Documentof TheWorld Bank FOR OFFICIAL USEONLY ReportNo. 33305-NG NIGERIA JOINT IDA-IMF STAFF ADVISORY NOTE ONTHE NATIONAL ECONOMIC EMPOWERMENT AND DEVELOPMENT STRATEGY OCTOBER6,2005 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. FOROFFICIAL USEONLY INTERNATIONALDEVELOPMENT ASSOCIATION AND INTERNATIONALMONETARY FUND NIGERIA Poverty Reduction Strategy Paper Joint StaffAdvisory Note Preparedby the Staffs o f the International Development Association (IDA) and the International MonetaryFund(IMF) Approved by Gobind T. Nankani (IDA) and Saul Lizondo and Carlo Cottarelli (IMF) October 6,2005 I.Overview 1. The 2004 NationalEconomic Empowermentand Development Strategy (NEEDS) focuses on Nigeria's commitment to rapid and sustainable growth and poverty reduction. NEEDS is based on three pillars: (i) empowering people and improving social service delivery; (ii)fostering economic growth, inparticular inthe non-oil private sector; and (iii)enhancing the effectiveness and efficiency o f government and improving governance. This Joint Staff Advisory Note (JSAN) was prepared inresponse to two recent events: (i) the e-classification of Nigeria as an IDA-only country on June 2, 2005, and (ii) the authorities' request for the IMF to support their reform program under a proposed non-borrowing instrument. Since NEEDS was prepared about 18 months ago, the JSAN presents an assessment o f the strategy itself, progress in its implementation to date and the staffs' advice on keypriorities for strengthening NEEDS and its implementation. 2. The staffs of IDA and the IMFconsider NEEDS a significantachievement. NEEDS presents a first attempt to clearly articulate a coherent and comprehensive vision for economic growth and poverty reduction inNigeria. Inthe view o f the staffs, NEEDS correctly identifies the key development challenges Nigeria faces and proposes a response that i s broadly sound. However, more work i s needed to (i) understand better the nature and dynamics o f poverty in Nigeria; (ii)prioritize and sequence the different elements o f the strategy; (iii) NEEDS make more operational by detailing and costing specific sectoral strategies and programs to achieve the goals and objectives; and (iv) design and implement a strong evaluation and monitoring framework. Implementation o f the strategy in 2004 and the first half o f 2005 has been impressive, especially in the area o f macroeconomic policies, but implementation o f the overall strategy will need to be deepened and sustained over a period o f time to beginto yield the desiredimpact on poverty. This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not b e otherwise disclosed without W o r l d Bank authorization. - 3 - 3, Within the framework of Nigeria's federation, policy coordination between the three tiers of government is critical for achieving poverty reduction objectives. This presents an important challenge that cuts across all sectoral initiatives and requires a much better definition o f the roles and responsibilities o f the various levels o f government. The federal government has set up a framework to make subnational governments active partners in a nationally coordinated economic reform and poverty reduction strategy. Under the umbrella o f NEEDS, all 36 states have now developed state specific poverty reduction strategies-State Economic Empowerment and Development Strategies (SEEDS), and 35 states have volunteered to be assessed on their SEEDS and on their implementation performance to date. This presents, for the first time, an avenue for coordinated macroeconomic and sectoral policies, including reform strategies inpriority areas. 4. The staffs recommend that the federal government accelerate the preparation of the first annual progress report and revise and update NEEDS based on the recent implementation experience. Special attention should be paid to clarification o f program targets in the core social sectors, as well as stronger linkage between NEEDS targets and MDGs. In addition, several sectoral strategies will have to be developed to facilitate implementation o fNEEDSpolicies. 11.Poverty Diagnosis 5. Poverty diagnosis in NEEDS is constrained by weak statistics on poverty, particularly on income poverty. Surveys in 1980 and 1992 showed an increase in percentage o f Nigerians living below the relative poverty line (defined as expenditures o f less than 2/3 o f the average per capita household expenditures), from 28 percent to 43 percent. A 1996 survey suggested a further increase inthis level to 67 percent, but this is likely to be an overestimation inthe light o f the trend in GDP per capita over the same period (inaddition, the various household surveys are not fully comparable over time). Based on the 1996 survey, the NEEDS document indicates that in 1999, over 70 percent o f Nigerians lived below this relative poverty line, with an estimated 70percent o f this group living in rural areas. The available data on non-income indicators are weak as well, but they also suggest a high incidence o f non-income poverty, especially in the rural areas. Life expectancy i s a mere 54 years, and infant mortality (100 per 1000 live births) and maternal mortality (704 per 100,000 live births) are among the highest in the world. Only 64 percent o f school age boys and 58 percent o f girls attend primary school. These outcomes vary widely by income and by geographic location. 6. A National Living Standards Measurement Survey (LSMS) was completedin 2004. Preliminary data from this source provide some of the first high-quality data on poverty levels in Nigeria. Based on this data, the National Bureau o f Statistics (NBS) estimates that in 2004, 54 percent o f Nigerians lived below the relative poverty line o f 2/3 o f per capita household expenditures, while 22 percent lived below the extreme relative poverty line o f 1/3 o f average per capita household expenditures. Due to differences in coverage, these data are not directly comparable to earlier surveys. However, the current data provide a good - 4 - baseline for future poverty measurements. The LSMS also provides a good opportunity for stronger poverty diagnosis to inform the updating and operationalization o f NEEDS. 7. To move towards an effective poverty monitoring system, the staffs recommend that the government strengthens its framework for generating,regularly updating and disseminatingincome and non-incomepoverty data. Capacity for poverty monitoring and analysis at the N B S needs to be strengthened as part o f the ongoing restructuring o f the agency. An important short term priority in this area i s the implementation o f a national Core Welfare Indicators Questionnaire (CWIQ) survey in2005. 111.MacroeconomicPoliciesandFramework 8. The staffs of IDA and the IMF support the thrust of the macroeconomicpolicies proposed in the NEEDS document. The introduction in 2004 of a reference oil price in budget decisions i s central to Nigeria's efforts to strengthen management o f the volatility o f oil revenue. Fiscal restraint, along with tight monetary policy was consistent with macroeconomic stability and inflation was reduced significantly by end-2004. Developments inthe first halfof2005 were characterized by apick-up ininflation andbroadmoney growth. However, inJune, the Central Bank o fNigeria (CBN) initiated actions to reduce broad money growth, including an increase in commercial banks' reserve requirements. The authorities have committed to implement a prudent fiscal policy consistent with maintaining macroeconomic stability and will therefore contain the 2005 non-oil primary deficit to 41 percent o f non-oil GDP, while the deficit in 2006 i s expected not to exceed 38 percent o f GDP. 9. The medium-termmacroeconomicframework presentedin the NEEDS document i s broadly in line with staff projectionsunder a policy refordhigh growthscenario. The medium-term macroeconomic outlook i s positive against the backdrop o f international oil prices that have increased substantially after the completion o f the NEEDS document. Accordingly, extemal reserves have increased much faster than anticipated in NEEDS. NEEDS aims at achieving a medium-term annual growth o f 7-9percent in the non-oil economy, equivalent to real per capita income growth o f about 4 percent, while maintaining single digit inflation, raising gross international reserve coverage to 7-8 months o f imports (goods), and reducing the public debt burden to sustainable levels. Such sustained high growth rates are necessary to halve poverty by 2015 to meet the MDGs. To achieve these goals, which are very ambitious, overall favorable economic conditions and a strong coordinated implementation o f reform policies will be needed across all main economic sectors. As done in some other countries preparing PRSPs, it may be useful to consider inthe future alternative macroeconomic scenarios, some o f which may be more in line with past experience. The staffs also recommend that fiscal projections in future NEEDS documents focus on the consolidated fiscal position, rather than just the federal government's fiscal position. 10. NEEDS provides for a considerable increase in public investments, which primarily reflects the government's desire to address the country's vast development - 5 - requirements.Nevertheless, this may result in a wider non-oil fiscal deficit and complicate the management o f monetary policy, while leading to spending inefficiencies and crowding out exports and private investment.The staffs stress the importance o f improving expenditure management, including by cost-benefit analyses for large investment projects, in order to reduce these risks (see below). 11. The staff considersthe passageandimplementationof the Fiscal ResponsibilityBill proposedin NEEDS as centralto the sustained implementationof prudentfiscal policy, and to the reduction of the risks posed to macroeconomicstability by Nigeria's fiscal federalism. The bill clarifies intergovernmentalfiscal relations and the roles o f the executive and the legislature inthe budgetary process and sets out transparency requirements, sanctions . for noncompliance, guidelines for budgetary practices, and a fiscal framework centered on an oil price-based rule. This will help improve macroeconomic management over the medium term. The staffs urge the authorities to complete work on the draft and intensify their efforts to gamer support for the bill in the National Assembly and amongst state governors. As indicated inNEEDS, more work i s also needed to improve revenue administration. 12. NEEDS rightly recognizes that Nigeria's trade and tariff policies are out of tune with the rest of ECOWAS andwith other developingcountriesand envisages a move to the ECOWAS Common ExternalTariff and the removal of the myriad of ad-hoc non- tariff barriers currently existing in Nigeria. The staffs recommend that the government ensures that this major reform o f the foreign trade regime i s implementedinthe second half o f 2005 as scheduled. The new tariff system has four tariff bands (0, 5, 10 and 20 percent). A temporary 50 percent tariff band will be applied to selected imports that compete with locally produced goods. Import bans will be phased out by end-2006 and the 50 percent tariffband by end-2007, respectively. These measures are expected to enhance growth, redress anti-export bias inthe current regime, and diminishincentives for smuggling and parallel market foreign exchange transactions. The staffs advise against NEEDS' proposal to use import restrictions to facilitate the restructuring o f selected firms and industries, as this will harmother sectors o f the economy. IV. PublicExpenditureManagement 13. NEEDS places considerable emphasis on strengthening public expenditure management to ensure that spending is effective, efficient, and clearly linked to the achievement of objectives of NEEDS. The key elements o f the strategy-improving the budgetary planning process, maintaining an oil-price based fiscal rule, adopting a Medium Term Expenditure Framework (MTEF), making public procurement open and competitive, strengthening the budget office, and ensuring better collaboration between the executive and the legislature on the budget-are sound. The authorities are now preparing an MTEF. Eight major ministries will formulate their medium term objectives and strategies in line with NEEDS and the MDGs, and link their spending programs to these objectives within the MTEF. In addition, a virtual poverty fund will be set up to track poverty-reducing spending. The authorities also aim to undertake annual public investment reviews and cost-benefit analyses for large investment projects to ensure rationalization o f capital spending. However, more work i s needed to detail the strategy to strengthen public expenditure management and - 6 - the timeline for implementation. Financial management processes needto be modernized and a system for poverty-focused expenditure tracking and reporting for state and local governments needs to be developed. The staffs also recommend that the authorities renew efforts to secure passage o f the Public Procurement Bill, which provides for establishment o f a Public Procurement Bureauto oversee all public procurement. V. SectoralPolicies 14. Agriculture is identified as a major priority in NEEDS, but the strategy for achieving the ambitious performance targets needs to be better articulated and operationalized. Agriculture is the backbone of the rural economy, and since about 70 percent o f the poor live in rural areas, agricultural growth would have a high impact on reducing poverty. Nigeria's rich endowment o f land and water resources confers a high potential for agricultural growth, but this potential i s not being realized. The staffs stress that the achievement o f the government's vision for agriculture as a major driver o f growth and poverty reduction will require development o f a comprehensive agricultural development strategy that directly addresses issues related to (i) the coordination o f policies, including government support, inthe sector; (ii) access to key production inputs such as seeds, fertilizer, and credit; (iii)definition o f roles and responsibilities among the various actors in the sector, (iv) sequencing ofinterventions, and (v) strengtheningcross-sector linkages. 15. The staffs agree with the education and training strategy outlined in NEEDS, and urge the authoritiesto flesh out the operationalizationand costingof the strategy. More detailed analysis o f the institutional and administrative structure for implementation i s also recommended. The staffs also urge the authorities to prepare national and state secondary and tertiary education strategies in line with the objectives o f NEEDS that aim to realign education with the needs o f the labor market. More analysis o f the growing demand for middle and higher level skills and how the quality of graduates can be improved at each level i s needed. The staffs propose that the authorities review experiences in other federal systems regarding the use o f matching grants in education and health to help define more clearly how the matching grants system suggested inNEEDS can be operationalized. 16. The UniversalBasic Education (UBE) Act, passed in May 2004, sets out roles and responsibilities and a new organizational structure at the federal level. It includes a definition o f the roles o f federal agencies for formal education, non-formal programs, early childhood and nomadic education. Despite the considerable effort in the preparation o f the UBE program, implementation will be challenging and will require close coordination betweenfederal, state and local governments. 17. NEEDS provides a comprehensive list of necessary activities in the health sector and supports the finalization of importantlegislationdefining a national health system and the responsibilitiesof the three levels of government in the sector. The health sector strategy outlined in NEEDS i s extremely ambitious in terms o f what can realistically be accomplished within the proposed time frame. Moreover, there i s no clear indication o f priorities and little indication o f a sequence for introducing the changes. The staffs recommend that the authorities work to prioritize and detail the strategy, including by - 7 - articulating elements that, as the NEEDS indicates, are yet to be prepared. The staffs stress the need for policies to address the large disparities across regions in health services utilization and health outcomes and the need for increased funding o f the sector, especially at state and local government levels. In addition, within the new set o f government responsibilities defined in the National Health Act, all stakeholders will have to work hard to build the ownership and capacity o f state governments, while simultaneously getting federal agencies to play a more facilitating, as distinct from implementing,role. 18. T o implementNEEDS' healthsector strategy, the authoritieshave prepared a new National Health Policy (approved in 2004) and a detailed Action Plan for achieving progresstowards the MDGs.Key elements of the action plan include (i) a strengthening o f the role o f state governments insupporting local governments to provide basic health services (ii)developing a National Health Insurance Scheme to help more effectively channel the significant private resources in the system; and (iii) strengthening the federal government's direct support to primary health care under the Health Act. Each o f these elements presents a significant coordination and technical challenge. 19. With a prevalencerate of 5 percent,Nigeria is at the tippingpoint for an expansion of HIV/AIDS. NEEDS unambiguously recognizes the potential negative impact o f HIV/AIDS on the economic and social well beingo fNigerians and outlines a sound strategy for meeting this challenge. 20. NEEDS recognizes the importance of a competitive private sector for rapid and broad-basedeconomic growth in Nigeria. The strategy focuses on reducing administrative and regulatory barriers, promoting privatization, enhancing access to key infrastructure and specific measures to promote growth in selected key sectors. The discussion o f private sector development however focuses on the formal capital intensive segment o f the sector. The staffs recommend that greater emphasis be placed on strategies to develop the currently non-formal small scale sector and allow these enterprises to transit to the formal economy. The authorities will also needto pay greater attention to analytical work on labour market dynamics and the extent to which labour market regulations constrain productivity and growth. 21. As part of the strategy to develop the private sector, NEEDS highlights the importance of a well developed and stable financial sector and outlines an ambitious strategy in this regard. Progress has been already made in its implementation. The CBN announced a major bank restructuring reform inJuly 2004. The minimumcapital requirement will be increased from about US$15 million to US$190 million at end-2005. The capitalization program i s supported by measures to encourage bank consolidation through mergers and acquisitions. A high-level steering committee to guide the process was established in June 2005. While welcoming these steps, the staffs recommend that the C B N develops a strategic plan to deal with failing banks, strengthen its legal powers to close them, and enhance banking supervision. Moreover, the scope o f the financial sector reform program needs to be broadened to improve the lending environment for banks and increase the capacity o fthe financial system to fulfill the financial service needs o f the economy. - 8 - 22. NEEDS emphasizes rapid development of energy resources as critical for growth and poverty reduction. It outlines an ambitious strategy to raise generation capacity by over 3000 MW in the next three years through public private partnerships. The staffs recommend that inparallel with this effort to raise generation, adequate attentionbe paid to strengthening and improving transmission and distribution networks. The staffs also recommend that the recently adopted Electric Power Sector Reform Act be fully implemented, particularly in terms o f expeditious set up o f the regulatory framework and establishment o f a competitive market for open access to the grid, to ensure the proper environment for more active engagement o f the private sector. Since incremental power generation will depend crucially on access to domestic natural gas and associated essential infrastructure investments, the staffs also urge sustained pursuit of reforms inthe gas sector. In addition to steps to improve transparency in the petroleum sector, the staffs advice completion o f ongoing commercialization o f the NNPC, the privatization o f the oil refinery complexes and the articulation o f a national petroleum sector strategy, which should include a plan for the re- introduction o f a market-based mechanism for setting petroleum product prices. Considerable work has been done on appropriate strategies to encourage development o f the local gas market. Reform legislation, which i s now under consideration in the National Assembly, has to be adopted shortly. Inaddition, more attention could be paid inthe strategy on the issue o f access and affordability o f energy services (and in fact other basic infrastructure services) at the household level, especially for the poor. 23. The weak financial discipline in the power sector requires further government attention. The annual subsidy from the federal budget to cover financial losses and investments in the sector amounts to nearly US$400 million, higher than the federal budget for health. It will be important to identify the "full costs" o f providing power and begin to translate this into appropriate pricing o f the service, while introducing adequate mitigation measures to protect vulnerable groups. As part o f efforts to improve financial discipline inthe sector, the government i s also implementing a strategy called CREST (Commercial Reorientation o f Electricity Sector Toolkit) that targets loss reduction, energy accounting, commercial improvements and customer service enhancements. The objective i s to build value in the distribution business in order to pave the way for further reforms and private sector participation. 24. Implementation of the reforms underpinning the power strategy gained momentum with the unbundling of National Electric Power Agency into eleven distribution business units, six generation units and a Transmission Business Unit betweenJanuary and October 2004. These units are now operating as virtual companies as a prelude to their eventual set up as registered public companies under the new Electric Power Sector Reform Act. 25. The transport strategy which focuses on rapidly privatizing key infrastructure services; providingtargeted transport service interventionsfor the poor and vulnerable; and encouraging public-private partnership in the delivery and management of transport infrastructure is appropriate. It also stresses the importance o f sustainable road maintenance arrangements. The staffs recommend that the specific institutional and policy reforms neededto ensure service efficiency and sustainability be elaborated. The staffs also - 9 - urge the government to pay specific attention to (i) enacting the Public-Private partnership in Infrastructure Bill, and entrenching the principle o f balanced share o f risks by adoption o f a transparent costing process in the infant stages o f the partnerships; (ii)drafting and enacting legislation to establish the proposed Federal Highway Authority; (iii) drafting and enacting legislation to establish the National Roads Board and the Road Fund to finance road maintenance on a sustainable basis; and (iv) assisting states in improving mobility o f and access to all season roads byrural communities. 26. In line with this strategy, the government has now begun implementationof both port and railway reforms aimed at institutional restructuring, streamlined staffing, improved private sector participation and establishment of an independent regulator. Negotiations are underway for the management o f four port terminals to be handed over to private operators. 27. NEEDS highlights the government's desire to accelerate privatization.While the privatization strategy i s sound, the,pace of the process was disappointing in 2004. However, the authorities have ambitious plans for further privatizations and concessioning in 2005-06, including in key sectors such as oil and gas, power, telecommunications and transport. The government i s also taking steps to upgrade legal and regulatory frameworks, creating a regulator for each sector to ensure transparency and accountability, and expanding market opportunities for private sector participation, including in unbundled services for the power and oil and gas sectors. In the area o f privatization as well as in a number o f other sectoral reform areas considered above, it will be important for the authorities to consider conducting Poverty and Social Impact Analyses o f the potential impact o f selected reforms on the poor. VI. Governance,Transparency andAccountability 28. Strengthening the accountability and transparency of public policies, fighting systemic corruption in public institutions, and enforcing the rule of law are central elements in NEEDS. The authorities believe that weak governance practices have been the root cause for Nigeria's poor economic performance and stalled reform efforts. The NEEDS strategy i s comprehensive and broadly sound. Its specific elements include greater budget transparency; transparency in the oil sector; procurement reform, strengthening o f anti- corruption agencies such as the Independent Corrupt Practices and Related Offences Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC); and review and strengthening o f relevant laws and regulations. Implementation o f these measures has been vigorous. The government has raised the profile o f its anticorruption drive through the arrest and trial o f high-level officials. A civil service reform program has recently been extended from the pilot ministries and agencies to the entire civil service, and work i s under way to computerize the civil service roster and the payroll. 29. Nigeria has made significant progress in advancing its commitment to the Extractive Industries Transparency Initiative (EITI). Passage o f an EITI bill, expected before end-2005, will provide the legal basis for collecting and publishing oil revenue data. Furthermore, an international firm i s auditing the oil and gas accounts o fboth government and oil companies for 1999-2004. Physical and cost audits o f the oil and gas industrywill follow - 10- andthe results are expected to be publishedby the end o f 2005. Campaigns have also started to inform the wider public about the objectives o f EITI and its relevance to the Nigerian population. Other critical actions include the publication of audited NNPC accounts and transparent licensing of new exploration and production rights. The staffs advice that in line with the EITI, the above transparency and good governance initiatives be extendedbeyond the government departmentdministries to cover major parastatals. VII. Participation,Coordination,andMonitoring 30. The authorities have deepened civil society consultation and participation during NEEDS preparation and implementation. Core information is being provided to the Nigerian public on the management o f public expenditures and on the NEEDS objectives. This is empowering Nigerians to demand accountability from the government. The federal government has also begun efforts to bring civil society into consultations on budget preparation. 31. The poverty reduction strategy has been an important vehicle for donor coordination. Nigeria's donor partners worked closely to support the preparation o f the NEEDS and have also supported the ongoing benchmarking o f states' performance under their SEEDS. Donors are now framing their assistance around NEEDS and SEEDS, thus bringing greater coherence into donor support programs. The World Bank and DFlD have prepared a joint strategy o f assistance to Nigeria and other donors are likely to join this partnership.On the side of the government, donor coordination is being strengthened through the consolidation of this function within the federal Ministryo f Finance. 32. The government has recently inaugurated a high level Committee for Monitoring progresstowards the implementationof NEEDWEEDS and the MDGs. This is chaired by the President and includes state governors, key ministers and directors o f federal agencies. A technical secretariat to inform the work o f this highlevel committee has also been set up. An MDGmonitoring framework, which includes an expenditure tracking system, is beingput inplace. However, monitoring ofNEEDS/SEEDS andthe MDGsandtracking expenditures is complicated by Nigeria's federal structure and the considerable autonomy of states and local governments. A particular challenge will be to define proper roles andbuild adequate capacity for several agencies (such as Joint Planning Board, National Council on Development Planning, etc.) that are central to program monitoring. The staff highlighted the need for considerable technical assistance over a period o f time to build needed capacity, particularly at the state and local levels. Building capacity o f civil society to engage on budgets and on NEEDS will need to be a central element o f this effort. The staffs noted the critical importance o f considerably strengthened statistics for adequate monitoring and evaluation o f the NEEDS. VIII. Conclusion 33. In sum, Nigeria's poverty reduction strategy is a major first step forward in defininga credible agenda and framework for economic growth and povertyreduction. Given the complexity o f Nigeria's poverty reduction challenge, more work is needed in - 11- subsequent revisions o f the NEEDS to further prioritize, detail and operationalize the strategy, amend it in light o f implementation experience and prepare a detailed costing o f the program. In addition, a strong monitoring and evaluation framework needs to be built to regularly assess outcomes and impact. Implementationo f the macroeconomic aspects o f the NEEDS in 2004 and early 2005 has been impressive. The authorities have taken bold steps to improve macroeconomic policy management and to tackle corruption, in keeping with their intention to consolidate democracy and improve the business climate. 34. At the same time, the staffs point to considerable risks for successful implementation of the NEEDS. Domestic political support for reforms could diminish as Nigeria approaches the 2007 national elections. There are also fundamental risks associated with apossiblenegative oilprice shock. Finally, institutional and technical capacitywithin the public service to implement and monitor the NEEDS i s limited. To reduce these risks, the staffs recommend (i) adhering to the oil-price based fiscal rule, based on a conservative international reference price for oil; (ii) accelerating adoption of core reform laws (such as fiscal responsibility, procurement, and EITI bills); (iii)strengthening the government communication strategy to increase understandingo f the benefits o f reforms; and (iv)focusing implementation efforts to achieve "quick wins" in service delivery. 35. As the government strengthens the focus and implementation of its poverty reductionstrategy, the mainchallenges are: to maintain sound macroeconomic policies and strengthen the links between the poverty reduction strategy and annual government budgets by the timely development and update o f a Medium-Term Expenditure Framework aligned with the strategy; to strengthen the basis for private sector growth by improving power and transport infrastructure; to improve transparency and accountability o f the public sector, rationalize the public investment program, and reduce corruption; to secure adequate resource allocations for the health and education sectors, improve service delivery, and develop a poverty-related expenditure tracking and reporting system for all government levels; and to update NEEDS, develop sectoral strategies, strengthen the links between NEEDS and SEEDS, and develop NEEDS-based performance targets andprogress reporting. IX. Issues For Discussion Do Directors support the staffs' view that NEEDS i s a major first step forward indefining a credible agenda for economic growth andpoverty reduction inNigeria? D o Directors agree with the priorities for strengthening NEEDS and its implementation, as identifiedby the staffs? Do Directors agree with the major risks to the strategy, and the measures that could .be taken to mitigate these risks, as identified by the staffs? Meetina tveryone's Needs National Economic Empowerment and Development Strategy Nigerian National Planning Commission Abuja 2004 02004 NigerianNationai Planning Commission Abuja, Nigeria Ai/ rights reserved Editing and production by Communications Deveiopment incorporated Design by Grundy & Notfhedge Photographs by Chris Martin, Rea/ WoridPhotography iSBN0-9741108-4-1 Foreword 1 NEEDS 1 Foreword The National Economic Empowermentand ensure the sustainabilityof the NEEDS beyond Development Strategy (NEEDS)is the responseto 2007. As we all know, it is only bad plans that the developmentchallengesof Nigeria. In 1999, do not allow for periodic amendments. NEEDS most people grossly underestimatedthe extent of is a living document, and aspects of it may be social, political,and economic decay of the modified in the light of implementation experi- country.Since 1999,we have succeeded in ences. Nigerianshave agreed, however,that the stabilizingthe polity,consolidatedthe democratic major thrusts of NEEDS are what Nigeria needs governance structure, and made modest to move forward. progressin the social and economic spheres. The reform programme is rightly ambitious. Over the next few years (2003-07), NEEDSwill For one thing, we need focused goals and consolidatethe achievementsof the previousfour ambition to make progress.The programme years and lay a solid foundationfor sustainable reflectsthe impatience of Nigeriansto see things poverty reduction,employment generation, change dramaticallyand also the fact that Nigeria wealth creation,and value reorientation. has immense potential waiting to be unleashed, Nigeria has all it takes (humanand material talents to be tapped. Having lost some decades, resources)to become the strongest economy in we are in haste to cover lost ground, catch up Africa-and one of the leading economies in the with our contemporaries, and become the largest world in the longer term. The goal of NEEDS is to and strongest economy in Africa. We are, mobilizethe resourcesof Nigeriato make a however, mindful of the need to sequence the fundamental break with the failures of the past reformsto minimizethe costs and preventable and bequeath a united and prosperous nation to pitfallswhile maximizingthe benefits. generations to come. While we look forward to a better future I am particularlyhappy that if there is under NEEDS, we are not unmindful of the long anything like a home-grown reform programme, and difficult journey ahead. The economic and NEEDS is it. For the first time, we embarked on development agenda under NEEDS must of an extensive consultativeand participatory necessity be complemented by other reforms- process, involving major stakeholders in the especially in the electoral and political gover- design of NEEDS. It is this national ownership, nance architecture that is consistent with together with the results already visible,that will deepening and sustaining democracy. The iii political class, legislature,and judiciary need to states and local governments also need serious also think about and act on reforms so that we reforms. all can build a more sustainable future. Finally,let me commend NEEDSto all Some state governments have already Nigerians and to all stakeholdersinthe Nigerian designed and are implementing their own State economy. It is your plan:seize it with both hands. Economic Empowerment and Development It should be our collectiveresponsibilityto ensure Strategy (SEEDS).Other states need to effectiveimplementationand monitoring. Chapter complete their own SEEDS as necessary 11 on implementationdetailsthe roles and complements to NEEDS.As the saying goes, if responsibilitiesof everyone in ensuringeffective you fail to plan, you plan to fail. Medium-term implementation. Everyonehas a roleto play. If planning also needs to be mainstreamed at the everyone plays it well, Nigeriawill surely be great local government levels, and more effective again-and soon. In my dreams I see a new accountability and transparency need to be Nigeria in the hands of God.As I traverse all parts instituted at the lower levels of government. For of Nigeria,I feel a new Nigeria emerging.Let us sustainable poverty reduction in Nigeria, the thereforejoin hands and make Nigeria even better. Olusegun Obasanjo, GCFR President,FederalRepublicof Nigeria Table of Contents ~ NEEDS ~ Table of Contents Foreword iii Preface vii Overview viii Part One Vision and Macroeconomic Framework 1 Chapter 1 Statement of Vision, Values, and Principles 2 Chapter 2 The Development Challenges Facing Nigeria 7 Chapter 3 The Macroeconomic Framework 14 Part Two Empowering People 26 Chapter 4 The Social Charter Investingin the Nigerian People 28 Part Three Promoting Private Enterprise 50 Chapter 5 Creating a Competitive PrivateSector 52 Chapter 6 Sectoral Strategies 67 Chapter 7 Regional Integration and Trade Policies 80 Part Four Changing the Way the Government Does Its Work 84 Chapter 8 Creating a More Efficient and Responsive Public Sector 86 Chapter 9 Improving Security and the Administration of Justice 95 Chapter 10 Tackling Corruption and Promoting Transparency and Accountability 100 Chapter 11 Implementation and Financing 103 Boxes 1 The Kuru Declaration viii 2 We Are Already Making Progress xii 3 Maintaining the Environment xix 1 1 Nigeria at a Glance 3 ~ NEEDS ~ Table of Coiltents 1.2 The Kuru Declaration 5 2.1 Nigeria'sEconomy Is Improving 8 4.1 Measuring the Quality of Life: Comments by President OlusegunObasanjo 29 5.1 Institutionaland AdministrativeReforms to Reducethe Cost of Doing Business 56 11,l Allocation of the Federal Government Capital Budget to Priority Sectors 113 Tables Targeted Instrumentsfor ProtectingVulnerableGroups wii 2 SelectedTargets Under NEEDS,2003-07 xxiv 2.1 Implicationsof Alternative GrowthScenariosfor Key DevelopmentIndicators,2000, 2015. 2030 11 3.1 Selected Macroeconomic Projections,2003-07 15 4.1 Incidence of Poverty in Nigeria,Selected Years 31 4.2 Projected Sources and Means of Employment Generation under NEEDS 45 4.3 Risks,At-Risk Groups, and Formal Responses 48 4.4 Targeted Instrumentsfor Protecting VulnerableGroups 49 8.1 Monetized Fringe Benefits for Federal Civil Servants 92 11.1 New Legislation Needed to Implement NEEDS 111 11.2 Aggregate InvestmentProjections, 2003-07 112 Figures 1 NEEDSataGiance x 2 How NEEDS Will Be Implemented xxii 11,l InstitutionalFramework for Implementing NEEDS 105 Abbreviations 118 Preface This is the first volume of the NationalEconomic is key for success. Without state and local Empowerment and DevelopmentStrategy governments,federal programmes alone would (NEEDS)working document. After two months of amount to attempting to clap with one hand. nationwideconsultations and debates on the The importance of coordination was earlier draft document, it was substantially recognizedvery early in the development of revised,as comments and contributions received NEEDS.Through the statutory organs for from stakeholdersand government officials were intergovernmentalcoordination (theNational incorporated. The volume specifiesthe broad Economic Council, the National Councilfor strategic thrusts, targets, and instruments of Development Planning,and the Joint Planning NEEDS,charting the overall direction of change, Board),state governments not only endorsed the the destination,and how to get there. Volume II, thrusts of NEEDS but also committed to the ImplementationGuide, includes matrices of developing State Economic Empowerment and objectives.specific targets, implementation Development Strategies (SEEDS). timelines,responsibleagencies, and similar detail The states also agreed on a minimum set of for each reform element described in this volume. prioritiesthat each state government must reflect Work is still ongoing on some technical in its SEEDS, namely,agriculture, small and aspects of the strategy, especially on costing the medium-sizeenterprises, rehabilitationand programme; developing nationally coordinated maintenanceof infrastructure (especiallyroads), sectoral strategiesfor agriculture,the environ- and public finance reforms and transparency.The ment, health,education, water, and infrastruc- National Planning Commission is collaborating ture; and streamlining and rationalizing with donor agencies to provide technical implementationagencies and the coordination assistance to the states in developing their framework.The federal ministriesresponsiblefor SEEDS as a necessarycomplement to NEEDS. these issueswill collaboratewith the National Usingthe Guidance Manual it prepared, the PlanningCommission, with the respectivestate National PlanningCouncil is organizingtraining government ministries,and with relevant workshops for the states in the six geopolitical stakeholders to develop the national sectoral zones of the country on preparing, monitoring, strategies and project plans. National sectoral and evaluating state plans. councils will play a critical role in this process. In addition, work will soon begin on a full The output of these sector-wide strategies will Medium-TermExpenditure Framework and a feed into the revisionsof the NEEDS document. clearly articulated Project Plan for the medium NEEDS providesa framework for a nationally term. A policy matrix (indicatingthe status of coordinated programme of action by the federal, each policy measure)is also being prepared. state, and localgovernments. Most of what is The 2004 budget proposalsalready reflect articulatedhere refersto actions by the federal some of the major thrusts of NEEDS.The sectors government. However,with state and local that are key to poverty reduction-health, governmentscontrollinghalf of consolidated education,electricity,roads, and water-received public sector spending, effectivecoordination the highestpriority in resourceallocation, receiving among the tiers of government in the federation about 60 percent of the total capital budget. 1 NEED5 Orerview ~ Overview What Is NEEDS? A Vision of Tomorrow's Nigeria The NEEDSvision is based on the Constitution: NEEDS-the National Economic Empowerment the Kuru Declaration(box 1);previous initiatives, and Development Strategy-is Nigeria's plan such as Vision 2070; and the widespread for prosperity. It is the people's way of letting consultation and participation throughout Nigeria is the government know what kind of Nigeria they that was part of the NEEDS process. The wish to live in, now and in the future. It is the programme's core values draw on the Vision pian forprosper/ty government's way of letting the people know 2070 report, which recognizedthe importance of how it plans to overcome the deep and respect for elders, honesty and accountability, pervasive obstacles to progress that the cooperation, industry,discipline,self-confidence, government and the people have identified. It is and moral courage. also a way of letting the international commu- Beforethe restorationof democracy,Nigeria nity know where Nigeria stands-in the region sufferedsetbacksthat tarnished its reputation.A and in the world-and how it wishes to be primaryaim of NEEDSis to create a new Nigerian supported. citizenwho values hardwork and who realizesthat What is the vision for Nigeria?What kind of one cannot havesomethingfor nothing.Achieving Nigeria do we want for ourselves, for our this aim may bethe strongest action Nigeriacan children, and for the rest of the world? These take to builda better future for its people. questions were our stalting point in creating a plan for prosperity. In the three years it took to develop NEEDS, a dedicated team travelled the country, holding meetings and workshops to have for Nigeria:to build a truly great Airican identify what the Nigerianpeople want for the democratic country. politicallyunited, integrated and future, what problems they face, and what can stable. economically prosperous. socially organized. be done to overcome them. with equal opporlunity for all, and responsibilityfrom NEEDS is the people's plan. It is up to regular Nigeriansas well as the government to see that it is implemented. subregionally,regionally, and globally. viii 1 Although Nigeriais rich in natural and human be punished. The NationalOrientationAgency NEEDS focuses 017 resources,7 of every 10 Nigerianslive on less and its state-levelcounterparts will be strength- foiir key strategies: than $1 a day. NEEDSwishes to make poverty a ened to lead a campaign to re-instilthe virtues of thing of the past in Nigeria.It aims to create a honesty, hard work, selfless service, moral reorienting values, Nigeriathat Nigerians can be proud to belong to rectitude, and patriotism.The campaign will draw reducing pove/Q, and gratefulto inhabit, a Nigeriathat rewards on resourcesfrom a variety of government hard work, protects its people and their property, agencies, nongovernmentalorganizations creating wealth,and and offers its children better prospects than (NGOs),and community-based organizations, generating those they may be tempted to seek in Europe or including schools colleges, universities,and the United States. All citizens,regardlessof privatesector, religious,social, cultural, and elnploymei7t gender, race, religion,or politics, should feel that traditional organizations. they have a stake in Nigeria'sfuture and that their NEEDS is about the Nigerianpeople.Their loyalty and diligencewill be rewarded.The welfare,health, employment, education, political NEEDS vision is also one in which Nigeriafulfils power, physical security,and empowerment are its potential to become Africa's largest economy of paramount importance in realizingthis vision of and a major player in the global economy. the future. To reduce poverty and inequality,the plan proposes acting on severalfronts: How Can NEEDS Help Realize This Vision? Offering farmers improved irrigation, NEEDSfocuses on four key strategies: reorienting machinery,and crop varieties will help values, reducing poverty,creating wealth, and boost agriculturalproductivity and tackle generating employment. It is based on the notion poverty head on, since half of Nigeria's that these goals can be achievedonly by creating poor people work in agriculture. an environment in which businesscan thrive, Supporting small and medium-size government is redirectedto providingbasic enterprises will help create jobs. Together services,and peopleare empoweredto take with the state economic empowerment advantage of the new livelihoodopportunitiesthe and development strategies (SEEDS), plan will stimulate (figure 1). NEEDS seeks to implement an integrated NEEDS sets out far-reachingpublic reforms rural development programme to stem the that will make clear that corruption and graft will flow of migration from ruralto urban areas. I' MACROECONOMIC FRAMEWORK I finsncing and planimplementationstrategies- Half of Nigeria's people are children,the employmentand wealth creation. It empowers bridge to a prosperous future. NEEDS people to take advantage of these opportunities recognizesthe importance of children by by creatinga system of incentivesthat reward making the improvement of the education hard work and punishcorruption, by investingin system a top priority. education,and by providingspecial programmes HIV/AIDSis a majorsocial and health prob- for the most vulnerablemembers of society. lem.It also threatensthe country's produc- tivity and economy.The plan isto improve Promoting private enterprise. The privatesector the system of healthcare delivery with will be the engine of economic growth under emphasison HIVIAIDSand other prevent- NEEDS. It will be the executor. investor,and able diseases,such as malaria,tuberculosis, manager of businesses.The government will play and reproductivehealth-related illnesses. the role of enabler, facilitator,and regulator, NEEDS ainw to NEEDS calls for replacingthe pension helping the private sector grow, createjobs, and restriicture the scheme, which is in crisis, with a generate wealth. Deregulationand liberalization contributory scheme. It proposes special will diminish governmental control and attract government to make it programmes targeting people who have privatesector investment. smallel; strongel; the weakest politicalvoice and who are most vulnerable to the ravages of poverty. Changingthe way the government does its work. better'skilled, and Laws and programmes will be imple- NEEDSaims to restructurethe government to more efficient at mented to empower women, children,the make it smaller, stronger, better skilled,and more disabled, and the elderly. efficientat delivering essential services. It seeksto Cieliverjngessential NEEDS emphasizesthe critical importance of transformthe government from a haven of services improving infrastructure.More-and more corruptionto an institutionthat spurs develop- reliable-electricity and a new and better ment and serves the people. maintainednetwork of roads will encourage The number of government jobs will decline, businessesto expand. and the cost of running the government will fall NEEDS gives special support to agriculture, dramatically,as in-kind benefits for civil servants, industry,small and medium-scaleenterprises,and such as subsidized housing, transport, and oil and gas. Under the plan,the governmentwill utilities,are monetized. Reforms and regulations seek long-termcapital for investment.Trade policy, will be implemented to ensure greater trans- so criticalto Nigeria'sstake inthe regional parencyand accountability, and corrupt practices economy,will be modifiedto unburdenbusinessof will be outlawed. Government activitiesand the red tape and complex proceduresthat hinder it budgeting will be informed by a framework that from flourishing.NEEDSenvisages forgingstronger connects policy with government income and links betweeneducational institutionsand industry expenditure. to stimulaterapid industrialgrowth and efficient exDloitationof resources. Our Future, Our Plan NEEDS is a development plan like no other ever Empoweringpeople. By allowingthe private seen in Nigeria. It identifiesthe major problems sector to thrive, NEEDS createsopportunitiesfor we face today and suggests how we can begin 1 NEEDS 1 Oberv'ew NEEDS builds on the progress made between 1999 and The number of telephone lines rose from just 2003 it used the informationand insights generated 400,000 in 1999 to about 3 million in 2003. during the two year effort to preparethe Interim Poverty Economic development Reduction Strategy Paper and the wide consultative and Government support to agriculture has boosted participatory processes associated with it productivity.According to the UN Food and The government has already delivered significant Agriculture Organization. Nigerian agriculture benefits grew an unprecedented 7 percent in 2003. lnternationaireiations Industrialcapacity more than doubled. from 29 Nigeria has reintegratedwith the regionaland percent in 1999 to 60 percent in 2003. internationalcommunity Incomegrew at an average rateof 3.6 percent NEDS differs from Nigeria is a founding member of the New between 1999 and 2003-a significant increase earlier development Economic Partnershipfor African Development over the 2.8 percent rateof growth duringthe and the Economic Community of West African 1990s. plans in three impoifant States (ECOWAS) Unemployment fell from 18 percent in 1999 to Nigeria is the current chair of the Office of the 10.8percent in 2003. and 3.5 million new jobs ways Commonwealth were created. It is the people's plan Nigeriahas shown that it has strategic Foreigndirect investment in the nonoil sector importance in Africa and is a source of stability in grew at an average annual rate of 3.6 percent for prosperip West Africa It led an internationalpeacekeeping between 1999 and 2003. force to Liberiaand Sierra Leone and is playing a Security It coordinates action continuing peace-keeping role in the subregion The police force doubled in size between 1999 at the federal and Infrastructure development and 2003. Electricitygeneration in Nigeria has doubled The government is committed to consolidating and state levels since 1999 expanding these achievements under NEEDS. It is a feasible plaii to solve them over the next four years. It sets through commercial enterprises and community- realistictargets for progress and outlines a way based organizations. Using this framework, it can of funding activitiesto achieve them. check the progress it is making against the NEEDS is the first Nigerian development plan targets set out in NEEDS. that integrateseconomic development efforts at the federaland state levels.It does not confine How Is This Plan Different? itselfto specific sectors or limit itself to address- NEEDS differs from earlier development plans in ing only the major challenges identified. Instead, three important ways, First, it really is the it looks at the big picture, examining how the people's plan for prosperity. Our government challenges identified in each sector affect one wrote the plan, using the information it collected another. from the Nigerian people. The plan enjoys widespread commitment, Past development plans have been made from the President to village chiefs. The without sound knowledge of the causes of government has set up a monitoring framework poverty. Before drafting this plan, for the first time at the federal, state, and local government levels the government investigatedhow ordinary Nigerians live. The process began in 2001, when society.The targets for progress are realistic, not peoplefrom all walks of life and all parts of Nigeria "pie in the sky" objectivesthat will never be were given the chance to tell the government achieved.The targets are achievable,because about their needs and ambitions. Information they were set after taking into account the extent collectedfrom farmers, labourers,factory owners, of the problems, the skills and funds needed to teachers and university professors,community- addressthem, and the amount of funding and basedorganizations,charities,and other expertisethat can be mobilizedover the next stakeholderswas used to draft an InterimPoverty three years. ReductionStrategy Paper. NEEDS builds on the informationgathered for that strategy paper.We continued to consultwith What Prevents Progress? stakeholders in preparingthe first draft of NEEDS, Thepian for prosperity The governmentcirculatedthe draft plan inApril Despitegreat natural wealth, Nigeria is poor and must addressa 2004, asking the peoplewho took part in earlier social development is limited. If present trends consultationsfor their comments.This process continue, the country is not likely to meet the sta/?/ingparadox: gives us confidencethat the final version of NEEDS Millennium DevelopmentGoals. more than two-thirds reflectsthe true feelings of the Nigerianpeople Three main problems hamper progress: about where the country stands today and how it Not all our people enjoy the same chance of the Nigerianpeople should developand grow over the next three years. of prosperity. are pool; despite livii7g Second, NEEDScoordinates action at the Past governments in Nigeria, instead of federal and state levels. It connects problems on focusing on deliveringessential public in a country with vast the ground with programmes at the federal and sewices, assumed control of major potential weaith state levels.Each state drafts it own SEEDS, sources of national income. In the process, which identifies priority programmes for key corruption thrived in public service and areas of development. gained a strong foothold in society. This coordination is critically important when it The environmentin Nigeria is hostile to comes to financing development programmes. private enterprise, not one that helps For the first time in Nigeria,government and key businessesgeneratejobs and create beneficiarieswill work at the nationallevel to wealth. develop sector-wide strategiesfor key sectors, including agriculture,solid minerals,and small Poverty and Inequality and medium-scaleenterprises.The federal The plan for prosperitymust address a startling government will be able to budget accuratelyfor paradox: morethan two-thirds of the Nigerian development programmes at the national and peopleare poor, despite living in a country with state levels. vast potentialwealth.Although revenues from Finally, NEEDS is a feasible plan.The fact that crude oil have been increasingover the past Nigerianshave spent SO much time and effort decades,our people have been falling deeper into giving their views allowedthe drafting committee poverty.In 1980an estimated 27 percent of to write a plan based on a thorough understand- Nigerianslived in poverty.By 1990,70 percent of ing of what life is like for people at all levels of the population had incomeof lessthan $1 a day- xiil and the figure has risen since then, Poverty levels previous development plans is that it relies on a vary acrossthe country,with the highest holisticview of the social and economic proportionof poor peoplein the northwest and the challenges facing Nigeriaand offers a multi- lowest inthe southeast. pronged approach to tackling them. Why are so many of our people poor? Poverty is dynamic and has many dimensions.People Weak and Inappropriate Public Sector may move in and out of poverty as a result of Nigeria'slegacy of mismanagement and corrupt natural disasters or health problems, lack access governance has encouraged many peopleto to credit, or the lack of natural resources.Poor seek ways of sharingthe nationalcake insteadof people are more likely to live in rural areas, be helping bake it. By 1999 corruption was Perhaps the greatest less educated, and have larger familiesthan the practicallyinstitutionalized.Government was rest of the population. widely regardedas a provider of large contracts, hiiidrance to progress Poverty has many causes, all of which distributed by officers in power to peoplewealthy has been the booni- reinforceone another.One source of poverty is enough to buy their influence.This was particu- the lack of basic services, such as clean water, larly so in the case of the oil industry.Over time, and-Dust mode of education, and health care. Another is lack of the judiciary became intimidated,as the rich and economic assets, such as land, tools, credit, and support- powerful manipulatedlaws and regulationsto ive networks of friends and family. A third is lack their advantage. Insteadof engaging in productive management, of income, including food, shelter,clothing, and activities that would help our economy grow, encouragedby the empowerment (politicalpower, confidence, people chose insteadto peddle their influence dignity).Some of these factors directly affect and position. The legitimacyand stability of the dominance of oil it1 poverty.Others contribute indirectly,by state suffered,as people beganto deviseways to the ecoiion7y producing inequality-by stifling the political survive that lay outsidethe law. power of certain sectors of the population, for example, or denying them their dignity or human Poor Economic Management rights. All of these factors are affected by the Perhapsthe greatest hindranceto progress has environment in which people live. Discrimination been the boom-and-bust mode of economic on the grounds of gender, race, disability,age, or management, encouraged by the dominance of ill health increasevulnerabilityto poverty. So do oil in the economy. Past governments allowed oil naturalor human-caused shocks-market income to influence spending: when income was collapses,conflicts, droughts, or floods. high, spending was high, while dips in oil prices The many strands of poverty intertwine and were treated as temporary.Together with poor can pull people into a downward spiral. Because coordination between federal and state tackling one factor may not be enough to lift a governments in budgeting and expenditure,this family out of poverty,an effective poverty- practice led to spiralling debt.Today all tiers of reduction strategy must attack poverty on all government spend far more than they earn: the fronts at the same time. Poverty is not the same deficit for the past five years alone amounts to as inequality,but solving the problems of more than kdl trillion.With external and domestic inequalitycan help lift people out of poverty. One debt of 70 percent of GDP, current revenue is of the key ways in which NEEDS is different from largely eaten up just by debt service. Nigeriahas one of the weakest economies in Empowering People the world, and it has lost decades of develop- Meetingthe needs of our people and nation is ment as a result of slow economic growth. the primary aim of the plan for prosperity. NEEDS Despiteoil export earningsof about $300 billion insiststhat every Nigerianhas the right to since the mid-l970s, average income in 2000 adequate water and sanitation, nutrition, clothing, was 20 percent lower than in 1975. Despitethe shelter, basic education, and health care, as well mounting debt burden, past governments did not as physical security and the means of making a control public expenditure. Policieswere not living. NEEDS proposes a contract between the coordinated within federal departments or Nigerian people and their government in the form between federal and state governments.As a of a social charter,or bargain.This charter result,the national plan and budget have little recognizesthe people'srights to government relevancetoday as a guide to funding and services that provide basic needs for life. In NEEDS recognizes thal implementing development programmes. return, the people agree to work hard and the governmentmust honestlyto make NEEDS a success. In Hostile Environment for Private Sector formalizing the contract between the people and wurk riot on& io Growth the government, NEEDS empowers the people in7pruve incomes hiit Overdependence on oil and traditionalsectors, to challenge the government if it does not keep such as agriculture and services,is partly due to its side of the bargain. to tackie the mai7y the hostile business environment.Businesses NEEDSrecognizesthat poverty has many other sociai and wishing to operate in Nigeriaface many strands and must therefore be tackledfrom several constraints, including poor infrastructure, different directionsat once. It recognizesthat the political factors that particularlyroad networks and electricitysupply; government must work not only to improve contribute to poverly inadequate physical security;corruption; weak incomes but to tackle the many other social and enforcement of contracts, and the high cost of politicalfactors that contributeto poverty These and social exciusioi7 finance.These factors have deterred foreign are very difficult to separate and are thereforeoften entrepreneurs from investing in Nigeriaand thought of as a bundle of factors that result in induced many Nigeriansto take their money and socialexclusion.A poorly educated farmer is less skills abroad. likely to know how to keep his family healthy and less ableto find alternative employment.As a result,he is morevulnerable to externalshocks, How Will NEEDS Change Things? such as drought or falling market prices. NEEDS empowersthe poor by tackling social exclusion The success of NEEDS rests on three pillars: head on, payingparticularattentionto generating empowering our people,creatinga legaland jobs to improve incomes,housing,healthcare, financial environment that enables us to makethe education,politicalpower,and physicalsecurity. most of our natural resourcesand flair for business, To improve the lives of the Nigerianpeople, and reformingour laws and the way our govern- NEEDS includes plans for creatingjobs, creating ment works. Removeor weaken any of these three affordable housing, improving health care pillarsand NEEDSwilltopple,just likea three- services,strengtheningthe skill base, protecting leggedstool will fall if any of its legs is removed. the vulnerable, and promoting peace and security Creating jobs. At 5.3 percent,the rate of NEEDSwill also prioritizethe creation of a urbanizationin Nigeriais among the highest in NationalHealth InsuranceScheme and a Blood the world. Since manufacturingIS stagnant,there TransfusionService. It will support the establish- are few jobs for the growing urban population, ment of a strong manufacturing base for and urban unemploymentis currently estimated essential drugs and reagents.Antenatal, at 10.8percent. The major focus of NEEDS is postnatal, and family planning services and therefore economic empowerment. NEEDS outlets will receivetargeted support in order to policies will create about 7 millionnew jobs by reduce maternaland infant mortality. 2007 by making it easier for private enterprises to thrive, by training people in skills relevant for the Strengthening the skill base. Nigeria'sfuture world of work, and by promoting integratedrural prosperity depends on producing children who futfii-e development in collaborationwith the states are well preparedto take their place in tomorrow's prosper@ &pen& on (throughtheir SEEDS programmes). society.The NEEDS strategy thereforeseeks to pro"'ci''g chi'drei7 implementthe UniversalBasic Educationlaw in Creating affordable housing. Nigerianeeds more order to increaseschool enrolment and provide V J ~ O are wejiprepared housesthat average Nigerianscan afford.To better schools and colleges and better-trained to take their piace in address the problem, NEEDS will take several teachers and trainers. Specifically,NEEDSwill Steps: ensurethat more funds are spent on: tomorrow3 sociep a Make it easier for developersto buy land Providing courses that build vocational and on which to build affordable housing. entrepreneurialskills Cut the cost of building houses by Buildingtechnical schools and buying encouragingthe use of local building equipment materials. Improving training and exposureto Train a new generationof architects in information and communication technol- designing low-cost housing. ogy at all levels Enable constructioncompanies and local Making Frenchcompulsory from primary and state governmentsto assume through secondary schools responsibilityfor providing low-cost housing. Providing special distance learning programmes for specific segments of the Improving health care services. NEEDSwill fully population, including nomadic peoples. review health care services in order to design a NEEDS will promote strict adherenceto the strong national healthsystem that can deliver UniversityAutonomy Act, which permits effective,good-quality, and affordableservices to universitiesto attract private-sectorfunding and all Nigerians.The new policieswill target priority institute new mechanismsto cover their operating diseases,such as malaria,tuberculosis, costs. The courses taught at universitieswill be HIV/AIDS, and reproductive health-related changed to reflectthe priority demands of the illnesses.A stronger emphasis on health economy. Science and technology,particularly education will help make Nigerians more aware information and communications technology,will of their rights and obligations regardinghealth be mainstreamed. Innovativeapproacheswill be services as well as promote disease prevention. developed to ensure that lecturers have accessto continuing professionaldevelopment so that they Reorient police officersto offer more remain at the cutting edge of their disciplines people-friendly service Wages will be linkedto performance,and Establishan early warning and response students will be exposed to mobilizationand system that will detect conflicts reorientationcampaigns that emphasizethe Providea fairer allocation of revenuesand critical importance of hard work, discipline,and responsibilitiesbetween federal and state selfless sewice governments Mainstream conflict preventionby Protecting the vulnerable. In additionto these establishingstructures and processes that comprehensivemeasures,special attention must promote a peaceful culture be paid to particularly vulnerablegroups. NEEDS provides a safety net that will prevent peoplefrom Promoting Private Enterprise If the private sector is becoming poor or poorer.Special programmes If the private sector is to become Nigeria's to become Nigeria's will protect the rural and urban poor, peopleliving engine of growth, its motor needs to be primed. with HIV/AIDS, women, widows and widowers, The government has to make certain funda- engine of growth, its and victims of ethnic violence,crime, unemploy- mental changes to create an environment in motor needs to be ment, or loss of income (table1). which business will thrive. In the language of economists, it has to create a macroeconomic primed Promoting peace and security.To promote framework-a kind of overarching, national peace and security, a nationalaction plan will: housekeeping budget-that will ensure that Reformthe security sector. Nigeria makes the most of what it earns as a Rural poor Access to credit and land: participationin decisionmaking:agricultural extension services: improvedseeds, farm inputs,and implements:strengtheningof traditional thrift, savings. and insuranceschemes Urban poor Labour-intensivepubiicworks schemes: affordable housing.water, and sanitation:skill acquisition and entrepreneurialdevelopment: access to credit scholarships and aduit education Women Affirmative action (to increasewomen'srepresentationto at least 30 percent)in ail programmes;education.including aduit education: scholarships; access to credit and land: maternal and child health Youth Education.entrepreneurial development, skill acquisition.access to credit, preventionand control of HIV/AIDS and other sexuallytransmitted diseases Children Children's Parliament,juvenilejustice administration. universai basic education, education for girls, care of orphans andvulnerablechildren (chiidrenaffected by HIV/AIDS), prevention and treatment of childhooddiseases Rural communities Water, rural roads, electricity.schools, healthfacilities, communications ~xvii nation, that it spends only what it can afford, Adopt a public expenditure rule that and that all levels of government use the same prohibits the deficit from exceeding budget. 3 percent of GDP. NEEDS proposesthat the government not Many of Nigeria's laws and regulations stifle spend morethan it takes in, not pay for unbud- private enterprise. NEEDS seeks to simplify geted programmesor projects,not purchase import and export procedures to make importing goods or services that do not contributeto and exporting a less daunting prospect and to Nigeria'sdevelopment.It also suggests increasing increasethe turnover of businesses in the sector. taxes to pay for basicservices.Under NEEDSthe The reform programme will also: government will try to stabilize the value of the Increaseaccess to credit. Simply providing more nairaand create a systemto ensure that it has Implementa coherent and consistent trade sufficient foreign exchangeto buy the goods it policy. and more reliable needsfrom other countries. Implementthe comprehensive tax reform power could triple the Under NEEDS,the government will: billto eliminate multiple taxation and Diversify the economy away from oil and remove barriers to the growth of a vibrant amount Nigerian solid mineralsin order to increase private sector. iiidustries produce by economic stability and generatejobs. Hold regular dialogue with private sector Privatize,deregulate,and liberalizepublicly operators and participate in economic 2007 owned industriesto promote competition, planning based on market principles, expand industries,generate employment, Grant land use rights and facilitate private create wealth, and receivevalue for money. sector development in the area of social Develop infrastructure,particularlypower and environmentalresponsibility(box 3). generation,transport, and telecommunica- Empower indigenous small and medium- tions infrastructure,to stimulate growth of size enterprises by imposing minimum the private sector. quotas for local produce in tendering and NEEDS proposes the following strategies to procurement processes. stabilize and rationalizepublic spending, increase domestic savings and private investments, and Improving infrastructure. Reforms in the addressthe issue of public debt: transport sector aim to complete the 3,000- Adopt a medium-term expenditure kilometre network of roads and strengthen the framework to ensure predictable and Roads MaintenanceAgency, which overseesthe sustainable public financing at all levelsof repair and rehabilitationof some 500 roads The government, government aims to develop the country's sea Implementtax reformsto increase revenues. ports to handle modern shipping activities, Enact a FiscalResponsibilityPact to upgrade the railways,and achieve total radar ensurethe coordination of government coverage of Nigerianairspace expenditureacross all tiers of government. Power alone accounts for 5 percent of new Adopt an oil price-based fiscal rule and a business start-up costs Simply providing more fund for excess revenuesfrom crude oil and more reliable power could triple the amount sales. Nigerianindustries produce by 2007 Under xviii Overview NEEDS Nigeriais endowed with a rich and diverse natural Conservationof uniquehabitats.Nigeria hastwo- environment but over the years it has reaped its riches thirdsof CentralAfrica's mangrove stands and with insufficient care for the livelihoodsand well-being of wetlands.These are amongthe most important future generations NEEDS will address several areas of mangrove habitatsin the world, but they are under concern threat from exploitation of timber,oil spills, gas flaring, Waste production and disposai Developmenthas and the impacts of increasingcoastal urbanization. proceeded with no regardfor waste management Poiiution and other probiems. Our environmental or pollution control Cities have inadequate laws are inadequate and are not enforced. We do systems for the safe disposai and treatment of not know how much biodiversity has been lost as a waste As rurai emigration to urban areas grows, result of oil and gas development. the probiem worsens NEEDS aims to turn this bleak picture around by Ciianging the way the Deforestation Some 92 GOO hectares-a quarter establishinga regulatoryagency to enforce environmental goverment works is of our land-was once covered in forest Today just laws, monitor industrycompliance, conduct environmen- half of our forests remain and the potential for their tal audits and impact assessments.and set standards. a colossal task, but future exploitation is extremely limited NEEDS seeksto develop a private-public sector Deforestation has been followed by erosion and partnershipscheme to addressthe increasing problems NEEDS wiil build 017 desertification in some areas of waste management. processes that have already begun to NEEDSthe National Electric Power Authority, enterprises.These enterpriseswill be developed formerly a government enterprise,will be in science and technology parks and technology make a diiierence unbundled into distinct business units, which will incubation centres. They will focus on food eventuallybe privatized.The industry will be processing, industrialchemicals, information and regulated by a new regulatory agency,and a fund communication technologies, biotechnology, will be set up to increase access to electric electronics and space technology, and energy, power in rural areas. oil, and gas. Many people in Nigeriaspend one to three A major policy thrust of NEEDS is the idea hours a day collecting water for domestic use. that Nigeria should stop squandering its natural Providingthem with access to safe water can resourcesby sellingthem as crude products. The offer them the chance to use those hours in more more these products can be processed within economicallyproductive activities. NEEDSaims Nigeria,the morejobs they will create and the to increaseaccess to safe drinking water for at more export earningsthey will generate. NEEDS least 60 percent of the population. sets ambitious targets for the sector: 7 percent annual growth, 70 percent capacity utilization, Promoting industry. NEEDS proposes developing and 70 percent of investment made by the the industrial sector by relying more on local private sector by 2007. resources and less on imports. It will be guided by a local research and development strategy Improving agriculture. Agriculture is Nigeria's that seeks to promote science and second-largest source of national wealth, after oil. technology-based small and medium-size NEEDS will promote the cultivation of improved, Ixix higher yieldingcrop varieties and provideextra the process of attracting private investment in support to agriculturalresearch and training. areas such as power generation and infrastruc- NEEDS aims to encourage businessintereststo ture development. To prevent nepotism, providecredit and supply and distribute favouritism, and corruption, the government has agricultural inputs, such as seeds,fertilizers,and transformed the process by which private machinery.Silo complexes will be refurbishedto companies bid for government contracts. It increasethe capacityof the food reserve established the new Budget Monitoring and Price programme and move closer to food security. IntelligenceUnit, which reviews, oversees,and certifies government contracts to ensure value for Promoting other sectors. NEEDSwill promote money.Commonly known as "due process." this programmes that develop informationand mechanism has already saved the Treasury POiicies lWiii communication technology,tourism, and hundreds of millions of naira. e/?slirethat a///eve/s entertainment and financialservices.Proposed The government has also instituted massive Of government "Opt trade policy reformswill aggressivelypromote anticorruption campaigns and establishedthe exports and harmonizetariffs with regionaltrade Independent Corrupt Practicesand Other an annual budget organizationswhile protecting local industries. RelatedCrimes Commission and the Economic and The plan also envisages developinga deep sea and FinancialCrimes Commission, which outlaw port, free trade zones, and a shipbuildingfacility corrupt practices. The government is committed gui&/ines in order to boost coastal shipping. international to the Extractive IndustriesTransparency trade, and regional integration. Initiative,which encourages oil companiesto fully disclose revenues and costs of operations.The Changing the Way the Government government's televised auction of digital mobile Does Its Work licences was hailed as one of the most NEEDS seeks to restoretrust in government as a transparent licence auctions in the world. facilitator of development, an institutionthat Under NEEDS,the government will build on creates or maintainsan environment that enables these efforts by: Nigeriansto implement livelihoodstrategies and Strengthening and modernizingthe anti- achieve personal goals, The government has to corruption organizationsit has established. stop trying to run businesses and redirect its Exposing unethicaland illegalpractices effort to providing essentialservices. It must sell and punishing those who engage in them. off the businessescurrently under its control in Encouraging organizationsto adopt and order to free up labour and funds that it can use publish formal codes of ethics. to improve basic services. Establishingformal training in ethics and Changing the way the government works is a fostering leadershipby example. colossaltask, but NEEDSwill build on processes Enacting a Fiscal Responsibility Pact and a that have already begun to make a difference. Right to InformationAct. The Fiscal The administration has already put several Responsibility Pact will requiregovernment essentialbuilding blocks in place. agencies to publish annual audited In privatizationand liberalization,the accounts within six months of their government has auctioned licences and begun financial year end and set up a revenue stabilizationfund into which windfall DevelopmentPlanning,which will also provide a revenueswill be transferred.The Rightto forum for dialogue between government and the InformationAct will promote openness and business community.This dialogue will be feedback. intensified under NEEDS;the businesscommu- To reform the bureaucracy,the government nity will participate more in statutory coordinating has begun cutting civil service benefits.The meetings,especially in the Independent government has monetized benefitssuch as MonitoringCommittee at the NationalCouncil on utilities,domestic assistance,and drivers and Development Planning. reduced the incentive for corruption by offering The framework for decisionmakingand civil servants higher wages, bonuses, and implementingNEEDSwill be regular meetings of improved working conditions. the NationalEconomic Council, the Economic NEEDS policies will ensure that all levels of Advisor and PlanningCommissioners,the Joint NDS wi//cost about government adopt an annual budget framework PlanningBoard, the National Planning $4.5billion through and guidelines,The guidelineswill promote CommissionDirectors and Directors of Planning, balanced budgets, implementationof priority the researchand statistics departments of all line 2007,milch of which programmes, budget discipline, cost effective- ministries,and representativesfrom the Ministry will have to come ness, and the generationof internal revenuesand of Finance,the Nigeria Institutefor Social and savings.A peer review mechanismwill enable Economic Research,and the FederalOffice of from outside Nigeria heads of government agenciesto compare their Statistics. performance and nurture a common culture of Putting NEEDSinto operation will rely on the excellence.The Joint PlanningBoard, the Joint instruments of the plan and the budget, the Tax Board, and the National Economic Council medium-term expenditureframework, will work together to achieve a more effective Presidentialdirectives, legislation,and decisions system of economic management.The NEEDS of the ExecutiveCouncil. The National Planning period should be characterizedby the punctual Commissionwill establishconsultation meetings releaseof annual budgets. As participants in the with the priority sectors of agriculture, industry, plan for prosperity,the Nigerianpeople will be small and medium-size enterprises, solid kept informed of how well these measuresare minerals, culture, tourism and others that the performing by the press and by special reports. President may specify. How Will We Pay for NEEDS? How Will NEEDS Be Implemented? NEEDS will cost about $4.5 billionthrough 2007, much of which will haveto come from outside NEEDS is a holistic plan that touches all aspects Nigeria.Overseas development assistance-in of the economic and politicallife of our country. the form of grants, loans, and technical To ensure a high level of coordination, the assistance-is being sought. As the reforms NEEDS Secretariat is located within the National begin to change the perceptions of Nigeria PlanningCommission,the hub of all governmen- abroad, about $1.5 billion in foreign direct tal planning processes(figure2). Coordination will investment can be expected in manufacturing, be the responsibilityof the NationalCouncil on steel, construction, solid minerals, and large- xxii Cverv'ew NEEDS scale farming At the same time, the government monitoringtour of all states to view progress and will increase its income by eliminating waste, challenges.Their report will be presentedto the selling assets, and reformingthe tax laws National Economic Council for peer review and to the NationalAssembly for information. How Will We Know If NEEDS Is Working? The following informationwill be collected and A new organization, the IndependentMonitoring analyzedas part of the monitoring and evaluation Committee, made up of members of the programme: government. the private sector,the media, and Income per capita civil society, will periodically monitor and evaluate Changes in the cost of goods programmes implemented under SEEDS and Amount and type of investment NEEDS.The committee will report directly to the Income patterns across the population NationalAssembly for informationand to the Developmentindices (infantmortality, AI/ Nigerians have a President,through the National Economic primary school enrolment) stake in niaking Council, for appropriate action. The Federal Office of Statistics will be responsiblefor The Success of NEEDS Dependson All of Us NEEDS a success providingthe data necessary to monitor the NEEDS is an excellent plan, but it is only a plan. progressof the plan. However well thought out, plans remain merely In collaboration with the National Planning thoughts on paper unless they are imple- Commission, the Presidency will select 15-20 mented. The President and his key advisors and large projects for intensive monitoring. In ministers, governors and their key staff-all are addition, national consultative councils will be fully committed to the reform programmes and set up for agriculture, industry, health, and to the massive changes that NEEDS calls on all education, Nigerians to make. All Nigerians have a stake in Representativesof the federal government, making NEEDS a success. The people of the national legislature.the states, local Nigeria must ensure that the government government, business, labour organizations,civil implements the reforms, and they must keep society organizations,and international their side of the bargain by working hard to organizations will take part in an annualjoint make NEEDS a success. u i i i Macroeconomic Growth in real GDP (percent) 10.2 5.0 6.0 6.0 7.0 Growth in oil sector (percent) 23.0 0.0 0.0 0.0 0.0 Growth in nonoil sector (percent) 3.3 7.3 8.5 8.3 9.5 Reduction in poverty incidence (percent) 5.0 5.0 5.0 5.0 5.0 Minimum number of new jobs (millions) - 1.o 2.0 2.0 2.0 Growth in real private consumption (percent) - 4.8 4.8 4.8 4.8 Growth in real privateconsumption. per capita (percent) - 2.0 2.0 2.0 2 0 Inflationrate (percent) 15.0 10.0 9.5 9 5 9.0 Sectoral Growth in agriculturalsector (percent) 7 0 6 0 6 0 6 0 6.0 Growth in manufacturing sector (percent) - 7 0 7 0 7 0 7.0 Manufacturing capacity utilization(percent) 53 0 - - - 70.0 Number of tourist visitors (percent) - 100 10 0 10 0 10.0 Communication (teledensity) 1 40 - - - 125 Solid minerals Self-employment for at least 500,000 Nigerians Agriculturalexports - - - - $3 billion Environment Reduce ali forms of enwronmentai degradation by 30%of 2004 levels by 2007 Fiscal Maximum public deficits (percent of GDP) - 3 0 3 0 3.0 3.0 Maximumways and means @ercentof previousrevenue) 12 5 10 0 10 0 10.0 10.0 Total expenditure (percent of GDP) 25 1 23 5 23 4 22.9 22.3 Recurrent expenditure (percent of total budget) 70 0 65 0 60 0 60.0 60.0 Capital expenditure (percentof total budget) 30 0 35 0 40 0 40.0 40.0 External sector Externalreserves($ millions) 7,187 7,687 8,687 9,687 10.687 Growth in imports (percent) - 15.0 18.0 25.0 30.0 Growth in exports (percent) - 10.0 20.0 25.0 30.0 Earningfrom nonoii exports (percent of total exports) <5 - - - >I0 Food (percent of total imports) 14.5 - - - 7.5 Unrequitedtransfers At least $3 billion a year from remittances Financial Growth in credit to private sector (percent) 30.0 30.0 30.0 30.0 30.0 Education Adult literacy rate (percent) 57.0 - - - 65.0 Overview NEEDS Health HiV/AlDS prevalence rate (percent) 6.1 - - - 5.0 Immunization coverage (percent) 39.0 - - - 60.0 Access to safe water (percent) 64.1 - - - 70.0 Access to adequate sanitation (percent) 53.0 - - - 65.0 Infrastructure Power generation (megawattsi - 4,000 5,000 7,000 10,000 Roads (rehabilitation,maintenance and new roads) 3,000 3.500 3,500 4.000 4,000 Public sector reforms Public sector reform Review the nature Economic coordination and institutional reforms and relevanceof Public-private sector partnership collected data Security and administration Of justice Restructure and Judicial sewice reforms strengthen the institutional Prison reforms capacity and Eliminatingcorruption: improving transparency professionalization of and accountabiiity the statistical system E-Governance Ensureproduction of timely. Strengthening of National Statistical System reliable,and relevantstatistics Millennium Development Goal Targets Literacy rate of girls Work stili Primary school enrolment and completion ongoing on Maternai mortality determination of infant mortality the targets Note The GDP growth projections are very ccnsewative The growth potentials are huge-not only 'n ternis of the abundant human and material resources. but also for the fact that Nigeria mimics a post-conflict economy with lots of idle resources With the various targeted presidential initiatives on agriculture, ihe increased coordiiation with the states on key priority sectors-agriculture, small and medlum~slzeenterprises, infrastructure and social sectors-the growth effects are expected to be substantial However, the projections are kept 'ow wth clear poss'bliities that they could be exceeded 1 NEEDS 1 PARTONE I Chapter 1 Statement of Vision Values and Principles Chapter Statement of Vision, Values, and Principles NEEDS IS not just a plan It defines a process of President Olusegun Obasanjo'sgovernment development anchored by a clear vision, sound seeks to use NEEDS as a nationallycoordinated values, and enduring principles. framework of action, in close collaborationwith The vision for Nigeria'sdevelopment derives state governments and other stakeholders,to from the country's history,endowments, consolidate the achievementsof the past four NEEDS is notjust a experience,and aspirations.Developmentof this years and build a solid foundation for the vision has drawn inspirationfrom the views of a attainment of Nigeria'slong-term vision. Over the plan, it defines a cross-section of stakeholdersand the aspirations medium term, NEEDS will lay the foundation and process of of Nigeriansas conveyed in provisionsof the achieve significant progress in wealth creation, Constitution.The vision underscoresthe employment generation, and poverty reduction. development necessity and urgency of building a modern anchored by a clear Nigeriathat maximizesthe potential of every citizen, of becoming the largest and strongest Core Values vision,sound values, economy in Africa, and of becoming a force to and enduring be reckoned with in the world beforethe middle NEEDSis anchored inthe imperativeto restorethe of the twenty-first century (box 1.1).Nigeria fundamentalvalues of Nigeria, which have been principles envisionsa twenty-first century that is Africa's weakenedover the years.As described in Ision century,with Nigeriaamong the leading nations. 2070, "Nigeriais a multiethnicsociety with a value This vision was articulated in the 2001 Kuru system that derives from the diversity of its people, Declaration,which states: religion and cultures.The elements of this value TO build a truly great African demo- system includerespectfor elders,honestyand cratic country, politically united, accountability,cooperation,industry,discipline, integrated and stable, economically self-confidenceand moral courage."President prosperous, socially organized, with Obasanjocapturesthe essenceof the new value equal opportunity for all, and responsi- system as one that puts Nigeria, selflessserviceto bility from all, to become the catalyst of country,and loveof fellow citizenaboveall else. (African)Renaissance,and making Accordingto the President,"Alwaysask what is in adequate all-embracing contributions, it for Nigeria. I see a new Nigeria inthe hands of subregionally, regionally,and globally. the Lord.Our Missionis the creationof a New Cbapte: 1 State'qent of Vision Values. and Principles I PARTONE I NEEDS I Nigeriahad an estimated population of 125 miliion in current rate of production, these reservesare sufficient to 2001-nearly one-quarter of Sub-SaharanAfrica's last about 37 years, Provennatural gas reservesare population. It is estimated that one in every six black estimated at 174trillion cubic feet. with energy content people in the world is a Nigerian.The country has more slightlygreater than the country's oil reserves. At current than 200 ethnic groups, with three major tribes, the lgbo production levels, these reserves will last 110years. (East).the Hausa (North).and the Yoruba (West). More Nearly 80 percent of the natural gas produced is than 500 indigenous languages and dialects are spoken. currently being flared; most of the remaining20 percent Average life expectancy at birth is 54 years. is used to generate electricity. It is expectedthat the Nigeriaspans an area of 924.000square kilometres, export of gas will be substantial after 2004. Nigeria's bordered by the Gulf of Guinea. Cameroon. Benin, rivers also constitute a substantial energy resource, Niger, and Chad. The topography ranges from providing the country with nearly half of its eiectricity. mangrove swampland along the coast to tropical rain Nigeriais blessed with abundant solid mineral forest and savannah to the north. The Sahara Desert deposits, including coal. tin ore, kaolin, gypsum, encroaches upon the extreme northern part of the columbite, gold, gemstones, barites, graphite, marble, country, while gully erosion threatens the carrying tantalite, uranium, salt, soda, and sulphur. capacity of lands in the south. Some 10 percent of the Nigeria has more than 60 universitiesand boasts an land is covered with forest, including large stands of educated labour force. Various independent estimates mahogany.walnut, and obeche. Bountifui flora and put the unemployment and underemployment rate at fauna create a rich source of biodiversity that serves as more than 15 percent of the labour force, with a very a reservoirof the pharmaceutical industry and a high rate of unemployment among university graduates. sustainable source of genetic materials for improving the The aduit illiteracy rate is 49 percent. About 76 percent nation's food production potential. But rapid of children of primary schooi age attend school; the deforestation has reduced Nigeria's forest by 50 percent participation rate falls to 20 percent for children of in the past 15 years. The country's fishery resources are secondary school age. small. concentrated in the coastal area. Capacity utilization in industry is about 50 percent. Agriculture is the dominant economic activity in Independent estimates suggest that capital flight has terms of employment and linkages with the rest of the been significant. If appropriate policies and enabling economy. Roughiy 75 percent of Nigeria's land is arable, environment were in place to induce Nigeriansto of which about 40 percent is cuitivated. The United repatriatejust the interest earnings on their assets, Nations Foodand Agriculture Organization rates the Nigeria could reap an estimated $2-$3 billion a year in productivity of Nigeria's farmland as low to medium- return foreign direct investment-multiples of the current but with medium to good productivity if properly inflow of barely $1 biilion a year. managed. Despite two major rivers.the Niger and the Nigeria has a large domestic market, which could Benue, agriculture is predominantly rain fed. Yams, serve as a springboard for entering export markets. cassava. rice. maize. sorghum, and millet constitute the These and many other national assets could pave the main food crops. The principal export crops are'cocoa way for seizing the many development opportunities that and rubber, which together account for neariy 60 come with cross-border cooperation and the percent of nonoil merchandise exports. globalization of industry, trade, and investment. With Nigeria has estimated proven oil reservesof 32 billion skillful management, such opportunities could be barrels,mainly in the southeastern and southern coastal converted into higher per capita income, job creation, area,and is the sixth-largest producer in OPEC. At the and reductions in poverty. I NEEDS ~ PARTONE ~ Chapter 1 Statemer: of Vision, Values, ai;d Prtnciples Nigeriawhere all the negativevalues in our society of the Federal Republic of Nigeria mandates the are reversedand intheir place are established following: enabling values of a caring,well-governedsociety The security and welfare of the people shall where justiceand equity reign." be the primary purpose of government. These are the fundamentalvalues upon which The state shall,within the context of the NEEDS rests.The strategy hopes to lay a solid ideals and objectivesfor which provisions foundation for a national rediscovery and strong are made in this Constitution,harnessthe values based on the following principles: resources of the nation, promote national Enterprise,competition, and efficiency at prosperityand an efficient,dynamic,and all levels self-reliant economy and control of national NEEDS' focus is Equity and care for the weak and vulnerable economy in such a manner as to securethe Moral rectitude, respect for traditional maximumwelfare,freedom, and happiness wealth creation, values, and pride in Nigeria'sculture of every citizenon the basis of socialjustice employment A value system for public service that and equality of status and opportunity. results in efficient and effectiveservice The state shall direct its policy towards generation, poveify delivery to the citizens ensuring reduction, elimii7ation Disciplineat all levels of leadership The promotion of a planned and According to the 2001 Kuru Declaration(box balanced economic development of corruption, ai7d 1.2),all public officials, elected and appointed, That the material resourcesof the nation values reorientation swear to abide by certain codes of values are harnessedand distributed as well as embodying Nigeria'sdevelopment objectives and possibleto serve the common good human capital needs. NEEDSrecognizesthat That the economic system is not these values cannot take root and be sustained operated in such a manner as to permit unless conscious efforts are made to mobilizethe the concentrationof wealth or the means Nigerianpeople around them. Without paradigm of production and exchange inthe shifts, fundamental changes in mindset, and hands of a few individualsor a group. acknowledgment that businessas usual is not That suitable and adequate shelter, acceptable, especially by the elite,the change suitableand adequate food, a reason- that NEEDS seeks to bring about will be difficult ablenational minimum living wage, old to attain and sustain. age care and pensions, and unemploy- Furthermore,the NationalAssembly is poised ment, sick benefits,and welfare of the to enact the relevant legislationfor effective disabled are provided for all citizens. implementationof NEEDS.Some of these are The government shall direct its policy listed in chapter 1 1 . towards ensuring that there are equal and adequate educational opportunities at all levels. Fundamental Principles The nationalethic shall be discipline, integrity, dignity of labour, social justice, Under the FundamentalObjectives and Directive religioustolerance, self-reliance, and Principlesof State Policy,the 1999 Constitution patriotism. Chapter 1 Stateiw'lt of Visioii Values and Principles 1 PARTONE I NEEDS I We adopt the New Orientation as an agenda for 7 We shail abide by the terms of the code of conduct deaiing with immediate and future issues of which we all have signed as expression of our governance in Nigeria; removing impediments to commitment to the crusade against corruption and efficiency and effective implementation and work closely with ali relevant agencies, such as the execution of programmes initiated by the federal Independent Corrupt Practices and Other Related government: expeditious actualization of OffencesCommission the Code of Conduct Bureau government objectives and vision of national renewal and the Pubiic Complaints Commission and re-construction. 8 We undertake to strengthen the partnership in We rededicate ourselves and those who serve under working with the private sector since this partnership us to the values of patriotism, honesty,hard work translates to a better appreciation of the wealth- and diligence, merit and excellence,trustworthiness. creating and job creating capacity of this sector and personal discipline, tolerance and mutual respect, the need for government, through its various justice and fairness, lo& care and compassion. ministriesand legislativeprocesses, to create an enabling environment for the sector to function We pledge to eschew corruption, slothfuiness, efficientlyas the major driver of the economy nepotism, indiscipline. bitterness, prejudice and other manifestations of anti-social behaviours. 9 We shall strive to strengthen and inculcate the culture of working closely and in consultation with the We shail undertake a critical review of practices and leadershipof labour and civil society organizations procedures in every ministryand depariment of government, with the aim of introducing and 10 We shall mobiiize involve and promote the interest of inculcating modern management techniques and all stakeholders, namely the society in general since procedures in every department of government, so in the ultimate all decisions and actions of as to rapidly increasetheir productivity and service government are primarilyconcerned with promoting delivery to the public. the security and generalwell-being of the people There is also the need for a new attitude that has that We shall foster a culture of efficiency in the concern permanentiy in focus as the only goal, and management of funds and other resources, that the economic well-being of all citizens in a truly maintaining high standards of resource management democratic environment is of cardinal importance and reducing waste at all times. 11 We shall design strategies andtechniques of We shali effectively superviseail government implementation for the New Orientation so as to departments and agencies, ensuringtimely reports ensure that the values being inculcated permeate all and returns and undertaking regular spot-checks. levels of management and staff The Constitution clearly stipulatesthat public NEEDS is based on these principles. It aims policy must be directed to balancethe objectives to achieve the directive principles of state policy. of efficiency,effectiveness,and equity in order to Its focus is the creation of wealth, the generation ensure a broad-based, poverty-reducing growth of employment, the reduction of poverty,the and developmentstrategy,the dividends of eliminationof corruption, and the general which will be distributed fairly across all classes. reorientationof values. 1 NEEDS 1 PARTONE I Chapter 1 Staiei-ient of Visacn Values and Principles Three other principles underpinNEEDS.They stakeholders inthe economy-all branches commit the governmentto: of government, the public and private Create an incentivestructure that rewards sectors, civil society and the international and celebrates private enterprise, community-to promote prosperity. entrepreneurialspirit, and excellence. Create a public sector that delivers prompt Establish new forms of partnershipwith all and good-quality service. Chap!er 2 The Development Challenges Facing Nigeiia 1 PARTONE I NEEDS 1 Chapter The DevelopmentChallenges Facing Nigeria Since the transition to democracy in 1999, in the 19905,and it grew just 0.8 percent Nigeriahas laid a solid foundation for economic between 1999 and 2003-far lowerthan growth and development (box2.1). NEEDS is a the 4.2 percent per capitagrowth needed development strategy that consolidates the gains to significantlyreduce poverty.Compared achieved over the past four years, unlocks with other African and Asian countries, Nigeria'sdormant potential, and provides the especially Indonesia,which is comparable base for sustained development.The strategy to Nigeriain most respects,economic Nigeria3 rich human signals a break with past efforts to pursue several development in Nigeriahas been disap- and niaterial resource unsustainablestrategies. pointing.With GDP of about $45 billionin Nigeria'srichhumanand material resource 2001 and per capita incomeof about $300 endowments give it endowments give it the potentialto becomeAfrica's a year, Nigeriahas become one of the the potential to largest economy and a major player inthe global poorest countries in the world. As of 2000 it economy.But much of its potentialhas remained had earned about $300 billionfrom oil becomeAfrica s untapped,puttingattainment of the Millennium exports since the mid-I970s, but its per largest ecoiiomy and DevelopmentGoals by 2015 injeopardy. capita income was 20 percent lower than in 1975. Meanwhile,the country has become a major player in the so heavily indebtedexternal and domestic global economy Development Challenges Remain debt amount to about 70 percent of GDP- Daunting that it has seriousdifficultyservicingdebt. Regional and sectoral unevennessin growth Significant improvementshave been recorded in performanceis high.The real sector is still many areas since 1999, but the development dominated by the primary production challengesremain daunting NEEDS aims to sectors.Agriculture,predominantlysmall address many of these challenges,includingthe farmers with low and declining productivity, following accounts for 41 percent of the real sector, Per capita GDP in Nigeria was among the while crude oil accounts for 13 percent.The lowest in the world during the 1980s and secondary sector,especially manufacturing. 199Os,costing it decades of development has been stagnatingat about 5-7 percent Annual per capita GDP remainedstagnant of GDP, making Nigeriaone of the least 1 NEEDS 1 PARTONE 1 Chapter 2. The Development Challenges Facing U'qeria Confidence in Nigeriais high, the environmentfor doing grew nearly 1,000 percent, to more than 4 miliion lines business is improving. and both Nigerianand foreign in 2003. Growth in the hotel and tourism industry was businesses are reacting positivelyto recent develop- also extraordinary. The totai number of hotel beds ments in the country The government has consolidated nearly tripled, from 12,900in 1999 to 37,528 in 2003. democracy and improved governance, and the economy Room occupancy rate also increased, from 71 percent has begun to turn around. in 1999 to 82.5 percent in 2003. The number of visiting During the 1990s the economy stagnated, growing foreign nationals nearly tripled, from 1,392 to 3,897, at an average annual rate of just 2.8 percent. leaving the with annual growth rates in 2002 and 2003 averaging per capita income growth rate at zero. By 1998 Nigeria 30 percent. was faced with both a failed state and a failed economy, Foreigndirect investment in the nonoil sector ais0 and Nigerians were leaving the country in droves. rose, from divestment in the 1990s to a few biliion dollars Today many of these trends have been reversed. in 1999-2003. Heinekenbuilt its largest plant in the Corruption and other economic and financial crimes are world and upgraded its existing plants, investing about being vigorously fought. More than 200 Nigeriansare 500 million.The BritishAmerican Tobacco is making currently being detained or tried for fraud, and iilegally iarge investments in Ibadan, and Solgas, a U.S. obtained assets worth more than $500 million have been company, is investing in the Ajaokuta Steel Mill. A survey confiscated. The introduction of due process in of 108 medium and large-scale firms operating in Nigeria government procurement has saved the government showed that they invested more than $10 billion during more than $600 miliion.Aggregate annual GDP growth the period. Private investment in power and other averaged about 5 percent between 1999 and 2003, and infrastructure is ais0 growing steadily,with a number of preliminaryestimates of growth in 2003 stood at 10.23 acquisitions and new investments already approved by percent, the highest rate of growth in three decades. the administration. The superlative growth of 2003 was driven mainiy These developments have increased employment, by improvements in agriculture, which grew 7 percent, causing the unemployment rate to fall from about 20 and the oil sector, which grew 23 percent. The percent in 1999to 10.8percent in 2003. Male minimum rediscount rate fell steadily, from 20.7 percent unemployment feil from 18 percent in 1999 to 10.6 in 1999 to 15 percent in 2003. Other rates followed the percent in 2003, while female unemployment fell from same trend. with the prime lending rate failing from 18.2 percent in 1999 to 11.2 percent in 2003. There has 22.5 percent to 19.6 percent and the rate on time also been a reversal of the decade-iong decline in real deposits held more than a year failing from 15.3 take-home wages, with real wages rising about 30 percent to 12.3 percent. The annual depreciation of the percent between 1999 and 2003. The results of an exchange rate averaged 9.7 percent over the period, ongoing household survey wiil provide more recent down from 29.4 percent for 1994-98 and 114 percent socioeconomic statistics. (The poor quality of socio- for 1986-93. The country's external reservesas of the economic data in Nigeria is being addressed by end of March 2004 stood at about $10.2 billion, about restructuring and strengthening the Federal Office of 10 months' import cover. Statistics. Efforts are ongoing to refinethe national The iiberalization of the service sector yielded accounts data using best-practice methodology. A significant resuits. in the first 40 years of Nigeria's household survey that will provide up-to-datestatistics independence, aggregate installed telecommunication on basic socioeconomic conditions is also being lines stood at about 450,000, With the licensing of conducted. The anaiysis in this report could be revised GSM and other wireless landline operators, this number when new data become available.) Chapter 2. The Development Challecges Fac!ng Nigeria PART ONE NEEDS industrializedcountriesinAfrica. Services Nigeriahas lost international market share has beenthe fastest-growingsector since even in its traditional (agricultural)exports. independence. Macroeconomic policy has been highly Between 1975 and 2000 Nigeria'sbroad circumscribed by inefficient,highly volatile, macroeconomicaggregates-growth, the and unsustainablepublic sector spending terms of trade, the real exchangerate, and by unusually highvolatility of major government revenue and spending-were macroeconomic aggregates.Fiscal amongthe most volatile in the developing decentralizationhas proveda challenge to world, Over the past three decades,high effective macroeconomic stabilizationand macroeconomicvolatility has become a key efficient public finance management. There determinant-as well as a consequence- has been a lack of policy coherence of poor economic management.The between the states and the federal Nigeria's economic economy has been caught in a low growth government and even among the various striicture remains trap, characterizedby a low savings- agencies of the federal government. The investmentequilibrium(atlessthan 20 traditional instruments of economic highiy undiversified: percent).Industrializationand exports management-the national plan and Oil exports account remain low.With an average annual budgeting processes-have been investmentrate of barely 16 percent of GDP, rendered ineffective. for 95 percent of total Nigeriais far below the minimum investment Financesat all levels of government are in expoi?s, while rate of about 30 percent of GDP requiredto poor shape. Domestic debt increased more unleash a poverty-reducinggrowth rate of than 200 percent between 1999and 2002 manufactiiring at least 7-8 percent per year. (toabout $9 billion).The external debt accounts for iess than Inthe more than 40 years since indepen- burden,which the government is barely dence, Nigeriahas never grown at 7 able to service, representsabout 50 1 percent percent or more for more than three percent of contractual service obligations. consecutiveyears. Because of perceptions Governmentfinance is also characterized of risks and the high costs of doing by a pensioncrisis, arrears of salaries of business, privateagents keep the bulk of civil servants,huge debts to government their assets abroad, and more than 2 contractors and suppliers of goods and million Nigerians(mostly highly educated) services,a boom and bust cycle of revenue have emigrated to Europe and the United and expenditure,misallocation and States. Most foreign direct investment into mismanagementof resources,and other the country goes into the oil and extractive problems. At the state government level,a sectors. Only since 1999 has foreign direct major crisis is looming but goes largely investment in the nonoil sectors begun to unnoticed. Many states are accumulating rise significantly.Nigeria's economic debt at unsustainable levels, institutions are structure remains highly undiversified.Oil weak, and economic governanceis poor. exports account for 95 percent of total The very low productivity of the private exports, while manufacturing accounts for sector and the lack of diversificationof the less than 1 percent. Since the 1970s economy are due mainly to the inhospitable NEEDS PART ONE Cbapter 2 The Development Challenqes Facing iu'geiia businessenvironment.The constraintsto Nigeriais very high;unemploymentis businessesincludeinfrastructuredeficien- threatening socialcohesion,security, and cies, poor securityof livesand property, democracy;and the imminentHIV/AIDS corruptionand rent-seeking,low accessto epidemicis a potent time bomb waitingto and the high cost of finance,weak explode,with potentialdire consequences institutions,poorly definedproperty rights for productivityinthe economy.Social and enforcementof contracts,and unstable exclusionand discriminationagainst women macroeconomicpolicies,especially fiscal hampertheir ability to fully contributeto the and trade policy.Althoughthese conditions developmentof the economy. have begunto improvesince 1999, The educationalsystem is dysfunctional,as Despite efforts to significantobstacles needto be addressed. graduatesof many institutionscannot meet Nigeria's urbanization rate-about 5.3 the needs of the country. Institutionsare in promote a private percenta year-is one of the fastest inthe decay, strikes and cultism are common, sector-led market world. With a stagnantsecondary sector, and corruption has become rampant. urbanunemployment-and its attendant Youth militarismhas now gone beyond the econom~Nigeria still problemsof slums,crime,and sociopolitical walls of schools to the heart of society. faces the chalienge of tensions-is high. In March1999,23.2 Despiteeffortsto promote a private percentof the rural labourforce and 12.4 sector-led, competitivemarket economy transitionfrom an percentof urbandwellerswere withoutjobs, framework, Nigeriastill faces the fundamen- economy dotninated By March2003 the rural unemploymentrate tal challengeof transitionfrom statism and had droppedto 12.3percent and the urban rent-seekingin an economy dominated by by thepublic sector rateto 7.4 percent,yielding a composite the public sector.The deep vested interests unemploymentrateof 10.8percent. that profit from the system have proved Nigeriafaces the challengeof meetingthe resilient.They are strengthenedby evidence Millennium Development Goals. Statistics of weak institutions.As a result,implemen- from the 1996survey indicatethat povertyis tation failures in Nigeria are persistent. deep and pervasive,with an estimated 70 percentof the populationliving in poverty. (Manyanalysts questionthe 1996 poverty What Went Wrong? statistics,especiallythe methodologyused. The ongoing Living StandardMeasurement The problems NEEDS addresses reflect decades Survey will give a more accuratepictureof of corruption and mismanagement, especially the actual level of povertyin Nigeria.See under military rule.The old development models chapter 4 for a detailed analysis of the of import substitution industrializationand nature,dimensions,and causes of povertyin statism, in which government assumed the Nigeria,as well as a survey of the interven- dominant role as producer and controller in the tions the governmenthas usedto tackle it.) economy, created perverse incentives, inefficien- Poverty in Nigeriavaries widely by region, cies, and waste. In an oil-producing economy sector,and gender. Other social indicators (whererents from oil are easysources of are also under stress: income inequality in government revenue),a culture of rent-seeking Chapter 2 The Development Challevqes F a m g Nigeria 1 1 ~ PARTONE NEEDS quickly developed. The government became an that Nigeriaadopt fundamentalnew policies in instrument for instant acquisition of wealth, order to break out of the low-growth povertytrap it distorting the incentive to work and to create finds itself in. wealth in the private sector.With government as What are the implicationsof alternative growth the major source of patronageand rent-seeking, scenariosfor per capita income and poverty in the fight for public office becamefierce. the medium to long run (table2.1)? Three These factors created an incentiveframework scenarios are examined: that did not reward private enterprise,trans- In Scenario A Nigeriamaintains the parency,or accountability. Frequent regime average growth performance recorded changes and changes in policy were defining between 1999 and 2002 (about 3.5 features in Nigeria in the past. Militarydictator- percent)through 2030. Assuming that per ships allowed weak institutionsto endure. capita income was $300 in 2000, it would Creatingthe Inappropriate development frameworks, poor increase by just $23 by 2015 and by just conditions for rapid and frequently changing policiesand pro- $48 in 2030. If current trends in the rest of grammes, lack of clear vision and commitment to the world continue, this rate of growth and broad-based development, and a citizenry that acquiesced to would leave Nigeriaone of the poorest growth will require the culture of patronage are the major causes of countries inthe world. Under this scenario, Nigeria'sfailed past. poverty worsens, engulfingas much as 80 fundamentai new percent of the population by 2030. policies to break out of In Scenario 6 growth risesto the average Prospects for the Future level of the late 1980s (5percent).This level the low-growthpoverty of growth is sufficient to prevent poverty trau The Nigerianeconomy faces enormous chal- from worsening, but it is not strong enough lenges-and a bleakfuture if fundamentalsteps to reduce it. By 2030 the incidence of are not taken to redressthe legacies of the past. poverty remains at 70 percent,while per Among the many requirementsfor rejuvenating the capita income increasesto $416 in 2015 economy is rapid and broad-basedgrowth. and $576 in 2030, still leavingthe average Creatingthe conditions for such growth will require Nigerianvery poor. A Per capita income 3 6 $300 $328 $352 Incidenceof poverty 3 6 70 percent 75 percent 80 percent E Per capita income 5 0 $300 $416 $578 Incidenceof poverty 5 0 70 percent 70 percent 70 percent C Per capita tncome 7 0 $300 $556 $1 031 Incidenceof poverty 7 0 70 percent 35 percent 17 percent 1 NEEDS 1 PARTONE I Chapter 2 The Develoomeit Challenges Facing Nigetia In Scenario C Nigeriafundamentally potentialfood security crisis. Nigeria'snatural changes its strategy and achieves an resourcebase is rapidly being depleted,and the average annual rate of growth of 7 percent. processof diversificationis proceedingvery slowly. This rate of growth is adequate to meet the As a result of the declining educationalsystem,an MillenniumDevelopment Goal of cutting increasingproportion of graduates are unemploy- the incidence of poverty by half by 2015. able.All these factors havegrave implicationsfor Under this scenario,the percentage of poverty and unemployment. people living below the poverty line could Nigeria'ssize and strategic importance in fall to less than 20 percent. Africa (especiallyin West Africa) mean the stakes Of course, the impact of growth on poverty are very high. Nigeria is the source of stability in A vibrant and growing depends on the sources of growth. Even with West Africa. It led multilateralpeacekeeping rapid growth of 7 percent a year, the incidenceof forces in Liberiaand Sierra Leone, and it Nigeria17 economy will poverty may not decline significantly if growth is continues to play a peacekeeping role in the act as a strong not pro-poor. The effects on poverty of growth subregion. On the economic front, Nigeria led by agriculture,small and medium-size accounts for about 60 percent of West Africa's growth pole for West enterprises,and manufacturingwould be very GDP. A vibrant and growing Nigerianeconomy and even Central different from those of growth led by the mining will thus act as a strong growth pole for West and quarryingsector. A policy that targets the and even Central Africa. Sub-SaharanAfrica as a Africa very poor states would have a greater effect on region cannot succeed in reducing poverty and it poverty reduction than one that does not. cannot reach the Millennium DevelopmentGoals Scenarios A and 8 reflect high population by 2015 unless Nigeria,with one-fifth of the growth and urbanization.If the population African population, develops successfully. continues to grow at 2.8 percent a year, there will be 182 million Nigerians by 2015, 87 millionof them (48 percent) living in urban areas, and 275 The Potential for a New and Strong million Nigerians by 2030, 182 millionof them Beginning under NEEDS urban (66 percent). If the secondary sector, especially manufacturing and services, does not Nigeriahas abundant human and material grow sufficientlyto absorb the inflow of labour to resourcesto initiateand sustainrapid and broad- urban areas or rural areas are not transformed based growth and development. It can also take enough to stem the rate of rural-urban migration, advantage of opportunities offered by globalization the rate of urban unemployment could soar. (includingprospects for leapfrogging)and by the All of the scenarios reflectincreasingdesertifi- preferentialand differentialtrade arrangements cation,land use intensification,and rain-fed and concessions under the Economic Community agriculturewith low productivity. If current trends of West African States (ECOWAS)Treaty;the continue, agriculturewill not be able to support the African Growth and OpportunityAct; and the economy interms of employment or income.The Cotonou Agreement trade pact and impending average age of the labourforce in agricultureis economic partnershipagreement betweenthe about 48-60 years.The growingfood import bill EuropeanUnion and the African, Caribbean,and (about 10 percent of total imports)attests to the Pacificcountries. If appropriate incentivesare in Chapter 2 The Development Challenqes Facing Nigeiia PART ONE NEEDS place,the brain drain of Nigerianscould beturned infrastructurerehabilitationand maintenanceare into a braingain-through increasedremittances, proceeding,and an emphasis on agriculture led technologytransfer,and even returnof capital to an unprecedented bumper harvest in 2003. flight (whichcould repatriateup to $2-$5 billion a Furthermore,there is a broad national consensus year).In other words, there are ample opportuni- around the reform agenda. ties to jump-start faster growth-if the right Second, effective mechanisms are being strategy can be crafted and implemented. institutedfor coordinating state and federal Some momentum for change has been government programmes and jointly monitoring buildingsince the transitionto democracy in performance.The statutory organs for such 1999,This momentum can be acceleratedand coordination and monitoring (such as the sustained.Since 1999 foreign direct investment in National Economic Council, the National Council the nonoil sector has risenfrom almost zero to on Development Planning, and the Joint Planning There is a billionsof dollars,capacity utilization in industry Board)are being strengthened. The impact of the team spirit jn has doubled, unemploymentrates are leveling off, federal programme will be increasedas the 36 and GDP growth has risenmoderately. Increasing states develop their own reform programmes gavernnient, which is numbers of Nigerians inthe diaspora are willing to (knownas State Economic Empowerment and critical for returnand contribute to the economy,and many Development Strategies, or SEEDS)consistent of the donor agencies that boycotted Nigeria with the broad thrusts of the federal reforms. iinplementing and during the militaryera have returned. More Third, the right people are in place to adopt siistaining the refarin fundamentally,the new politicalleadershipat the and implement NEEDS.A critical mass of reform- federal and state levels as well as consensus minded representativesare serving inthe effort among key stakeholdersin the economy seems NationalAssembly,which is ready to enact the to be committed to a significantchange. relevant legislationsfor effective implementation Severalfactors suggest that NEEDS is a of NEEDS (see chapter 11).The President has strategy that is likelyto succeed. First,the constituted a very strong economic team to drive current administration'spolicy thrust is consistent the process of reforms. There is a strong team with the provisionsof NEEDS. The 2004 budget spirit in government, which is critical for signals a fundamental change in strategy.The implementingand sustaining the reform effort, liberalizationof the downstream oil sector has Fourth,NEEDS will become the basisfor begun, with the full eliminationof subsidies, and government budgets and the eventualformulation the refinerieswill soon be privatized.The of a medium-term expenditureframework. conversionof public servants' perquisites into Implementationis a key element for success.The cash to reduce government expenditure and Presidentis leading efforts at implementation, waste associated with maintainingthese facilities chairinga weekly, 90-minute meetingof the is on course. Actions to fight corruption and economic managementteam designedto monitor increasetransparency have been taken, and and coordinate implementationamong key commitment to the ExtractiveIndustries agenciesand ministries.The agenda is focused TransparencyInitiativehas been reinvigorated. and selective,and aspects of it will be imple- The piloting of public service reforms has begun, mented by the private sector, nongovernmental the privatizationprogramme is on course, organizations(NGOs),and donor agencies. 1 ~ NEEDS ~ PARTONE Chapter 3: The Macroeconomic Framework Chapter The Macroeconomic Framework Many factors inhibit growth in Nigeria, including: accounts, and the monetary sector accounts Inconsistentmacroeconomic policy (table 3.1).A workable programme requires Instabilityand policy reversals that the four accounts be consistent, so that Conflicts between different macro- they ensure predictability and sustainability of economic policy goals the macroeconomy and spur rapid and broadly Public sector dominance in production and shared pro-poor growth. NEEDS proposes bold consumption steps to achieve Pervasiverent-seekingand corruption, inacroeconoinic facilitated by the fact that the government The Real Sector isthe hub of economic activities stability and support a Inadequateand decaying infrastructure Overall,growth in Nigeria has been disappoint- more efficient use of High volatility of major macroeconomic ing. Annual growth averaged less than 3 percent aggregates for most of the three decades following the resources to grow fhe Weak institutionalcapacity for economic discovery and exploitation of oil. This era, economy policy managementand coordination through 1999,was bedeviled by waste, a Unsustainabilityof public finance at all bloated public sector, high public expenditures, a levels of government distorted budgeting system, and a weak private Lack of effective coordination across levels sector. Changes occurred, but they were minor. of government Coming at a time when some of the world's Large debt overhang fastest growing economies were growing by Many of these problems are institutional. more than 10 percent a year, 3 percent real GDP Others reflect the fact that the means are growth was sad news, particularly given annual inadequateto achievethe goals. population growth of 2.8 percent. Efforts clearly NEEDS aims to redress these imbalances, needed to be stepped up to improve the based on an overall macroeconomic frame- performance of the economy. work. The analyses and projections presented With the return to democracy in May 1999, in this chapter are based on the four basic hopes were rekindled about prospects for jump- macroeconomic accounts: the real sector, the starting the economy. Everyoneunderestimated fiscal account, the balance of payments the magnitude of the decay and hence the Chapter 3 The Macroeconomic Framework 1 ~ PARTONE NEEDS ~ Real sector Growth in real GDP (percent) 10.2 5.0 6.0 6.0 7.0 Growth in oil sector (percent) 23.0 0.0 0.0 0.0 0.0 Growth in nonoil sector (percent) 3.3 7.3 8.5 8.3 9.5 Oil production, including condensates (millionsof barrels a day) 2.2 2.2 2.2 2.2 2.2 Gross national savings (percent of GDP) 12.4 14.1 17.2 23.9 29.0 Inflationrate (percent) 11.o 10.0 9.5 9.5 9.0 Federal government finance (percent of GDP) Overall fiscal balance -3.3 -1.9 -3.2 -3.2 -3.2 Primary balance -1.4 0.1 -1.7 -1.5 -1.4 Retainedrevenue 9.7 9.7 7.8 7.6 7.3 Total expenditure 25.0 23.5 23.4 22.9 22.3 External sector Overall balance (percent of GDP) -7.7 -1 0.8 -9.2 -4.4 -1.3 Current account balance (percent of GDP) 2.7 -2.9 -2.3 -0.5 0.3 Externalreserves ($miilions) 7,187 7,687 8,687 9,687 10,687 Growth in money and credit (percent) Net domestic credit 28.3 24.5 24.6 22.5 21.8 Net credit to government 44.4 29.9 29.9 23.5 21.5 Credit to private sector 30.0 30.0 30.0 30.0 30.0 Narrow money (MI) 10.3 10.8 8.3 16.7 19.8 Broad money (M2) 15.0 15.0 15.5 15.5 16.0 a Provisional challengesthat neededto be faced. Aggregate growth of about 21 percent in the electricity growth has been slow and the sectoral subsector in 2002 may be threatened. distributionof growth uneven.While some This unstable growth-a hallmark of sectoral sectors, such as telecommunications, have performance-presents an enormous challenge. enjoyed very rapid growth. others, such as Putting the economy back on the path of mining, have contracted. Some of the sectors sustainable growth requires a systematic and that recorded vety high growth rates in 2001 consistent framework. NEEDS proposes bold slumped in 2002. Oil refining,for example, grew steps to plug leakages in order to achieve 191 percent in 2001 but declined about 8 macroeconomic stability and support a more percent in 2002. Indicationsare that average efficient use of resourcesto grow the economy. I 1 NEEDS 1 ~ PARTONE Chapter 3 The Macroeconomic Framework Policy Thrusts efforts, almost every sector will perform better in NEEDS supports the following policy thrusts: the coming years. Stronger growth performance Sustain a rapid, broad-based GDP growth is expected as the private sector takes advan- rate outside of the oil sector that is tage of the different reform strategies and policies consistent with poverty reduction, and as the government reduces its role in the employment generation, and a sustainable economy and redressesthe perverse incentive environment. structure facing investors.Growth projections Diversifythe production structure away attach weights to different informal sector from oil and mineralresources. activities in order to capture the overall share of Make the productive sector internationally the sector in projected economic growth. NEEDS siipports competitive. Changes in agriculturewill generally drive Systematically reducethe role of increases in growth. systematically government in the direct production of Criticalto growth performance is improvement reducing the role of goods, and strengthenits facilitatingand in power and other infrastructure;a reduction in regulatoryfunctions. the cost of doing business: creation of a more government in the conducive investmentenvironment, including direct production of Key Strategies security of life and property; and training and NEEDS proposes achieving its goals in the development of the human resourcesneeded to goods and following ways: increase capacity and productivity. Human strengthening its Privatize, deregulate, and liberalizekey resource development is needed to reduce the sectors of the economy. reliance on expatriates and increasethe facilitating and Coordinate national sectoral development contribution of the local labour force in foreign regulatory functions strategies for agriculture,industry investment, (especiallysmall and medium-size Strong growth is expected in the primary and enterprises),and services (especially secondary sectors, particularlyagriculture, tourism). manufacturing, and solid minerals.The Develop infrastructure,especially electricity, manufacturing sector is expected to grow at transport, and water. least 7 percent a year between 2004 and 2007, Address the problems of financing the real while agriculture is expected to grow about 6 sector, and mobilize long-term savings and percent. Growth in other sectors may not be as investment, strong as growth in the primary sector. Create effective regulatoryregimesthat Aggregate output for the four years of NEEDS is include environmentalstandards. projected to increase5 percent in 2004, 6 Target programmes to promote private percent in 2005, 6 percent in 2006, and 7 sector growth and development. percent in 2007. Output in the oil and gas sector A major target of the current reform effort is is expected to remain unchanged.The projected the reduction of poverty. But the effects of some decline in oil production as Nigeriamaintainsits structural changes will be felt only after a lag. OPEC quota is expected to be offset by Medium-term growth performance is projected increases in gas production, leaving net output in based on the assumptionthat given the reform the sector unchanged. Growth of the nonoil 1 I l 6 Chaflter 3 The Macroeconomic Fran3ewoi k PART ONE NEEDS sector, the major target of the diversification tiers of government,weak institutionalstructure, effort, is expected to rise from 6.8 percent in a fiscal federalism structure that places little or no 2003 to more than 9 percent in 2007. premium on intertemporalfiscal solvency, and a Annual private consumption is expected to weak institutionalmechanismfor regulatingthe grow 4.8 percent in real terms. With projected actions of the different tiers of government and population growth rate of 2.8 percent,this will their agencies.These problems have led to a mean a 2 percent growth in annual real per heavy debt burden, huge recurrent expenditure capita consumption. At the same time, public burdens at all tiers of government, inefficient consumption expenditure is expected to steadily public deliveryof services, and distortions in the decline. Investibleresourceswill be reallocated incentive structure for both the private and public from the public sector to the privatesector, and sectors. Currently,all tiers of government spend the investment pattern by both government and far more than they earn:cumulative deficits over Currenth a//tiers of private investors will change. For example,with the past five years alone stand at more than goveriiment spend far agriculture as a priority area in the medium term, $1 trillion, excluding arrears of pensions and the government will increase incentivesfor gratuities and debt to local contractors. With more thaii they earn: investment in the sector. foreign debt of about $31 billion in fiscal 2001 (in curnuiative deficits a $45 billion economy),the government spends a huge proportion of current revenuein debt- over the past five Fiscal Operations and Policy: servicing and interest payments. years alone stand at Budget, Tax Reforms, and Public The budgeting process reached the point of Expenditure Management near collapse beforethe democratic government more than $1 trillion came to power.The main problems have to do Fiscal policy is the most important instrument of with lack of politicalwill and commitment to macroeconomic management in Nigeria. abide by stipulated rules and budget guidelines. Reforms at this level are therefore critical for This has led to a high incidence of extra- overall macroeconomic consistency. budgetary expendituresand the breakdown of Despite plans to diversify the government's medium- to long-term plans to guide the revenue base, Nigeria'sfiscal and budget budgeting process, with projects implemented landscape has been dominated by oil income, haphazardlywithout proper evaluationand which accounts for at least 70 percent of total coordination. As a result, hundreds of projects lie government revenues.Swings in the international uncompleted or abandoned; completing the oil price and production create enormous projects would cost more than $100 billion. volatility in government revenue. In periods of Allocation to projects became ineffectiveand boom, government expenditures increase,while often arbitrary.Spread thinly over a large number drops in oil prices are treated as temporary.The projects, the allocations had little impact for the same pattern is repeated by the states and local most part A high level of recurrent expenditures governments. and the lack of cooperation between tiers of Other problems include inefficientuse of government and line ministrieswith the resources, waste and misplaced priorities in coordinating agencies (such as the National government expenditure,high fiscal deficits at all PlanningCommission and the Ministry of I NEEDS 1 PARTONE Chaptef 3 The Vacroeconoinic Framework Finance)underminethe budget process.The excess revenuefrom crude oil sales, with lack of a formal mechanismfor dealing with specific conditions for the fund's use. budget surpluses or shortfalls has led to the Establish a public expenditure rule that issuance of warrants without cash backing. holds the deficit to no more than 3 percent of GDP. Policy Thrusts Projections on the fiscal account are based on The key policy thrusts of NEEDS include the consolidated public sector revenueand following: expenditure profiles.The internationalprice of oil Create a predictable macroeconomic is expected to decline over the period, but environmentin which resourcesare used production and earnings in the gas subsector are Thesuccess (or efficiently,predicated on a Medium-Term expected to rise significantly,offsetting any ExpenditureFrameworkthat ensures negative oil price movements that may occur. failure) of the reform predictable and sustainablepublic finance A basic assumption made in the fiscal prograamme hinges at all levelsof government. account is that state and local governments Adopt policiesthat are consistent with balancetheir budgets. However,the federal largely on greater raising domestic savings and increasing government can borrow up to 12.5percent of fiscal coordi/7afioi~ private investments. the previous year's retained revenuefrom the Maintaina sustainable level of public debt. central bank to finance its deficits. This provision, which is consistent with the Central Bank Act, is Key Strategies expected to lapse in fiscal 2004. The key strategies and instrument includethe Beginning in fiscal 2005, the projections in the following: fiscal account reflect the provisions of the West Adopt a budget strategy that strengthens African Monetary Zone, which stipulatesthat no the planning process and project and more than 10 percent of the previous year's programme evaluation,with early retained revenue can be financed by the central involvement of stakeholders. bank. An oil price-based rule using projectionsof Adopt tax reforms aimed at raising oil prices that are lower than the expected revenuesand diversifying the revenue internationalprice of oil over the timeframe is also base. adopted. Public sector (consolidated)deficits are Strengthenthe Budget Office. constrained not to exceed 3 percent of GDP. Adopt a medium-term expenditure While the reform plan has a long-term compo- framework and a fiscal strategy paper nent,the framework is designed principallywith a consistent with the thrusts of NEEDS. medium-term focus. Establishintergovernmentalfiscal Given the proposed public sector reforms, coordination based on a Fiscal overall recurrent expenditure as a proportion of ResponsibilityAct or similar initiative. total expenditure is expected to continue to fall. Reform and strengthen the procurement Currently, recurrent expenditure consumes about process. 70 percent of total revenues at both the federal Establisha fiscal rule based on the price of and other levels of government. Given the oil, and establish a stabilizationfund for planned increase in government efficiency, Chapter 5 The Macroeconoinic Franiev,oik PART ONE NEEDS recurrent expenditure is expected to fall gradually Coordination will be improved by the active use over the reform period. State governments are of the formal organs of government, including assumed to maintain previous levelsof recurrent the National Council on Development Planning, expenditure (about 80 percent of total revenue) in the Joint Planning Board, and the National 2004. The ratio of recurrent to capital expendi- Economic Council. ture is expected to improve to 70130 in 2005 and While the key challenge is to rein in govern- to 60/40 in 2006 and 2007. ment spending and get all tiers of government to All tiers of government in Nigeriasuffer from spend no more than they take in, spending must the volatility of revenue and expenditure. State also be in line with predetermined priorities and and local governments account for about 50 reap value for money spent. Thus part of the percent of consolidated public sector spending. strategyof the reform effort is to strengthenthe This figure could increase with the proposed new due process mechanism and the institutionsset IWhile the key revenue allocation formula. Over time it has been up by the administration. Based on established challenge is to rei17 i/7 difficultto control the intertemporal distribution of sectoral priorities,the government will set expenditure of state and local governments using expenditure ceilingsthrough lump-sum government spending monetary and fiscal policies as the Constitution allocations to public enterprises and government and get a//tiers of grants each state full autonomy over itsfiscal agencies,and it will monitor the performance of actions. The success (or failure) of the reform these agencies. The overall aim is to gradually government to spend programme hinges largely on greater fiscal but consistently reduce the government deficit no more than they coordination. from the current 5 percent to no more than 3 The Fiscal Responsibility Pact, expected to percent of GDP over the lifespanof NEEDS. take in, spending come into effect no later than 2005, will help Doing so will require a roll-back of recurrent mist also be in line achieve such coordination. Under the provisions expenditures by all three branches of govern- of the bill, executive office holders are expected ment-executive, legislature,and judiciary-as wjth predetermined to structure their expenditures in line with the well as by all tiers of government, primarily priorities and reap provisions of the capital and recurrent expendi- through efficiency gains. ture provisions of the reform programme. In The budgeting framework will adopt a valiie for money spent addition, the central bank is currently discourag- mandatory calendar that ensures early involve- ing bank lending to all tiers of government. ment of the legislatureand finalization of the According to the new rule, any bank is free to budget at least three months before the lend to any government agency, provided it beginning of a new budget year. In collaboration provisions 50 percent of the loan value to the with the National Planning Commission, the Central Bank of Nigeria if the loan is considered Budget Office will produce and disseminate performing or 100 percent if the loan is quarterly monitoring and evaluationreports to the considered nonperforming. The Securities and general public, The budget process will also be Exchange Commission is also revising the reformed to reduce or eliminate arbitrariness. conditions for borrowing, lending, and floating Essentially,the budget will be in linewith the bonds by all tiers of government to maintain policiesand priorities of NEEDS, subject to more consistency in the pattern of capital market detailing of programmes and projects by line access and usage by all tiers of government. ministriesand state enterprises. 1 NEEDS I ~ PARTONE Chapter 3 The Macroecomnic Framework Inthe immediateterm (2004 and 2005),the process mechanismand developinga catalogueof aim will be to introduce a more orderly and commonly procuredequipment,supplies,and disciplined budget formulation processthat tries sewices as a referencefor ministriesand agencies. to corral the numeroussources of extra- Tender procedureswill be enforced, and the scope budgetary expenditures,a processthat involves of checkson valuefor money will be expanded. input upfront from both the executive and the Proceduresfor competitive bidding, contract legislativebranches on priorities.The lack of review,and award of various levels of contracts ownership by the legislature of the prioritiesset have been introduced. The Budget Monitoring forth by the government in previous budgets-as and Price IntelligenceUnit was created in the well as attempts to add priorities, regardlessof Presidencyto oversee the procurement reforms Part of the new the impact on the overall fiscal position-virtually and push implementation of the due process derailed the budget process in 1999-2003. Part review and contract certification process. The strategy will be to of the new strategy will be to introduce a more mechanism will be strengthened and upgraded introdiice a more collaborativeapproach between the two into the Federal Procurement Commission. branches of government in order to enhancethe Accounting officers will ensure that excessive collaborative effectivenessof the budget process. expenditures discovered by postauditing checks approach between the The bloatedfederal recurrentbudget is are recoveredfrom those responsible. Every unsustainable,as isthe unwieldycapital account, a department will have internal and external executiveand substantialpart of which is made up of abandoned auditors, who will be responsible for tracking legislative branches of and underfundedprojects.State governmentsalso expenditures and ensuring value for money. have bloatedrecurrent expendituresand littleroom government in order for capital programmes.The challenge isto design Increasingrevenue generationand supporting tax to enhance the appropriatestrategiesand action plans to redress reforms.The reformsalso aim at strengtheningthe the situation. machinery for tax collection,trackingall govern- effectiveness of the The public sector capital programmewill be ment revenuespaid into differentbank accounts as budget process rationalizedto give priorityto health, education, well as recoveringdebts, misappropriatedand agriculture,power supply, and the maintenance of lootedfunds, and paymentsfor work not executed. infrastructure projectsthat have high linkage Stateand localgovernments are expectedto gear effects with other projects and those that will up thelr effortsto generaterevenuerather than generateemployment at minimalcost. A sunk depend on statutory allocationfrom the federation cost approach will be introduced in determining account or borrowingon the capital market. whether to proceed with ongoing and abandoned Inthe short to medium term, the strategy will projects.Rigorous project selectioncriteria will be address six issues: imposedon new projects, includingthe need to The structure of the tax system ensure fundingto completion. The cleaning up of Revenuegeneration the budget will produce a more concise capital Efficiencyof collection programme in fiscal 2005. Tracking and response to comparative and internationalstandards Pruningwaste. NEEDSwill support new Investmentpromotion procurementproceduresby strengtheningthe due Coordination of tax administration Chapter 3 The Macroeconoinic Fravewoik PART ONE NEEDS The structureof the tax systemoverwhelmingly poor infrastructure,and stimulate private favoursindirecttaxes. Althoughthese taxes are investment in the real sector. generally regressive,the high rateof evasionof A major nuisanceto businessesoperating in direct taxes-attributed mainlyto poor data on Nigeriais the multiplicityof taxes imposed at the peopleand sources of income(theresult of a large federal,state, and local levels.While NEEDS will informalsector)-makes indirecttaxes attractive. not encouragethe pooling of all taxes in a federal This structure will continue over the NEEDS system, it will seek agreement among all tiers of period.The mainsources of nonoil revenue government on which level should collect which include customs tariffs,value-addedtax, and sales taxes and how, in order to avoid too great a taxes. Governmentsat all levelswill continueto multiplicityof taxes and conflicting methods of explorethe possibilitiesof collecting user charges collection. The Joint Tax Board and the peer on infrastructureand some social services. review mechanismto be established under this HistorMly, the The government is collecting far less in strategywill help achieve a more harmonizedtax Nigeria/?eflerila/ income tax (individualand corporate, including system and ensure coordination and compliance. withholding taxes) than it should. The tax Effortswill also be intensifiedto increasethe sector account could collection machinerywill therefore be revamped, contributionsto public sector financing of major be referred to simply restructured, and strengthened for more effective public enterprises,such as the NigeriaMaritime collection. Authority,the NigeriaPorts Authority,the Federal as an A new phenomenon is the loss of revenues AirportsAuthorityof Nigeria,the Shippers' arising from the system of remittance of tax Council,the NationalCivil Aviation Authority,the revenuespaid through banks to the appropriate Securitiesand ExchangeCommission, and authority.Significant revenue is being lost through NICON Insurance,Over time, these public diversion and inadequate monitoring of the enterprises havemade minimalcontributions to process. Such leakages will be plugged, and development. defaulting banks will be delisted and subject to substantialpenalties. In addressingthe level and structure of taxes, The Balance of Payments attention will be paid to competitiveness. Taxationand fiscal policy will be pro-poor and Historically,the Nigerianexternal sector account used as an instrument for reducing high income could be referredto simply as an oil account. disparities,as well as providing incentivesfor Becauseof the economy's lack of diversity,swings investmentand productivity growth. Direct taxes in OPEC quotas and largechanges in the on lower income groups will be reduced, while internationalprice of oil have continuedto dictate those of the highest groups will be increased. But the directionand pace of shifts inthe external the structure will pay attention to the competitive- account. As a resultof increases inthe OPEC ness of Nigeriarelativeto countries at similar quota, especially since 2000,the country's current levels of developmentwith which Nigeria has to account balanceand reservesshowed remarkable compete for foreign direct investment.The tax improvements,with reservesreachinga IO-year structure will establish a level playingfield, high of $10.4 billionin 2001.There are few adjusting for the cost of doing business due to assurancesthat the government'sefforts to secure j NEEDS I Chapter 3. The Macroeconoinic Framework ~ PARTONE additional increases inthe country'sOPEC quota tariffs, and use special levies and import will be successfulinthe short term, however. prohibitions to protect local industries. The volume of imports in Nigeriais high, and Establisha market-determined nominal imports are diversified. Imports range from exchange rate regime, and avoid capital goods and machineryto unprocessed overvaluation of the real exchange rate. food and other primary items. This high Seek debt reduction to make Nigeria's propensity to import food items and the debt service sustainable. associated health hazards they pose has been a The trade balance has been in surplus in source of concern to the government, which has recent years, as a result of the rise in oil prices. imposed temporary bans on some items. Balance of payments projections assume no lvigeria's tariff and Nigeria'stariff and trade policy is character- change in Nigeria'sOPEC quota and stable oil ized by uncertainty and highly varying rates of prices of $22-$23 a barrel between 2004 and trade policies are out protection, and its customs and ports clearance 2007. This cautious posture is due mainly to the of tune with trends in system is inefficient.Policies are out of tune with expected re-entryof Iraq into the oil market and trends in the Economic Community of West the unpredictable behaviour of Russian oil supply. the Economic African States (ECOWAS)and in other develop- However,negativechanges in the international oil Con7munityof West ing countries. Externalreservesare volatile, market may not be fully reflected in the balance capital flight persists(albeitat a lower rate than of trade because of expected positivechanges in African States and in under the military regimes),and inflows of the gas subsector, where production and other developing portfolio and foreign direct investment into the earnings are expected to rise. nonoil sectors remainweak relativeto the size of Export earnings should be diversified.In the countries the economy.The external debt overhang short run, the emphasis should be on the export remainsominous, with total debt service of food and other primary products, with value payment about equal to the federal government's added to exports over time. Incentiveswill be capital budget (evenwhen the government is not given to domestic producers in manufacturing fully servicing all the service payments due). and agricultureto exploit opportunities provided The balanceof payments situation is not by the numerous bilateral and multilateraltrade sustainable.Oil prices cannot continue to rise concessions of which Nigeriais a potential indefinitely,and increases in the OPEC quota are beneficiary. not guaranteed.Aggressive export diversification Despite these incentives,only small changes and expansionas well as gradual import are expected in the volume of imports in the short liberalizationrepresent the winning strategies for run. Although Nigeriahas banned the importation moving forward. of some products, the share of these products in total imports is small. Furthermore,the lowering of Policy Thrusts tariffs in tandem with the rates set by the West NEEDS is based on four main policy thrusts: African Economic and Monetary Union is likelyto Promote exports and diversify exports increasethe import bill, perhaps offsettingthe away from oil. effects of the import bans. Factor payments Gradually liberalizeimports, harmonize arising from industrializationprogrammes and the tariffs with ECOWAS' common external import of industrial raw materialswill continue, at Cl?ap:e' 3 The Macroeconoinic Framework PART ONE NEEDS least in the short run, to put some pressureon the Securitized domestic public debt nearly current account. Thus annual current account quadrupled between 1996 and 2003, rising from deficits of about 0.52 percent of GDP are about W343 billionto about W1.3 trillion.The expected between 2004 and 2007. domestic debt stock is characterizedby a With modest deficits, net reserveswill grow number of deficiencies.One isthat the stock is slowly but steadily,from $7.7 billion (aboutfive concentrated at the short end of the market. months' imports cover) in 2004 to $10.7 billion About 60 percentof the stock is made up of (morethan six months' import cover) in 2007. 91-day Treasury bills;longer term debt constitutes This growth is expected to arise from a larger less than 25 percent.This impliesa mismatch export base and slower growth of imports. The between assets and liabilities,as much govern- projection for reservesis within the minimum ment expenditureis long term. stipulations of the West African MonetaryZone, Another defect is that nonbank public If reforn?sstay 017 allowing Nigeriato keep pace with the regional holdings of government securities representjust course Nigeria is integration process while pursuing its domestic 6 percent of all debt; the central bank and reform programmes. deposit banks hold about 94 percent. The large expected to be able to Assumptions on debt service payment are holding of government securities by the banking get debt relief, optimistic, Only 53 percent of the $12.3 billion of system has adverse implicationsfor the growth debt sewice due between 2004 and 2007 is of the money supply and the effectiveness of substantia//yreducing expected to be paid in full. The states will monetary policy.Although reliablefigures on external debt service account for 25 percent of payments, while the nonsecuritizedpublic debt are not available, federal government will take up the other 75 indications are that the figures run into the trillions payments percent, If the reforms stay on course, with policy of nairafor all tiers of government. consistency and increasedprudence in the management of public resources,Nigeria is Key Strategies expected to be able to get debt relief,substan- Duringthe medium term, policy will focus on: tially reducing external debt service payments. Restructuring existing securities into Debt relief would also reduce the debt stock, longer term bonds significantly affecting the overall balance. Reducing central bank holdings of the Additional resourcesfrom debt relief are government debt so that the Central bank expected to show up in increased spending on of Nigeriahas wider room for efficient and the social sectors (health,education, water, and unconstrained monetary policy infrastructure).This reallocationwould increase Financinggovernment deficits by floating the impact of the reform programme on human bonds in the capital market capital development, a major policy goal of Developingan efficient capital market reform. In addition, current efforts by the Debt InAugust 2003 the government floated W150 Management Office to sensitize state govern- billionof federal bonds, with tenors of 3, 5, 7, and ments to the implicationsof their fiscal actions I O years-the first bond issuein 17 years. A will be increased. Inthis regard, civil society has major goal of domestic debt management during a responsibilityto demand accountability from the programme periodwill be to sustainthis effort public office holders. by lengtheningthe term structure of debt and 1 NEEDS 1 PARTONE 1 Chapter 3. The MacrOeconoiT,!cFramework increasing nonbank public holdingof government Restructurethe composition of credit to debt in order to bring government borrowing the private sector to boost production. under the disciplineof the capital market. Provide more credit to the private sector, In addition, domestic borrowing guidelines especially long-term credit for real sector will be developed and applied to all tiers of development. government and their agencies.These Create effective regulatoryand supervisory guidelines will help ensure that the unsustainable mechanismsto ensure orderly develop- and defective domestic debt portfolio of the ment of the financial system. federal, state, and local governments does not Continueto use the retail Dutch auction deteriorate. system to determine the nominalexchange The conduct of the rate regime, and adopt a wholesale Dutch auction inthe medium to long term. monetary. credli, and Monetary and Exchange Rate The conduct of the monetary,credit, and exchange rate policies Policies exchange rate policies will continue to be guided by the central bank's monetary,credit, foreign will continue to be Historically,monetary policy in Nigeriawas mainly trade, and exchange policy guidelines, which are guided by the centra/ short term, but the Central Bank of Nigeriahas now issued for two-year periods. The current recently moved to a medium-term framework. guideline, Monetary Policy Circular No. 37, bank's guidelines, Given the fiscal posture for the reform period, covers the policy guidelines for fiscal 2004 and now issiied for two- monetary policy outcomes will depend largelyon 2005. The overall goal of monetary policy the government's fiscal stance.The disparity remains price and exchange rate stability:the year periods between monetarytargets and outcomes is wide instruments are those consistent with a largely because of the statutory financing of deregulatedfinancial system. budget deficits and the inabilityof the apex bank Given that the government is committed to a to sterilize the liquidityeffects of government tighter fiscal stance, the inflation rate is expected expenditures. Thus monetary policy intervention to drop progressivelyover the four-year time has been basically reactionary and short term, horizon, reaching9 percent by 2007. The decline leading to missed targets and ineffectivenessin in inflationis expected to improve the macro- performance. Despitethe fact that the basic goal economic environmentfor planning and to of monetary policy has been price stability, reduce pressure on domestic costs and real inflation has been relativelyhigh and above the interest rates. Interest rates will remain deregu- West African Monetary Zone targets. lated and market determined, but policy will aim at rates that 'are above the inflationrate in order Policy Thrusts to mobilize savings.The reform programme will NEEDS supports several main policy thrusts: aim to reduce the spread between lending and Striveto meet the second West African deposit rates of interest. Monetary Zone's convergencecriteria. Historically,the structure of credit allocation Maintain low real lending interest rates. has been a problem. It is widely believedthat Maintain a competitive but stable public sector demand for credit crowded out the exchange rate regime. private sector. Credit to the private sector has Chapter 3 Tbe Macroeconoinic Framework 1 PARTONE I NEEDS 1 also been affected by the low absorptive rediscounting and refinancingschemes of capacity of the economy. Monetary projections commercial bank debts for small and medium- for the reform period envisage lower public size enterprises, will be intensified.The aim is to sector deficits, increasing the availabilityof funds create incentivesthat alter the structure of for lending to the private sector. Banks need banking from deposit driven to credit giving. inducements to lend to the privatesector rather Giventhese incentives,credit to the private than trade in government instruments,conduct sector is projected to grow at least 30 percent a foreign exchange transactions, or finance short- year. The framework also provides for steady but term (commercial)activities. slow averageannual changes in broad money Providing credit to the private sector will be over the reform period, With a substantial decline encouraged through a set of incentives.The in government borrowing, less financing of central bank has already introduced a credit (risk) government deficits by the central bank, and guarantee scheme for commercial bank lending reduced dependence on oil income for foreign to small and medium-size enterprisesand the exchange earnings, changes in broad money are agriculturalsector. Other incentives,such as the expected to be less volatile. - 0 t0 P m C tIs) I- i i: Q, t c 5 9 0 t CI m P c 0 B ~ eli 1 f 6 d . . . . . . . . . . . . . . . . . . . . . . . eka . . . . . . . . . . . . . . . . . . . . . . . . . . . . e d I i I m B . . 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