Nigeria: Background Papers and Statistical Appendix

This Background Paper and Statistical Appendix examines economic development in Nigeria in the first half of the 1990s. Economic growth slowed for the fourth consecutive year in 1994, to 1.3 percent from 2.3 percent in 1993. The slowdown was widespread, affecting every sector except agriculture. Output in the petroleum sector is estimated to have declined by 6 percent, mainly as a result of industrial actions by oil workers during July and August 1994. In the non-oil sectors, negative growth was recorded in both fishing and manufacturing activities.


This Background Paper and Statistical Appendix examines economic development in Nigeria in the first half of the 1990s. Economic growth slowed for the fourth consecutive year in 1994, to 1.3 percent from 2.3 percent in 1993. The slowdown was widespread, affecting every sector except agriculture. Output in the petroleum sector is estimated to have declined by 6 percent, mainly as a result of industrial actions by oil workers during July and August 1994. In the non-oil sectors, negative growth was recorded in both fishing and manufacturing activities.

Nigeria - Basic Data

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Changes between average-year rates in foreign currency per naira.

Base on Information Notice System.

I. Recent Economic Developments

1. Output

Economic growth slowed for the fourth consecutive year in 1994, to 1.3 percent from 2.3 percent in 1993. The slowdown was widespread, affecting every sector except agriculture. Output in the petroleum sector is estimated to have declined by 6 percent, mainly as a result of industrial actions by oil workers during July and August 1994. 1/ Growth in real non-oil GDP is estimated to have dropped to less than 2½ percent in 1994, from 3 percent in the preceding year (Chart 1). In the non-oil sectors, negative growth was recorded in both fishing and manufacturing activities. Output in fishing dropped by 6.5, as coastal fishing fell for a third consecutive year, partly in response to a rise in relative input costs associated with increased fuel prices. Manufacturing has experienced continuous problems in recent years and output in 1994 was only 2 percent above its 1989 level. Cutbacks in output ranged from 2 percent in petroleum refining to 34 percent in footwear production. The sharp drop in foreign exchange allocations during the second half of the year and civil unrest during the third quarter of 1994 were some of the factors that led to a decline of 5 percent of value added in the manufacturing sector.

Chart 1.
Chart 1.


Citation: IMF Staff Country Reports 1995, 143; 10.5089/9781451828856.002.A001

Sources: Data provided by the Nigeria authorities; and staff estimates.

Value-added in services expanded by 3.7 percent in 1994, down from 6.1 percent in 1993, and was almost wholly attributable to increased government and community services, each of which grew by nearly 10 percent during the year. Activity in financial services is estimated to have increased by 3 percent, largely associated with foreign exchange operations, while other services were roughly unchanged from their 1993 levels.

Value added in agricultural activities, which accounted for 38 percent of GDP at constant prices in 1994, is estimated to have grown by 2.4 percent, which marked a significant improvement over the 1.4 percent growth registered in 1993. The production of staple crops is estimated to have increased by 4.8 percent, while output of other crops grew by 1.5 percent, as improved rainfall patterns led farmers to increase the land under cultivation, and more fertilizer was distributed to smallholders.

Difficulties in the Manufacturing Sector

While aggregate production at end-1994 was 20 percent above its 1985 level, only 4 out of 14 manufacturing sub sectors were producing above their 1985 levels. The decline in some manufacturing activities has been dramatic: at end- 1994, vehicle assembly was at 16 percent of its 1985 level, output of roofing sheets was at 27 percent, and manufactures of footwear was at 48 percent. A nationwide survey of 509 manufacturers conducted by the Central Bank of Nigeria (CBN) in 1993 showed that only 13 out of 29 survey subgroups were operating above 30 percent capacity, and only 5 of those were operating above 50 percent capacity.

What accounts for the severe decline in this sector? A majority (85.3 percent) of respondents to the 1993 CBN survey noted a continuing pessimism on the business outlook. In qualifying their pessimism, they cited foreign exchange constraints and general political conditions as important factors. Businessmen also noted the effects of high interest rates, the poor state of public utilities, most notably electricity, and the effects of inflation on consumer demand.

Indices of Manufacturing Production

(1985 = 100)

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Source: Central Bank of Nigeria.

Has the Structure of Production Changed?

The structure of Nigeria’s economy has remained fairly stable over the past six years or has changed dramatically, depending on the indicator used. In constant 1984 prices there has been a striking shift since 1989: the share of primary output has declined by nearly 7 percent, the share of manufacturing and other secondary activities has dropped by 11 percent, while the part of services in the total has increased by 13 percent. The structural shift within sectors is even more pronounced. In the tertiary sector, the share of government services has increased by nearly 38 percent and finance and insurance has risen from 6.2 percent of output to 9.0 percent, while wholesale and retail trade dropped by nearly a percentage point.

In current prices, intra-sectoral shifts have been significant but sectoral shares remained nearly static: the primary sector varied significantly around a mean share of 68 percent, while the secondary sector share moved from 7.4 percent in 1989 to 7.7 percent in 1994, and services rose from 25.2 percent go 26.5 percent over the same period. The intra-sectoral movements contrast strongly with the constant price data: the share of both government services and finance and insurance declined, while agriculture and manufacturing increased.

Which picture is correct? Shifts in output shares at current prices are influenced by relative price changes as well as relative variations in output. To the extent that current prices are volatile, short term variations can mask underlying structural trends. Statistics based on constant price data, however, can also be misleading, and the 1984-based weights can distort the significance of major changes. Supporting production statistics, however, confirm the trends in the constant price data. Nigeria’s industrial base has contracted significantly while the service sector has grown.

Structure of Gross Domestic Product, 1989–94

(In percent)

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Sources: Federal Office of Statistics, National Planning Commission; and staff estimates.

2. Consumption, savings, and investment 1/

While data on national accounts by expenditure category are provisional and rudimentary estimates, indications are that the share of gross national savings in GDP increased by 1.3 percentage points, to 15.2 percent in 1994, reflecting primarily a rise in federal government savings. Aggregate consumption is estimated to have remained roughly unchanged from 1993 in real terms, but the composition of consumption changed markedly, as the Federal Government limited expenditures on goods and services, while the rise in private consumption reflected, in part, the previously noted increase in the production of staple crops.

Gross domestic investment is estimated to have increased by almost 1 percentage point, to 17.7 percent of GDP in 1994. Government investment declined sharply, as the Federal Government tightened capital expenditure. Private investment, however, increased significantly from the abnormally low level of 1993, to 8.8 percent of GDP. Given the continued contraction in the secondary and tertiary sectors of the economy, the pick-up in private sector investment, to a level still below historical trends, is believed to be associated with previously noted developments in agriculture.

Composition of Gross Domestic Product by Expenditure Category at Current Prices, 1989-94

(In percent)

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Sources: Federal Office of Statistics, National Planning; and staff estimates.

GDP minus consumption.

Gross domestic disposable income minus consumption.

3. Prices

Inflation, as measured by the consumer price index, continued to climb in 1994, reaching 76.8 percent on an end-period basis. Unlike 1993, during which some three fourths of inflation was realized during the first half of the year, prices rose sharply in the second half of 1994, largely reflecting increasing expansionary fiscal and monetary policies. Inflation was also clearly influenced by shortages in foreign exchange, the effects of civil unrest, and the significant hike in the retail price of petroleum products at the beginning of October 1994. On an average annual basis, however, inflation remained steady at 57 percent.

During the first quarter of 1994 inflation was relatively constrained, with the aggregate CPI increasing by 9.7 percent and the principal sub-indices, those for food and energy, rising by 9.4 percent and 11.3 percent respectively. The 15.7 percent rise in the CPI during the second quarter was led by fuel prices, which increased by 29.9 percent, related to industrial actions in the petroleum sector. Price increases for other components of the CPI remained within the range of 10 percent to 20 percent, with food prices growing by 14.3 percent. Reflecting the October 1994 fuel price increases, the price index for accommodation, fuel and light increased by 44.3 percent during the third quarter and a 50.3 percent increase was registered in transport prices. Given the additional impetus of expansionary fiscal policies during the third quarter, food prices rose by 18.5 percent, and the overall CPI increased by 21.4 percent. For the year as a whole, food prices increased by 67.1 percent, prices for accommodation, fuel, and light rose by 139.8 percent, and price rises for transportation, health services, and household goods ranged between 97.5 percent and 105.4 percent.

Inflation in Nigeria

In a recent study on the main determinants of inflation in Nigeria, 1/ it was found that monetary policies, primarily resulting from expansionary fiscal policies, largely explained the inflationary process in Nigeria (Chart 2). In addition, the lagged impact of the devaluation of the naira and agroclimatic conditions were also important factors. A dynamic forecasting model was estimated based on these factors, which explained almost 70 percent of the change in prices over the 1963-93 period. This model, when used to project inflation in 1994, performed quite well, explaining about four fifths of the average inflation rate of 57 percent. In reviewing the prediction of the model against actual price developments in 1994, it is clear that several exogenous factors go a long way in explaining the difference between the projected and actual rates, including the civil disturbances in July/August and the 238 percent increase in the retail price of gasoline in October 1994.

Chart 2.
Chart 2.


(Annual percentage change)

Citation: IMF Staff Country Reports 1995, 143; 10.5089/9781451828856.002.A001

Sources: Data provided by the Nigerian authorities; and staff estimates.
1/ See “The Main Determinants of Inflation in Nigeria,” by Gary Moser in Staff Papers, Vol. 42 No.2 (June 1995), pp. 270-289.

4. Developmens in public finance

a. The structure of public finances

The Government of Nigeria consists of three tiers; the Federal Government, 30 state governments, and 589 local governments. It operates as a federation with responsibilities shared among the three tiers. In this regard, certain federally collected revenues are shared, including oil proceeds, customs duties, excise taxes, and revenue collected by the Federal Board of Inland Revenue, consisting mostly of corporate income taxes. These revenues accrue to the Federation Account, where they are distributed monthly to the three tiers of government: 48.5 percent to the Federal Government, 24 percent to state governments, 20 percent to local governments, and 7.5 percent to five special funds. The five funds include general ecology, development of mineral producing states, federal capital territory, stabilization, and derivation. In addition, the revenue generated from the value added tax, introduced in 1994, is separately shared between the federal (20 percent) and state governments (80 percent). 1/ Independent revenue, consisting mainly of loan repayments and profit remittances by parastatals, is retained by the Federal Government.

The Federal Government in recent years has excluded from its budget certain expenditures associated with investments in the oil sector, high priority investment projects, and other expenditures through a system of off-budget dedicated accounts. Between 1988 and 1994, an estimated US$12.4 billion was allocated outside the budget process. In a major effort to improve transparency in budgetary operations, beginning in 1995, the Government closed the dedicated accounts and included all oil revenue and related dedicated account projects in the budget.

In addition to the statutory allocations from the Federation Account, state governments receive revenue from income taxes, grants, the stabilization account, and other fees. They also finance expenditure with foreign project-related borrowing and domestic bank borrowing. Federation account resources are allocated to state and local governments, after deductions for debt service, based on a formula including equality (40 percent), population (30 percent), social development (10 percent), land mass/terrain (10 percent) and internal revenue (10 percent) indicators.

b. The Federal Government’s budget

The overall fiscal position of the Federal Government deteriorated substantially in recent years, with the deficit increasing from 2.9 to 18.1 percent of GDP during the 1990-93 period. It widened largely as a result of a decline in revenue buoyancy, resulting primarily from the terms of trade decline, and a rapid increase in nondebt expenditure (Chart 3).

Chart 3.
Chart 3.


Citation: IMF Staff Country Reports 1995, 143; 10.5089/9781451828856.002.A001

Sources: Data provided by the Nigerian authorities; and staff estimates.

The Federal Government’s budget for 1994 aimed at a tight stance of fiscal and monetary policies, with a view to lowering inflation, stimulating economic activity, and reducing pressures on the exchange rate. The budget entailed a sharp reduction in the overall fiscal deficit, from ₦ 126 billion (18.1 percent of GDP) in 1993 to ₦ 56 billion (5 percent of GDP) in 1994, and targeted an improvement in the primary fiscal balance, to a surplus equivalent to 1.9 percent of GDP, from a deficit of 6.3 percent in 1993. In an effort to broaden the tax base and reduce its reliance on oil receipts, the Government introduced a value-added tax in 1994, which covered domestic consumption, including imports, but exempted basic food items. The value added tax replaced the state sales tax, which had a significantly narrower base. The Federal Government retained 20 percent of total VAT revenue (estimated at ₦ 8.6 billion), with the remainder going to the state governments. Under the 1994 budget, the Federal Government’s access to central bank credit was to be limited to the temporary settlement of “contingent” expenditure, and outstanding balances in ways and means advances were to be liquidated at the end of each quarter, leaving the Federal Government’s net position vis-à-vis the Central Bank of Nigeria (CBN) at the level reached at the end of 1993.

The estimated fiscal outcome for 1994 deviated substantially from the budget plan. The overall fiscal deficit reached some ₦ 79 billion (8.8 percent of GDP), which was largely financed by central bank credit. The primary fiscal balance improved much less than envisaged, and recorded an estimated deficit of one percent of GDP.

Selected Fiscal Indicators, 1990-94

(In percent of GDP)

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Sources: Data provided by Nigeria authorities; and staff estimates.

Oil Revenue in Nigeria

Nigeria’s fiscal operations rely heavily on oil sector receipts. This reliance has continued unabated since the mid-1970s despite numerous efforts by the authorities to diversify the revenue base, most notably during the 1986-90 structural adjustment program period. Oil revenue has increased as a share of total revenue in recent years, increasing from 82 percent in 1986-89 to 84 percent in 1990-93, before dropping to 75 percent in 1994, largely on account of the fall in oil export prices and the introduction of the value-added tax. More importantly for 1994, the substantially overvalued official exchange rate affected oil revenue (in naira terms) significantly. For example, had a market exchange rate of ₦ 60 per US$ been used to convert the oil revenue to naira, fiscal oil revenue would have increased almost three fold.

Oil revenues derive from two sources: the operations of the Nigerian National Petroleum Company (NNPC), and its joint venture partners. The joint venture partners pay a royalty to the Federal Government of 19.6 percent of total exports and a profit tax of 85 percent. The joint venture partners are permitted to withhold certain amounts from their net export proceeds in the form of “notional” costs and guaranteed profits, both of which are denominated in U.S. dollars per barrel. The partner companies settle their actual tax liability to the Federal Government at the end of each company’s fiscal year.

Through the end of 1994, the NNPC was permitted to sell a specified number of barrels each day to cover its dollar-denominated costs (“dollar cash calls”) and to help finance its capital budget (“dedicated oil”). A certain number of barrels per day were also sold on behalf of the Federal Government, which accrued directly to an off-shore account. The NNPC’s net export proceeds (excluding dollar cash calls and all dedicated oil) were deposited in the Central Bank’s account at the Federal Reserve Bank of New York and the naira counterpart was deposited into the Federal Government’s “Royalty Account” at the Central Bank. The NNPC deposited the proceeds from domestic oil sales into this account as well, and withdrew funds to cover its naira-denominated costs.

The system for collecting oil revenue was modified substantially in 1995, when the Federal Government closed the off-budget dedicated accounts and began depositing the total amount of NNPC export proceeds directly into a Federal Reserve Bank account. From this account, the Government’s share of specific operating costs for the oil industry (“first charges” against the budget) are then deducted. This new process has improved both the budget coverage and transparency of oil revenue collection.

In addition to dollar export proceeds, the NNPC generates revenue from the domestic retail sales of petroleum products and is expected to pay the Federal Government both a notional cost for the crude oil it uses for domestic refining (at a transfer price in 1994 of ₦ 183 per barrel) and operational profits. In recent years, the NNPC has operated its domestic operations at a loss, as a result of the low retail prices set by the Government. It has not paid the Federal Government for crude oil in recent years. In October 1994, the retail price of gasoline was raised substantially (from ₦ 3.25 to ₦ 11 per liter), and the NNPC has since been able to pay a higher transfer price (US$17 per barrel) to the Federal Government. In addition, profits from domestic sales have been deposited into a newly created Petroleum Trust Fund account at the Central Bank, which is to be used for priority infrastructure and social sector projects.

Federally collected revenues were broadly in line with budget provisions, largely as a result of higher oil export prices (US$16 per barrel) than had been assumed in the budget (US$14 per barrel), which more than offset the shortfall in oil production (see Box 4 for a discussion of oil revenue in Nigeria). Federally retained revenue reached ₦ 98 billion, compared with ₦ 114 billion envisaged in the budget. The revenue shortfall can be attributed to the larger than anticipated allocation of federally collected revenue to the Federation Account, as well as lower independent revenue.

On October 5, 1994, the Federal Government raised domestic petroleum prices by an average of more than 200 percent, which helped considerably in reducing distortions in the domestic petroleum market. 1/ The fiscal impact of this measure was minimal, however, as the increased revenue resulting from the price changes was not transferred to the Federal Treasury.

Total expenditure of the Federal Government in 1994 is estimated at ₦ 176 billion, slightly in excess of the ₦ 170 billion provided by the budget. The relatively small departure from budget reflects, however, significant overruns in nondebt recurrent expenditure, which exceeded budgetary provisions by ₦ 14 billion (15 percent), mainly reflecting supplementary and extrabudgetary provisions, while domestic interest payments were some ₦ 11 billion below budget. 2/ The federal government deficit in 1994 was largely financed by recourse to credit from the banking system, totaling some ₦ 50 billion, equivalent to 5.5 percent of GDP, with the remainder financed through net foreign borrowing (₦ 16 billion), and nonbank domestic financing (₦ 13 billion).

c. State and local government finances

Information on state and local government finances is extremely limited and based largely on preliminary budget estimates and financing data, as reflected in the monetary accounts. The overall fiscal position of the state and local governments deteriorated in recent years, with the overall surplus falling from an estimated 2.7 percent of GDP in 1991 to some 0.3 percent in 1994, reflecting mostly diminishing revenue. The weakening of the fiscal positions of state and local governments has reduced considerably the ability of the Federal Government to borrow from the state and local government’s stabilization accounts (Box 5).

Stabilization Accounts

Part of the funds in the Federation Account are allocated to the Federation Stabilization Account, which was created in 1989 to sterilize windfall oil revenues. Based on partial financing data, it is believed that some US$13 billion was allocated to the stabilization account during the 1989-94 period. The Federation Stabilization Account has been used by the Federal Government to finance supplementary and extra budgetary spending, while distributions from this account to the state and local governments have been made on an ad hoc basis. As a matter of accounting, the Federal Government’s share is included as federally-retained revenue, while the amount allocated but not distributed to state and local governments is included as nonbank borrowing of the Federal Government.

5. Money and banking

a. Monetary developments

The Central Bank’s monetary and credit policy guidelines for 1994 targeted broad money growth at 15 percent, consistent with a programmed increase in domestic bank credit of 9 percent and a strengthening of the net foreign assets position of the Central Bank. Control of domestic credit expansion was to be effected primarily through the use of open market operations (OMO) of the CBN, with the supporting use of reserve requirements and operations at the CBN’s discount window. The issuance of mandatory stabilization securities by the CBN, though suspended under the guidelines, was retained as a fall-back instrument should the functioning of the OMO proved inadequate. 1/ The guidelines also introduced interest rate controls, with a maximum lending rate of 21 percent, minimum deposit rates within a range of 12 percent to 15 percent, and credit allocation guidelines for commercial and merchant banks.

In the event, monetary developments for 1994 differed sharply from the targets set under the policy guidelines. Broad money is estimated to have grown by 38 percent during the year, reflecting fully the expansion in net domestic assets with a broadly unchanged net foreign assets position. Credit to the Federal Government rose sharply, accounting for nearly two thirds of the total increase in credit, while credit to the private sector expanded by 33 percent.

Monetary Policy Targets and Outcomes

The Central Bank set targets for money growth, total domestic credit and credit to the private sector, based on the Federal Government’s budget and external sector policies. As shown below, outcomes have deviated significantly from targets in recent years. The growth of money, narrowly defined, exceeded target by an average 26.5 percentage points over 1991-94 and domestic credit grew by an average 59.8 percent, against average target growth of 12.7 percent. While targeted growth in net credit to the Federal Government has ranged between 0 and 14.5 percent, the expansion in banking system credit averaged 71.9 percent between 1991 and 1994.

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Sources: Central Bank of Nigeria; and staff estimates.

While the growth in broad money was similar during the first and second half of 1994, increasing by 18 percent and 17 percent, respectively, the underlying factors differed significantly. During the first half of the year, demand deposits increased by ₦ 15 billion (7.8 percent of beginning of period broad money) and time and savings deposits increased by ₦ 21 billion; part of these deposits were counterpart funds to back demand for official foreign exchange at the CBN. Currency in circulation was roughly unchanged during this period. During the second half of 1994, however, currency in circulation increased by 62 percent, reflecting primarily the worsening of the net federal government position vis-à-vis the Central Bank.

Contributions to the Growth of Broad Money, 1994

(In percent of beginning-of-period broad money)

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Source: Central Bank of Nigeria.

The fixing of interest rates below market clearing levels severely hampered the Central Bank’s ability to control credit developments in 1994 and the scale of open market operations was inadequate to significantly reduce the liquidity of commercial banks and, thereby, limit the expansion of domestic credit.

Sectoral Credit Allocation Guidelines

With the objective of promoting activity in priority sectors, the Government prescribes part of the distribution of total credit expansion. During 1992-93, commercial banks were required to allocate 15 percent of credit to agriculture and 35 percent to manufacturing, while merchant banks were required to allocate 10 percent of credit to agriculture and 40 percent to manufacturing. Beginning in 1994, the export sector was included in the credit allocation scheme and the overall share of credit subject to minimum allocation guidelines rose from 50 percent to 70 percent.

Banks that fail to adhere to the guidelines are required to deposit an amount equivalent to the shortfall, for each sub sector, with the Central Bank. These deposits earn interest, but do not count toward the minimum cash and/or liquidity reserve requirements.

On aggregate, neither commercial nor merchant banks adhered to the established distribution, with commercial bank credit to earmarked sectors 6.7 percentage points and merchant bank credit 2.7 percentage points below the limit, respectively.

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Source: Central Bank of Nigeria.

b. Interest rates

The capping of lending rates at 21 percent and the limitation of deposit rates to a range of 12 percent to 15 percent, led to a significant change in the structure of interest rates. The spread between the prime lending rate and savings deposit rates narrowed from an average of 15 percentage points in 1993 to 8 percentage points in 1994. Thus, the change in interest rate policy reduced the profitability of financial intermediation. In real terms, both lending and deposit rates became increasingly negative during 1994. 1/ The average real prime lending rate fell from -15.6 percent at end-1993 to -32.0 percent at end-1994, while the real rate of return on treasury bills fell from -20.6 percent to -36.4 percent in the same period.

c. Distressed financial institutions

By end-1994 the number of technically insolvent commercial and merchant banks had risen to 34 and an additional 8 banks were deemed illiquid. Combined, these distressed banks accounted for ₦ 17 billion (10 percent) of the deposit liabilities of the banking system and ₦ 16 billion (15 percent) of the outstanding loans and advances. More than two thirds of the aggregate loans and advances extended by these banks were non-performing and their adjusted net worth totaled - ₦ 5 billion.

Financial Savings in Nigeria

At end-1994 there were 66 commercial banks with 2,397 branches, 54 merchant banks with 144 branches, and 970 community banks operating in Nigeria. Other savings institutions included the National Provident Fund (NPF), over 279 primary mortgage institutions, and some 103 active insurance companies.

Commercial and merchant banks are, by far, the most important of the savings institutions, accounting for 94.1 percent of bank and non-bank financial savings at end-1994, with the other institutions having specialized roles in financial intermediation.

The NPF is the statutory recipient of obligatory pension contributions from businesses operating in Nigeria. At end-1994, deposits held by the NPF totaled some ₦ 758 million, less than 1 percent of total deposits.

Of the 279 primary mortgage institutions, with deposits of ₦ 1.1 billion, 150 have been declared to be distressed. In response to the distress in the sector, the Federal Mortgage Bank of Nigeria, charged with surveillance of these institutions, has raised the minimum capital requirement for entrants, and set deadlines for existing institutions to recapitalize in line with the new minimum set at ₦ 20 million.

Financial Savings at Bank and Nonbank Financial Institutions, 1989–94

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Source: Central Bank of Nigeria.

Distress in commercial and merchant banking has been traced, in part, to the rapid expansion in the sector following liberalization of the sector in the late 1980s. Audits of the distressed banks by the Nigeria Deposit Insurance Corporation and the CBN have identified management weaknesses and/or malfeasance as a critical factor in the banks’ poor performance. In response to this, the Federal Government issued a decree in 1994, supporting the investigation of banking abuse and providing penalties for malpractice in banking. 1/

Supervision of the Banking System

Nigerian banks operate under the Central Bank of Nigeria Decree of 1991 (CBN 1991) and the Nigeria Deposit Insurance Corporation Decree of 1988 (NDIC 1988), which provide regulators with broad ranging powers. Under CBN 1991, the Central Bank has discretionary authority to determine capital requirements and issue banking licenses. Accounting standards for financial institutions are issues by the Nigerian Accounting Standards Board (NASB) which includes, among others: the CBN, the Federal Ministry of Finance, the Nigerian Stock Exchange, and the Securities and Exchange Commission. The accounting standards are consistent with internationally recognized accounting practices for banks and other types of financial institutions. In addition, in 1994, the Financial Services Regulation Coordinating Committee, including the previously noted member of the NASB, was established to coordinate and harmonize standards for the various financial services institutions.

The “Prudential Guidelines for Licensed Banks,” issued by the CBN in November 1990, provide criteria for the classification of credit facilities, require that audited financial statements disclose the performance status of outstanding credits, and mandate provisioning for nonperforming credits. In assuring conformance with the Prudential Guidelines, the Central Bank is authorized to specify acceptable external bank auditors.

While the NDIC is responsible by law for conducting bank examinations and initiating corrective actions. In practice, NDIC works in tandem with CBN in carrying out bank supervision. The supervision system includes both extensive off-site examination of periodic reports submitted to the CBN, including balance sheets, income statements and supplementary schedules, and joint on-site special examinations of problem banks. In 1994, 152 off-site examinations were conducted on 35 commercial banks and 24 merchant banks. Thirteen special examinations into six commercial banks and seven merchant banks were also undertaken.

Nigeria: Structure of Interest Rates, 1992–94

(In percent, unless otherwise indicated)

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Source: Central Bank of Nigeria.

Nominal interest rate adjusted for changes in inflation over previous year.

6. External sector

a. Balance of payments

The external current account deficit widened slightly in 1994 to 2.9 percent of GDP, reflecting the impact of broad-based administrative controls and the deterioration of the terms of trade. Oil exports are estimated to have fallen by 16 percent, due to both a drop in the price (by 10 percent) and volume (by 7 percent) of oil. Non-oil exports fell sharply as well (by about 15 percent), largely reflecting a fall in cocoa and rubber exports. The impact of the decline in export revenue on the current account balance was largely offset by an 18 percent drop in imports which reflected foreign exchange shortages (Chart 4).

Chart 4.
Chart 4.


Citation: IMF Staff Country Reports 1995, 143; 10.5089/9781451828856.002.A001

Sources: Data provided by the Nigerian authorities; and staff estimates.1/ Based on the weighted average of official (65 percent) and foreign exchange bureau rates (35 percent).

Selected External Indicators, 1990–94

(In percent of GDP, unless otherwise indicated) 1/

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Sources: Data provided by the Nigeria authorities; and staff estimates.

Dollar GDP calculated on the basis of changes in real GDP, adjusted for the U.S. GDP deflator.

Includes impact of 1992 commercial bank debt reduction operation.

In months of imports of goods and nonfactor services.

In percent of exports of goods and nonfactor services.

The deficit on the capital account is estimated to have declined by US$0.5 billion, to US$1.7 billion, in 1994, largely as a result of lower amortization obligations and smaller short-term capital outflows. Official disbursements and private capital inflows remained low in 1994. As a result, the overall balance of payments deficit is estimated to have decreased from 10 percent of GDP (US$3.3 billion) in 1993 to 7 percent (US$2.5 billion) in 1994, which was financed by an accumulation of external payment arrears of US$2.7 billion.

b. External debt

Following the reduction in the stock of debt of about US$4.9 billion in 1992, Nigeria’s public and publicly-guaranteed debt has steadily increased, to US$31.2 billion at end-1994, including arrears. Bilateral official creditors, including some US$1.7 billion owed to mainly to Russia, India and Singapore, account for nearly 70 percent of the total debt stock at end-1994. The remaining debt was owed to multilateral creditors (14.1 percent), London Club banks (6.6 percent), and holders of promissory notes (9.8 percent). The latter notes, issued to refinance the outstanding trade arrears during 1984-87 owed to uninsured creditors, were rescheduled in 1988.

Since the 1991 Paris Club rescheduling, Nigeria’s external payments arrears have continued to increase, amounting to US$9.1 billion at the end of 1994. Arrears to Paris Club creditors and other official creditors are estimated at US$7.9 billion and US$1.1 billion, respectively. It is estimated that post-cutoff-date arrears totaled some US$580 million. Nigeria is current with commercial and multilateral creditors.

Scheduled debt service totaled US$4.6 billion in 1994, of which US$1.9 billion represented interest obligation. The largest part of debt service (70 percent) was due to the Paris Club creditors. In terms of exports of goods and nonfactor services, the debt service ratio remained high, at nearly 48 percent. It is estimated that Nigeria made nearly US$1.9 billion in cash payments in 1994.

c. Exchange rate developments

In the last few years, Nigeria’s exchange system was frequently changed (see Box 10), and in 1994 the authorities took a more drastic step by eliminating the free market for foreign exchange and pegging the exchange rate at a highly overvalued rate (US$1 - ₦ 22). As a result, pressures in the official foreign exchange market increased considerably. The demand for foreign exchange at the official rate was a multiple of the official supply, which declined from roughly US$3 billion in 1993 to US$2 billion in 1994, prompting the authorities to reduce the frequency of the allocation sessions from every fortnight to every three weeks. Measures in midyear to divert part of the demand to the foreign exchange bureaus by allowing them a margin of 10 percent above the official rate did not have its intended results, and mounting pressures translated into a widening of the spread between the official and parallel market exchange rates. By the end of 1994, the spread between the official and parallel rates was around 300 percent, compared with 100 percent at the beginning of the year. In real effective terms, the exchange rate appreciated by 150 percent in 1994.

Changes in the Exchange System, 1989-93

After the introduction of foreign exchange bureaus in August 1989, there were virtually two separate legal markets for foreign exchange in Nigeria. The foreign exchange bureaus--where the exchange rate was close to the parallel rate for much of the period--were allowed to deal in foreign currency notes and, to a limited extent, in travelers’ checks, but they were prohibited from opening demand deposit accounts and from sourcing foreign exchange from the banking system within Nigeria. Most of the country’s foreign currency receipts, including oil export earnings, were allocated by the Central Bank to the banking system. Initially the allocation was based on the relative size of banks measured in terms of paid-in capital. In mid-December 1990 the guaranteed quota were removed and a “Dutch auction” system was instituted.

During 1991 and early 1992, as inflationary pressures mounted, the spread between the official and foreign exchange bureau rates widened, from 16 percent in December 1990 to 78 percent in February 1992. The official exchange rate vis-à-vis the U.S. dollar depreciated by 17 percent, whereas the bureau rate depreciated by 80 percent over the same period.

On March 5, 1992 the foreign exchange auction system was replaced by an interbank system, under which the official exchange rate of the naira was freely determined in the interbank market. Consequently, the official exchange rate depreciated by some 57 percent, from ₦ 10.56 to ₦ 18.48 per U.S. dollar. The spread between the official and bureau exchange rates narrowed from 83 percent at the beginning of March to less than 5 percent immediately thereafter. With heavy intervention by the Central Bank, the official exchange rate remained stable through end-August, but depreciated subsequently to ₦19. 75 per U.S. dollar at end-December 1992. The spread between the official and bureau rates widened to around 15 percent in December.

Following several interruptions of foreign exchange sales owing to the inability to meet demand, the Central Bank reintroduced a Dutch auction system for the allocation of foreign exchange to authorized dealers in February 1993. The exchange rate depreciated by 22 percent to ₦ 24.9 per U.S. dollar for the first auction, and further to ₦ 30 in the second. The rapid depreciation of the currency prompted the Central Bank to peg the exchange rate, initially at ₦ 24.9 per U.S. dollar, and to allocate foreign exchange on a pro rata basis. The rate was subsequently revalued to ₦ 21.9 per U.S. dollar in April 1993. The pegging of the exchange rate in the face of rising inflation caused the spread between the official and foreign exchange bureau rates to increase to 112 percent by the end of 1993, from 20 percent a year earlier.


Oil production fell by 1.5 percent in 1994, to a level of 2.007 million barrels per day.


The accuracy of national accounts by expenditure category, as reported by the Federal Office of Statistics (F0S), is impaired by the serious underrecording of imports. As a result, the staff has developed its own estimates of income by expenditure category, incorporating data from partner country commodity export reports, available information on general government investment, and assumptions on the income elasticity of private consumption. See Appendix II of SM/91/195 for a more detailed presentation on this subject.


The Federal Government’s share was increased to 40 percent in 1995.


The retail price of premium gasoline was raised from ₦ 3.25 per liter to ₦ 11 per liter, diesel fuel from ₦ 3 per liter to ₦ 9 per liter, household kerosene from ₦ 2.75 per liter to ₦ 6 per liter, and fuel oil from ₦ 2.5 per liter to ₦ 7 per liter.


It should be noted that the fiscal results are reported on a cash basis. No systematic information is available on a commitment or transaction basis, and by implication it is not known whether domestic payments arrears have developed during 1994.


Mandatory stabilization securities are issued by the Central Bank of Nigeria by debiting the accounts of banks in exchange for 90-day nontransferable and nonnegotiable securities at an interest rate equivalent to the prevailing Treasury bill rate plus a small margin.


Real interest rates are evaluated by adjusting nominal interest rates for consumer price inflation over the preceding 12-month period. While forward looking price expectations might yield a more appropriate measure of real interest rates, the analysis of forward looking rates is difficult given the significant variability of inflation during the period under review.


Decree Number 18, “Failed Banks (Recovery of Debts) and Financial Malpractices in Banks,” November 9, 1994.

Nigeria: Background Papers and Statistical Appendix
Author: International Monetary Fund