These figures only dimly reflect the efficiency of investment, yet they clearly show In addition, bocuwe the SAP geneated mmive relaive price changes, it is likldy that Nigak's ocal National Account statis c which are baed on 19U4 prics underestimte real output and eqpdiure for the entire post-SAP period. 77 how Nigeria funnelled domestic and foreign savings into wasteful investments throughout the oil- rich years, missing the opportunity to build up a solid foundation for leaner years to come. Box 6.3: Investment Quality Compared with the high oil-price period, the quality of investment in Nigeria appears to have improved during the SAP era. One indicator of these trends is a comparison between the investment-GDP ratio and the rate of GDP growth. Given that the actual investment-GDP share and the growth rates have fluctuated sharply year to year, the numbers presented in Figure 1 are based on trends-throe-year moving averages-rather than on actual figures for GDP and investment. These estimates show that as Nigeria began to enjoy the effects of improved terms of trade in 1973, GDP growth decelerated and kept falling steadily through 1983. While in 1974 GDP was growing at rates above 6 percent, in the early 1980s GDP growth turned negative. Aggregate investment increased dramatically in the 1970s, peaking around 1977-78 at more than 50 percent. After that, this ratio fell continuously through 1989, when it was 14 percent, until positive GDP growth resumed after the mid-1980s. In the early 1990s, the investment/GDP ratio increased to more than 15 percent, and GDP growth was sustained at average rates above 5 percent. Figure 2 presents two indicators of the capital stock in Nigeria' to illustrate the massive investment expansion during the oil boom, but also to show that in the second half of the 1980s, the Nigerian economy managed to resume growth, but with a capital stock significantly lower than at the turn of the decade. In per capita terms, the capital stock fell from N4.8 thousand to N2.7 thousand between 1981 and 1991: a fall of almost 45 percent. Meanwhile, the capital stockl/GDP ratio contracted from 3.2 to 1.9 between 1982 and 1991. This behavior was not inconsistent with the drastic changes in the incentive regime brought about by the SAP. Despite the relative wealness of these figures as a means of judging the efficiency of investment, they clearly indicate how the misallocation of domestic and foreign savings into wasteful investment was at the root of the missed opportnities for development in Nigeria. Fgure 1: GDP Growth and Share of Figure 2: Capital Stock Indicators, Investment/GDP, 1974 to 1992 1970 to 1992 S ' 44 OA a 1in 1w + V, sWAMW a polWam O These numbe were generted from invesment figure since 1950, and assume an amnual depreciation rte of 10 pacent. 6.19 Empirical work shows that-for Nigeria as well as for other countries-private investment and overall economic growth are closely related, and that private investment is 78 significantly affected by macroeconomic stability. Macroeconomic stability, therefore, is a necessary condition for sustained growth. To achieve macroeconomic stability, a country must establish a long-term policy strategy that is stable, responsive and seen as sustainable by the private sector. Over the last few years, however, Nigeria's policies have failed to meet all three conditions. E. Innation 6.20 One of the main characteristics of inflation in Nigeria is its high volatility (see Figure 6.4). Over the past ten years, Nigeria has experienced three episodes of high inflation. In the first two cases, inflation rates above 40 percent per year were followed by sharp drops to 10 percent per year, or less. The fundamental factor behind both the level and the variability of inflation has been monetary growth. In Nigeria, bursts of monetary growth (in excess of real economic growth) have accompanied every major episode of rapid inflation. Conversely, with monetary contraction, inflation dropped. Figure 6.4: Inflation: Percentage Rates of Change of CPI, 1978 to 1992 X0% 4 ON - 30% 10% 0% 1978 198 192 1984 1985s 1988 1990 1992 '1979 1991 1983 1995 1997 1999 1991 6.21 In the short term, many factors in addition to money growth influence inflation both direcdy and indirectly: the impact of weather on agricultural output and prices and other sectoral supply shocks, currency devaluations, wage concessions to trade unions, major policy announcements, terms of trade changes, etc. But in the long run, it is excess money growth that is responsible for locking the impact of these short term factors into permanent price increases. And in Nigeria, money supply growth has been in general driven by fiscal expansion (see Figure 6.5 and Chapter III). 79 Flgure 6.5: Fiscal Deficit and Money Creation, 1986 to 1992 50 40 30 20- 10 186 198ee 190o 1992 19e9 1991 O FlIscal DefIcTIt + ln.y Grwft h Note: Nairm billions. 6.22 Episodes of Rapid Inflation. In mid-1984, inflation rate reached almost 50 percent, but dropped virtually to zero in mid-1985. This episode was associated in part with the 1984 drought, which had been ravaging Western Africa since the 1970s and which devastated Nigeria's agricultural production. Inflation was also spurred by the widespread anticipation that the official exchange rate would be devalued. Over the course of 1983, the spread between the parallel and the official exchange rates had more than tripled. From early 1983 to end 1984, excess money growth had reached 43 percent. Over the same period, credit to the government increased by over 70 percent. 6.23 Nigeria's second big inflationary episode began in the fourth quarter of 1987 and accelerated through the third quarter of 1988 to reach more than 70 percent. This episode was related to the fiscal expansion initiated in the 1988 budget. Initially financed by central bank credit, the fiscal expansion was sustained by increasing oil revenues that were not sterilized in 1989. In the middle of 1989, the monetary authorities engineered a drastic monetary contraction.' The fiscal pressure eased as oil revenues continued to increase for a while and some degree of sterilization ensured monetary control. As a result, inflation fell steadily, virtually reaching zero by the middle of 1990. 6.24 Today, Nigeria is in the middle of its biggest inflationary outburst of the past ten years. Starting to rise in the last quarter of 1990, the rate of inflation reached 60 percent by the end of 1992. This acceleration, too, was clearly the result of government inability to control the fiscal deficit and its recourse to excessive monetary financing. Despite attempts by the central bank to control private credit and bank liquidity, money supply growth increased dramatically every year since 1990, reaching 70 percent in 1992. Monetry policia and their outcomes ame descnied in Chapter IV, while fiscal policies are decrObed in Chapter m. 80 6.25 Nigeria's experience highlights the fundamental relationship over the long-term between the price level, the stock of money, and the exchange rate (see Figure 6.6). Any attempt by the government to control inflation and the exchange rate must deal with excessive money growth and its main source, the monetary financing of the fiscal deficit. Figure 6.6: Inflation, Money Supply, and Exchange Rate, 1980 to 1992 soo .500- 400 250 300 250 200 50 198O '1862 Ia319614 19Ia 86'sla0 1999e ls 990 ise19 2P 1991 4992 '1925 '1997 '1929 1994 D 9vo.md Mon + CP InI nc O ff,cc_n Rate NoW: 1987 8 100. 6.26 Despite several high inflation experiences, however, Nigeria's economy has not been fundamentally inflation prone. Whether falling in one year from 50 to 7 percent or rising in another from 10 to 50 percent, the variations in money and prices have not been associated with significant short-term changes in production. Nigeria has no formal indexation mechanisms. However, in the last three years large fiscal deficits, high rates of money growth, and continued depreciations of the currency have become almost permnanent features of the economic environment. 6.27 Though money growth is the common fundamental cause of purely nominal depreciation and domestic price inflation in the long run, their short-term relationship can be difficult to predict. In 1986, for example, when consecutive devaluations and foreign inflation increased prices of imports by 131 percent, domestic inflation was moderate (8 percent in 1986), and the same was true in 1987. But in 1993, when Nigeria's currency was pegged for most of the year at a fixed rate of N22 per dollar, inflation reached 60 percent. F. Labor Markets 6.2S In general, Nigeria's flexible labor markets tend to facilitate movements between ural and urban areas in response to changes in market conditions. During the oil boom years, when the production of nontradables was favored, workers had moved from rural areas to urban areas to take up public sector employment and to join construction crews. With the introduction of the 81 SAP, relative prices shifted in favor of the agricultural sector in general and agricultural exports in particular. As nontradable activities in the urban areas, like construction, slowed down, workers returned to rural areas and the agricultural sector. 1. Employment 6.29 During the 1970s, employment opportunities increased rapidly in urban areas, where the Government was undertaking large investments in manufacturing activities as well as infrastructure development. Construction activities also expanded very rapidly during this period with the building of roads and highways. At the same time, cheap food imports reduced the demand for domestically-produced root crops and grains, while the appreciation of the naira made tree crop cultivation unprofitable. The net result was a steady stream of labor migration from rural to urban areas. The subsequent decline in economic activity through the mid-1980s made it difficult to continue to absorb the fast-increasing labor force. It led to a sharp increase in urban unemployment-from 7 percent at the end of 1983 to 10 percent in 1986. Secondary school leavers and university graduates faced very sharp increases in unemployment-to over 45 percent-while the unemployment rate for those with less than a secondary education peaked at about 6 percent. 6.30 After the introduction of the SAP, the demand for labor in the non-oil tradable sector expanded, especially in agriculture. This was a response to the depreciation of the exchange rate and the elimination of the commodity boards, which made export crops such as cocoa and rubber very attractive. Food imports meanwhile became more expensive, opening the way for a revival of demand for cassava and yam. As wages in rural areas rose in response to the emerging labor shortage, the labor market responded with a rapid inflow of workers (primarily unskilled) back to rural areas. Meanwhile, there were worker layoffs in parts of the industrial sector which were heavily dependent upon imports and for which import licenses had previously been available. This was broadly and increasingly offset, however, by expansion of firms producing goods that competed with imports or that used local inputs in production. 6.31 Unemployment rates began to come down during the SAP, starting in 1988. (See Table 6.1.) The rural unemployment rate declined from an average of 5 percent in 1986 and 1987 to 4.3 percent in 1988 and down again to an average of just over 3 percent for 1989-92. The improved rural employment situation is attributable to several factors, including the favorable response of the private sector to the new incentive regime in cocoa, cotton, rubber, and other export crops. Survey evidence suggests that the majority of returning migrants went back to their own farms; almost 20 percent were absorbed in the agricultural wage-labor market. Urban unemployment declined from an average of just under 10 percent for 1986-87 to 8 percent in 1988-89 and then dropped more solidly to around 5 percent for 1990-92. The overall trend can be explained by the SAP-induced expansion of firms producing export goods or goods that competed with imports or that used local inputs in production, and by a return of discouraged workers to their villages. 6.32 Although secondary school graduates had the highest unemployment rates over the entire period, according to the official statistics, this group also experienced the largest urban gains under the SAP. Their representation in the pool of unemployed dropped by an impressive 10 percentage points between 1986-89 and 1991t92. This trend matches the overall urban trend and may therefore be due to the increased demand for educated labour by the urban industrial sector. This seems well correlated with the increased unemployment rate for those who had received no schooling at all. Skilled post-secondary school workers fared best of all in terms of an overall low unemployment rate, although they suffered increasing losses through 1989 until the urban 82 Table 6.1: Structure of Unemployment, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (Percenage) A. UDemployment rtc? Nationrs 5.8 6.2 4.8 4.3 3.4 3.6 3.5 Urban 9.8 9.8 8.1 8.4 5.7 5.2 4.3 Rural 4.S 5.2 4.3 3.4 2.9 3.2 3.0 B. Diarnbution of urban esmploymen, by educa-tio None 13.2 11.7 13.9 11.0 NA 20.7 19.0 Primary 15.3 S.1 15.4 16.5 NA 19.3 12.5 Secondary 67.4 74.1 64.4 65.4 NA 53.4 62.3 Poa.secondary 3.6 6.1 6.3 7.3 NA 6.3 5.3 ToUi 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Annual averags of quaretty date. A---I averges, some quanriy daa rmissing or inierpolaled. Souce: Fderal Office of Staiasics (FOS) Labour Forc Survey. situation began to improve in 1990. 2. Wages 6.33 Household income data' suggest that the decline in real wages had begun well before the SAP. (See Table 6.2 and Box 6.4 below.) The index of real household income for urban wage earners declined by over 50 percent between 1980 and 1986. The group with the lowest real income in the early 1980s, the rural self-employed, experienced the smallest reduction in income, declining by about 25 percent between 1980 and 1986. The wage differential in favor of urban workers that had opened up during the oil boom apparently eroded before the introduction of the SAP. Rural income increased from 63 percent of urban income in 1981 to just above parity by 1986. Much of this was due to urban consumer prices rising faster than rural prices. Table 6.2: Index of Real Household Incomes of Key Groups, 1980/81 to 1986/87 1980I1 1931I2 19821U3 19U33S4 19S41S5 1935/86 19S6137 Rural ulfenployed 100 103 95 36 73 74 65 Ruzl wag earners 173 160 147 135 92 95 S4 AU1 nulhouabokds 105 107 99 89 74 84 74 UdiLa ssf-acpoyed 150 124 106 94 69 69 61 Urba nwages srs 203 177 164 140 101 101 90 All urbanhouebolks 166 142 129 109 *0 s0 71 Ruzalaspuewof urbe 63 75 77 32 93 105 104 Noe: Rural Slf-Enployed in 193031 - 100. Soue: National ziemgrd Survey of Hoholds (NISH), Federal Office of Siaiaics (FOS) coainr prics dam, and Bank aaff edimatio. Based on the National lnwtgmted Survey of Househokds. 83 Box 6.4: Real Federal Wages, 1980 to 1993 uals .0 330 Nonu~nal waege Index of foal wan Gnde Grade Grade Grade Gnde Grade 01 OS 17 01 OS 17 1990 1,200 3,564 12,696 214 242 245 1981 1,500 3,924 13,S12 221 221 221 19U2 1,500 3,924 13,S12 205 205 205 1983 1,500 3,924 13,S12 171 171 171 1984 1,500 3,924 13,812 121 121 121 19S5 1,500 3,924 13,8|12 lIS II8 IIJ 19t6 1,500 3,924 13,812 107 107 107 * SAP _d p_SAP 1987 1,500 3,924 13,812 100 100 100 i 19U 1,500 3,924 13,tl2 79 79 79 1989 1,50 3,924 13,812 53 53 53 1990 1,500 3,924 13.812 40 40 40 1991 3,000 4,905 13,812 67 42 34 199 3,000 5,t86 13,812 45 34 22 199 4,35 12,624 32,328 41 45 33 Nod Reawa index bud a se" wq" deflasd by dse urbn conaumer pnce iW (1987 - 100). Ch dim mq for F-dwa Gad 08. Scum: Fed nl yfmsr of Fum, Approved Budget, Appendix C, vuno um. 6.34 Ibe same decline in pre-SAP real wages can also be seen in federal government wages in Box 6.4. Federal salary scales had been frozen since 1981, with further measures talcen in 1985 to reduce fringe benefits. There was clearly a substantial erosion of purchasing power of public sector employees. By 1990, the real purchasing power of civil service wages, at all levels, had fallen to only 40 percent of their original value in 1987 at the start of the SAP. Grade 01 civil servants saw the real purchasing power of their wages cut in half between 1980 and 1986. The top grades saw their real wages cut even more, to less than 45 percent of their 1980 levels. Ihe national monthly wage for civil servants in grades 1-9 was doubled in 1991, and during IM9, the Govermment provided an across-the-board increase in civil service salaries of 45 percent. lhese improvements brought some relief but were quiclcly eroded by continued inflation so that, by 1993, real federal wages were still no better than 41 percent of their 1987 value for grade 01, 45 percent for grade 08, and 33 percent for grade 17. 84 6.35 Private sector wages, including the minimum wage, were frozen beginning in 1984, although fringe benefits were allowed to rise. The annual guidelines stipulating the allowable wage increases (including fringe benefits) that can be negotiated in the public and private sector issued by the Productivity, Prices, and Income Board were relaxed in 1990. The national minimum monthly wage was increased in 1991 from N 125 to N250, and the 1991 guidelines also allowed the private and public sectors to negotiate wage and salary increases over and above the minimum wage 'where the need arises, with a view to improving the living standards of the workers concerned.' However, those earning the minimum wage fell increasingly below the poverty line-that is, the level of income required to buy the essentials of life. (See Box 6.5.) Box 6.5: Evolution of Minimum Wages and Poverty, 1984 to 1992 moo *700 5400 3400 200 moo 134 I ,..5 I .3 I s" 30 I .-3 ,36 133 13 1331 o ~.rnmn A mnve w Li n- * urivl Povvts LIn- * MInim,60 Wages in Nigeria asr not indexed to inflation. The national minimum wage was fixed at N125 per month until 1990. Trnsportion and housing benefits added another N25 per month to rise the effective minimum wae to NISO per month. The minimum wage was increased to N250 in 1991; the effective wage, including fringe benefits, increased to N410 per month. Accounting for inflaion, the poverty line for the rural and urban ares, respectively, moved up to N505 and N710 in 1992, from N120 and N 180in 1984. Using data expressed in naira per moth, the figure above shows that, while the poverty line continuously moved up, minimum wages remaind unchanged until 1990, falling below the poverty line from 1985. 85 VII. IMPACr ON THE BALANCE OF PAYMENIT AND DEBT 7.1 Nigeria's oil export revenues peaked in 1980 at US$25 billion, with a record volume of 2.36 million barrels per day and a price in excess of US$35 per barrel. Subsequently, with the tightening of OPEC quotas and falling prices, the value of exports declined dramatically. In 1983 Nigeria's oil export revenues totaled only US$10 billion and in 1984 and 1985, only US$12 billion. In 1986, oil export revenues declined still further to US$6.4 billion, with unchanged volume and a per-barrel price of US$14-half the average 1985 price. This was the starting point for the SAP. 7.2 During the SAP era, Nigeria's balance of payments (BOP) continued to be dominated by developments in the oil market, and in its external debt position. From 1986 to 1992, although the services account was in deficit, the trade balance was in surplus every year. The current account was in surplus only in 1990 as a result of the surge in oil prices in the wake of the Gulf crisis. Scheduled interest on external debt amounted to more than US$2 billion every year (see Table 7.1). Table 7.1: Balance of Payments, 1986 to 1992 1986 1987 1983 1939 1990 1991 1992 (US dolaua mions) Tnde Balance 40 1,758 1,292 3,900 6,343 4.234 3,675 Expotta Merchandie 6,784 7,532 7,069 9,312 13,914 12,127 12,471 Inmpos Merchandie (6,744) (5,774) (5,776) (5,912) (7,070) (7,392) (3,796) Sftvied (4,391) (3,460) (3,S45) (4,263) (5,339) (5,256 0,249) Intme (2.,08) 2.,110) (2,370) (2,357) (2,739) (2,422) (145) Plivaa Trnlfens (32) (4) (26) (10) 26 27 29 Curna Account Balace (4,3U3) (1,706) (2.579) (377) 1.431 (995) (1,S45) Capita Account (4,024) (2,586) (2,320) (1,166) (2,03) (1,293) (6,1530 Dirct Invegrnmg 526 613 359 2,443 602 5U 576 Medium and Long Term (2,313) (3,230) (3,458) (2,502) (3,112) (2,539) 05,940) Ohar (2,237) 81 779 (1.103) 433 654 3 Ovell Balance (8,407) (4,292) (4,399) (1,544) (592) (2,29 (7,695) Facwig 3,407 4,292 4,899 1,544 592 2,292 7,695 RamerveMove_wa S51 73 331 (1,272) (2,508) (50) 3,370 Ciane in Anu. (792) (3,372) 4,568 (4,915) 334 (956) 1,849 Recweduling Credits 5,348 7,586 0 7,731 2,266 3,298 2,821 Other 0 0 0 0 0 0 (352) Stock oftRaerv" 643 565 234 1,506 4,014 4,064 830 Note: Parenthese denote nsptive number. Saurce: Ceul Buak of Nigeria, and Wodd Bank suff estimate. 86 7.3 The SAP had a limited impact on Nigeria's external position. There was considerable import substitution, but the non-oil export response was small. In part, this reflected the fact that world prices of the non-oil commodities that Nigeria exports dropped sharply after 1985. The potentially positive impact of incentive policies toward foreign investment was eroded over time by unstable macroeconomic policies. 7.4 Nor were there positive effects on Nigeria's external debt, which at end-1986 exceeded US$23 billion. Because of the dramatic fall in oil prices, the amount that would have been required to service this debt in 1986 was equivalent to about 75 percent of total export receipts. During the SAP era, Nigeria periodically negotiated rescheduling agreements with its main creditor groups; whenever this was not forthcoming, Nigeria accumulated large arrears. Even so, net transfers from Nigeria to its foreign creditors (disbursements of loans less actual payment of interest and repayment of principal) were negative every year of the SAP era, averaging 5 percent of GDP from 1986 to 1992. A. Current Account: Trade 1. Exports 7.5 Nigeria's total merchandise exports (free on board, FOB) increased from US$6.8 billion in 1986 to US$13.9 billion in 1990 , then, in 1992 decreased to US$12.4 billion (see Table 7.2). This was largely the result of fluctuations in prices and volumes of oil, which account for 90 percent of merchandise exports. Up to 1987, cocoa and rubber, Nigeria's traditional exports, accounted for the bulk of non-oil exports. Since then, however-in part in response to the SAP-exports of manufactured and semimanufactured goods have accounted for some 40 percent of non-oil Nigerian exports. 7.6 Oil Exports. Following the collapse in oil revenues-from US$25 billion in 1980 to US$12 billion in 1985 to US$6.4 billion in 1986, there was a modest recovery in 1987 but in 1988 a fall back to the 1986 level. In 1989-as a consequence of an increase in production and a recovery in price of about 24 percent-oil exports increased to US$9.4 billion. The following year, as a result of the Gulf crisis, Nigeria experienced a large windfall. Although oil prices increased significantly only in the second half of 1990, Nigeria's oil export revenues reached USS13.5 billion (a 10 percent increase of volume) at an average yearly price of US$24.2 per barrel. This added up to a US$4 billion in additional export revenues. But although Nigeria was able to sustain small increases in oil production and exports throughout 1991 and 1992, world prices declined from their 1990 peak. In 1991, oil exports totalled US$11.7 billion and in 1992, US$12.0 billion, with the price remaining steady at US$19.6 per barrel. 7.7 NonXil Exports. During the early 1980s, the export of manufactured goods-then the majority of non-oil exports-came to an almost complete halt. In 1988, non-oil exports rebounded modestly to reach a SAP-era high of US$613 million-far below the 1980 level. Since 1988, Nigeria's non-oil exports have hovered around US$400 and US$500 million. 7.8 Before the oil boom, cocoa and rubber were Nigeria's most prominent agricultural exports. In the early 1980s, however, cocoa exports suffered from the country's pricing policies, overvalued exchange rate, and unfavorable weather conditions. From 1985 to 1990, furthermore, world cocoa prices declined by about 65 percent to only 48 percent of the 1985 level by 1991. Rubber prices also fell sharply in 1986 and 1987 and recovered in 1988, but since then, the trend of world prices has been down. Between 1986 and 1988, the export volumes of cocoa and rubber both rose by over 100 percent, more than compensating for the impact of lower world 87 Table 7.2: Exports and Imports-Values and Volumes, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 OIL EXPORTS Value ($billions) 6.4 7.0 6.5 9.4 13.5 11.7 12.0 (Percentages) Volure Change -0.4 -10.1 5.9 17.8 9.7 3.2 2.0 Price Change -47.5 21.9 -13.1 24.0 31.0 -16.5 -3.3 NON-OIL EXPORTS Value (Sbillions) 0.4 0.5 0.6 0.4 0.4 0.5 0.5 (Percentages) Volume Change 66.9 41.1 45.9 -44.0 -9.3 15.4 -13.3 Price Change -34.1 -4.4 -21.9 16.9 11.5 0.9 16.6 IMPORTS Value (Sbillions) 7.5 6.4 6.4 6.5 7.8 8.7 9.7 (Percentages) Volume Chane -27.9 -23.6 -6.4 2.6 9.2 11.6 5.5 Price Change 13.0 12.1 6.9 -0.2 9.5 0.1 5.6 Mmorandum Item: (Permenlages) Growth Rate ofGDP 1.7 -0.2 9.8 6.7 5.6 5.1 4.1 Souce: Cental Bank of Nigena. ad WoHd Bank mff esmateas. prices. But, from 1988 to 1991, the export volume of cocoa fell by 56 percent. 7.9 Following the introduction of the SAP, Nigeria's manufactured and semimanufactured goods exports rose modestly, although at US$200 million in 1991, they still accounted for less than 2 percent of total merchandise exports. Unrecorded exports of manufactured goods could add significantly to non-oil exports, but would still account for only a small fraction of total exports. Overall, the SAP's goal to diversify and increase Nigeria's non-oil exports was only insignificantly met. 2. Imports 7.10 From 1986 to 1987, total merchandise imports (FOB) fell from US$6.7 billion to US$5.8 billion. Over the next five years, however, they increased, reaching US$8.4 billion in 1992. The 1987 decline reflected a drop in real volumes reflecting import substitution induced by the depreciation of the real exchange rate (see Box 7.1). There was a further real decline in 1988, which was offset by large price increases. In 1989-92, strong real GDP growth drove up import volumes, overcoming periodic real devaluations in the official and parallel exchange rates. 88 7.11 In 1988-90, oil-related imports rose from 17.2 to 21.3 percent of total imports, almost doubling in value to reach USS 1. 1 billion. This suggests an increasing level of investment in Nigeria's oil sector. Box 7.1: The Impact or the SAP on Imports and the Balance or Payments The SAP, by promoting import substitution, allowed the economy to economize on foreign exchange usage. The figure below shows the result of an empirical analysis of the determinants of inports used to simulate a counterfactual analysis. On this basis, if the real official exchange rte had remained constant at the 1986 avenge, then real imports, which declined by 30 perecnt between 1986 and 1988, would have declined by only 16 perment. This would be the equivalent of spending an additional USS1.2 billion more per ye.r on impors in 1987 and 1988. By 1992, total annual imports of goods and non-factor serviees would have been USSS billion higher than the actual amount. (See the figure below.) Given that the falling price of oil and the level of available external financing would not have supported these levels of imports, the alternatives to a devaluation of the official exchange rate were a tightening of quantitative restrictions, accumulation of arrars, or contraction of economic activity. 2 3 22 2'- 20K S-7 160 *9"2 n--40 lons >Soo *--ogo a / I MUL^TEO ACTUAL_ 7.12 Although consumer goods have accounted for a larger share of Nigeria's imports in recent years, that increase has not been steady. In 1985, consumer goods accounted for 22 percent of Nigeria's total imports; in 1988 they accounted for 29 percent; and in 1990, their share had declined to 25 percent. Over the samne periGd, imports of raw miaterials declined from 41 to 37 percent, while imports of capital goods increased slightly, from 35 to 38 percent. 7.13 Nigeria has traditionally imported mostly from Western European countries, whose share of the Nigerian import marlcet increased from 56 to 67 percent in 1986-90. During that period, the United Kingdom was the largest supplier at 22 percent, followed by Germany at 19 percent, and Japan at 10 percent, while US imports rose from 1 percent in 1986 to 12 percent by 1990. 7.14 Most significantly, the United States has now replaced the European Union as Nigeria's major client for oil. In 1986, the European Union accounted for S1 percent of Nigeria's oil exports and the United States for 32 percent. By 1991, their positions had switched, with the United States importing 54 percent of Nigerian oil and the European Union only 23 percent. 89 B. Current Account: Services and Transfers 7.15 During 1986-92, the services account deficit went from a low of US$3.5 billion in 1987 to a high of USS5.4 billion in 1990, in the main because of changes in nonfactor services imports. The evolution of costs for services in the oil sector and for insurance and freight closely parallels the path of merchandise imports. Interest payments on foreign debt has consistently averaged around US$2.3 billion a year, except for 1990, when it increased because of late payments on arrears. Other investment income is associated with the oil-sector repatriation profits which have little impact on total flows. Finally, with worker remittances in decline, private transfers do not make a significant contribution to the current account. 7.16 As a result of the developments outlined above, Nigeria's current account moved from a deficit of US$4.4 billion in 1986 (equivalent to 65 percent of exports) to a much smaller deficit of US$1.5 billion in 1992 (about 12 percent of exports). It exhibited a surplus only in 1990, following the Gulf Crisis related oil windfall. When evaluated at the official exchange rate, the deficit in 1986 was equal to 10.5 percent of nominal GDP and that of 1992 to 5 percent. (The 80 percent real depreciation of the naira between 1986 and 1992 explains why this percentage has only halved over the period, although the current-account deficit in dollar terms has declined by 66 percent and Nigeria's real GDP has grown by 35 percent.) C. Capital Account 7.17 Since 1986, Nigeria's capital account has suffered large deficits attributable in the main to the country's high level of scheduled repayments of external debt. In 1986 the deficit reached US$4 billion. It declined to US$1.2 billion in 1989, but increased again to US$2 billion in 1990. Nigeria's record 1992 deficit of US$4.7 billion includes a payment of US$1.7 billion to Londori Club creditors, which was used to buy back US$3.4 billion of commercial debt. Compared to long-term capital flows, direct foreign investment and net short-term capital flows are relatively small. Although they can affect the capital account significantly, most of the variability in the deficit is attributable to net movements in official borrowing. 7.18 During the SAP era, net capital flows associated with official borrowing were systematically negative. While disbursements averaged US$840 million per year, scheduled amortization (even after several debt and debt-service reduction operations) averaged US$3.7 billion-a sum almost equivalent to Nigeria's average trade surplus of US$3.1 billion for the period. When interest due is included, total debt-service obligations amount to about US$6 billion per year. (Net flows on private, nonguaranteed, medium- and long-term aebt have been negligible.) 7.19 Owing to the variability in the timing of receipts from petroleum exports, short-term capital flows have been subject to large fluctuations. Much of the outflow recorded in 1989 and 1990 occurred because of lags between oil shipment and payment, which amounted to US$2 billion in 1989 and US$0.6 billion in 1990, respectively. Autonomous capital inflows to commercial and merchant banks (totalling US$0.6 billion in 1989 and US$1 billion since 1990) partially offset these outflows. 7.20 The large negative short-term capital outflow in 1989 resulted from the sale of NNPC equity in joint ventures, which increased direct foreign investment (DFI) inflows to US$2.5 billion. For the most part, however, direct investment in Nigeria has been related to the oil sector. In 1992, total DFI totalled US$544 million (almost the average for preceding years of US$522 million, excluding 1989). Nigeria's formal restrictions on foreign company ownership 90 and its rudimentary stock market partially explain the limited foreign investment there to date, although the perception, since 1988, that the SAP may not be sustainable may have also affected Nigeria's attractiveness to foreign companies. 7.21 Little is known about the volume of capital flight from Nigeria.9 Some of the assets are repatriated in cash or other instruments which are converted into domestic currency at the local parallel foreign exchange rate. One estimate of capital flight during the period 1970-89 suggests that underinvoicing of exports amounted to US$8.2 billion and overinvoicing of imports amounted to US$6 billion. Table 7.3: Rescheduling and Arrears, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (US dolars nillionc) Total Debt Service Due * (5,141) (6,079) (6,419) (6,058) (6,760) (5,703) (5,346) Intert (2,085) (2,110) (2,370) (2,357) (2,739) (2,422) (3,150) AmortiAtion (3,056) (3,969) (4,049) (3,701) (4,021) (3,2S1) (3,196) Phs Addonal Obligatioes Debt nd debt-service rductiot - - - - - - (1,700) Cash paynwntofanarm (1,149) (263) S0 (297) (522) (668) - P_ New Credits Accuulatio of new arears 357 130 4,487 426 2,097 591 2,357 RAwcedulinqgofLTmaturities 2,757 2,915 - 1,896 470 1.766 425 Rewcheduling of ST mturitie 165 1,432 - 1,281 1,072 698 161 EqualsTotl Debt Serice Paid (3,011) (1,365) (1,352) (2,752) (3,643) (3,316) (3,603) Mmorandn i_m: (Percentages) Debt Service Ratiod Before mcheduling 72 78 86 59 47 46 58 After recheduling' 31 22 86 27 36 26 53 Total DebtService Paid 42 24 25 27 25 27 29 Note: Neptive numben in paren s denote outflows nd debits. ' Incles paymenl aociated with pr,-SFEM liabilities and the debt conversion scheme. b London Club debt work-out. Includec USSI.3 billion used to buy-back US$3.4 billion at a 60 percent discount and US$400 millioo usad to colaerlize paymens due on par bonds. 192 debt sice paid includes the financing of the DDSR operation, conmprising the cash buyback ($1.3 billion), principal collateral ($300 million), and inteet coDatemlization ($127 mnillion). d In percent of expors of goods and nonfacitor services. Source: Centml Bank of Nigeria, nd World Bank staff estimates. D. Rescheduling, Arrears, and Reseves 7.22 As indicated above, over the past six years, total scheduled debt obligations have averaged US$6 billion-or about 66 percent of total exports of goods and nonfactor services. See Ibi Ajayi, An Economic Analysis of Capital Flight from Nigeria, World Bank, 1992. 91 Nigeria has relied on exceptional financing from main creditor groups or-whenever this was not forthcoming-accumulated large arrears. With several successive rescheduling arrangements, Nigeria's scheduled debt-service ratio (including rescheduling credits) has averaged about 39 percent. For 1986-92, the debt-service ratio (including rescheduling credits and arrears accumulations) averaged about 29 percent. (See Table 7.3.) 7.23 From 1986 to 1988, foreign exchange reserves in relation to imports were very low. The increase in exports in 1989-90, together with the 1989 reschedulings-provided Nigeria with an opportunity to raise its level of reserves to a more sustainable level (equal to seven months of 1990 imports). By 1992, however, the country's increasing imports, added to the financial requirements of the London Club debt-reduction operation, brought reserves to a level equal to slightly less than one month of imports, or about US$830 million. E. External Debt 7.24 Throughout the 1980s, as a consequence of falling oil export revenues, Nigeria's external debt grew rapidly. The Government borrowed heavily, and large trade arrears were amassed in 1982-83. When oil prices fell in 1986, Nigeria found itself unable to meet its external obligations, and embarked on a program to reconcile and reschedule its debts. On a per capita basis, Nigeria's external debt stands at US$300, which is roughly equivalent to its per capita income. 7.25 Stock of Debt. As shown in Figure 7.1 and Table 7.4, in Nigeria's stock of external debt grew from US$23.5 billion at end-1986 to US$34.5 billion at end-1991. Two thirds of this increase came from the Government's assumption of nonguaranteed debt (particularly in 1986/87) and from successive rescheduling agreements; both changed the status of Nigerian external liabilities from arrears to public and publicly guaranteed medium- and long-term debt. Cross- currency revaluations (brought about by the depreciation of the US currency) contributed another 27 percent. By comparison, new net borrowing accounted for only 8 percent of the increase in external debt. 7.26 Net Transfers. During the SAP era, Nigeria's net transfer position on a cash basis (defined as project loan disbursements and balance-of-payments support minus total debt-service paid) was persistntly negative, averaging about US$2.1 billion per annum. (On average, debt- service payments amounted to US$2.9 billion and new disbursements US$800 million.) For the period 1986-92, this net-resource outflow averaged 6.4 percent of GDP. (See Table 7.4.) F. Agreements with Creditors 7.27 By the end of 1992, following the debt-reduction operation with London Club creditors concluded in March, Nigeria's total external debt had declined to US$30.7 billion. This operation effectively cut the volume of London Club debt by 60 percent, which was 7.5 percent of Nigeria's total external debt at the end of 1992. The rest (58 percent) of the stock is owed to Paris Club creditors; to other bilateral creditors (5 percent); to multilateral institutions, in particular the IBRD (13.5 percent); and to uninsured private and other creditors (15 percent). 7.28 Paris Club. More than half of Nigeria's external debt is owed to Paris Club creditors. Most of the associated debt-service obligations falling due in 1986 and 1987 were rescheduled in 1986. That agreement covered US$3.3 billion in medium- and long-term (MLT) maturities, US$0.5 billion in letters of credit (LCs), and US$2.8 billion in arrears on insured trade credits dating back to 1982-83. In early 1989, Government approached the Paris Club for a new 92 Table 7.4: Total External Debt Outstanding and Disbursed, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (US dollars rillions) A. Public & Publicly Guar. LT Debt 19,156 28,464 29,058 30,994 32,586 33,245 29,336 1. Official Crcditon 8,622 11,525 10,888 14,425 16,722 18,759 18,996 a. Multilateral 2,234 3,062 2,849 3,173 3,733 4,010 4,213 1 IDA 34 32 31 30 36 59 151 2. IMRD 2,137 2,939 2,728 2,907 3,254 3,297 3,320 b. Bilateral 6,383 8,463 8,039 11,252 12,989 14,749 14,713 2. Private Creditors 10,534 16,939 18,170 16,570 15,864 14,436 10,340 a. Bonds 0 0 0 0 0 0 1,990 b. Coumercial Banks 2,945 6,531 6,233 6,022 5,714 5,590 44 c. Other Private 7,589 10,409 11,932 10,547 10,150 8,896 3,306 B. Private Non-Guaranteed LT 600 552 537 406 391 343 339 C. Total LT DOD 19,756 29,016 29,595 31,400 32,977 33,5S8 29,676 D. Use of MF Credit 0 0 0 0 0 0 0 E. Short-Term Debt 3,717 1,640 1,652 576 1,580 909 974 F. Total External Debt 23,473 30,656 31,247 31,977 34,557 34,497 30,650 Debt Stock/GDP 56 113 98 102 98 101 102 Source: Federal Ministry of Finance, Central Bank of Nigeria, and World Bank Debtor Reponiq Sysem. rescheduling. In March 1989, a second agreement was reached with 17 creditor countries covering US$6.4 billion in payments. Of this amount, approximately US$2.9 billion was due to arrears on long- and short-term debt. The total amount of debt relief for 1989 and the first four months of 1990 is estimated at about US$3.5 billion, on conventional rescheduling terms, with a 10-year repayment period and a S-year grace period. 7.29 A third rescheduling agreement was signed with the Paris Club in January 1991. The repayment terms for the amounts rescheduled were those granted to heavily indebted lower- and middle-income countries. These terms included 15-year maturities for debt service owed to export credit agencies (ECA) and 20-year maturities for debt service owed for official development aid (ODA). In addition, all ODA debt (and 10 percent of ECA debt) was to be eligible for debt-equity swaps, which must be approved by individual creditors. Under the new agreement, arrears and maturities on previously nonrescheduled debt (falling due from January 1991 through March 1992) plus maturities due in accordance with the 1986 rescheduling agreement will be rescheduled. The actual amnount rescheduled has been estimated at approximately US$3 billion. All arrears that were not rescheduled were to be repaid by May 1991. 7.30 Promissory Notes. Fifteen percent of Nigeria's debt is in the form of promissory notes. These debts originated in 1982 and 1983 in trade arrears to uninsured suppliers. Under the terms of the rescheduling agreement signed with these creditors in January 1988, all claims (including late interest) were converted into promissory notes. Amortization is payable over a period of 23 years beginning in 1988 at an interest rate of 5 percent. Nigeria's new foreign investment law has made these notes eligible for debt-equity swaps. 7.31 London Club. There have been three agreements with the London Club, the first two for reschedulings in 1986 and 1989, and the third for a debt-reduction operation in 1992. In November 1986, Nigeria reached an agreement with the Steering Committee of the London Club 93 Flgure 7.1: Evolution of Debt Outstanding, 1980 to 1992 N ger a Evo I urt on of Debt Tota I Externa I Deot , n USS B i ons 40 0 35 0- 30 0- 25 0 ._ ~ ~ ~ ~ ~ ~ ~~ _ U) 0.0 CD 5. 0 Note: PPG MLT stands for Public and Publicly Guaranteed Medium- and Long-Term Debt. (1) Stock outstanding as of Deoember 1979. (2) Disburement less amortization p-id on PPG MLT Debt. (3) Cross-currency revaluation on PPG MLT debt. (4) Reschedulings and reductions on PPG MLT debt (except on categories below). (5) Promissory notes and other debt arising from assumption of 1982/83 trde credit in arrar. (6) Short-term debt and private non-guaranteed MLT debt. to reschedule US$1.7 billion in MLT maturities falling due between April 1986 and December 1987, and US$3 billion in arrears on letters of credit. (The agreement also involved US$320 million in new money, although this part of the agreement was never implemented because, in late 1987 when it was signed, Nigeria was out of compliance with the IMF.) In early 1988, the Nigerians reopened the agreement with a request for rescheduling on more favorable terms. In April 1989, a new rescheduling agreement was signed after lengthy negotiations. Under this agreement, the entire stock of debt-excluding interest in arrears, also inown as payable debt-was rescheduled over a 20-year period-15 years for the letters of credit-with a 3-year grace period. 7.32 In 1992, Nigeria reached a third agreement with the Steering Committee of the London Club. It included a buyback of US$3.4 billion of commercial debt at a 60-percent discount and 94 Table 7.5: Net Transfers, 1986 to 1992 1986 1987 1988 1989 1990 1991 1992 (US dollars millions) New disbursements of project loans 845 736 618 1,217 927 715 560 Total Debt Service Paid' 3,011 1,865 1,852 2,752 3,643 3,316 3,953 Not Trnsfers' -2,166 -1,129 -1,234 -1,535 -2,716 -2,601 -3,393 Nct Transfers/GDP -5 4 -4 -5 -8 4 -11 1992 debt service paid includes the finaning of the DDSR operation, comprising the cash buyback S1.3 billion, principal colateral $300 million, and interest collatealization (S127) million. Defined as disbursemens leu debt ervice paid. SouMe: CenRl Bank of Nigeria, and World Bank sff etimates. a swap of US$2 billion for par bonds backed by US Government securities. The cost of the operation, including collateral, totaled approximately US$1.7 billion and was financed entirely from Nigerian resources. The stock of debt owed to London Club creditors was reduced to US$2.2 billion, while debt service was reduced by US$700 million in 1992, and by about US$500 million per annum in subsequent years. 7.33 The Price Evolution of Nigeria's Commercial Debt. The announcement of the Brady Plan in March 1989 and the prospect of a future debt reduction operation prompted a rise in the price for Nigeria's commercial debt on the secondary market. From US$0.21, it leveled off at an eventual buyback price of about US$0.40 in June 1991. While this is broadly consistent with the experience of other countries, such exogenous factors as the windfall effect of the Gulf crisis and the subsequent decrease in world interest rates, also helped push up the price. Following the announcement of the 1994 budget, the secondary market price has fallen sharply. (See Figure 7.2.) Figure 7.2: The Secondary-Market Price for Nigeria's External Debt, 1986 to 1994 us ~ ~I *m I ma I 02 a l e U., mm r n- 0Q 95 Statistical Annex Table 1: NomInal GDP by Source ond Use (Naira Millions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p GDP at market prices 33,585 36,053 42,912 50,897 50,751 51,953 57,144 63,609 72,356 73,065 108,880 145,244 230,153 285,040 338,133 529,519 Net Indirect Taxes 523 691 755 1,731 292 383 433 602 988 934 1,999 2,565 4,101 5,658 8,151 16,335 GOP at factor cost 33,062 35,362 42,157 49,166 50,459 51,570 56,711 63,007 71,368 72,131 106,881 142,679 226,052 279,382 329,981 513,184 Agriculture 9,778 10,780 12,080 13,491 13,580 15,906 18,837 23,800 26,625 27,888 39,204 57,924 89,257 101.140 121,595 187,349 Industry 10,387 11,787 15,944 19,799 18,960 17,190 16,863 17,502 20,828 18,757 35,604 43.985 77,471 107,180 124,086 195,781 Mining and quarrying 6,896 7,341 9,892 13,149 11,102 9,294 8,451 10,155 12,539 10,071 25,709 30,243 57,532 82,855 95,675 152,005 PetroLeum 6,169 6,599 9,154 12,381 10,220 8,430 7,786 9,569 12,110 9,828 25,423 29,919 57,532 82,594 95,460 151,622 Other 727 742 738 768 882 864 665 586 429 243 286 324 307 261 215 383 Manufacturing and other 3,491 4,446 6,052 6,650 7,858 7,896 8,412 7,347 8,289 8,686 9,895 13,742 19,939 24,325 28,411 43,775 Services, etc. 12,897 12,795 14,133 15,876 17,919 18,474 21,011 21,705 23,915 25,486 32,073 40,770 59,324 71,062 84,301 130,054 Imports of CNFS 7, 564 8,567 8,180 9,650 13,490 11,591 10,016 8,239 9,001 14,976 26,863 31,995 54,042 70,882 99,968 197,319 Exports of GNFS 8,353 7,049 10,649 14, 767 11,434 8,491 7,779 9,446 11,648 12,490 31,152 33,515 73,507 113,300 121,369 221,377 Resource balance 789 (1,518) 2,469 5,117 (2,056) (3,100) (2,238) 1,207 2,647 (2,486) 4,289 1,520 19,465 42,418 21,401 24,058 0 Total Expenditures 32,796 37,571 40,443 45,780 52,807 55,053 59,382 62,402 69,709 75,551 104,591 143,724 210,688 242,622 316,732 505,461 Total consunption 23,283 27,645 30,967 34,470 40,992 44,661 50,957 56,341 63,218 64,546 89,676 124,160 178,265 200,897 261,542 409,123 General government 4,515 5,922 5,945 6,079 6,534 8,349 10,133 11,217 9,792 11,584 13,627 18,176 21,040 32,354 42,592 28,408 Private, etc 18,767 21,723 25,022 28,390 34,458 36,313 40,824 45,124 53,426 52,962 76,049 105,984 157,225 168,543 218,950 380,715 Gross domestic investment 9,513 9,926 9,476 11,310 11,815 10,392 8,425 6,060 6,490 11,005 14,914 19,564 32,423 41,725 55,190 96,338 GOFI 9,592 10,006 9,536 11,397 12,407 11,477 9,077 7,214 6,937 10,594 15,970 19,225 31,450 42,142 55,689 MA Changes In Stocks (79) (80) (60) (87) (592) (1,085) (652) (1,153) (447) 411 (1,056) 339 973 (417) (500) WA Memoronrum Items: GDP FC (Non-oil) 26,893 28,763 33,003 36,785 40,239 43,140 48,925 53,438 59,258 62,303 81,458 112,760 168,520 196,788 234,522 361,562 CDP FC (Non-oil, lon-agr.) 17,115 17,983 20,923 23,294 26,659 27,234 30,088 29,638 32,633 34,415 42,254 54,836 79,263 95,648 112,927 174,213 Cross domestic saving 10,302 8,408 11,945 16,427 9,759 7,292 6,187 7,268 9,138 8,519 19,204 21,084 51,888 84,143 76,591 120,396 Population (new estimate) 64,931 66,911 68,983 71,148 73,409 75,774 78,217 80,699 83,196 85,718 88,273 90,866 93,505 96,203 98,983 101,922 Source: Federal Office of Statistics, and staff estimates. Table 2: Re lCDP by souree an Use (1987 Mairs Millions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991e 1992p GOP at market prices 119,046 112,184 119,767 124,803 110,792 109,922 102,509 98,114 107,243 1W9,106 108,880 119,525 127,489 134,577 141,388 147,236 Net Indirect Taxes 2,307 2,430 2,295 5,170 766 909 859 998 1,543 1,356 1,999 2,043 2,367 2,989 3,486 4,685 GDP at factor cost 116,739 109,754 117,471 119,633 110,027 109,012 101,650 97.117 105,700 107,749 106,881 117,482 125,123 131,588 137,902 142,551 Agriculture 42,017 38,385 37.223 39,061 32,630 33,459 33,361 31,747 37,076 40,495 39,204 43,051 45,088 46,922 48,799 50,751 Irnustry 45,111 43'441 51,653 50,524 45,403 43,515 37,117 36,931 38,896 36,676 35,604 39,147 42,156 44,855 46,784 47,731 Mining ard q.mrrying 42,456 38,893 44,424 41,130 30,408 27.254 25,876 28,727 30,391 28,371 25,709 27,802 31,802 34,600 36,157 36,679 Petroleum 40,077 37,014 41,530 39,206 28,271 25,048 24,260 27,420 29.741 28,183 25,423 27,483 31,633 34,412 35,961 36,446 Other 2,379 1,879 2,894 1,924 2,136 2,206 1,616 1,307 649 188 286 319 170 188 197 233 Manufacturing awd other 2,655 4,547 7,228 9,394 14,996 16,261 11,241 8,204 8,505 8,305 9,895 11,345 10,353 10,255 10,626 11,052 Services, etc. 29,611 27,928 28,596 30,048 31,993 32,039 31,172 28,438 29,7218 30,578 32,073 35,284 37,879 39,811 42,319 44,068 Ieports of GNFS 83,154 83,045 73,646 87,498 107,835 86,301 70,958 56,360 52,378 37,657 26,863 26,398 27,663 31,460 35,298 35,770 Exports of GNFS 49,623 39,867 59,447 53,824 34,783 27,838 26,373 30,218 34,242 34,156 31,152 33,852 37,880 41,207 42,731 43,352 Resource balance (33,532)(43,178)(14,198)(33,674)(73,052)(58,463)(44,585)(26,142)(18,136) (3,501) 4,289 7,454 10,216 9,747 7,433 7,582 Total Expenditures 152,578 155,362 133,965 158,477 183,845 168,385 147,094 124,256 125,379 112,607 104,591 112,071 117,273 124,830 133,954 139 654 Total conswmption 86,897 107,729 92,275 111,164 135,509 130,712 117,776 103,775 106,785 91,396 89,676 95,752 98,312 103,854 111,342 116,584 o General government 20,727 23,341 20,324 16,509 19,695 22,257 21,898 15,909 14,003 15,743 13,627 14,127 13,660 16,381 19,084 8,099 Private etc. 66,170 84,387 71,951 94,655 115,814 108,455 95,877 87,866 92, 782 75,653 76,049 81,625 84,653 87,474 92,259 108,485 Private 58,266 61,124 60,941 72,901 70,449 70,756 66,603 67,021 76,280 72,760 76,049 84,001 88,968 90,806 93,750 108,485 Statistical discrepancy 7,903 23,263 11,010 21,754 45,365 37,699 29,274 20,844 16,502 2,893 0 (2,377) (4,315) (3,332) (1,492) 0 Gross domestic Investment 65,681 47,633 41,690 47,313 48,335 37,673 29,318 20,481 18,594 21,212 14,914 16,319 18,961 20,976 22,612 23,070 GDFI 69,368 50,236 43,935 49,934 50,476 42,276 32,112 24,379 19,810 20,422 15,970 16,033 18,393 21,188 22,819 MA Changes In Stocks (3,687) (2,603) (2,246) (2,621) (2,140) (4,604) (2,794) (3,898) (1,216) 789 (1,056) 285 568 (212) (207) MA Memoran&am Items: GDP FC (Non-oil) 76,662 72,740 75,941 80,427 81,755 83,965 77,390 69,697 75,958 79,567 81,458 89,999 93,490 97,176 101,941 106,105 GDP FC (Non-oil, Non-agr.) 34,645 34,355 38,718 41,366 49.125 50,506 44,029 37,949 38,882 39,071 42,254 46,948 48,402 50,254 53,142 55,354 Gross domestic saving 74,356 32,921 63,920 93,710 31,903 14,591 13,466 28,739 34,001 14,960 19,204 17,573 28,925 39,803 30,169 27,734 Capacity to Import 91,829 68,333 95,876 133,895 91,402 63,219 55,105 64,618 67,785 31,406 31,152 27,652 37,627 50,287 42,854 40,131 Terms of trade adjustment 42,207 28,466 36,429 80,071 56,619 35,381 28,733 34,400 33,543 (2,750) 0 (6,200) (252) 9,080 123 (3,221) Gross doNestic Income 161,253 140,650 156,195 204,874 167,412 145,302 131,241 132,514 140,786 106,356 108,880 113,325 127,237 143,657 141,511 144,015 Source: Federal Office of Statistics and staff estimates. 1992 figures are preliminary. Table 3: Balamce of Pa'ymets (US$ Miltlions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1959 1990 1991 l992p Trade latance 2.411 (1,166) 4,923 11,221 (672) (2,725) (1,081) 3,009 4,287 40 1,758 1,292 3,900 6,843 4,234 3,675 A. Exports FOB 12,376 10,444 16,767 25,956 17,718 12,154 10,370 11,891 12,566 6,784 7,532 7,069 9,812 13,914 12,127 12,471 1. PetroleLm 11,564 9,455 15,655 24,942 17,162 11,888 9,954 11,568 12,203 6,385 6,994 6,456 9,411 13,508 11,655 12,026 2. otber 811 989 1,112 1,014 556 266 416 323 363 399 538 613 401 406 472 445 3. lifports FOB (9.965)(11,610)(11,844)(14,735)(18,390)(14,879)(11,451) (8,882) (8,279) (6,744) (5,774) (5,776) (5,912) (7,070) (7,893) (8,796) Services (3,233) (2,320) (2,860) (6,335) (4,803) (3,539) (3,535) (3,743) (4,241) (4,391) (3,460) (3,845) (4,268) (5,389) (5,256) (5.249) A. inwestment Income (2,046) (1,097) (2,026) (4,472) (2,147) (1,661) (1,527) (2,309) (2,916) (2,934) (2,770) (2,903) (2,668) (3,286) (2,969) (2,833) 1. Net Interest (537) (228) (448) (1,213) (653) (57) (1,126) (1,998) (2,020) (1,988) (2,020) (2,290) (2,205) (2,529) (2,134) (2,034) Credits 5 6 12 19 17 356 110 116 122 97 90 so 152 210 288 111 DebIts (542) (234) (460) (1,232) (670) (933) (1,236) (2,114) (2,142) (2,085) (2,110) (2,370) (2,357) (2,739) (2,422) (2,145) 2. other Investment Income (1,510) (869) (1,578) (3,259) (1,494) (1,084) (401) (311) (896) (946) (750) (614) (463) (758) (835) (799) B. Non-Factor Services (1,187) (1,223) (834) (1,863) (2,655) (1,877) (2,008) (1,434) (1,325) (1,457) (690) (942) (1,599) (2.102) (2,287) (2,416) 1. Exports 582 652 864 1,050 793 453 368 433 466 335 225 334 167 169 197 186 2. Imprts (1,769) (1,875) (1,699) (2,913) (3,449) (2,331) (2,376) (1,867) (1,791) (1,792) (915) (1,276) (1,767) (2,271) (2,484) (2,602) Net Private Transfers (180) (250) (347) (409) (448) (389) (376) (306) (244) (32) (4) (26) (10) 26 27 29 Current Account Saience (1,002) (3,736) 1,716 4,478 (5,923) (6,653) (4,992) (1,040) (198) (4,383) (1,706) (2,579) (377) 1,481 (994) (1,545) Capital Account NA 1,515 1,725 67 (277) 1,357 (768) 658 125 (4,024) (2,586) (2,320) (1,166) (2,073) (1,297) (6,150) A. Net official Transfers (5) (19) (41) (167) (119) (40) (19) (26) (16) (140) (20) 89 128 48 22 (9) . I. Direct investment /9 382 211 305 (739) 165 430 365 189 345 526 613 359 2,443 602 588 576 . C. Medium and Long-Termn NA 1,387 1,033 652 811 2,976 1,404 (181) (1,098) (2,313) (3,280) (3,458) (2,502) (3,112) (2,539) (5,940) Officiat MLT NA 1,393 977 604 782 2,976 1,404 (181) (1,082) (2,211) (3,233) (3,432) (2,484) (3,094) (2,566) (6,002) Disbursemtents NA 1,448 1,005 988 1,365 3,603 2,352 1,848 1,560 845 736 615 1,217 927 715 594 Amortization (scheduled) NA (55) (28) (384) (583) (627) (948) (2,029) (2,642) (3,056) (3,969) (4,049) (3,701) (4,021) (3,281) (6,596) Private MLT 16 (6) 56 48 29 0 0 0 (16) (102) (47) (26) (18) (18) 27 62 O. Short-Term /a (78) (101) 10 134 409 (1,143) (2,095) 18 544 (1,815) (48) 142 (1,758) (106) 88'. (513) E. Net Errors and Om~iasfors (100) 37 417 188 (1,544) (866) (423) 658 350 (282) 149 547 522 496 (252) (264) Overall Balance NA (2,222) 3,440 4,545 (6,200) (5,296) (5,760) (382) (73) (8,407) (4,292) (4,899) (1,544) (592) (2,292) (7,695) F Inanc Ing 818 2,222 (3,440) (4,545) 6,200 5,296 5,760 382 73 (8,407) (4,292) (4,899) (1,544) (592) (2,292) (7,695) A. Reserve Movements 818 2,222 (3,440) (4,545) 6,200 2,367 1,045 (475) (696) 851 78 331 (1,272) (2,508) (50) 3,370 B. Mon-Reserve Assets /b 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (352) C. Change In Arrears 0 0 0 0 0 2,929 4,715 857 (280) (792) (3,372) 4,568 (4,915) 834 (956) 1,849 D. Rescheduting Credits 0 0 0 0 0 0 0 0 1,049 8,348 7,586 0 7,731 2,266 3,298 2,828 Memo Items: Pi ~" Debt Service Pad(LT PPG) 138 1'9 393 ,,,4 1.304 1,714 2,160 3,474 4.,067i 1,685 921 2,062 2,185 3,324 3,153 2,402 o/lw Interest 52 66 258 531 669 873 998 1,249 1,299 485 584 1,458 1,517 1,845 2,218 1,656 olwa Amortization 86 83 135 243 634 841 1,162 2,225 2,769 1,200 338 605 668 1,479 982 746 - stock of Reserves 4,350 2,021 5,546 10,327 4,451 1,959 1,226 1,504 1,687 891 755 320 1,592 4,100 4,150 830 --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /a incltudes transactions associated with the sale of petroleum produaction equity in 1989. /b Cost of collateral for the 1992 London CluA deal. Source: central Bank of Nigeria, World lank Debtor Reporting System, and staff estimates. 1992 data are preliminary. Table 4: Exports by Comodities (USS HItlions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p ................ ............ ............ ............. ..............................................----------------------------.....-----------.....-.-.....-.-.-..-.---------..-----. Nomntal Value 11.564 9,455 15,655 24,942 17.162 11,888 9,954 11,568 12,203 6,385 6,994 6,456 9,411 13,508 11,655 12,026 Constant Value (1987=100) 13,689 11,770 13,050 12,026 7,697 6,290 5,869 6,877 7,815 7,783 6,994 7,408 8,29 9,575 9,883 10,080 Value Index 165 135 224 357 245 170 142 165 174 91 100 92 135 193 167 172 Volume Index 196 168 187 172 110 90 84 98 112 111 100 106 125 137 141 144 Unit Value Index 84 80 120 207 223 189 170 168 156 82 100 87 108 141 118 119 Cocoa Value 482 595 717 569 233 176 313 239 258 265 375 325 142 150 176 Constant Value (1987-100) 184 211 262 264 135 173 290 173 173 276 375 566 244 280 248 Value Index 129 159 191 152 62 47 83 64 69 71 100 87 38 40 47 Volume Index 49 56 70 70 36 46 77 46 46 74 100 151 65 75 66 Unit Value Index 262 283 273 216 172 102 108 138 149 96 100 57 58 54 71 . Cocoa Butter Vatue 60 28 35 37 41 24 40 31 52 32 13 16 15 16 7 Constant Value (1987-100) 9 5 6 7 11 8 18 11 20 14 13 8 7 8 6 Value Index 459 213 265 285 312 185 306 238 400 246 100 123 115 123 54 Volume Index 66 36 47 57 88 62 138 86 157 106 100 63 56 61 44 Unit Value Index 699 594 567 498 355 298 222 277 254 232 100 195 206 202 123 Riuber Value 17 20 22 26 29 17 21 22 23 23 15 45 69 41 78 Constant Value (1987=100) 11 12 10 11 15 12 7 10 11 13 15 26 40 26 38 Value Index 114 131 143 171 192 111 136 144 154 154 100 298 457 272 517 Volume Index 71 79 67 71 102 77 44 64 74 86 100 175 267 171 250 Unit Value Index 160 165 212 239 18 144 307 226 208 180 100 171 171 159 208 Palm Kernals - Value 51 20 20 26 29 30 23 11 9 5 8 15 16 12 6 Constant Value (1987=100) 11 3 3 4 5 7 8 2 3 5 8 9 9 5 2 Value Index 664 263 258 339 384 393 301 145 117 71 100 197 211 155 80 Volume Index 140 43 39 57 66 86 102 31 35 64 100 119 125 71 28 Unit Value Index 474 614 668 595 583 455 297 468 334 110 100 165 169 223 223 Other Value 202 326 320 356 225 19 20 20 21 73 127 212 159 187 205 445 Constant Value (1987=100) 184 313 262 266 193 18 18 18 21 74 127 176 138 80 166 Value Index 158 256 251 280 177 15 16 16 17 58 100 166 125 147 161 Volume index 144 246 206 209 151 14 14 14 17 58 100 139 109 63 131 Unit Value Index 110 104 122 134 117 105 111 112 100 100 100 120 115 233 123 Merchanvdise FOE Value 12,376 10,444 16,767 25,956 17,718 12,154 10,370 11,891 12,566 6,784 7,532 7,069 9,812 13,914 12.127 12,471 Constant Value (1987-100) 14,087 12,313 13,593 12,578 8,056 6,507 6,209 7,091 8,043 8,165 7,532 8,193 9,168 9,973 10,342 10,493 Value Index 164 139 223 345 235 161 138 158 167 90 100 94 130 184 161 165 Volume Index 187 163 180 170 110 89 84 97 110 109 100 109 122 133 138 140 Unit Value Index 88 85 123 206 220 187 167 168 156 83 100 86 106 139 116 118 Sance: Central lank of Nigeria end staff estimtes. Table 5: lIports CIF by End-Use (UsS Milifons) 1977 1978 1979 1980 1981 1982 1983 1984 1,985 1986 1987 1988 1989 1990 1991 1992p :-.. . . ... ....-.-.-.-...-----.-...-----..........----.--------------- ...-----.-.-.. Consumer Goods Current Prices 3,166 3,724 3,691 6,459 9,039 6,852 5,261 3,638 2,025 1,628 1.540 1,835 1,787 2,090 2,167 Constant 1987 Prices 5,587 5,711 4,998 7,974 11,113 8,556 6,722 4,750 2,623 1,788 1,540 1,711 1,677 1,856 1,887 Value Irdex 206 242 240 419 587 445 342 236 131 106 100 119 116 136 141 Volume Index 363 371 324 518 721 555 436 308 170 116 100 111 109 121 123 Unit Value Index 57 65 74 81 81 80 78 77 77 91 100 107 107 113 115 Capital Goods Current Prices 5,302 6,117 6,372 5,464 6,331 4,151 4,107 3,166 3,199 2,703 2,697 2,046 2,925 3,170 3,320 Constant 1987 Prices 9,357 9,380 8,628 6,746 7,784 5,183 5,248 4,133 4,142 2,969 2,697 1,907 2,746 2,816 2,892 Value Index 197 227 236 203 235 154 152 117 119 100 100 76 108 118 123 VOlume Index 347 348 320 250 289 192 195 153 154 110 100 71 102 104 107 Unit Value Index 57 65 74 81 81 80 78 77 77 91 100 107 107 113 115 Raw Materials - Current Prices 2,552 2,994 3,028 4,372 4,967 5,403 3,283 2,920 3,794 3,128 2,141 2,506 1,826 2,567 3,215 Constant 1987 Prices 4,503 4,590 4,100 5,397 6,107 6,746 4,195 3,812 4,914 3,436 2,141 2,336 1,714 2,281 2,800 Value Index 119 140 141 204 232 252 153 136 177 146 100 117 85 120 150 Volume Index 210 214 191 252 285 315 196 178 229 160 100 109 80 107 131 Unit Value Index 57 65 74 81 81 80 78 77 77 91 100 107 107 113 115 Mfiscellaneous Current Prices 11 17 19 16 20 66 25 108 147 7 13 6 7 0 35 Constant 1987 Prices 19 26 26 20 25 82 32 141 190 8 13 6 6 0 30 Value Index 85 135 151 128 159 515 198 846 1,147 58 100 S0 51 0 2 73 Volume Index 150 206 204 158 196 644 253 1,105 1,486 64 100 47 48 0 238 Unit Value Index 57 65 74 81 81 80 78 77 77 91 100 107 107 100 115 Total CIF Current Prices 11,031 12,852 13,111 16,312 20,358 16,471 12,676 9,832 9,165 7,466 6,392 6,395 6,544 7,827 8,737 9,737 Constant 1987 PrIces 19,466 19,708 17,753 20,137 25,029 20,567 16,197 12,837 11,869 8,201 6,392 5,960 6,143 6,953 7,610 7,402 Value Index 173 201 205 255 318 258 198 154 143 117 100 100 102 122 137 152 Volume Index 305 308 278 315 392 322 253 201 182 131 100 94 96 105 117 125 Unit Value Index 57 65 74 81 81 80 78 77 79 89 100 107 107 117 117 122 Source: Central Bank of Nigeria and staff estimates. Tabte 6: Long-term Debt (USS Milltons) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p DISBMRSEWfNTS Pub(lc and Publicly Guaranteed A. Officilt Creditors 73 72 208 695 1,560 2,134 1,950 1,195 1,486 1,232 1,314 939 1,511 892 844 702 1. uttiltaterat 64 59 54 73 8S 150 190 262 288 545 408 265 606 542 501 532 2. Paris Club /1 9 13 140 622 771 1,685 1,344 932 1,163 581 854 572 905 335 342 170 3. other /2 ' - 14 - 705 299 416 - 35 105 53 102 - 16 - - I. Private Creditors 15 1,399 777 492 1,056 1,424 722 529 83 62 14 23 28 44 0 0 1. London Club /3 - 1,399 777 444 1,027 1,417 713 426 82 21 14 23 27 - - - 2. Uninsured Supptlers b - - - 29 4 9 - 1 - - - 1 44 - - 3. Promissory Notes /4, - - * * - - - - - - 4. Other 15 0 0 48 0 2 0 103 0 41 0 (0) (0) (0) 0 0 Private Non-Gturanteed 53 239 457 565 524 166 308 300 90 50 75 83 99 0 0 4 Total 141 1,709 1,442 1,753 3,141 3,724 2,981 2,023 1,659 1,344 1,403 1,045 1,638 937 844 706 AMORTIZATION "3 Pubilc and Pubilcly Guaranteed A. Official Creditors 27 27 36 51 56 158 311 441 1,036 306 164 413 477 1,061 881 660 1. Multilateral 20 19 21 25 30 34 41 40 46 85 135 207 213 247 291 316 2. Paris Club /1 7 8 14 25 26 122 260 303 560 214 26 189 250 771 564 252 3. Other /2 - 0 0 0 2 9 98 430 7 2 17 14 43 26 91 8. Private Creditors 34 23 15 14 304 483 639 1,584 1,608 894 174 192 191 419 54 75 1. London Ctub /3 - - 290 457 620 834 984 234 140 160 156 71 6 75 2. Uninsured Suptliers b 2 3 -32- - - - 3 1 3 3. Promissory Notes /4 - - . . - 740 620 647 - - - - - 4. Other 34 23 15 14 14 25 16 8 1 13 34 31 35 348 48 Privete Non-Guaranteed 26 33 84 177 274 200 213 200 125 so 123 90 14 15 47 12 Total 86 83 135 243 634 841 1,162 2,225 2,769 1,250 461 694 681 1,495 982 746 /1 Includes bilateral loans and all other loans rescheduled by the Paris Club. /2 Includes nan-Paris Club bilateral creditors and loans rescheduled by these creditors. /3 Commercial banks. /4 Originally short-term trade credits In arrears. Source: World Bank Debtor *eporting System. 1992 data are preliminary. Teble 6s: Long-tem Debt (USS NIlitamw) 1977 1978 1979 1980 1981 1982 193 1984 1985 1986 1987 1988 1989 1990 1991 1992p INTEREST Public and Publicly Guaranteed A. Official Creditors 38 43 59 86 172 212 370 449 505 228 412 782 732 1,136 1,435 744 1. Multilateral 30 34 46 46 44 54 60 75 85 146 212 240 219 262 355 322 2. Paris Club /1 8 9 13 38 127 153 277 321 367 74 194 533 498 538 1.064 381 3 otherl? - - 0 2 1 4 33 53 54 8 6 8 14 36 16 41 B. Private Creditors 5 4 151 354 369 556 572 690 752 257 172 676 786 709 783 910 1. London Club /3' - 147 347 363 550 483 538 360 195 157 460 545 332 418 563 2. Uninsured Suppliers b - - - - 2 2 2 1 - - - - - 2 2 3. Promissory Notes /4' - 83 148 366 49 - 181 234 330 360 345 4. other 5 4 3 7 6 4 4 2 24 14 14 34 6 47 3 - Private Non-Guaranteed 8 18 48 91 128 106 55 110 42 30 29 26 10 3 13 3 Total 52 66 258 531 669 873 998 1,249 1,299 515 613 1,484 1,527 1,848 2,231 1,656 DEBT OUTSTANDING AND DISBURSED 0 Pubilc and Pubcicly Guaranteed A. Official Creditors 781 853 1,028 1,625 3,018 4,856 6,026 6,036 7,761 14,537 18,603 17,911 20,367 22,309 23,103 21,915 1. Multilateral 451 490 524 571 623 737 883 955 1,431 2,234 3,062 2,849 3,173 3,733 4,010 4,087 2. Paris Club /1 330 363 490 1,042 1,680 3,136 3,867 3,999 5,477 11,053 14,019 13,578 15,636 16,788 17,486 16,392 3. Other /2 - - 14 12 715 982 1,276 1,081 852 1,250 1,523 1,483 1,559 1,788 1,607 1,436 B. Private Creditors A4 1,455 2,239 2,659 3,343 4,250 6,154 5,357 5,378 4,619 9,861 11,147 10,628 10,277 10,081 6,542 1. London Club /3 1,399 2,196 2,586 3,263 4,197 4,195 3,705 2,926 2,580 6,165 5,873 5,657 5,666 5,590 2,051 2. Uninsured Suppliers b - - - 28 27 30 24 29 33 38 35 13 56 46 46 3. Promissory Notes /4' - - - - 1,920 1,525 1,956 1,511 3,195 4,809 4,562 4,507 4,446 4,446 4. Other 74 56 43 73 52 26 9 103 468 496 462 431 396 48 0 0 Private Non-Guaranteed 130 336 709 1,097 1,347 1,313 1,300 1,400 1,416 600 552 537 406 391 343 331 Total 985 2,645 3,976 5,381 7,709 10,419 13,481 12,793 14,555 19,756 29,016 29,595 31,400 32,977 33,527 28,789 /I includes bfilateral loans and all other loans rescheduled by the Paris Cltub. /2 Includes non-Paris Ctub biltateral creditors and loars rescheduled by these creditors.P. /3 Conmercfmt banks. /4 Originally short-term trade credits in arrears. Souirce: World Bank Debtor Reporting System. 1992 data are preliminary. Tblbe 7: 54mcry Baudgpet of the Federal Govenrient (Neira Mililons) I, ~~~~~.... ..... .... ...... ..... .................. ..... ........ .................................. ........................................................................ ...... 1977 1973 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p Federally Retained Revenue 6,830 5,749 8,891 12,059 8,057 8,254 7,483 7,345 9,007 11,293 16,583 16,356 35,133 53,985 68,779 90,242 Total Expenditures /a, 9,009 7,334 9,648 12,202 13,240 12,617 14,078 10,264 10.422 13,654 22,438 30,176 44,816 61,645 90,869 138,000 A. Recurrent 2,680 2,491 3,678 5,229 4,997 4,164 6,627 6,362 5,854 7,936 15,511 20,910 31,576 44,649 54,819 79,732 1. Interest Payments 205 424 449 693 748 1,360 2,045 2,607 2,886 3,574 12,282 15,442 23,871 33,650 38,083 55,813 a Externl Ib' 21 111 144 225 289 346 616 761 826 989 8,401 10,367 16,736 21,332 23,062 35,866 b. Domestic 184 313 305 468 459 1,014 1,429 1,846 2,060 2,585 3,881 5,075 7,135 12,318 15,021 19,947 2. Other 2,475 2,067 3,229 4,536 4,249 2,804 4,582 3,755 2,968 4,362 3,229 5,468 7,705 10,999 16,736 23,919 B. Capital 6,329 4,843 5,970 6,973 8,243 8,453 7,451 3,902 4,568 5,718 5,425 8,268 11,335 15,507 34,382 55,056 C. Exchange Rate Guarantees /c 0 0 0 0 0 0 0 0 0 0 1,502 998 1,905 1,489 1,668 3,212 aLtnce (2,179) (1,585) (757) (143) (5,183) (4,363) (6,595) (2,919) (1,415) (2,361) (5,855)(13,820) (9,683) (7,660)(22,090)(47,758) Net financing 2,179 1,585 757 143 5,183 4,363 6,595 2,919 1,415 2,361 5,855 13,820 9,683 7,660 22,090 47,758 A. External 298 925 93 255 500 264 174 (95) (379) (255) 3,486 5,430 8,230 (251) (467)(12,449) S. Net Domestic 1,881 660 664 (112) 4,683 4,099 6,421 3,014 1,794 2,616 2,369 8,390 1,453 7,911 22,557 60,207 1. Banking System 1,147 723 (97) 125 3,526 3,803 5,063 2,317 1,626 (807) 2,360 6,131 (9,276) 2,768 12,828 44,127 2. Non-bank Credits 734 (63) 761 (237) 1,157 296 1,358 697 168 3,423 9 2,259 3,439 3,365 1,005 0 3. Federation Account Trans 0 0 0 0 0 0 0 0 0 0 0 0 7,290 1,778 8,724 16,080 Note: The 1992 date are preliminary estimtes and are subJect to revision. /a Audited accounts have not been available since 1982. Expenditures are derived as the difference between revenues and financing. /b The Federal Government assumed responsibility for most debt service after the reschedullng agreements which began in 1986. /c Obligations incurred prior: 6,830. Source: Ninistry of Finance, Central Sank of Nigeria, and staff estimates. Table 8: oney Supplty and Its Determinants (Naira Millions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p Met Domestic Credit 6,099 7.866 7,348 8,843 15,017 20.759 26,841 29,507 33,081 36,767 41,867 52,742 45,998 53,301 73,980 137,316 A. Credit to Goverrnent (net) 2,634 3,143 2,281 1,825 5,828 10,059 15,234 17,433 18,551 18,067 19,784 25,195 17,496 19,007 31,419 80,704 fn 1. Federal Government NA NA 3,230 3,020 6,546 10,349 15,412 17,729 19,869 19,062 21,422 27,553 18,277 21,044 33,873 86,189 2. State Government NA NA (807) (1,104) (554) (232) (103) (168) (1,073) (791) (1,315) (1,917) (314) (1,297) (1,552) (4,372) 3. Local Government NA NA (142) (91) (164) (58) (75) (128) (245) (204) (323) (441) (467) (740) (902) (1,113) B. Credit to Pvt. Sector and 0 3,465 4,723 5,067 7,018 9,189 10,700 11,607 12,074 14,530 18,700 22,083 27,547 28,502 34,294 42,561 56,612 Net Foreign Assets 2,962 1,486 3,228 5,607 2,550 977 (1,075) (147) 1,822 1,839 1,129 10,220 23,120 44,790 58,753 38,522 Other Item (ret) (1,248) (1,831) (727) (60) (2,328) (5,043) (6,732) (8,117)(11,200)(14,255)(13,117)(23,084)(24,862)(35,930)(49,878)(45,773) Money ptus tuasf-Money 7,813 7,521 9,849 14,390 15,239 16,694 19,034 21,243 23,703 24,351 29,879 39,879 44,256 62,161 82,855 130,066 A. Money 5,184 5,150 5,161 7,747 8,984 9,669 10,702 11,522 12,502 11,754 13,612 20,089 24,326 34,918 46,615 79,532 B. OQasi-Money 2,257 2,677 3,248 4, m 5,500 6,352 7,556 8,795 11,201 12,597 16,267 19,789 19,930 27,243 36,240 50,533 Source: Central lank of Nigeria and staff estinmtes. (A a Table 9: Selected Prices. Exchange Rates wid Interest Rates 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 199le 1992p NOMINAL TERMS A. Domestic Interest Rates Deposit Rate (3 months) 2.8X 4.1X 4.51 5.3X 5.71 7.61 7.41 8.3X 9.1X 9.2X 13.11 13.1X 15.6% 19.7% 15.2% 18.5% Discount Rate (end of perlo 4.0X 5.0X 5.01 6.01 6.01 8.01 8.02 10.0 1¶0.01 10.01 12.81 12.85 18.5% 18.5% 15.5% 17.5% B. Consumer Prices Index 24.1 29.3 32.7 36.0 43.5 46.8 57.7 80.5 85.0 89.8 100.0 154.5 232.4 249.5 281.1 406.5 Inflation 12.01 21.71 11.71 10.01 20.81 7.71 23.21 39.61 5.5% 5.72 11.4% 54.5% 50.4X 7.4% 12.7% 44.6% C. Official Exchange Rates (US 1.550 1.575 1.658 1.828 1.629 1.486 1.383 1.309 1.119 0.570 0.249 0.220 0.136 0.124 0.101 0.058 Index 622.6 632.4 666.0 734.2 654.1 596.7 555.5 525.7 449.2 228.8 100.0 88.5 54.5 50.0 40.5 23.2 Appreciation/Deprecistion ( -- 1.61 5.31 10.21 -10.9X -8.81 -6.91-5.4X -14.5% -49.1% -56.3 -11.5% -38.4X-8.4% -18.9% -42.71 D. Parallel Exchange Rates (US 0.976 0.877 0.943 1.108 1.082 0.878 0.553 0.308 0.264 0.249 0.211 0.146 0.095 0.104 0.075 0.047 Index 41.6 414.7 446.2 523.9 511.6 415.4 261.6 145.5 124.8 117.7 100.0 68.9 45.0 49.3 35.6 22.4 Appreciation/Depreciation ( .. -10.21 7.6X 17.41 -2.31 -18.81 -37.0X-44.4% -14.2% -5.7% -15.01 -31.1% -34.7X 9.6X -27.8% -36.9% E. Crude Olt (OPEC basket, USS 12.8 12.9 18.6 30.5 34.3 31.0 28.1 27.5 26.7 13.6 17.2 13.6 16.3 21.2 17.3 17.6 Index 74.4 75.0 108.1 177.3 199.4 180.2 163.4 159.9 155.2 79.1 100.0 79.1 94.8 123.3 100.6 102.3 Inflation (I) 9.4% 0.82 44.2 64.01 12.5% -9.61 -9.42 -2.11 -2.91 -49.1% 26.51 -20.91 19.9% 30.11 -18.4% 1.71 F. Internmatonsl Interest Rate 6.41 9.21 12.2X 14.01 16.71 13.61 9.91 11.3% 8.62 6.81 7.31 8.12 9.3% 8.4% 6.11 3.8% G. Internmatonal Inflation (MUM) Index 56.7 65.2 73.9 81.0 81.3 80.1 78.3 76.6 77.2 91.0 100.0 107.3 106.5 112.6 114.8 119.7 Inflation Cl) 9.91 15.1% 13.31 9.7X 0.4X -1.51 -2.32 -2.11 0.81 17.91 9.8% 7.31 -0.71 5.72 2.0% 4.3X REAL TERMS N. Domestic Interest Rates Deposit -9.61 -14.41 -6.5% -4.31 -12.51 -0.11 -12.8% -22.4% 3.4% 3.31 1.6% -26.81 -23.2% 11.5% 2.2% -18.0% Discount -8.6% -13.71 -6.0X -3.61 -12.31 0.3% -12.3% -21.2% 4.22 4.1% 1.3% -27.0% -21.2% 10.3% 2.5% -18.7X 1. Official Exchange Rates (USS/N) Index 292.4 309.3 319.4 341.3 382.5 392.6 463.8 638.9 572.7 312.7 100.0 118.6 105.4 97.9 82.5 65.5 Appreciation/Depreciation ( - 5.8% 3.3% 6.8% 12.1% 2.71 18.1% 37.81 -10.4% -45.4% -68.0% 18.6% -11.1% -7.1% -15.81 -20.6% J. Parallel Exchange Rates (USS/N) Index 196.00 186.24 197.66 232.69 273.43 242.84 192.84 152.98 137.32 116.06 100.00 99.13 98.10 109.27 87.18 76.20 Appreciatlon/Depreciation ( - -5.0X 6.1% 17.7X 17.5% -11.2% -20.6% -20.7X-10.2% -15.5% -13.8% -0.9X -1.0% 11.4% -20.2% -12.6X K. Terms of Trade (Crude Oil) Index 131.3 115.0 146.4 218.9 245.2 225.0 208.7 208.7 201.0 86.8 100.0 73.7 89.0 109.5 87.6 85.5 Inflation (2) -0.41 -12.4% 27.3% 49.5% 12.0% -8.2X -7.2% 0.0% -3.72 -56.82 15.1% -26.3% 20.72 23.1% -20.0% -2.5% L. International Interest Rate -3.21 -5.1% -1.01 4.01 16.21 15.4% 12.5% 13.72 7.8 -9.4% -2.3% 0.8% 10.01 2.6% 4.0% -0.4% Source. Central lank of Nigeria, IMF International Financial Statistics, and World Currency Yearbook. Table 10: luptifelt CDP Deflators by Source and Use Base Index (1987 a 100) .. .. .............................................................................................-----------------------.---................-------------------------------.......-------------.-....--------.- ... 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992p GOP at warket prices 28 32 36 41 4 47 56 65 67 67 100 122 181 212 239 360 Net Indirect Taxes 23 28 33 33 38 42 50 60 64 69 100 126 173 189 234 349 GDP at factor cost 28 32 36 41 46 47 56 65 68 67 100 121 181 212 239 360 Agriculture 23 28 32 35 42 48 56 75 72 69 100 135 198 216 249 369 Indastry 23 27 31 39 42 40 45 47 54 51 100 112 184 239 265 410 Mining nd quarrying 16 19 22 32 37 34 33 35 41 35 100 109 181 239 265 414 Petroleum 15 18 22 32 36 34 32 35 41 35 100 109 182 240 265 416 Other 31 39 25 40 41 39 41 45 66 129 100 102 181 139 109 165 nuwfecturing end other 132 98 84 71 52 49 75 90 97 105 100 121 193 237 267 396 Services, etc. 44 46 49 53 56 58 67 76 80 83 100 116 157 178 199 295 Imports of GNFS 9 10 11 11 13 13 14 15 17 40 100 121 195 225 283 552 Exports of GNFS 17 18 18 27 33 31 29 31 34 37 100 99 194 275 284 511 Totat Expenditures 21 24 30 29 29 33 40 50 56 67 100 128 180 194 236 362 Total consuyption 27 26 34 31 30 34 43 54 59 71 100 130 181 193 235 351 General goverrrent 22 25 29 37 33 38 46 71 70 74 100 129 154 198 223 351 Private, etc 28 26 35 30 30 33 43 51 58 70 100 130 186 193 237 351 Gross dciestic investment 14 21 23 24 24 28 29 30 35 52 100 120 171 199 244 418 GDFI 14 20 22 23 25 27 28 30 35 52 100 120 171 199 244 NA Changes In Stocks 2 3 3 3 28 24 23 30 37 52 100 119 171 197 241 NA Nerorandue Iteas: GOP FC (Non-olf) 35 40 43 46 49 51 63 77 78 78 100 125 180 203 230 341 GOP FC (Non-oll. Non-agr.) 49 52 54 56 54 54 68 78 84 88 100 117 164 190 213 315 ...__ ............................................ ......................................................................... .............. .................... ...... .......,,,,,,,.....,,,,, a Source: Federal Office of Statistics, and staff estimta.. 1992 figures are preliminary. 109 Bibliography III BIBLIOGRAPHY Ajayi, S. Ibi. An Economic Analysis of Capital Flight from Nigeria. Washington, D.C.: World Bank, WPSS #993, October 1992. Bevan, D., P. Collier, and J. Gunning. Nigeria. San Francisco: International Center for Economic Growth, Country Study No. 11. Brautigam, D. Regional Industralization in Eastern Nigeria. Washington, DC: World Bank, AF4CO, July 1992. Collier, P. An Analysis of the Nigerian Labor Market. Oxford, England: Institute of Economics and Statistics, Oxford University, 1986. Central Bank of Nigeria. Annual Report and Statement of Accounts. Burrup Mathieson & Co., various years. 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Adjustment in Africa: Lessons Learned from Country Case Studies," World Bank Regional and Sectoral Studies, March 1994. -. Social Indicators of Development." Baltimore and London: The Johns Hopkins University Press, various years. BURKINA 0 ; \; X 0 X A N A FAS ( KE59 S KOTO > < 'A 0 Bi ~ t A81,i < / JGW W AtA'IIVIS ION (~~~~~~~~~~~~~~~~~~~~~Te Jh denooto~sede ®r S)T/ f@2ATE CAPITALS S01<0`0Y REA RIVERS (~~~~~~~~~~~~~~~~~~- KIOETR 0 60NA ?D 20 00 A; g< K - INTIRNATIONAJ 0~~~ ~~ i I GLfOfN >t ,015 '0 40 f0 , IKEJ_ A J f E N U G U fMD LAGOS X C 0 *EU 5 / d , . or Eh STATECBOUNDA,7E AAAU 2 NaGER f : vy IMO ,;g,*a CROSS I soupRhe oenomsnecons us ,f0 STATE CAPITkAURLS _B DLAg< IERo F 9nop NAIONKAL CAITA 9 U 0 ' dA 9 t / . . . / . _ INTERNATI°NAt |-~~~BAUCH ao m~~~~~~~llF