1. Despite its rich resource endowment, Nigeria remains one of the poorest countries in the world, with a per capita GNP of only US$240 in 1996 according to World Bank estimates. In recent years, and in particular growth in the non-oil economy, has barely kept pace with population growth (estimated at 2.9 percent per annum). Policy reversals, widespread fuel scarcities, frequent interruptions in power and water supply, and fertilizer shortages have depressed private investment and dampened non-oil output growth. During the period 1995-97, however, Nigeria implemented prudent financial policies that have led to macroeconomic stabilization. Inflation declined sharply, real interest rates turned positive, and foreign exchange has been freely available at market-clearing prices for current international transactions. Economic growth, however, continues to be impeded by structural bottlenecks and by political uncertainties regarding the ongoing transition to civilian rule.

Abstract

1. Despite its rich resource endowment, Nigeria remains one of the poorest countries in the world, with a per capita GNP of only US$240 in 1996 according to World Bank estimates. In recent years, and in particular growth in the non-oil economy, has barely kept pace with population growth (estimated at 2.9 percent per annum). Policy reversals, widespread fuel scarcities, frequent interruptions in power and water supply, and fertilizer shortages have depressed private investment and dampened non-oil output growth. During the period 1995-97, however, Nigeria implemented prudent financial policies that have led to macroeconomic stabilization. Inflation declined sharply, real interest rates turned positive, and foreign exchange has been freely available at market-clearing prices for current international transactions. Economic growth, however, continues to be impeded by structural bottlenecks and by political uncertainties regarding the ongoing transition to civilian rule.

I. Recent Economic Developments

1. Despite its rich resource endowment, Nigeria remains one of the poorest countries in the world, with a per capita GNP of only US$240 in 1996 according to World Bank estimates. In recent years, and in particular growth in the non-oil economy, has barely kept pace with population growth (estimated at 2.9 percent per annum). Policy reversals, widespread fuel scarcities, frequent interruptions in power and water supply, and fertilizer shortages have depressed private investment and dampened non-oil output growth. During the period 1995-97, however, Nigeria implemented prudent financial policies that have led to macroeconomic stabilization. Inflation declined sharply, real interest rates turned positive, and foreign exchange has been freely available at market-clearing prices for current international transactions. Economic growth, however, continues to be impeded by structural bottlenecks and by political uncertainties regarding the ongoing transition to civilian rule.

Selected Growth and Inflation Indicators, 1992-97

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A. Economic Growth and Price Developments

2. Economic activity in Nigeria picked up modestly from its previously low growth rates in 1996-97, as growth in real GDP averaged 4 percent, compared with an average of under 2 percent over the period 1992-95 (Appendix Table 17).1 The recovery was underpinned by steady growth in the petroleum sector, which comprises over 40 percent of GDP and which benefited from buoyant world market demand and high international prices (Appendix Tables 16 and 20). Value added in the petroleum sector rose in real terms by 6.9 percent and 4.4 percent in 1996 and 1997, respectively. Growth in non-oil GDP, however, remained sluggish at about 3 percent, as modest growth in the agricultural sector was offset in part by low growth in the industrial and services sectors (Figure 1). Influenced mainly by timely and adequate rainfall and lower incidence of pest and disease outbreaks, agricultural production rose by 3.7 percent in 1996 and 4.1 percent in 1997 (Appendix Table 17). While output increased for both export and food crops, shortages in the supply of fertilizer led farmers to shift production away from fertilizer intensive crops such as maize, to other crops, such as sorghum, yams, and cassava (Appendix Table 21). During 1996-97, the growth performance of the livestock and forestry subsector was much below the average for the agricultural sector, while the fisheries subsector grew at a rate much higher than the average. Growth in manufacturing production, however, declined from 1.0 percent in 1996 to 0.7 percent in 1997 on account of chronic fuel shortages, continual power outages, weak domestic demand, and large buildups in inventories (Appendix Table 22). Service sector growth also remained low, averaging only 2.3 percent during 1996-97, owing in part to a decline in government services.

Figure 1.
Figure 1.

Nigeria: Developments in the Real Sector, 1990-97

Citation: IMF Staff Country Reports 1998, 078; 10.5089/9781451828870.002.A001

Sources: Federal Office of Statistics; and staff estimates.

3. Inflation, as measured by changes in consumer price index, receded for the third consecutive year, falling from a peak of 77 percent in 1994 (end-of-period rate) to 10 percent in 1997 (Figure 1 and Appendix Table 23). The deceleration in the rate of increase in the price level was most pronounced with regard to food, accommodations, and fuel and light, both in urban and in rural areas (Appendix Tables 24 and 25). The decline in overall inflation was largely the result of the authorities’ conservative financial policies and the improved supply of foreign exchange for imports. Low domestic demand, along with the good harvest, also contributed to the reduction in inflationary pressure. The reported national unemployment rate which grossly understates the slack in the labor market, rose from an average of 1.9 percent in 1995 to an estimated 4.5 percent at end-1997 (Appendix Table 26).2

B. Developments in Public Finance

4. The consolidated government’s fiscal position improved substantially during 1995-97 (Appendix Table 27).3 After recording an overall deficit equivalent to 8.8 percent of non-oil GDP in 1994, the consolidated government recorded overall surpluses for three consecutive years, on account of both higher revenues and relatively lower growth in public expenditure. Improvement in the revenue outturn was reflected in both oil and non-oil receipts. In response to increased production and favourable world oil prices in 1995 and 1996, proceeds from petroleum exports, the petroleum profit tax, and the petroleum royalty increased on average by some 22 percent per annum. Domestic petroleum product revenue, on account of the October 1994 price increase, rose from ₦6 billion in 1994 to ₦59 billion and ₦72 billion in 1995 and 1996, respectively.

5. Nonpetroleum revenues also increased substantially during the period. Sizable gains were generated in the form of profits from sales of foreign exchange in the newly created autonomous foreign exchange market (AFEM), which yielded ₦79 billion in 1995 and ₦103 billion in 1996. The implementation of the value-added tax (VAT), which was introduced in 1994, continued to demonstrate its buoyancy and acceptability as an important and growing source of government revenue, rising from ₦7 billion in 1994 to ₦21 and ₦31 billion in 1995 and 1996, respectively. Customs duties and levies have increased, reflecting the positive impact of customs administration and port reforms introduced in 1996, as well as the resurgence in imports in light of the increased availability of foreign exchange. Federal government independent revenue, however, declined in 1996, owing due largely to the inability of most parastatal and public enterprises to remit dividends and operating surpluses to the federal government. The collection of state government independent revenues, of which the personal income tax is the major component, continued to improve, rising from ₦12 billion in 1994 to ₦19 billion and ₦22 billion in 1995 and 1996, respectively (Appendix Table 38).

6. Since public expenditure was budgeted on the basis of an assumed oil price that was below that prevailing in the world market, increases in recurrent and capital outlays in 1995 and 1996 were held well below those of revenue. As share of non-oil GDP, total expenditure declined in 1996 relative to 1995, with real reductions in both recurrent and capital expenditure. Declines in recurrent expenditure occurred on account of the continued freeze on civil service wage scales, the containment of interest payments on domestic debt at below-market rates, and the capping of external debt service payments at the equivalent of US$2 billion per year. Nominal capital expenditure was held largely in check.

7. In 1997, the consolidated fiscal balance remained in surplus, although it declined as a share of non-oil GDP to 2.6 percent from 9.2 percent in 1996. Crude oil receipts rose by 11 percent, largely because the increase in production more than offset the decline in world oil prices, which began to tumble only during the fourth quarter of the year.4 Revenues from domestic petroleum products declined by 10 percent to ₦65 billion, however, owing to the problems with the domestic refineries and the inability to supply the domestic market. Nonpetroleum revenues increased by 9 percent, with increases in income taxes, customs duties, and the VAT more than offsetting a ₦13 billion fall in AFEM profits.5 Total expenditure, however, rose by one-third, led by a doubling in budgetary capital expenditure, the full-scale rolling out of capital expenditure by the Petroleum Special Trust Fund (PSTF), and increased recurrent expenditure on goods and services, as well as on domestic interest payments. Payments on external debt continued to be capped at the equivalent of US$2 billion, and foreign-financed capital expenditure declined.

C. Monetary Developments

8. Consistent with the fiscal stance, monetary conditions remained tight during 1995-97, as growth in the monetary aggregates showed a remarkable deceleration compared to the previous period (Appendix Table 39). After having increased on average by 47 percent and 54 percent in 1993-94, annual growth in broad money and narrow money averaged only 14 percent and 16 percent, respectively, in 1995-97. Monetary growth during this period was influenced primarily by the large increases in net foreign assets, the sizable buildup of deposits by the PSTF, the impact of the AFEM on the demand for credit, and the repurchase of stabilization securities held by merchant and commercial banks, as well as overall improvements in the government’s fiscal operations. Net foreign assets of the banking system shifted from a negative position in 1994 to a positive balance of ₦62 billion in 1995 and grew on average by 73 percent in 1996 and 1997, largely on account of increased oil receipts. A counterpart to the increases in net foreign assets was the large buildup of government deposits held at the central bank in the form of sterilized oil receipts. The combination of these deposit balances and the improvements in the consolidated government’s overall fiscal operations triggered a fall of 83 percent from ₦258 billion in 1995 to ₦44 billion in 1996 and, subsequently, a negative balance (i.e., deposits exceeded claims) of ₦26 billion in 1997. With credit to the private sector increasing on average by 37 percent per annum in 1995-97, domestic credit declined from ₦435 billion in 1995 to ₦263 billion in 1996 before rising marginally to ₦275 billion in 1997. Credit to the private sector rose during this period largely because economic agents had to secure additional funds in order to meet the naira cover requirement for acquiring foreign exchange in the AFEM.6

9. Throughout the period, the banking system was awash in excess liquidity, forcing the monetary authorities to take corrective action. The PSTF initially held its sizable and growing deposit base at the central bank, where it was effectively sterilized.7 In order to earn market rates of interest, the PSTF shifted substantial portions of its deposit base to the commercial and merchant banking system. This shift, combined with the repurchase of stabilization securities held by the merchant and commercial banks in 1996 and the low level of aggregate demand prevailing in the economy, resulted in banks holding excess reserves in the amount of ₦15 billion in 1995, ₦21 billion in 1996, and ₦31 billion in 1997 (Appendix Tables 43-44). The authorities responded by conducting open market operations, intervening in the AFEM, suspending the release of the remaining balance in outstanding stabilization securities, encouraging the PSTF to lodge its deposits at the central bank, and delaying the proposed transfer of government accounts from the central bank to the commercial and merchant banks. While these measures assisted in reducing excess liquidity during the period, the ability of the central bank to mop up the remaining excess liquidity was constrained by the capping of interest rates in open market operations, which, until the last quarter of 1997, yielded negative real rates of interest.

D. External Developments

10. During 1995-97, Nigeria’s balance of payments position improved substantially, largely on the strength of its oil exports. The current account balance improved from a deficit of 12.4 percent of non-oil GDP in 1994 to 5.4 percent of non-oil GDP in 1995 (Appendix Table 48). It improved further in 1996 and 1997, as the current account balance turned from a deficit into a surplus. Gross official reserves increased from about US$1.4 billion in 1994 to US$1.8 billion in 1995 and reached about US$7.5 billion by the end of 1997.

11. During the period, Nigeria continued to be heavily dependent on crude petroleum, which accounted for more than 95 percent of the country’s total exports. With steady increase in both price and volume of production, crude oil export proceeds grew by a nearly 25 percent in 1995 and a record 37 percent in 1996, as the value reached US$15.8 billion in that year, the highest in recent years. However, in 1997, the value of oil exports declined by about 6 percent, to US$14.9 billion, on account of a decline in average oil prices from US$20.8 per barrel in 1996 to US$19.7 per barrel. Despite this decline, the terms of trade improved by about 5 percent in 1997 owing to an offsetting decline in average import prices. With the improvement in price competitiveness resulting from the introduction of market based exchange rate (see Chapter V), non-oil exports recovered during 1995-97 from their generally low level in the early 1990s. After years of stagnation and low growth, non-oil exports (mainly agricultural products) recorded a robust growth of about 23 percent in volume terms in 1997, albeit from a very low base, largely as a result of improved competitiveness and buoyant prices of primary commodities (Appendix Table 49).

12. With the implementation of liberal policies, as well as some policy-induced expansion in public sector imports, total imports increased unevenly during 1995-97. The growth in the value of imports (resulting mainly from non-oil imports) was particularly high in 1995 (26 percent) and in 1997 (49 percent) with a decline (29 percent) intervening in 1996. While public sector imports grew substantially in 1995 and 1996 (by some US$800 million each year), the high growth in 1997 was largely driven by non-oil private sector imports, reflecting a recovery from an unusually low level recorded in 1996. Non-oil imports were unusually low in 1996 largely due to bottlenecks in clearing goods at ports and possibly some under-recording of imports.8

13. During 1995-97, the country also received progressively larger amounts of private transfers from Nigerians living abroad; this total reached US$1.5 billion in 1997, in response to improved incentives and the implementation of liberal policies. Given the upturn in imports and some decline in exports, the current account surplus declined to the equivalent of 8.3 percent of non-oil GDP in 1997, compared with about 31 percent of non-oil GDP in 1996. The latter surplus was made possible by a combination of the high value of oil exports resulting from high oil price and unusually low level of non-oil imports noted above. Net inflow of private capital (direct investment) increased in 1997, responding partly to the improved macroeconomic environment. The overall capital account balance, however, remained in deficit because amortization due on external debt exceeded the level of new official borrowings, which were deliberately limited (see Chapter VI).

14. The overall balance of payments, for the first time in recent years, recorded a small overall surplus of about US$124 million in 1997 compared with deficits of US$803 million in 1996 and US$2.2 billion in 1995 (Appendix Table 48). Gross international reserves rose from about US$4.2 billion (5.6 months of imports cover) in 1996 to over US$7.5 billion (7.1 months of imports cover) in 1997. With cash payments for external debt service totaling only US$1.9 billion in 1997, compared with US$5.2 billion in debt service due, the stock of arrears on external debt continued to increase reaching US$3.2 billion to US$15 billion in that year, while the total stock of external debt (including arrears) stood at US$28.7 billion, equivalent to about 75 percent of GDP (see Chapter VI).

1

This discussion is based on staff revisions of the national accounts, which are described in Chapter II.

2

The estimates refer to “open” unemployment captured by the Federal Office of Statistics (FOS) surveys. In the past, the FOS has not made any attempt to measure “disguised” unemployment.

3

The derivation of the consolidated government accounts is described in Chapter IV.

4

In addition, there is a two month lag in the receipt of oil revenues.

5

AFEM profits declined because a larger portion of foreign exchange demand was being met from central bank sources, which were purchased from private parties at the AFEM rate and which, hence, did not generate profits. Only foreign exchange purchased at the official rate from the government and subsequently sold in the AFEM generate profits.

6

The high levels of inflation and the relatively low interest rates on borrowing also contributed to private sector demand for credit early in the period.

7

The PSTF held deposits of ₦7 billion, ₦51 billion, and ₦49 billion in 1995, 1996 and 1997, respectively. These deposits accumulated because the PSTF did not begin full-scale operations until 1997—long after its creation in 1995, when it began receiving transfers from the Petroleum Trust Fund.

8

The large negative short-term capital (net) in 1996 possibly reflects an offsetting entry to the unusually low imports officially recorded in that year.

Nigeria: Selected Issues and Statistical Appendix
Author: International Monetary Fund