19-VA-Macrodev by Agence Française de Développement

May 2015 / N

Macroeconomics and Development

Introduction With 180 million inhabitants, Nigeria is the most p opulous country in Africa. Its economy is also the strongest. Just twice as large as France in size, its p eople are also very diverse: more than 250 distinct ethnic groups call it home. The northern part of the country is p rimarily Muslim, while the southern part is primarily Christian. Along with such a heterog eneous mix of ethnicities, and a tenuous balance of power, is a wealth of energy resources that are unequally d istributed in favour of a few in the south west of the country. Exploitation of natural gas and oil reserves has p rovided the financial basis for development in the country, but income disparity has always been a significant issue. It crystallises existing tensions that have been exacerbated even further by ethnic and religious divides. For more than three decades, economic growth has been fuelled by oil extraction. Since the turn of the 21 st century however, there has been a shift towards tertiary services which has meant a decrease in the contribution of oil and gas to the wealth of the country overall. Growth has ensued at a stable, regular pace, and has enabled significant progression in terms of income per capita, which in real terms has more than doubled since the beginning of the decade (now more than 3,000 USD). Nonetheless the growth path of the Nigerian e conomy is only tangible for a lucky few. The sheer number of people who live in poverty – 62% of the population in 2010 made under 1.25 USD per day in

Nigeria: The Restrained Ambitions of Africa’s Largest Economy Slim Dali Department of Macroeconomic Analysis and Country Risk dalis@ afd.fr

terms of p urchasing parity power (PPP) – reveals the acute income disparity in the country. Furthermore, i nequality is on the rise. Three central hubs of activity have developed around Abuja (the administrative capital, in the centre of the country), Lagos (the e conomic capital, in the south west), and Port Harcourt (the oil region, in the south east), which has e xacerbated the polarisation of revenues. Over the years, marked differences between the north and south regions have appeared in terms of economic disparity. Potential drivers of growth do exist in Nigeria, h owever. These cannot be unleashed without addressing the shortcomings of power generation, reforming the oil and gas sector, and solving the issues of institutional corruption that beset the country. Such are the main challenges for President Buhari, whose recent election was an historical changeover, and who seeks to consolidate the country’s democratic regime. The first part of the present study aims to describe the

socio-political context of Nigeria, and will enable us to understand the second part, which focuses on e conomic growth and its constraints. Then, the federal p ublic finances will be a nalysed, and the effects of the dependence on oil

revenue will be made explicit. Finally, the fourth part of the study shall present the country’s financial system, ending in an inquiry into the external aggregates of the economy in the context of low oil prices.

Index INTRODUCTION 1

4. BANKING SUPERVISION HAS IMPROVED BUT THE FINANCIAL SYSTEMS REMAINS EXPOSED

1.1. A fragile but strengthening democracy

3 3

4.1. A concentrated banking sector that only modestly finances economic activity

1.2. Dynamic economic growth is still accompanied by exclusion

4.2. A profitable sector with high exposure to the oil industry

1.3. Historical violence and tensions that aggravate the socio-political landscape

4.3. Supervision of banks has been reinforced but vulnerabilities remain

5 A MONO-EXPORT ECONOMY EXPOSED TO A DOWNTURN IN PRICES

1. REGIONAL DISPARITY AGGRAVATES ISSUES OF VIOLENCE

2 A DYNAMIC ECONOMY BUT DEPENDENT ON THE OIL SECTOR 2.1. Sustained and less volatile growth 2.2. A more diversified economy but with serious infrastructure shortcomings 2.3. Foreign trade is exposed to volatile oil prices

13 17

3. SATISFYING SOLVENCY BUT LIQUIDITY PRESSURES REMAIN

3.1. A limited level of public debt that is partly held by non-residents

3.2. A budget implementation that is vulnerable and exposed to oil prices

3.3. The risk of non-sustainability of public debt remains low but vulnerabilities are increasing 3.4. An unfavourable credit history

12 12

24 26

5.1. Energy exports, determinants of current account positions 5.2. Low external capital flows 5.3. External liquidity is under increasing tension

35 37 37

CONCLUSION 39 LISTE OF ACRONYMS AND ABBREVIATIONS 40 BIBLIOGRAPHIC REFERENCES 41

1. Regional disparity aggravates issues of violence Nigeria is a vast country – twice the size of metropolitan France – inhabited by nearly 180 million people. Its tumultuous political history following the declaration of independence led to the beginning of a democratic regime in 1999. Every four years, the president of the republic is elected by universal suffrage, as are the members of the two parliamentary chambers, the thirty-six federal state governors, and the assembly for each state. Even so, Nigeria’s political and institutional systems remain affected by several fundamental issues.

1.1. Dynamic economic growth

is still a ccompanied by exclusion

A tumultuous political history The deep-seated roots and routes of Nigeria’s history have taken hold over the passage of caravans, and the kingdoms of various ethnic groups. From the year 900 to 1500, the country was composed of several different territories whose borders were defined not by their present definition but by traditional ethnic rule, such as Yoruba, Ibo, Hausa, Nupe, Kanem, and the Borno, to name a few. The geographical distribution of ethnic groups, however, was not much d ifferent from its present configuration (See Map 1). First contact with Europeans took place in the fifteenth century, when the Portuguese set to exploring the south west part of the country (Uwechue, 1971). They were soon followed by the English, who explored the coastlines from 1539 onwards, and who established their first colony midway into the nineteenth century. At the same time, in 1804, the interests of Usman dan Fodio (of Fulani ethnicity) collided with those of the Hausa kingdom, whom he accused of having abandoned the precepts of Islam. [ 1] He founded the caliphate of Sokoto, whose influence extended throughout what

is now the north of the country. At the head of each conquered territory, an emir was appointed. Following the Berlin Conference in 1884-1885, which determined many of the current boundaries of Nigeria, and which approved English occupation of the country, in 1906 the English Crown would administer both the north and the south as two p rotectorates. These would later be merged in 1914, but would retain a significant part of their autonomy, thereby representing the starting point of an unified country with federal system that was to be formally introduced by the 1946 constitution. [ 2 ] As a result of the emergence of nationalist movements that arose in the wake of World War II, Nigeria emancipated itself from the British imperial administration in 1960 and constitutionally became a republic in 1963. From 1966 onwards, a long, tumultuous period characterized by military coups d’état and a bloody secessionist conflict arose: the Nigeria Civil War, or Biafran War (1967-1970). Pressure escalated after the proclamation of the republic of Biafra in three oil-producing states in the east of the country. Central to the problem was ethnic tension against the Ibos (who were originally from the regions in question, see below), and the federal government’s increase in power (which followed the administrative division of Nigeria from four into twelve states just two months earlier). [ 3] More than one million people perished in the civil war. Both Nigerian society and the federal republic were beset with the dual issues of ethnic antagonism and centralization of power from the outset. Overall, the political history of Nigeria from independence onwards can be said to be particularly agitated, with the assassination of three heads of state, the successful staging of six coups d’états (in addition to a number of aborted attempts), the onset of a civil war, and thirty years of military regime. Return to democracy in 1999 emerged in a context in which the country had been divided

[1] The introduction of Islam to Nigeria dates back from the 9th century and occurred via trade routes. [ 2] The capital of the Federation of Nigeria was Lagos (which had a status of crown colony from the end of the 19th century until 1914), and the regions of the west, the east, and the north, which were bounded by the Niger and Benué rivers. [ 3] After a countercoup in July 1966, General Aguiyi-Ironsi, of Ibo ethnicity, was assassinated, mostly for having wanted to abolish the federal character of Nigeria and for his incapacity to produce a constitution that would serve the interests of all regions. After this event, thousands of Ibos were massacred in the north of the country, dominated by the Haussa-Fulani. The flight of hundreds of thousands of Ibo to the south east, where Ibos are dominant, has been one factor of Biafra’s secessionist impulses.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

into thirty-six individual states, each whose federal capital was located in the center of the country (in 1999), and whose political parties were no longer allowed to be based on ethnic grounds.

A centralized federal government for a diverse population The creation of states and local administrative structures in Nigeria – of which there are thirty-six states and 774 local authorities – are an expression of two factors: the diversity of the population (which is comprised of more than 250 distinct ethnicities), and the abundance of crude oil resources. In fact, in response to changing historical c ircumstances, the adoption of a federal system has meant a more consensual relationship to governance in the country. For example, the first territorial redrawing of boundaries in 1967 was the result of a desire to reduce the amount of power that was exerted by the three large geo-ethnic conglomerates, which represented nearly one third of the total population in Nigeria (Hausa-Fulani, Ibo, and Yoruba) [Bach, 2006]. At the same time, the existence of oil r esources in certain regions, most notably in the south west, fuelled their desire for autonomy. Such was the impetus for the war of Biafra, and which from the end of the conflict onwards, amplified the perceived need for constituency changes. The creation of new states was funded by oil revenues, which were considered to be nearly inexhaustible. It occurred as an instrument for responding to the demands for autonomy or for access to national resources (Bach, ibid. ). In the case of Nigeria in particular, the multiplication of administrative entities was accompanied by the reinforcement of centralized power, on which the regions highly depend – especially when it comes to the distribution of oil revenues. In fact, the centralization of financial resources by the federal government after independence meant that thirtysix p rogressively-created states would directly dependent on national funds. Before independence, in the 1950s, this was not the case: funds from import and export taxes were directly paid back to the regions. Such a dual process of reinforcement of the federal government, with its centralizing character accompanied by the multiplication of states and local governments, forms the basis of the Nigerian federal system. It has been described as a form of “federalism by fission” (“ fédéralisme scissipare ” – (Bach, 1991).

The 1999 Constitution decreed that finances from oil revenues would be divided among the regions in the following manner: 39% to the federal state, 20% to the individual states, and 15% to the 774 local governments, and 13% to special funds. The oil-producing regions in the Niger Delta in turn receive an additional 13% of fiscal resources, in application of the “principle of derivation” (see Box 3 for more details), [4] but this does not suffice to calm those who feel that revenues should be returned directly to the territories in which they are generated. In their eyes, the money is rightfully theirs (Bach, 2006). Instead, the funds are allocated to various federal bodies, such as the states, and the local governments, and are used in a discretionary fashion. Finally, another particularity in Nigeria is the existence of a legal pluralism at the heart of the federation, in which courts for general or common law operate alongside courts for Islamic law (for both civil and penal affairs) [5] in the twelve northern states in which Sharia law is applied.

Map

Distribution of main ethnic groups in Nigeria

Source: Lamm (2014).

[ 4] Between 1969 and 1989, this share went from 50% to 1%, before going back up to 3% in 1992 (Sébille-Lopez, 2005). [ 5] The application of Sharia law is rooted in an ancient historic tradition, revitalized in the early 19th century with the establishment of the Caliphate of Sokoto (Usman dan Fodio’s jihad, see above). It was limited to civil affairs and it is its purview that has been extended to penal affairs starting in 1999. Common right upheld by federal courts always has primacy over Islamic tribunals however.

1. Regional disparity aggravates issues of violence

Consolidating a nascent democracy… In favour of the 1999 Constitution, the fourth republic of Nigeria introduced a federal parliamentary system based on the separation of power and governed by a strong p resident. Along with the 360 representatives of the lower chambers, the 109 senators, the thirty-six governors of federated states, the Assembly of each state (which includes twentyfour to forty elected officials), and the councillors of 774 local administrations, the president is elected by universal direct suffrage for a mandate of four years, renewable only once. More specifically, officials are elected by a singlemember majority constituency system – more commonly known as a “winner-takes-all”, or “first past the post”, s ystem (Engelsen, 2011). In order to be elected in the first round of the presidential election, the candidate must s imply receive the majority of the votes, in addition to 25% of the votes in at least two-thirds of the thirty-six states and the federal capital. This has been the case since 1999. State governors are elected in the same way – they must obtain 25% of the votes in two-thirds of their constituency.

… in a context rife with corruption Putting into place a reinforced centralised federal parlia mentary system at the same time as a division of regional boundaries is ripe terrain for the development of corruption in the political economy. Indeed, the political economy in Nigeria has been characterized by a complex network of cronyism – be it at the federal level, the state level, or at other administrative levels. Equitable distribution of the income from oil and gas sectors is a central challenge. Allocated oil revenues are often used by governors and presidents who can never completely be sure of being reelected (Fouchard, 2007). What gives rise to the r edistributive and discretionary character of financial resources is the inexistence of constitutionally-mandated checks and b alances on the budget. At the same time, the oil sector is rife with corruption. To provide a specific example, the p revious president of the Bank of Nigeria and the Emir of Kano, Lamido Sanusi (who was dismissed in February 2014) accused the Nigerian National Petroleum Corporation (NNPC) of having redirected 20 billion USD between January 2012 and July 2013. [6] According to a 2015 estimation, corrupt practices account for 30% of the cost of all business in Nigeria (HIS, 2015). Economic indicators d istributed by the NGO Transparency International, and the

World Bank, reveal the widespread nature of corruption and the weaknesses of the administration. Nigeria, in fact, ranks as the 35 th country with the poorest governance out of a total of 210, according to 2013 World Bank figures. In the year 2000 measures were taken to clamp down on such activity in the public service, and anti-corruption laws were adopted. These enabled the creation of the Independent Corrupt Practices Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC). Nonetheless, the power of the ICPC is restricted by the fact that deputies and senators have amended the laws governing the institution: it cannot press charges and it can only conduct an investigation after an official complaint has been filed in court. [7]

Politics driven by political parties The gradual changes towards a centralized federal parliamentary system have enabled the representation of political elites from each individual state, even if this type of federalism has been ineffective at promoting the representation of minorities from every region (Fourchard, ibid .). Since the return to democracy in 1999, Nigerian political parties no longer lay claims to ethno-regional identities, something that is reinforced by the first-past-thepost polling system. They are instead transformed into political vectors for the candidates in the different elections, obliging the candidates to forge alliances outside their ethno-geographical persuasion. The fact that candidates must now garner public support has deterred them from basing their platforms on issues that could bring about political, ethnic, or religious dissention (Bach, 2006) – at least, when it comes to one party dominating the entire political arena. In fact, since 1999 and until just recently (2015), the People’s Democratic Party (PDP) has been in power and has dominated Nigerian politics in the sense that the candidates have found themselves systematically e lected in every round of the elections (in 1999, 2003, 2005, 2007, and 2011), and/or the majority in the assemblies (55.5% of seats in the lower chambers and 65% in the higher chambers in the case of the 2011 elections). The PAP generally follows an implicit rule that the presidency will be occupied first by a president from the north (which is primarily Muslim), followed by one from the south (which is primarily Christian). In addition to this internal practice are other applications of the federal doctrine, such as the inclusion of diversity in the composition of the federal cabinet (in that there must be at

[ 6] An audit by PriceWaterhouseCoopers, certain conclusions of which have been made public, estimates that a minimum of 1.48 billion USD have been embezzled by the NNPC. [ 7] For instance in March 2013, a former governor of the state of Bayelsa was pardoned by president Goodluck Jonathan after having been found guilty of corruption.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

least one minister from each of the thirty-six states), the cabinet of governors, the presidential nominees, the composition of the armed forces, and the federal administra tions. This constitutional obligation is extended to each state in the federation, and a federal commission is there to ensure that the principle is followed. The federal doctrine is based upon differences between what constitutes native and non-native Nigerian citizens within each state (or locality) (Bach, ibid .). However, the standard definition is based on bloodlines, and not on residence (though a constitutional amendment adopted in 2005 made allowances for ten-year residents). The simple fact that in many cases it is impossible to prove what one’s state or region of origin truly is means a significant number of people claim to be stateless. They are thus excluded from the process of designating their government. Finally, the number of people who have been displaced because of the violence of Boko Haram in the three north-western states – which is estimated to be approximately 1.5 million – adds to the proportion of “s econd-class” citizens. [8]

Electoral periods are systematically troubled by violence Between 1999 – when the country returned to a regime of civil government in which parties were determined by democratic vote – and 2015 – the date on which the e lections were peaceful –, elections in Nigeria have been associated with violence. Historically, violence during election periods was orchestrated by the parties themselves, who would recruit a whole range of subcontractors, including unions, political entrepreneurs, militias, associations, chiefdoms, and religious organizations (cf. Fourchard, 2007). These form an integral part of political strategy: p arties recruit gangs (often by way of intermediaries such as entrepreneurs) to promote violence and extort money from citizens by way of racketeering, thereby ensuring the party of a source of revenue throughout the campaign. The spring 2015 elections were an exception to the rule that such activities tend to accompany the polling process – be it through intimidation, controversy around ballot counts, or that the number of actual ballots that exceeds the number of people in the constituency, such as in 2007, for example. Violence between groups of rivalling political interest, or between the police and members of the opposition, is not

uncommon. Every election is followed by a number of court appeals by the opposition, contesting the results. Finally, no measures are taken to limit or to regulate the procedures of financing elections. Common are the contributions made by certain extremely wealthy people who are able to draw upon personal resources, or those of the state, to finance election campaigns or to support certain candidates. [9]

… Particularly due to the mobilization of ethnic and religious sentiment Despite the fact that the 1999 Constitution allows a leader to serve two successive mandates, the PDP adheres to a tacit agreement to alternate the presidency between the north and the south. However, tension mounted when in August 2013, Goodluck Jonathan – a Christian from the oilproducing region in the south Delta – announced his i ntention to seek renewal in the 2015 elections. Deep-seated differences in opinion began to weaken party solidarity, and led several members (of whom seven were members of the state) to join forces with a coalition of four opposition p arties: the All Progressives Congress (APC). Formed in 2013, the party unites Christians and Muslims, despite the fact that the former fear that the latter may have more i nfluence. Muhammadu Buhari, a general from the north was thus the APC candidate during the primaries, before being elected president in March 2015. A Muslim of Fulani ethnicity, he had already been president once before, following a coup d’état in 1983. Nigeria’s political landscape is thus moving towards a two-party system that is likely to put an end to the hegemony of the PDP. In fact, following the last elections, the composition of the two assemblies is for the first time equal (225 seats for the APC, and 125 for the PDP, in the lower chambers; 60 seats for the APC, and 49 for the PDP, in the Senate). Such changes have been accompanied by the use of ethnic and religious belonging as tools to foment political sentiment in the general election campaigns of 2015 (International Crisis Group, 2014).

Towards the end of the democratic transition that began in 1999 The results of the March 28 th, 2015 elections were a turning point for the young Nigerian democracy, because they resulted in the election of the opposition party candidate, Muhammadu Buhari, in a context of very little violence.

[ 8] This political management of differentiated citizens is inspired by British rule, where it was used starting in 1911 – in each town of the former colony, certain neighbourhoods were reserved to non-natives and equipped with specific municipal institutions. There has been no equivalent of such a policy in French West Africa (Fourchard, ibid.). [ 9] According to a former programme manager at the International Foundation for Electoral Systems, in Washington, investing in politics earns higher yields that investing in the economy (source: Jeune Afrique, February 2015).

1. Regional disparity aggravates issues of violence

This was unlike the previous elections in 2007, 2011, and 2013. Goodluck Jonathan, the president at the time, recognized his defeat and stepped down even before the Independent National Electoral Commission (INEC) c onfirmed the results. He saluted the new president, who was inaugurated on May 29th, 2015. Such a victory of the opposition over the party which has been in power since 1999 was made possible by the APC coalition, which united the opposition parties into one single candidacy. Another factor leading to such a defeat was the model of governance in neighboring Lagos (whose population is 15 million) for fifteen years prior. The governing body there is an opposition party, which has, in a way, paved the way for political alternation. Such a change had not occurred in the country since the democratic turn in 1999. A rather clean-cut victory from the first round onwards was had by Buhari, a Muslim from the north of the country. It demonstrates that the sentiment of belonging to a united federation can transcend ethnic and religious differences. The secession of Biafra combined with the increase in risk that Boko Haram represents have resulted in the development of a sentiment of national unity in the majority of the population. People from the north have indeed voted largely in favor of the new president, and those of the south have voted in favor of Jonathan, the candidate from the south. Yet those of the centre and the south west (Yoruba regions) have in large part chosen the new president from the opposition, even if he does not share their ethnic or religious background. The INEC, which proved itself over the election process of March 28 th, 2015, made the decision to change the date of the elections that were to be held on February 14 th, in order to better distribute the new electoral cards. Announcements of the results of the elections were met peacefully, and the president who stepped down was not reluctant to recognize his defeat – even before the commission communicated the official poll counts.

1.2. Dynamic economic growth

is still accompanied by exclusion

From the end of the Biafran War onwards, economic growth in Nigeria has been dynamic, but volatile. After the changes in the productive structure of the economy (see Part 2), growth stabilized from the end of the 1990s onwards. The progression that followed enabled a rise in the amount of

wealth per habitant, which from the beginning of the year 2000 more than doubled in real terms. It was evaluated at more than 3,000 USD per person in 2013, which has c lassified Nigeria as a lower medium income country (LMIC). Nonetheless, growth is uneven, and income is unequal. In fact, the country is wrought with poverty: 62% of the population lives under the international poverty line (1.25 USD per day). [10] In comparison with other countries with the same level of income, the number of people in poverty in Nigeria is among the highest (the average p overty rate at 1.25 USD per day among LMICs was 22% in 2011). The p roportion of Nigerians who live under the poverty line has changed very little over the last decade, despite the inc reasing level of economic activity. Such is one of the clearest indicators of the weak level of inclusion in the country’s growth: despite the fact that national wealth t ripled in real terms from 2000 onwards, the poverty level was only reduced by a fraction (61.8% in 2004). At the same time, the Gini coefficient, which reflects inequality in revenues, was 43 in the year 2010. [11] Between 2004 and 2010, it even worsened. Significant income levels in Nigeria are reserved for a lucky few: 20% of the richest households account for a whopping 49% of the gross national income (GDP), while 20% of the poorest account for only 5%. Such inequality in income levels is a reflection of regional differences: poverty rates in the north are at 72% and 52% (with a poverty line of 1.25 USD per day). Disparity is the result of uneven economic development, in which activity is concentrated in just three main regions. These regions are Abuja (the administrative capital, in the center of the country), Lagos (the economic capital, in the south west), and Port Harcourt (the oil-producing region, in the south east). Generating 32% of the total gross national product, they have generated a significant discrepancy in income levels. The differential between the northern and the s outhern states (aside from the capital of Abuja), is 2.8. [12] Though the states in the south are the most populated, wealth in the country is also concentrated there. Differences between states have been evaluated on a scale of one to three, between the states in the north and those in the south. Over time, poverty rates in the north have evolved unfavorably, while poverty rates in the south have decreased (cf. World Bank, 2014). Maps 2 and 3 present the disparities and trajectories of growth according to region.

[ 10] According to the World Bank, the poverty headcount ratio at 2 USD a day (in PPP) amounted to 82.2% of population in 2010. [ 11] The more the Gini index is close to 100, the more income inequalities are high. [ 12] The most recent dataset on state GDP dates from 2010. We will only refer to state GDP in relative terms and not in absolute terms given that the March 2014 revision of the base year has changed this nominal dataset.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Map

Poverty rates in Nigeria (poverty line at 1.25 USD a day in PPP)

Geographical distribution of wealth per capita in Nigeria (in USD, 2010)

North West 74,2 % North West 75,4 %

North Central 65,8 % South West 47,9 % South South South East 54,9 % 53,3 %

Sources: NBS (Harmonized Nigeria Living Standards Survey [HNLSS] 2009—2010) and AFD.

Sources: Nigeria’s National Bureau of Statistics, AFD.

Compounding the problem of economic disparity are social issues such as education (Map 4). Access to elementary school in Nigeria, which has a primary education rate of 64%, is lower than in other Sub-Saharan African nations (whose rate is 76%). Furthermore, the north differs from the remainder of the country by more than ten percentage

Table

Primary and secondary school enrolment rate (net, in %), healthcare expenditures (in % of government budget) and life expectancy at birth (in years) Nigeria (2010)

LMC (2012)

Sub-Saharan Africa (2012)

Primary school enrolment rate

64 (2010)

87 (2012)

77 (2012)

Secondary school enrolment rate

26 (2010)

58 (2012)

32 (2012)

Healthcare expenditures

6.6 (2012)

8.7 (2012)

10.8 (2011)

Life expectancy at birth

52.1 (2012)

66.2 (2012)

56.4 (2012)

Source: World Bank, author’s calculations.

points (See Table 1). Children in rural areas are not registered in schools nearly as often as children in urban areas. In 2013, the education rate in rural areas was estimated at 51.8%, in contrast to the rate in urban areas of 71.2% (see USAID et al ., 2013). During the harvest season, girls do not often go to school (Renouard, 2010).

1. Regional disparity aggravates issues of violence

Regional disparities in terms of education are related to unemployment rates, which are much higher in the north. Indicators of access to health services also reflect the weak economic and social performance in the country. Compared to countries with the same level of income, and the rest of the African continent, public health expenditures are significantly lower in Nigeria (See Table 1). The regions in the north are the most disadvantaged in terms of access to health care and quality of treatment. Reviewing the rate of infant mortality clarifies this point quite explicitly: 66 to 89 deaths per 1,000 births in the northern regions, versus 58 to 82 deaths per 1,000 births in the southern regions. Taking into account the significant levels of population growth (2.8% in 2013), Nigeria is likely to have a population of more than 250 million people in 2050. In such a context, socioeconomic development is fundamental.

Map

Literacy rates in Nigeria (2013)

North West 47,2 % North West 44,1 %

North Central 68 % South West 70 %

South South 74,9 %

South East 81,4 %

Sources: Nigeria Demographic and Health Survey, 2013 and AFD.

1.3. Historical violence and tensions that

aggravate the socio-political landscape

Ever since independence in 1960, Nigeria has undergone periods of violence. Tensions stem from the geographical and ethnological specificities of the country: first of all, it is physically large (twice as large as France), with a very diverse population (more than 250 ethnic groups call it home, with a relatively equal proportion of Christians and Muslims), with physical geographical characteristics that coincide with ethnic and religious boundaries, and with significant oil and

gas reserves in the south west. If it is the exploitation of such reserves that has been the primary fuel of development in Nigeria, it is unequal distribution of income and the increase in the divide between haves and have-nots that have sowed the seeds of conflict. Such conflicts include Biafra and the Movement for the Emancipation of the Niger Delta (MEND) in the delta region, and Boko Haram in the north. Sentiments of ethnic and religious belonging have only exacerbated the tension that stems from the issue of unequal distribution of economic resources.

Polarization of tensions in the Niger Delta, in the south of the country More than one million casualties resulted from the Biafran War, which was fought from 1967-1970. The source of conflict was the centralisation of federal power against the Igbo minority, who lived east of the Niger Delta, in the oilrich regions. The secession of three states in the east of Nigeria led to an armed conflict and a blockade, which caused a series of famines. Later, several other forms of violence sprung up around the central issue of income distribution in the same oil and gas regions, and it was the local populations that stood to gain from the conflict. One example of this was the violence that arose from disputes about oil in the Niger Delta between 1999 and 2004, in which more than one thousand people perished (Hamilton et al ., 2004). The issue was industrial pollution and the devastating consequences that it has for human health (most notably, the flaring of excess gas and the sentiment that local ethnic groups had (Ijaws and Ogonis in particular) of being victims of economic injustice. When MEND (a militant movement that formed in 2004), set out to fight such issues, tensions increased. Kidnappings of e xpatriates with demands for ransom took place, bombs were set off, pipelines were sabotaged, cargo ships full of crude oil were hijacked… Occurrences of violence m ultiplied from 2007 onwards, as authorities attempted to quell MEND’s uprising (including the series of military actions that they pursued in May 2009). In 2009, an amnesty agreement was signed, which smoothed over the tensions and set out to undertake a number of initiatives that would b etter allocate the revenues from the oil and gas industry: for example, payment of royalties in the form of 10% of the profits of joint ventures from oil transactions; improvement of social conditions for the inhabitants of the Delta, such as the construction of schools, hospitals, and roads. At the same time, under the pressure of well-organized and i nfluential unions, oil companies preferred to resolve i nternal social politics, calling upon subcontractors and local agents

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

to implement local development initiatives around their production sites (Giraud and Renouard, 2010). Despite the decrease in number and intensity of conflicts since the amnesty was signed, violence has continued along with the increase in the number of pirate activities perpetrated by MEND, including the theft of oil from offshore rigs. Every day, nearly 300,000 barrels of crude oil are stolen from the ocean off the coast of Nigeria – in short, the equivalent of 20% of national production (see Beyond Ratings, 2015).

A cycle of violence in the north brought about by Boko Haram and army repression In the north west of the country, it is the terrorist group called Boko Haram that is antagonistic towards the state and its representatives in general, and which gains popularity from its relationship to social revolt. A Salafist movement, it was created in 2002 following the scission between its founder, Mohamed Yusuf, and the Izala movement, which appeared in 1978. Recruited are those who undergo economic hardship, for whom an Islamic political agenda is nourished by the disillusionment that has accompanied the transition to democracy from 1999 onwards. According to Yusuf, it is precisely because Sharia law has been inaccurately applied (most specifically, in the state of Borno), that inequality and social injustice have persisted, and in some cases, increased.[13]. Until 2009 (see below), the actions of the sect were focused on political confrontation, and their attacks were directed to govern mental organizations, government representatives, and a certain part of the population who were considered to be “bad Muslims” (who were the most fiercely targeted victims). Repression by armed forces in 2009 caused the death of more than 800 members of the movement in addition to the arrest and filmed execution of Yusuf. Since, and with the assumption of power by Abubakar Shekau, the movement has become frenetically violent. [14] Over time, their geographical terrain has shifted outside the borders of Borno, and the institutions that they have explicitly t argeted, such as prisons, banks, mosques and churches, and civil p opulations (primarily Muslim and Christian) have brought about considerable numbers of human fatalities. A s pecificity of the Boko Haram movement as regards its precursors is the number of suicide attacks it engages in (Pérouse de Montclos, 2012), and the vicious repression of the army, which together have caused many deaths. Since 2006, more than 80,000

people have perished in attacks perpetrated by Boko Haram (see Graph 1). Brutal initiatives on behalf of Nigeria’s armed forces have taken place, which have reinforced the status and legitimacy of the movement, seen by many as a protector of the population (Pérouse de Montclos, 2012 a ). The fact that Nigeria’s army is incapable of stopping the progression of Boko Haram is due to two important factors. The first is that the army has suffered from appropriations of the budget: despite the 5.8 billion USD levied in 2014, only a few hundred million USD were actually used to finance operations on the ground (Pérouse de Montclos, ibid .). The second is a corollary of the first: the army has been beset by mutinies and internal tensions, which have occurred between soldiers and their hierarchy, and which are also linked to both a lack of proper equipment and to repeated malfunctions. Finally, another type of violence has been observed in the Middle Belt (the central regions). It is linked to the competition for access to land – most significantly, between farmers and livestock breeders (the first being primarily Christian and the second being primarily Muslim). Ethnic and religious differences have been mobilized as the base of the conflict, yet fundamentally, it is land rights that have been at the heart of the matter. The regional environment is also exposed to border tensions. Historically, and after the wave of African countries achieving independence, all the armies of the region have fought with Nigeria at a time or another, except for Niger’s: interferences of Nigeria during Chad’s civil wars at the end of the 1970s, 1994 conflict with Cameroon for a disputed territory next to the oil-rich Bakassi peninsula (Pérouse de Montclos, 2015). Today, the ripple effects of Boko Haram are visible at the borders of Nigeria’s neighbouring counties. The cultural and ethnic similarities, as well as the porosity of borders, explain why Boko Haram is not limited to its Borno state stronghold but also among the Adamawa peoples of Cameroon and Kanem-Borno in Niger and Chad. The ramifications of the terrorist group towards the jihadist group of the Sahel seem limited however. The internationalization of the response to the terrorist threat, with the intervention of Chad, Cameroon, and Niger, has contributed to extend the scale to the Boko Haram movement and driven up b order tensions (Pérouse de Montclos, 2015). The successful coordination of armies since February 2015 has nevertheless made it possible to push Boko Haram back.

[ 13] Quoted from Pérouse de Montclos (2012): “In his book, Mohamed Yusuf most calls for disobedience and rising up against tyrannical and corrupt Muslims who do not properly apply Sharia law. There is no question of killing Christians or Jews.” [ 14] Since 2009, Boko Haram has become fragmented with the creation of Ansura, a movement that condemns attacks on Muslim civilians.

1. Regional disparity aggravates issues of violence

Map

• The continuing levels of extreme violence by terrorist organiza-

tion Boko Haram, though the victories claimed since February by the military coalition formed by Nigeria, Chad, Cameroon, and Niger, and the recent commitment of Nigerian Armed Forces, seem to be able to limit the risk of a carry-over to the rest of the country and neighbouring countries;

Boko Haram’s violence JANUARY 2015 2 146 VICTIMS

SEPTEMBER 2014 1 319 VICTIMS

• In case tensions at the borders of the four concerned

JULY 2009 700 VICTIMS Sequence of Boko attacks and number of victims per month since 2009

2009-2010

2011-2012

THE CYCLE OF VIOLENCE IS TRIGGERED THE MOVEMENT RADICALIZES AND EXPANDS

2013

ON THE VERGE OF A NEAR CIVIL WAR SITUATION?

countries continue, risks of regional conflicts cannot be discounted in the long-term. The new president, Muhammadu Buhari, will give priority to the fight against Boko Haram and will probably continue the successful military cooperation initiated with Nigeria’s neighbours;

2014-2015

• The uncertainty of the electoral process seems to have

THE BLUEPRINT FOR A BLOODY CALIPHATE

Source: Grandin et al. (2015).

Violence is pervasive in Nigeria, which is one of the most violent countries in the world (20 homicides per 100,000 inhabitants in 2012, see Graph 2). Given this turbulent s ituation, several factors seem to be particularly negative for the stability of Nigeria’s socio-economic environment:

Graph

been largely checked thanks to a peaceful presidential ballot on 28 March 2015 that confirms political alternation at the head of the federation;

• Finally, the potential questioning of the amnesty programme for MEND militants by the new president may lead to renewed tensions and violence in the Delta.

Graph

Number of fatalities in violent public events in Nigeria between 2006 and February 2015

Annual homicide rate for 100,000 people (2012, international comparison)

25 000

20 000

15 000

10 000

5 000

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Feb)

0 Nigeria

Sub-Saharan Africa

LMIC

World

Sources: Nigeria Watch. Source: World Development Indicators (WDI), author’s calculations.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

2. A dynamic economy but dependent on the oil sector 2.1. Sustained and less volatile growth Starting in the early 1970s, at the end of the Nigeria Civil war, or Biafran War (1967-1970), Nigeria’s growth path was highly dynamic, concurrent with a significant rise in oil p roduction, one of the country’s major resources. The e conomic history of Nigeria following independence, and then for more than three decades, is thus intimately linked to oil. [15] Economic growth maintained a fairly robust pace between 1970 and 2013, clocking in at 4.4%, but has experienced unbalanced periods (Graph 3). The volatility of economic growth up to the 2000s shows the extent to which Nigeria’s industry is exposed to international oil prices.

Graph

Real GDP growth rate and average annual growth rate (in %) Note: Data from 1980 onwards has been retropolated by the International Monetary Fund (IMF) following the GDP rebasing calculations, as the updated dataset starts in 2010.

After achieving independence in 1960, Nigeria put in place an import substitution policy – notably with initiatives to d evelop the agrifood and textile industries and an emphasis on heavy industry (oil, gas, cement, steel). The fourfold increase in oil prices in 1973 put the finishing touches on the full shift from this conventional accumulation model based on agricultural exports to the dominance of the oil industry (Bach et al., 1988). Since then, and up to the 2000s, Nigeria’s economic growth has varied according to international oil prices and does not seem to be particularly resilient to external shocks. The emergence of a service economy unrelated to the oil sector at the end of the 1990s and particularly since the early 2000s has nevertheless made it possible to stabilize the growth path. The average annual growth in the previous decade is evaluated at 6.8% and seems much less erratic than in the past (with a standard deviation of 2.2 between 2005 and 2013, down from 7 between 1980 and 2000). The v olatility of the growth path is now comparable to those of emerging economies such as Brazil, India or South Africa (Graph 4).

Graph

Standard deviation of the real growth rate of GDP between 2005 and 2013 (in %)

25 20 3

15 10

2,5

5 0

-5

1,5

-10 -15

-20 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: WDI and World Economic Outlook (WEO); author’s calculations.

0,5 0 Nigeria

SSA

LMIC Indonesia Brasil

India

South Afr.

Sources: WDI and WEO; author’s calculations.

[ 15] Oil production in Nigeria started in 1958 – at a modest rate of 6,000 barrels per day, to be contrasted with the present production of upwards of 2 million barrels per day – following the discovery of major oil deposits around the Niger Delta by Shell and BP (Sébille-Lopez, 2005).

2. A dynamic economy but dependent on the oil sector

The revision of Nigeria’s national accounts in March 2014 revealed that the country had become Africa’s largest e conomy and led to nominally revaluating GDP by nearly 90% in 2013 (up to 522 billion USD in current prices, see Section 2.2 for more details). This has resulted in new, higher, per capita income figures, evaluated at more than 3,000 USD in 2013, and has achieved its goal of making Nigeria part of the lower middle income countries (LMIC) group. [16] Nigeria’s sustained growth path has thus enabled per capita income to increase substantially, more than doubling in real terms since the beginning of the decade starting in the 2000s decade (Graph 5). Economic growth has partly enabled Nigeria to converge with the average of the world’s economies since then (Graph 6). Nigeria’s economy has grown at a less sustained rate than other countries of the same income bracket but nevertheless grows faster than other African economies.

Graph

GDP per capita (PPP, real terms, % of average GDP per capita) Nigeria/MIC Nigeria/SSA Nigeria/World

180 160 140 120 100 80 60 40 20 0 1990

1994

1998

2002

2006

2010

Source: WDI, author’s calculations.

2.2. A more diversified economy but with

PGDP per capita index (USD, PPP, real terms, base 100 in 1980)

serious infrastructure shortcomings

350

2.2.1. A growth model that has changed since 1990

300

The update in national accounts statistics, the results of which were published in March 2014, hadn’t been carried out since 1990. This revision highlights the structural changes in the Nigerian economy between 1990 and 2010 (the base year of the new national accounts) that are important to describe and to compare. The statistical retropolation of historical data that will make the two “base years” converge (1990 and 2010) has still not been fully achieved by the National Bureau of Statistics (NBS) at the time of writing this report (and dates back to 2010).

250 200 150 100 50 0 1980

1984

1988

1992

1996

2000

2004

2008

2012

Source: WDI, author’s calculations.

Despite the strong increase of GDP per capita at a national level, regional growth trajectories seem to have progressed in very distinct ways. Map 2 illustrates the unbalanced character of wealth creation in Nigeria. The development of the three major economic centres of Abuja (the administrative capital in central Nigeria), Lagos (the economic capital, in the south west) and Port Harcourt (oil region, in the south east) has brought about a remarkable polarization of incomes, with a contribution of over 32% of GDP. As a result, although the southern states are the most populated, per capita income is also much higher there, with records showing incomes in southern states to be three times higher on average than in northern states, see Part 1). [17]

Table Sector

2 GDP sector composition 1990

2010

Oil and gas

35.8

15.5

Agriculture

31.5

24.0

Industry (excluding oil)

7.7

10.3

25.0

50.2

Services

Source: NBS, IMF, author’s calculations — Data for1990 is from IMF’s Selected Issues dated 15 September 1998.

[ 16] With a per capita income of 1,280 USD in 2011, Nigeria was already a part of this group of countries but was borderline with low income countries (1,025 USD). [ 17] It must be noted that the macroeconomic impact of Boko Haram’s activities in the four most affected states (Yobo, Borno, Adawama, Gombe) is probably relatively low as these states account for less than 8% of total population (according to the 2006 census) and 4% of total GDP.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

The structure of Nigeria’s economy has changed substantially – a fact that is startlingly clear in the above table. In 1990, the (primarily extractive) oil industry was the d ominant sector and amounted to 36% of GDP. This share is still admittedly high, but already at a lower level than in the 1980s (when it amounted to around 50% of GDP – IMF, 1998). The decline that began at the end of 1980s – notably following the implementation of the IMF’s structural adjustment programme in 1986 [18]– then continued, with a decrease of the share of the petroleum sector in the GDP by nearly half, in 2010 (15.5% of GDP). At the same time, the income of activities linked to the oil industry have fuelled the growth of the service economy (and construction – see Bach et al. , 1988), which has become the largest sector of the economy and which amounts to more than 50% of GDP. This has to be qualified for two reasons however. Firstly, certain service activities existed in 1990 but were either poorly accounted for or simply forgotten (such as certain activities in relation to healthcare, information and communication technologies, scientific and technical services). Thus, according to the IMF, had the service economy that had previously existed been better accounted for, Nigeria’s economy would not have registered the very fastpaced growth rate of 6% between 1990 and 2013 (retropolated, in real terms) but rather a slower pace of 3 to 3.5% since 1990. Furthermore, the relative weakness of the oil and gas extractive sector compared with its apex historical levels must be qualified, as it does not take into account the service economy associated with it – and these indirect effects from the oil economy are difficult to evaluate a ccurately.

A thriving service economy The recent revision of national accounts has revealed that the economy is more diversified than it has been in previous decades with the substantial and dominant contribution of non-oil activities to total growth (see Table 3 and Graph 7). This had already been observed before the rebasing calculations, since the end of the 1990s, but the introduction of new service activities (entertainment and recreation, research, patents, etc.), trade, and agrifood have accordingly impacted the contribution of these sectors to GDP growth.

Table

3 GDP sector composition in 2012 (in %)

Sector

Former base year (1990 base)

New base year (2010 base)

Oil and gas

37.0

15.8

Agriculture

33.1

22.1

Manufacturing

1.9

7.4

Construction

1.3

3.1

Services

24.0

42.3

Other

2.7

9.3

Source: NBS, author’s calculations.

Graph

Contribution of sectors to GDP growth in 2013 (real terms, in %)

Source: IMF (Article IV Consultation).

More precisely, the service activities that have expanded rapidly since the early 2000s are telecommunications (8.3% of GDP in 2013) – in connection with the development of mobile phone services –, real estate (7.7% of GDP), and entertainment – film, music and other creative industries account for 2% of GDP. The lesser contribution of the agricultural sector to economic growth is consistent with the minor changes in poverty rates in rural Nigeria (see Part 1). Thus, the analysis of the structural changes in Nigeria’s economy highlights a major issue: the sustained growth of (mostly urban) services activities, and the relative decline of economic activities in rural areas, confirms the seemingly inevitable polarization of active incomes. Authorities are considering the implementation of public policies to help develop the agricultural sector and the agrifood industry,

[ 18] The Nigerian government has implemented a set of recommendations by the IMF in 1986: de facto devaluation of the naira, liberalization of imports, and removing subsidies on petroleum products.

2. A dynamic economy but dependent on the oil sector

based on comparative advantages, within a plan for industrial development, [19] as these sectors have very strong potential for development according to the IMF. However, both economic growth and the attempts to diversify Nigeria’s economy are thwarted by structural constraints that are linked to the level of education and regional disparities in the matter – which weigh on the productivity gains on already existing industries – as well as constraints due to the lack of infrastructure (see Section 2.2.2). The decrease in oil revenues due to the sharp fall in oil prices (which decreased by 50% between June 2014 and February 2015) has forced the federal government to defer social expenditures (including education) as well as certain investments (see Part 3).

The oil and gas sector remains pivotal In spite of the relative decrease of the petroleum industry in national wealth creation, it is still essential for Nigeria and represents more than 70% of the federal government’s f iscal revenue, and more than 90% of goods exports. Many associated services are also dependent upon it. The oil

Graph

Oil production (million barrels per day) and oil prices (spot price of Brent crude oil, USD) 3000 2500

Oil Production (million bpd, left scale) Brent price (USD)

120 100

d rilling industry, which accounts for the bulk of the sector due to a very low refining capacity, had generated a market value of 55 billion USD per year between 2000 and 2013 (with an oil price assumption of 65 USD per barrel). The federal government levies 55% of this value, the b alance covering investments, operating costs and cash flow f inancing of all market participants. [20] As a result, given the country’s energy resources – which are primarily oil and gas –, Nigeria has a substantial potential for development. The oil and gas reserves that are considered proven represent respectively 40 and 150 years of current production levels and several centuries in both cases at current levels of domestic demand. [21] Nigeria therefore ranks among the top producers and exporters of fossil fuels. Proven reserves and production sites are mostly concentrated in the Niger Delta and the region of Port Harcourt, as well as the Gulf of Guinea (onshore and offshore sites). Since the beginning of the 1970s, oil production has been stagnating at 2 to 2.5 million barrels of crude per day (bpd), which is significantly less than the estimated potential of 4 million bpd, according to Beyond Ratings.

Table

4 Estimates of thefts and losses for different oil producing countries (2011)

Country

Thousand of barrels per day

Principal method

Colombia

0,4

Theft from Ecopetrol pipelines

Indonesia

Theft from Pertamina pipelines in South Sumatra

2000

1500

Iraq

Smuggling from Kurdistan into Iran and (possibly) Turkey

1000

Mexico

500

Theft of condensate from pipelines

Russia

150

Theft from Transneft pipelines, esp. in Dagestan

Nigeria (2012)

250

Theft from transfer pipeline

0 1980 1984 1988 1992 1996 2000 2004 2008 2012 Sources: BP (formerly British Petroleum) and the International Energy Agency (IEA); author’s calculations.

TOTAL

421,4

Source: IMF (from the 2014 Article IV Consultation).

[ 19] The development of agricultural and agrifood products laid down by this plan are, for instance, palm oil, rubber, sugar, and rice (Nigeria Industrial Revolution Plan, 2013-2017). [ 20] Onshore production is organized under the form of joint venture partnerships between the national company NNPC (Nigerian National Petroleum Corporation) and multinationals (Shell, ExxonMobil, Chevron Total, Agip, etc.). The share of onshore production within the total tends to be decreasing while offshore drilling is increasing – offshore drilling is subject to Private Sharing Contracts (PSC), which are less profitable for the Nigerian government (AFD, 2008). [ 21] Industry estimates for ultimate resources of crude oil (i.e., the sum of recoverable resources from the past, present and future) to about 100 billion barrels, i.e., around 70 billion barrels still available given that about 32 billion barrels have already been recovered to date. For gas, reserves are estimated at 55 billions of barrel of oil equivalent, with 3.5 billion boe having been extracted to this day (Beyond Ratings, 2015).

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Absolute and relative performances of the power generation sector (in %)

Utilization rate (left scale)

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0% 2003

10%

0% 2002

20%

10% 2001

30%

20%

2000

40%

30%

1999

50%

40%

1998

60%

50%

1997

70%

60%

1996

80%

70%

1995

90%

80%

1994

100%

90%

1993

100%

1992

Rich in energy resources and arable land, Nigeria boasts an underexploited potential for development. The lack of infrastructure in Nigeria is a major limiting factor that inhibits economic growth and socio-economic development. The most fundamental constraint is probably the deficient power generation sector, whose limited p roduction capabilities and daily power outages inhibit economic growth and the diversification of the manufacturing sector. Indeed, electricity providers presently deliver between 4,000 and 5,000 MW, to be compared with an installed capacity of nearly 9,000 MW. [22] Such a low production capacity utilization rate is primarily due to a lack of inputs (especially gas) fed to the electrical infrastructure (Graph 9). The production capabilities of the power generation sector are therefore not capable of meeting the demand for e lectricity (which is at least twice as high). Due to the lack of a proper distribution network, more than 50% of the population has no access to electricity. At the same time, the s upply of electricity is of low quality as Nigeria shows the highest values in the world in terms of the number of power outages (twenty-five per month on average in 2007) and their duration (more than eight hours on average). In this context, 75% of companies consider the supply of e lectricity to be a major constraint and 25% of the country’s total electricity production was actually self-produced in 2013. The quality of the supply of electricity in Nigeria is among the world’s worst: the country ranks 141 st among 144 countries in 2014 according to the World Economic Forum (Graph 11). Yet, Nigeria’s gas resources are very abundant

Graph

1991

2.2.2. Lack of infrastructure is a major constraint for potential growth

(estimated at 55 billion barrels of oil equivalent). The use of these resources – and the largely underdeveloped potential for natural gas liquefaction and hydroelectricity – combined with the building of major infrastructure projects in e lectricity production and transmission are key to a ccelerating the country’s growth path and helping diversify the m anufacturing sector.

1990

This gap between actual oil output and potential oil output is due to disruptions on the production sites – illegal oil siphoning on onshore sites by the population of the Niger Delta, paramilitary operations on offshore sites – and the instability of the contractual framework. Lack of t ransparency and operational management is also an issue. Indeed, according to IMF estimates, losses and thefts have represented between 2003 and 2012 around 150,000 – 200,000 barrels per day – which is the highest amount of losses among oil producing countries (see Table 4; IMF, 2014). These losses amounted to 150,000 barrels per day in 2014 – yet are down from 250,000 in 2012 –, which represents a loss of tax base for the federal government of no less than 5.4 billion USD (assuming an average Brent price of 99 USD over the course of 2014).

World ranking – in percentile (right scale)

Source: Beyond Ratings calculations, based on Enerdata ﬁgures.

Source: Enerdata, Beyond Ratings calculations.

At the same time, refining capacity is low, despite the fact that Nigeria produces light crude oil with low sulphur content, which is much easier to refine. Refining capacity is capped at 440,000 bpd (for a production of around 2.5 m illion bpd). The level of utilization of operable refinery capacity is among the world’s lowest at only 20%, and Nigeria ranks among the 10% most inefficient, or even “damaged”, countries in terms of oil refining (Beyond Ratings, 2015). This rate has been continuously declining during the past two decades and is the result of distortions linked to subsidies on oil prices (Graph 10). Indeed, the low prices of refined products on the domestic market require a large flow of subsidies on behalf of the federal state to the refining operators in order to maintain a level of product that is in line with capabilities and demand. However, the strong increase of oil prices on the international markets since 2003 has multiplied the required amount of public subsidies by ten, which has had the consequence of g radually reducing the volumes of refined petroleum products for the domestic market and accelerating the obsolescence of refineries. Added to that, there is a powerful import lobby that has no interest in having the three existing refineries in

[ 22] According to the Federal Ministry of Power, the power generation sector is projected to produce about 20,000 MW in 2020, thanks to independent power producers (IPP).

2. A dynamic economy but dependent on the oil sector

operation, so it becomes clearer why Nigeria finds itself h aving to import 80% of its domestic needs in terms of petroleum products, imports that remain subsidized by the federal government.

Graph

government body ICRC (Infrastructure Concession Regulatory Commission) to finance this type of project, or to reform the electricity sector (implemented in 2011), with the privatization of electricity generation and distribution, due to low fiscal capacity for the promotion of public investments (see Part 3).

Absolute and relative performances of the refining sector (in %)

Graph

100

60 50 40

Electric power production and price (2011) 10 000 8 000

kWh produced per Capita Price US Cents/kWh

6 000

4 000

2 000

199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

50 40

Utilization rate (left scale) Source : calculs Beynond Ratings d’après Enerdata.

World ranking – in percentile (right scale)

0 Russia

Source: Enerdata, Beyond Ratings calculations.

The deficiencies that are prevalent in the energy sector also apply to the other physical infrastructure of the country, as is shown by the infrastructure quality index of the World Economic Forum in its 2014 report: the country is indeed ranked 134 th out of 144 (compared to Indonesia’s 56 th position and South Africa’s 60 th position). According to this report, the lack of infrastructure is the major impediment to economic activity for 26% of economic operations in the country, before corruption and political instability. The federal government is considering an extensive infrastructure investment programme, the National Integrated Investment Master Plan (NIIMP), with requirements estimated at between 30 and 50 billion USD per year for five years. This extensive plan is supported by the sovereign fund dedicated to infrastructure management (the Nigeria Sovereign Investment Authority, NSIA), which is endowed with 1 billion USD, 40% of which are flagged for investments in infrastructure. It calls for projects in several fields (refineries, gas pipelines, railway lines, ports, agriculture, healthcare, and the like). However, as noted by IMF services, domestic savings were only able to finance a third of this plan; the rest will have to be financed by foreign funds. Indeed, the national savings rate of Africa’s largest economy is low (18.6% of GDP in 2013, with 16.8% of GDP coming from the private sector), especially compared to other countries of the same income bracket (see Graph 12 for more details). The federal government has already implemented public private partnerships (PPP) with the collaboration of the

South Africa

China

Brazil

India

Nigeria

Source: IMF (2015 Article IV Consultation).

Graph

30 25

National savings rates and investment rate in 2013 (% of GDP) National savings rate Investment rate

20 15 10 5 0 Nigeria

SSA

LMIC

Source: WDI, author’s calculations.

2.3. Foreign trade is exposed to volatile oil prices Among demand-side factors influencing aggregate supply, it is primarily the investments of the oil sector that fuelled the phases of economic growth from the 1970s to the 1990s, following their characteristic cycles. At the same time, foreign trade made a positive contribution to GDP growth, apart from periods of exogenous shocks (such as the 1973 and 1979 oil shocks, the international financial crisis of 2008-2009, and the like). The terms of trade and GDP growth tended to move together up to the 2000s, reflecting

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

the emergence of the contribution of other components of demand in GDP (Graph 13). Net exports (the value of exports of goods and services minus the value of imports) nevertheless remain highly exposed to the variations in oil prices due to the mono-export nature of Nigeria’s external trade (Graph 14). From this vantage point, the diversification of Nigeria’s economy as it is described in previous sections seems deceptive.

Graph

GDP growth (% ) Terms of exchange (base 100 in 2000; right scale)

20 15 10 5

10 8 250

200

100

0 -5

-10 -15 1980 1984 1987 1990 1994 1997 2000 2004 2007 2010

Source: WEO, UN, author’s calculations.

50 40

Net exports (billion USD, real prices) Brent price (USD, right scale)

2 0 -2 -4 -6 2011 Consumption-private Investment Real GDP

120

Graph

Share of demand-side factors in aggregate demand (% of GDP, 2010—2013 average)

100

20 10

Net exports 10 GFCF* 16

0 20

-10 -20 1981 1985 1988 1991 1994 1998 2001 2004 2007 2011

Public consumption 8

Source: WDI, EIA, author’s calculations. * GFCF: gross fixed capital formation Source: NBS, author’s calculations.

2013 Consumption-public Net exports

2012

Source: IMF (2015 Article IV Consultation).

Net exports of goods and services (in billion USD, real terms) and spot price of Brent crude oil 60

Contribution of demand-size factors to GDP growth (in %)

150

Graph

Real GDP growth (in %) and terms of trade index (base 100 in 2000) 30

Starting at the end of the 1990s, and especially from the early 2000s onwards, internal consumption has become an increasingly important component of Nigeria’s economy, serving to stabilize the growth path. It is now the component with the highest contribution to economic growth (Graph 15).

Private consumption 66

2. A dynamic economy but dependent on the oil sector

Box

1 Direct effects of the decline in oil prices

The sharp contraction in oil prices observed since 2014 – 50% between June 2014 and February 2015 – as well as consistently low prices of crude oil, which will last in the medium run according to the IEA, puts Nigeria’s macroeconomic and financial framework/ environment at risk. Although extractive industries now only amount to 16% of GDP in 2013 (compared with 37% in 1990), the oil sector is essential to the country that is the largest producer of the African continent – more than 70% of the income of the federal government depends on oil and gas revenues; they account for more than 95% of exports of goods. In this context, the effects of a lasting 50% drop in oil prices for Nigeria spread throughout (i) a decrease in the budgetary revenues from the energy sector and (ii) a deterioration in the terms of trade and as a consequence in the balance of payments. According to the IMF, these simultaneous effects translate into a GDP fall of 1.5 percentage point in 2015 (to 4.8% dropping from 6.1%; estimation based on an InputOutput model; IMF, Selected Issues, February 2015). i. Effects spread through a contraction in budgetary revenues This channel is particularly significant in the case of Nigeria as oil fiscal revenues are estimated to decrease from 5.8% of GDP in 2014 to only 3.4% of GDP in 2015. After the 2008 global crisis, Nigeria set up an oil stabilisation fund, which is supposed to act as a shock absorber in case budgetary revenues are lower than expected. This fund’s balance is already declining – at the end of 2014, it was estimated at 2 billion USD, i.e., 0.4% of GDP while it was 8.6 billion USD in 2012 and a very far cry from the 6.3 billion USD level required to absorb a fourth of a standard deviation in oil revenues. As the fund is marginal, it will not make it possible for Nigeria to cope with exogenous shocks. Although the budget deficit is limited (-2.4% in 2013), very few solutions are available to Nigeria: it could either raise the budget deficit and increase the public debt ratio (which amounted to 10.6% in 2013), or cut federal government spending. Authorities – who lowered the oil price assumption to 65 USD in the 2015 budget – seem to favour the latter with capital expenditure as their main target. IMF thus estimates that the contraction in prices could lower the federal government capital expenditure by 40% (in real terms), which would lead to a GDP decrease of 0.5 percentage point in 2015. This impact is estimated to amount to two thirds of a percentage point when the multiplier effects on private consumption are taken into account. ii. Effects spread through a deterioration in the terms of trade Because foreign trade is mainly based on a single export product – oil –, its performance highly depends on variations in oil prices. The sharp contraction in oil prices observed since June 2014 thus impacts the value of exports. All things being equal, as a result of the 50% drop in oil prices, the current account balance could decline by more than 10 percentage points of GDP and a current account deficit of approximately 6% of GDP could emerge. Furthermore, given that the United States has stopped importing Nigerian crude oil last June (for more details on that matter, see part 5), adding a volume effect to the value effect. Since oil export revenues have been decreasing for several months, the Naira (NRN) – which is under a managed float regime – has been under more pressure, leading the CBN to devaluate the currency by 8% in November 2014. However, the further decrease in oil prices as well as resulting tensions on foreign-exchange reserves should lead the Central Bank to devaluate the currency again in the coming months. Indeed, a depreciation of the exchange rate causes a negative revenue effect that in turn causes a decrease in domestic consumption and ultimately translates into less economic growth. Furthermore, Nigeria appears resilient to this exogenous shock due to its low external debt (1.7% of GDP in 2013). The IMF evaluates the effect of this shock on the terms of exchange (a decrease of 38% of export revenues) on GDP growth at 1 percentage point.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

3. Satisfying solvency but liquidity pressures remain 3.1. A limited level of public debt that is

partly held by non-residents

Total public debt in Nigeria – of both the federal government and the state governments – is very low: it is estimated at 12.4% of GDP in 2014, with an external debt ratio of 1.7% of GDP contracted at concessionary rates and on a long-term basis (from international financial institutions). [23] It does not include the debt of public enterprises, such as the Nigerian National Petroleum Company (NNPC), which has run into high levels of arrears owed to private oil c ompanies that operate within the country, pursuant to its contractual o bligations (see Box 2). Nigeria’s external debt ratio has significantly decreased since the mid-2000s, thanks to an agreement with the Paris Club in 2005 (Graph 17).

Graph

This a greement has enabled Nigeria to cancel a debt stock e stimated at 18 billion USD, equivalent to 60% of its debt (which is estimated at 30 billion USD owed to official b ilateral creditors – see AFD, 2008). Since then, Nigerian authorities seem to want to bring external public debt under control. Public debt mostly originates from within the country: more than 85% of total public debt is held domestically and 46% is held by Nigeria’s commercial banks. Authorities plan to balance the share of external debt to 40% of the total in the mid-term, compared to its present level of 14%. However, the stock of total public debt should be limited to 14% of GDP, which reflects the authorities’ aversion to external debt (see above) but also a limited a bility to repay, as the federal government’s debt service amounts to 27% of its income (see Section 3.2).

Graph

Debt ratio of the federal government (in % of GDP)

Total public debt of the federal government (FG) and state governments (SG) (% of GDP)

14,0

12,0

10,0

8,0

External, SG

6,0

External, FG

4,0

2,0

0,0

2000

2002

2004

2006

2008

2010

2012

2014

Source: WEO, author’s calculations.

Internal, SG Internal, FG 2013

2014

Source: Debt Management Office (DMO), author’s calculations.

[23 ] The state governments and local governments must receive the approval of the federal government to issue debt. Local governments cannot incur debt abroad. Finally, the debt of state and local governments is guaranteed by the federal government.

3. Satisfying solvency but liquidity pressures remain

Despite a low ratio of external public debt (1.7% of GDP for the total in 2014, of which more than 95% by the federal government), almost 40% of the domestic debt of the federal government is held by non-residents at the end of 2013 (Graph 19).[24] Since 2011, this share has been continuously rising and is an additional source of exposure on the external liquidity of the country, which is already under pressure due to the strong decrease in oil prices (see Box 1 and Part 5). At the same time, the debt portfolio of the federal government seems to be exposed to market risk. Indeed, 85% of the debt

Graph

stock is composed of government securities (primarily Nigerian Treasury Bills and Federal Government of Nigeria Bonds), which is a source of vulnerability to changes in market confidence, be they domestic or foreign, in case the interest rate is changed or Nigeria’s sovereign risk is reappraised (see Graph 20). This risk is all the more significant in that 36% of the federal government’s domestic debt is short-term debt. In the context of a shifting relationship between internal and external debt, authorities are considering reducing the share of shortterm debt to 25% of the federal government’s domestic debt.

Graph

Domestic debt held by non-residents

Breakdown of federal government debt (in %, end of 2014)

Percent of GDP (left scale) Billion U.S. dollars (right scale)

Eurobonds; 3

Treasury bonds; 2

Multi and bilateral; 15

Treasury bills; 29

Federal Government of Nigeria bonds; 51

Source: IMF, Haver; projections for 2014. Source: DMO, CBN, IMF, author’s calculations.

Box

The NNPC, the public arm of Nigeria’s oil sector

The NNPC is the public body that manages and oversees the oil and gas sector of Nigeria. It was created in 1971 in order to better control the petroleum industry – following a recommendation of the Organization of the Petroleum Exporting Countries [OPEC] and with the objective of gradually nationalizing the sector by taking out increasing stakes in oil operators (from 35% in 1971 up to 60% in 1979). Now most oil “supermajors”, which are responsible for most of the production, operate with joint-ventures or joint operating agreements (JOA). These partnerships give the Nigerian authorities a share of 60% of production revenues and leave 40% for the private operators. Within this system, the NNPC (and therefore the federal government) takes part in the financing of operations, or cash calls, which helps oil companies absorb their high technical costs and share the commercial and operational risk. Due to eviction effects brought on by these capital expenses cash flows, the federal government has developed another type of contract: the Production Sharing Contracts (PSC), especially in the context of deep offshore sites (since 1999). These contracts aim to transfer the risks and financing of exploration, as well as new site development costs, to the private oil companies, all the while including a bonus for the federal government when the contracts are signed and a royalty calculated according to the oil revenue yield. The contractual framework of joint-ventures remains dominant however. As a result, the NNPC is believed not to have fulfilled an important number of its cash call obligations to private oil companies. The arrears run very high (several billion dollars) and can be considered contingent liabilities. Finally, it must be remembered that the NNPC is is an exemplary case of the opacity of Nigeria’s oil sector and is suspected to be highly affected by corruption. After his dismissal, the former governor of the CBN, Lamido Sanusi, accused the NNPC of embezzling 20 billion USD between January 2012 and July 2013. An audit by the international auditing firm PriceWaterhouseCoopers evaluates the amount of embezzled funds to a minimum of 1.48 billion USD. The audit concluded that the operational model of the NNPC was not sustainable. Sources: Sébille-Lopez (2005); AFD and Beyond-Ratings (2015).

[24] External debt is considered a debt denominated in foreign currencies. A stock of debt held by non-residents can by denominated in foreign currencies or in the local currency.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

3.2. A budget implementation that

is vulnerable and exposed to oil prices

3.2.1. Low budgetary revenues that are dependent on oil revenue The nominal increase of the level of national wealth during the rebasing calculations published in April 2014 (see Part 1), has put debt ratios and budgetary balance in a more comfortable situation but has brought to light the vulnerabilities of budget implementation. Indeed, although the budget deficit is low (2.4% of GDP in 2013, compared to 4% before the recalculation), total consolidated income of the federal government represents only 11% of GDP in 2013 (compared to the previous 24%). This income is highly dependent on oil revenues – at a level of more than 70% on average – at a time when non-oil revenues (or “independent revenues”) represent less than 4% of GDP (see Graph 21). Non-oil fiscal revenues of the federal government are among the world’s lowest – 2.4% of GDP on average in Nigeria, compared to 10-15% for most oil-producing countries. Together with the dependency on oil revenues, this is a major source of vulnerability for the country (see Graph 22). An increase in the tax base is said to be slated for reform in 2015 (after the general elections) by raising the value added tax (presently at a standard rate of 5%, one of the world’s lowest rates) and by improving tax collection (the informal sector is estimated at 60-65% of GDP). [25] Furthermore, the possible adoption of the Petroleum Industry Bill (PIB) [26] would make it possible to increase fiscal pressure on the oil sector and make the organization of this sector more transparent, among other things. However, the adoption of this law, which has already been delayed several times, faces opposition from the oil supermajors as well as non-producer states due to a lower planned redistribution of oil revenue for the latter (see Box 3). A reform of the oil sector, and of its associated fiscal revenues in turn, therefore seems fairly unlikely in the short term.

Total revenue of the consolidated government (federal government and state governments, in % of GDP) 20

Non-oil revenues (“Independent revenues”) Oil and gas revenues

18 16 14 12 10 8 6 4 2 0 2010

2011

2012

2014

Source: WEO, author’s calculations.

Graph

Fiscal revenues of the central government (2009-2013 average, in % of GDP)

25 20 15 10 5 0 Nigeria

LMIC

SSA

South Africa

Source: DMO, author’s calculations.

The strong decrease in oil prices that has occurred since the summer of 2014 (more than 50% between June 2014 and March 2014) automatically leads to a substantial reduction in the fiscal revenues of the federal government and state governments. The Ministry of Finance has thus drafted several successive versions of the 2015 budget bill according to different assumptions on the price of oil, and ultimately fixed at 62 USD per barrel of crude oil. The final text was approved in April 2015 and will be further restricted by 4 billion USD (0.5% of GDP; according to the IMF, as the funding gap was to be covered up to a price of 60 USD per barrel).

[25] The Ministry of Finance is receiving technical assistance of the cabinet McKinsey in order to increase the tax base of non-oil revenues. [26] Three or four versions of the PIB are said to be circulating, which will not facilitate its early adoption.

2013

3. Satisfying solvency but liquidity pressures remain

Given the current oil revenue allocation rule (see Box 3), the loss of 1 USD per barrel of crude oil represents a fall in revenues for the state and local governments of about 250 million USD according to IMF estimates. Thus, the decrease to 62 USD per barrel of Brent crude oil (spot price) in these past months will potentially cause a total revenue of over 15 billion USD for the federated entities, amounting to 60% of their fiscal income (on average between 2012 and 2014, with all other things considered equal; author’s estimations). The authorities are considering making additional adjustments of 15% in real terms to the budgets of these federal bodies. At the same time, the federal Minister of Finance noted that a large number of state governments will not be able to service their debt in such a context of falling oil revenues. Given the immense variety of situations, the federal government offers technical assistance to states (within training programmes) that have technical weak nesses, in order to implement the necessary budgetary adjustments. This is not the case with Lagos and Kano. Furthermore, the improvement of the efficiency of oil revenue collection is also critical. Indeed, the 2005 law allows for the determination of the variation of oil revenues according to the price of oil, to technical performance, and thus to the profitability of projects. Indeed, the yield of oil revenues, which is defined as the ratio of oil revenues received to the gross value of oil production, is on a downward trend. This yield was estimated at 0.3 in 2014, compared to an average of 0.70 from 2000 to 2009. As an example: in 2013 oil prices and oil production were higher by respectively 12% and 10% compared to 2008, but budgetary revenues from oil had fallen by 20% (Graph 23). The decrease in yields of oil revenues is caused by a number of factors: ageing production sites, the increase of production costs due to security incidents and supply issues (oil theft in particular), but also embezzlement. On the top of this structural downward trend of oil revenue, the sharp drop in oil prices that has occurred since the summer of 2014 with consistently low oil prices (in the m id-term) further increases the vulnerability of budgetary r evenues.

Graph

Changes in oil revenues (billion USD) Oil revenue yields (right scale) Non-oil revenues Oil and gas revenues Market value of oil production

120 100

0,8 0,7 0,6 0,5

0,4

0,3

0,2

0,1

0 2010

2011

2012

2013

2014

Note: Fiscal oil yields are defined as the ratio of the market value of oil production on fiscal revenues from oil and gas.

Source: IMF, author’s calculations.

Finally, the fund created to stabilize oil revenues (the Excess Crude Account, or ECA) had an estimated 2 billion USD (0.4% of GDP) at the end of 2014 and will only very partially cushion the shock in revenues. [27] This fund was established in 2004 in order to smooth budgetary revenues in case of a drop in oil prices: any revenue differential between realized and projected revenue is transferred to an account held at the Central Bank. Although this fund has occasionally been siphoned off to pay back part of the external p ublic debt owed to Paris Club members, it has only had a limited positive impact on budget implementation (notably due to lack of a constitutionally valid existence). This fund is gradually being transformed into a sovereign fund (SWF , 1 billion USD in 2014) whose legal framework will make it p ossible to better allocate expenditures (see below).

3.2.2. Expenditures constrained by the debt service burden Due to the low tax base, and, more generally to the low budgetary revenues, the expenditures of the consolidated government (federal government, state government, local governments) are seemingly low, at 12% of projected GDP in 2014 (Table 5). In particular, capital expenditures represent on average 1% of GDP, which is one of the lowest rates in the world (among countries of similar incomes and beyond). These remain lower than energy subsidies (nearly 2% of GDP on average), which are widely known to be inefficient.

[ 27] This fund was credited with 22 billion USD in 2008 and 8.6 billion USD in 2012. Around 7 billion USD in 2014 and 15 billion USD in 2013, are said to have been debited to finance military operations against Boko Haram.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Table

Budget implementation of the consolidated government (federal government, state governments, local governments) (% of GDP) 2010

2011

2012

2013

2014*

12.6

17.9

14.3

11.0

9.9

of which revenues from the oil and gas sectors

8.8

14.0

10.4

7.1

5.8

Total Expenses

16.9

17.6

14.7

13.4

12.3

of which energy subsidies

1.5

2.8

2.2

0.9

0.7

Budgetary revenues

4.0

4.5

3.8

3.7

3.5

of which revenues from the oil and gas sectors

2.8

3.2

2.5

2.4

2.0

Consolidated government Total Expenses

Federal government

Total Expenses

7.3

6.5

5.7

5.5

4.7

Current Expenses

5.6

5.3

4.7

4.4

4.1

of which labour costs

2.9

2.5

2.3

2.2

of which payment of interest

0.6

0.8

1.0

Capital Expenditures

1.6

1.1

1.0

0.6

Balance

-3.3

-2.0

-1.9

-1.8

-1.2

-11.6

-9.7

-8.1

-0.4

-2.4

Non-oil primary balance (% of non-oil GDP) Overall balance

-4.3

0.3

*: Projections Source: IMF, author’s calculations.

Authorities seem to consider that the price of a barrel of crude oil will remain low (at under 80 USD) and they believe it necessary to continue reforming the system of energy subsidies, as initiated in 2012. In the medium term, a reform of energy subsidies will allow for the allocation of 0.5% of GDP to infrastructure investments, which the country sorely lacks. Indeed, with such a limited tax base and the ancillary structural difficulties in addressing the infrastructure deficit, governing authorities intend to rely on public-private partnerships (PPP) and therefore on private capital. This had been the case for the electricity s ector, when power generation and distribution were privatized in 2011. Such an aggravated deficit is one of the most fundamental weaknesses of Nigeria’s social and economic development. At the same time, and in order to manage the implementation of projects linked to the Investment Plan, the government has established a sovereign fund, SWF, managed by the Nigeria Sovereign Investment Authority (NSIA), with 1 billion USD in financing , 40% of which is dedicated to an infrastructure investment fund. The better defined legal framework than that of the ECA

will make the management of these investments more efficient. However, the low amount allotted to this fund does not seem sufficient enough to create enough leverage to address Nigeria’s exceeding development challenges, in particular regarding territorial disparities.

3.3. The risk of non-sustainability of public

debt remains low but vulnerabilities are increasing

The exogenous shock caused by the fall in oil prices has directly impacted the revenues of the federal government and the revenues of foreign trade, in addition to hampering the economic growth of the country (see Box 1). At the same time, there has been a deterioration of the terms of Nigeria’s financing , both on the domestic market and abroad (Graphs 24 and 25). This is especially important for the federal government given that it has regained access to international markets (in the same way as other emerging economies) after successfully raising 1 billion USD-worth of

3. Satisfying solvency but liquidity pressures remain

Eurobonds in 2013 (the first time since 2011), [28] but also due to the increasing share of domestic debt held by non- residents (now 40% of government federal debt). Nevertheless, Nigeria’s commercial banks, which are very risk-averse (see Part 3) and hold 46% of public domestic debt (at the end of 2013), have a strong inclination for Treasury Bills. They seem positively inclined to purchase new Treasury Bills should the federal government decide to finance a growing budgetary deficit caused by the consequence of the fall in oil prices by issuing bonds locally.

Graph

600

Sovereign bond stripped spreads (basis points) EMBI Global

550

EMBI NIgeria

500

Despite the slowing economic growth and the exposure of the economy, as well as the deterioration of the terms of financing, Nigeria’s public debt situation remains favourable (primarily a result of its low public debt ratio). Analyzing the viability of public debt leads to the conclusion that the risk of non-sustainability of the debt remains low (IMF, 2015 a ). Nigeria’s Debt Management Office (DMO), in charge of servicing public debt, also concludes, following several stress tests including a pessimistic scenario (decreasing economic growth and fiscal revenues, current accounts balance, and the like) that the risk of non-sustainability remains low (DMO, 2014). However, the prolonged deterioration of economic growth, financing terms (interest rates) and/or budgetary revenues can increase tensions on debt service. This is among the major vulnerabilities of the federal government as it represents 27% of its budgetary revenues (and set to amount to 36% of revenues in 2015 according to the IMF; Graph 26).

450 400

Graph

350

Debt service (payments of the interest) and capital expenditures of the federal government (in % of federal government revenues)

300 250 200 Month1-13

Month3-14

Debt service

Source: JPMorgan, author’s calculations.

Capital expenditures

35 30

Graph

25 20

Treasury yields (%) and Brent price (USD) 25 20

Nigerian treasury bill yields (left scale) Brent price (right scale)

15 10 140

120

100 15

60 40

20 0

0 2007 2008 2008 2009 2010 2011 2012 2013 2013 2014 Source: IMF, IEA, author’s calculations.

2010

2011

2012

2013

2014

2015p

Source: IMF, author’s calculations.

Over the long term, the consolidation of public solvency is crucially dependent on the capacity of the government to transform oil revenues into non-oil related assets. Under these conditions, the main risk to be caused by a macro economic shock on public finances and the debt situation is the impact on potential growth and the increase in regional inequalities, which can be due to the decrease in public expenditures brought about when oil revenues fall.

[28] 500 million USD at a 5-year horizon at a rate of 5.375% and 500 million USD at a 10-year horizon at a rate of 6.625%. The issue was oversubscribed four times. It aimed to finance infrastructure projects, notably in the power generation sector.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

3.4. An unfavourable credit history Having met Paris Club creditors five times to discuss the issues that have arisen in servicing its debt, Nigeria has an unfavourable credit history. Due to weaknesses in the way economic policy was piloted in the past and the very significant exposure of the country to variations in oil prices, the plummeting oil prices in the 1980s resulted in a series of budget deficits and current account deficits that have abundantly fuelled domestic and external public debt. These deficits were mostly incurred by the states and financed by commercial banking institutions at variable rates and with the overarching guarantee of the federal government. After 1982, Nigeria was defaulting and undertook a number of measures to restructure and reschedule its public debt to Paris Club and London Club members. Its last agreement with Paris Club creditors in 2005 brought an overall reduction of 60% of its public debt stock. Since then, external public debt has varied more moderately and represented less than 2% of GDP in 2013 (see Graph 27).

Box

External and guaranteed public debt (in %) 180 160 140 120 100 80 60 40 20 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: WDI, author’s calculations.

How budgetary revenues in Nigeria are shared and the prerogatives of federated entities

Nigeria’s fiscal federalism allows for the distribution of oil revenues to the different federated and administrative entities (as specified in the 1999 Constitution). Thus, the statutory revenue allocation formula structures the better part of Nigeria’s public finance and its breakdown between entities can be updated every five years by the National Assembly. Revenue is allocated based on: (i) vertical distribution and (ii) horizontal distribution. (i) Under vertical distribution, revenues are allotted to each level of the federal structure: 38% of distributable revenue for the federal government, 56% to the 36 states and the 774 local governments, and 6% for the special funds. For oil revenues, an additional premium calculated according to the derivation principle is allotted to oil-producing states (13% of oil revenues). Only oil revenues from onshore drilling sites are subject to the derivation principle. As for the revenues from offshore sites, they are fully distributed to all states. Finally, it should be noted that, due to all these issues, the vertical distribution key is at the centre of a set of antagonistic claims. The potential adoption of the Petroleum Industry Bill should make it possible to increase the fiscal pressure on oil supermajors and increase the allocation linked to the principle of derivation for oil- producing states.

(ii) Under horizontal distribution, revenues are shared between states and local government according to the principle of equality of states (40% is divided equally among jurisdictions) and need (for the remainder of 60% according to population, social development, land mass, and internal revenue effort).

Graph

Sources of fiscal revenues (in % of total revenues) non-oil revenue

Source: IMF (2014 Article IV Consultation).

3. Satisfying solvency but liquidity pressures remain

The 1999 Constitution provides for the following distribution of responsibilities:

research, statistics and surveys, higher education, healthcare and welfare, etc.);

• an

• a concurrent list on which both states and local govern-

• a

• an exclusive list for local governments (including streets,

exclusive legislative list on which only the federal government can act (including matters of national concern such as defence, international relations, elections, roads and railways, etc.); concurrent legislative list on which both the federal government and states can act (including electricity, industrial, commercial and agricultural development,

ments can act (including primary, adult and vocational education, healthcare, agricultural resources and nonmineral resources, etc.); public equipment, waste water, etc.).

Sources: Sébille-Lopez (2005) and IMF (2014 Article IV Consultation), AFD.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

4. Banking supervision has improved but the financial systems remains exposed 4.1. A concentrated banking sector that only

modestly finances economic activity

Nigeria’s financial system is essentially limited to the banking sector, which is very concentrated as five banks control 56% of total bank assets (FBN, Zenith Bank, UBA, GTB, Access Bank). The concentration of Nigeria’s banking sector originates from (i) a 2004 reform by the Central Bank of Nigeria (CBN) that has increased the minimum level of regulatory capital, decreasing the number of banks from 89 to 25, then (ii) the 2009 banking crisis. In the aftermath of the banking crisis, the sector was drastically restructured: ten banks were nearly failing, three of which were nationalized by the bad bank AMCON (Asset Management Corporation of Nigeria). This structure, established to absorb and isolate the sector’s “bad” assets, has contributed to stabilize the banking system by absorbing 3,000 billion NGN of toxic assets (15 billion EUR), has recapitalized three banks and has recovered 1,800 billion NGN (8 billion EUR) of non-peforming assets and loans with high systemic risk (AfDB, 2014).

Graph

The 2009 banking crisis broke out due to the strong increase of speculative-grade asset-backed credits in 2007-2008, bank portfolio exposure to the oil and gas sector, as well as the poor management of banking risks. The bursting of the stock market bubble and the decrease in oil prices then triggered this systemic crisis. The remarkable shock that has been the 2009 banking crisis is now reflected in the limited size of the financial sector, the assets of which represent 27% of GDP in 2014, which is a level well beneath that of other countries of a similar per capita income range as Nigeria. [29] Furthermore, the degree of financial intermediation in Nigeria is stifled (domestic credit to the private sector represented 11.5% of GDP in 2013), and particularly so by international standards, reflecting the low capacity of the banking sector to finance economic activity (Graphs 29 and 30). Nevertheless, Nigerian bank assets are the second highest in Africa and amount to 1.5 billion USD in 2014.

Graph

Domestic credit to the private sector in 2013 – an international comparison (% of GDP) 180

Domestic credit to the private sector (% of GDP) 45 40

160

Banking crisis

140

120

100

20 0 Nigeria

LMIC

SSA

South Africa

Source: WDI, author’s calculations.

0 1990 1993 1995 1997 1999 2001 2003 2006 2008 2010 2012 Source: WDI, author’s calculations.

[29] By way of comparison, financial assets in Indonesia, which are considered as limited, represent 68% of GDP.

4. Banking supervision has improved but the financial systems remains exposed

4.2. A profitable sector with high exposure

to the oil industry

4.2.1. Stable bank resources but an increase of foreign currency deposits The analysis of the structure of bank resources – that is, the liabilities of the banking sector – clearly shows that most of them, 70%, are deposits, and that this share is only getting higher as years pass, which is a sign of stability of the b anking sector (52% in 2002, 62% in 2009, and 69% in 2014). At the end of 2014, foreign currency deposits represent 28% of total deposits, which is relatively high given the exposure to foreign exchange risk resulting from the depreciation of the naira against the dollar. Although this share does not seem to have changed since the beginning of the decrease in oil prices in June 2014, it has followed a remarkable upward trend since 2011 (up from less than 9% of deposits in 2011). Nigerian banks are seeking to diversify their resources by issuing bonds on the international bond market (nearly 4 billion USD of Eurobonds have been raised since 2011).

c ountry in the lower middle income bracket as credits to the private sector amount to no more than 12% of GDP in 2014. The capture of the economy’s resources by the banking sector is inadequate in respect of the ratio of bank deposits to the total liabilities (nearly 70% but 19.5% of GDP in 2014). At the same time, since the end of 2013, the growth of credits to the public sector is flagging, after h aving acted as a relay to the private sector for four years. However, the large part of credits to the public sector within total assets, on average more than 25% since 2011, exposes the banking sector to sovereign risk.

Graph

Compared growth of credit to the private sector (in real terms), the base rate and the inflation rate (year-on-year, in %) 140 120 100

Real credit growth (left scale) Base rate (right scale) Inflation rate (right scale)

80 40

-20

Contribution of the liabilities of commercial banks to the total growth of liabilities (in %) 110

16 12

60 20

Graph

-40 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: IFS, author’s calculations.

Debt to public sector Deposits

Equity capital

Total liabilities

50 30 10 -10 2007 2007 2008 2009 2010 2011 2012 2012 2013 2014 Source: International Financial Statistics (IFS), author’s calculations.

4.2.2. Low financing of the economy by the banking sector and exposure to the oil sector

The banking sector’s restricted financing After the bubble that preceded the 2009 banking crisis, credits to the private sector declined markedly and are experiencing moderate growth since then (Graph 32). Also, financial intermediation is still exceptionally low for a

The limited participation of commercial banks to the f inancing of economic activity is a tell-tale sign of the low level of financial inclusion in Nigeria: 30% of adults own a bank account in a financial institution and 60% of household savings is captured by the (disintermediated) informal financial system (Carlson et al. , 2014). An international benchmark shows that financial penetration is indeed low in Nigeria, and contrasts with the world average of 50%, a rate of 54% for South Africa and 42% for Kenya. All the more so, this presents a major constraint on the development on SMEs, which face difficulties to raise funds: bank loans to SMEs are limited to only 5% of the total amount of loans granted by commercial banks. The Central Bank of Nigeria (CBN) has therefore implemented incentives to ensure that banks finance SMEs more and diversify their exposure. The establishment of a development bank and a fund for the development of microentreprises and SMEs should also foster development of SMEs and improve financial inclusion – the objective is to bring the rate of financial exclusion down to 20% by 2020.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

• Post-consolidation: this capacity has further developed

Contribution of the assets of commercial banks to the total growth of assets (in %) 140

Other

120

to reach between 160 and 500 million USD per billion USD, with syndicated loans pooling funds from several banks. Some projects have even been financed without any international funding.

Credits to the NBC

100

Credits to nonresidents

Credits to private sect.

Credits to public.corp. Credits to gov.

Total assets

20 0 -20

-40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: IFS, author’s calculations.

Credits concentrated in the energy sector… Credits to the private sector are dominant in the activity of commercial banks and are the main contributor to the growth of bank assets, followed by deposits with the Central Bank (Graph 33). Credits to non-residents remain low and amount to 9% of bank assets. The share of bank credits denominated in foreign currencies is high however at 21% of overall credits (at the end of 2013), but the credit stock is covered more than twice by foreign-currency deposits. The activity of Nigerian commercial banks, which are very risk-averse, is concentrated on key accounts (or their affiliates), especially those of the oil and energy sectors but also those of the telecommunication sector. The financing of the energy sector as a whole is constantly increasing, both in absolute and in relative terms, and follows an array of incentives implemented by the monetary authorities in order to improve the financing of businesses (especially Nigerian ones) of the sector (establishment of specific funds after 2010). [30] These measures have lead to increase to capacity of commercial banks to finance the energy sector ( Beyond Ratings , 2015):

• Pre-consolidation (2010): the average participation of

Overall, the oil and gas industry is the main sector of the economy financed by the banking system in 2014. Its credit commitments amount to nearly 14 billion USD (at the end of 2013), that is 24% of total amount of loans and have experienced an increase of 72% in real terms compared to 2011 (CBN, 2014 a ). As for the electricity sector, its commitments to the banking system amount to 4% of total loans in 2014, i.e., about 2.25 billion USD, which brings the total amount of commitments from the energy sector to 28% of the total amount of loans (Graph 34). Under the terms of the convention put forward by the International Standard Industrial Classification of Economic Sectors of the United Nations, to which the Central Bank of Nigeria is a signatory, banks are considered “exposed” to an economic sector (concentration risk) when it concentrates more than 20% of total credit facilities.

Graph

18,0

Loans to the energy sector by Nigerian custodian banks

16,0

25%

14,0 12,0

20%

10,0

15%

8,0 6,0

10%

4,0

2,0 ‐

30%

2010

2011

2012

Loan amount (billion USD)

2013

2014

% of total bank loans

Source: CBN.

Nigerian banks amounted to about 60 million USD per billion USD of investments of the oil sector;

[30] The Nigerian Content Development Fund, established in 2010, aims to improve the access to credit of Nigerian oil and gas companies as well as to develop their competencies; the Power and Airline Intervention Fund, established in 2012 and initially funded with 1.58 billion USD is intended to promote energy generation and airlines; the Shell Kobo Fund and the Shell Contractor Finance Scheme (created in 2012) help Shell’s contractors raise funding by different means in partnership with several local banks.

4. Banking supervision has improved but the financial systems remains exposed

… and exposes banks to the falling oil prices The free-fall in oil prices (these have decreased by more than 50% since June 2014) is a source of vulnerability for Nigerian commercial banks, due to their strong credit portfolio exposure to the oil and gas sector and energy g eneration (table 6). This concentration of both the banking

Table

sector and allocated credits reinforces this negative exposure, although the sector appears sounder and better regulated following the 2009 banking crisis (see Section 4.3.1 ). Overall, Nigeria’s commercial banks are more exposed to the oil and gas industry than Russian banks. [31]

Share of the energy sector in the loan portfolio of the six main Nigerian banks (in %) Growth rate of the loan portfolio 2010-2013

Share of the oil and gas sector in the loan portfolio (Dec. 2013)

Share of the electricity sector in the loan portfolio (Dec. 2013)

Zenith bank

Guaranty Trust Bank

First Bank

Ecobank (USD)

117

Access Bank

UBA

Source: AFD-Beyond-Ratings.

Although the amount of loans denominated in foreign currencies that bank portfolios can hold are legally limited and thus remain moderate (13% of the total amount of loans and 9% of bank assets), the drop of oil prices, tensions on the naira and the decreased performance of the Lagos stock exchange, are as many sources of exposure (Graph 35) – financing terms for banks are getting harsher and the local financial market is increasingly volatile in a context where the bonds issued by Nigerian banks on international markets amount to nearly 5 billion USD since 2007. These sources of exposure seem to have been taken into account by the Central Bank of Nigeria, which has recommended to commercial banks at the end of 2014 to carry out stress tests on the basis of several scenarios sent to them. At a price level of the barrel of crude oil at 50 USD for instance – which is the level around which the Brent Crude has been varying since the beginning of the month of January 2015 –, the Central Bank estimates that 65% of the share of the credit portfolio of the oil and gas sector would be liable to be requalified as non-performing loans (i.e., a total rate of non-performing loans of 16%, compared with 3.2% in 2013).

Graph

Lagos stock index and crude oil prices (USD) Price of crude oil (USD, left scale)

140

Lagos stock index

120

100

0 2000

2002

2004

2006

2008

2010

2012

2014

Source: IFS, author’s calculations.

4.2.1. A satisfying level of solvency and profitability of the banking sector After the decline of balance sheet ratios in 2010, following the banking crisis, the recapitalization and the absorption of degraded assets by bad bank AMCON seem to be gradually restoring the solvency of the sector. At this stage, the capital adequacy ratio, used to assess bank solvency and computed as

[31] The exposure of the three main Russian banks – OAO Sberbank, VTB Bank OJSC, and Gazprombank OJSC – to the oil and gas industry amount to 2.2%, 8.1%, and 16% respectively (Beyond Ratings, ibid).

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

a ratio of a bank’s regulatory capital to its risk-weighted assets, is at 17.1% (in 2013), which is higher than the regulatory requirements of Basel II and Basel III (respectively 8% and 10.5%), thus enabling the sector to absorb shocks. It is indeed exposed to the decline in oil prices due to the concentration of credits to the oil and gas sectors and to foreign exchange risk (see above). Following the stress test simulations, the Central Bank of Nigeria (CBN) estimates that the banking sector is resilient to shocks on credits (increase of non-performing loans, NPL), on the interest rate and the exchange rate (CBN, 2014). The institution has decided in November 2014 to increase the reserve requirement of private-sector banks from 15% to 20%. At the same time, in order to limit the exposure of bank portfolios to foreign exchange risk, the CBN has decreased the limits on

Table

foreign currency borrowing by funds from 200% to 75% and has introduced measures to supervise and control banks on their assets denominated in foreign currencies (October 2014). Finally, the regional dimension of Nigerian banks is also a source of exposure due to the deterioration in operational performance of some of their subsidiaries in the African countries where they are established. There were 61 such subsidiaries in June 2014 (52 of which on the African continent) and they represent a systemic risk for the Nigerian banking system in the event of a failure according to CBN. Furthermore, two sub sidiaries of Nigerian banks have been the subject of regulatory measures and an intervention by the Central Bank of The Gambia, and one of these subsidiaries is still under the direct control of the supervisor according to the IMF.

Balance sheet ratios of the banking sector (in %) 2008

2009

2010

2011

2012

2013

2013 T2

Capital adequacy ratio (CAR)

21.9

4.1

1.8

17.9

18.3

17.1

16.4

Rate of non-performing loans

6.3

27.6

15.7

5.3

3.5

3.4

3.7

Provision rate for non-performing loans

45.2

78.9

70.6

49.6

52.7

45.0

Return on assets (ROA)

3.7

-8.8

3.9

0.2

2.3

2.5

Return on equity (ROE)

20.7

-222.8

266.0

2.2

21.1

18.9

20.7

Sources : CBN, IMF (Global Financial Stability Report), author’s calculations.

4.3. Supervision of banks has been

reinforced but vulnerabilities remain

4.3.1. A banking system that is better supervised since the 2009 banking crisis Established in 1959, the Central Bank of Nigeria (CBN) is in charge of the supervision and monitoring of banking institution, of defining the regulatory framework, and of implementing monetary policy. After the banking crisis of 2010 that had revealed the governance failures of the banking system, the CBN reinforced its prudential rules: risk management with a review of the credit portfolio (on a quarterly basis), provision rules (including collective provision), corporate governance (with term limits for CEOs and directors) and anti-money laundering provisions. At the same time, the CBN has implemented regular in situ controls at the leading banking institutions. Finally, the CBN has reconsidered the model of the universal bank following the banking crisis, by separating the so-called “traditional” commercial banking activities from those of insurance and asset management.

According to the IMF’s updated analysis of the Financial Sector Assessment Program (FSAP) in 2015, the supervision and monitoring of the banking system of Nigeria have improved since the 2009 banking crisis. The authorities have taken additional measures to strengthen the prudential framework in September 2014, focussed on the seven to eight banking institutions deemed of systemic importance (increase of the minimum required solvency ratio to 15%, increase in Tier 1 capital, etc.). The CBN has also made the application of IFRS (International Financial Reporting Standards) accounting standards compulsory and initiated the gradual implementation of the principles of Basel II/III (still ongoing). Lastly, according to the CBN, the well- capitalized banking sector is resilient to shocks on credits (increase of non-performing loans, or NPL), on the interest rate and on the exchange rate. In spite of these measures aiming to strengthen the p rudential framework, banking institutions are still characterized by weak governance according to the FSAP of the IMF. According to an assessment carried out by the monetary authorities, only 35% of bank directors are considered to meet minimum qualification requirements for their p osition.

4. Banking supervision has improved but the financial systems remains exposed

4.3.2. Monetary policy’s many objectives interfere with its clarity

Graph

The monetary policy of the Central Bank of Nigeria…

Exchange rate (NGN/USD) and sales of foreign reserves by the CBN (billion USD)

The monetary policy of the Central Bank of Nigeria hinges on pursuing multiples objectives: (i) maintaining the stability of prices and the national currency, (ii) issuing the legal tender of the country, (iii) maintaining the level of currency reserves in order to maintain the international value of the legal tender (i.e., a change regime with a quasi-fixed exchange rate), (iv) promoting a sound financial system, (v) to act as a bank and provide economic and financial advisory to the federal government. The high number of objectives interferes with the clarity of monetary policy and is confusing to market players. Thus, after the 2009 banking crisis, this confusion led CBN not to increase the interest rates when the solvency of banks was jeopardized, which was in conflict with the increasing pressures on the currency and prices. Furthermore, one of the major challenges that the CBN must face is the management of excess liquidity in the economy. This is caused by the oil and gas sector, and results in generating volatility in the financial system and to fuelling inflation. To manage the excess liquidity – inherent to oil economies such as Nigeria’s and caused by the high exposure of banks to the oil sector and by the public enterprise NNPC (in the context of its participation to oil operations, see Box 2) –, the Central Bank has introduced an array of instruments since 2007. Among them, the possibility of intervening directly on the foreign exchange market and carrying out sterilization operations by imposing fluctuation bands on the naira – an instrument that is not unlike a p ublic auction –, via the Retail Dutch Auction System (or rDAS, which has replaced the WDAS in September 2013). Nevertheless, reconciling the objectives of price stability (inflation was an average of 12% since the beginning of the 2000 decade), of parity and liquidity management, in a context where the latter is highly linked to oil prices, g enerates structural volatility (IMF, 2013). Thus, monetary authorities face structural liquidity cycles that can amplify shocks and increase revenue transfer risks between various federated entities (IMF, 2014).

Source: IMF (2015 Article IV Consultation).

The foreign exchange market is segmented between the Inter-bank Foreign Exchange Market (IFEM ) and the Bureau de Change, where rates are negotiated with a premium on the rDAS (Retail Dutch Auction System), the CBN’s instrument to intervene on the foreign-exchange market (see above). The existence of two exchange rates, as well as the existence of a parallel market, creates market distortions (Graph 36).

… when confronting the spinoff effects of the downfall in oil prices The decline of the price of oil has had the consequence of significantly lowering the inflow of foreign currencies through exports, which were virtually the only way the Nigerian economy is generating foreign currencies (more than 95% of the export value of goods, see Part 5). As a result, the level of foreign-exchange reserves has fallen by more than 30% between January 2014 and March 2015, to less than 30 billion USD (i.e., less than five months’ worth of imports of goods and services). At the same time, tensions on the national currency are mounting (Graphs 37 and 38). In order to address these pressures, the monetary a uthorities decided in November 2014 to:

• Devaluate the naira by 8%. The fluctuation band has been shifted from 150-160 USD/NGN to 160-176 USD/ NGN. The level of the naira before the devaluation was considered overvalued compared to the market rate on informal channels, where the going rate was 184 USD/ NGN.

• Increase the key rate by 100 basis points, to 13% • Increase the reserve requirement ratio of private-sector banks to 20%, up from 15%.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

Exchange rate and foreign-exchange reserves 210

USD/NGN exchange rate

200

Foreign reserves (billion USD, right scale)

55 50

190

180

170

(0.3 times M2), which is its lowest level since 2009 (Graph 39). This decrease in reserves was caused by the decrease in currency inflows (decrease in the value of crude oil exports) and the defence of the parity of the naira within its fluctuation band. At the same time, foreign currency deposits – which had been increasing since 2012 (28% of total deposits in 2014, see above) – are now markedly less covered by foreign-exchange reserves, with a coverage ration of only 1.3 at the beginning of 2015 (see Graph 40).

160 150

140 2013

25 2014

2015

Coverage of monetary mass by foreign-exchange reserves (foreign-exchange reserves/M1) 1,4 1,2

Oil prices and foreign-exchange reserves

0,8

Bonny Light crude oil price (USD per barrel) Foreign reserves (billion USD, right scale)

140

60 55

120

100

0,6 0,4 0,2 0 2009

Graph

30 2010

2011

2012

2013

2014

Source: CBN, author’s calculations.

Given the ongoing tensions, a new devaluation of the naira should be considered, to the very least, especially given that oil prices are now set to stay low for long and that the end of the US unconventional monetary policy has led to a gradual appreciation of the US dollar. [32] The inefficiency of the November 2014 devaluation may lead the monetary authorities to abandon the regime of semi-floating exchange rates, the defence of which is taxing for foreign-currency exchanges. The introduction of a more flexible exchange rate system may happen gradually. The decrease in foreign-exchange reserves since the Summer of 2014 (by more than 30%) is such that these inflows now cover only 0.7 times the M1 money supply

2011

2012

2013

2014

Coverage of foreign currency deposits by foreign-exchange reserves (ratio of foreign-exchange reserves to foreign deposits)

25 2009

2010

Source: CBN, author’s calculations.

40 20 2008

1,6

Source: CBN, author’s calculations.

Graph

9 8 7 6 5 4 3 2 1 0 2008

2009

2010

2011

2012

2013

2014

2015

Source: CBN, author’s calculations.

[32] The appreciation of the US dollar since April 2014 may explain part (up to half) of the downfall in oil prices (source: Olivier Rech, Beyond Ratings – quoted in an interview in La Tribune of 9 October 2014).

5. A mono-export economy exposed to a downturn in prices 5.1. Energy exports, determinants

of current account positions

Nigeria’s current account balance is structurally positive since 1980, except for the downturns on the international oil market due to its mono-product export base (see below, Graph 41). Also, since the early 2000s, the current account balance is estimated at an average of 8% of GDP, even though this surplus is seemingly declining since 2005. Nevertheless, Nigeria’s external financing needs – the sum of the current account balance minus external debt service), estimated at an average of more than 24 billion USD since 2005, must be qualified due to: (i) The very high level of the “Errors and omissions” item in balance of payments – 4% of GDP on average since 2005 (Graph 42). This reveals weaknesses on part of the Central

Graph

Bank, which is in charge of drafting this statistical document, in estimating Nigeria’s foreign transactions. [33] Thus, a ccording to the IMF, the surplus of the current account b alance is overvalued by a significant (but unknown amount); (ii) The predominance of oil and gas exports in current external trade and investment flows (exports of goods and services, remittances, current transfers). These energy exports are estimated to represent 97% of the exports of goods on average since 2000 and, along with current transfers, determines the profile of the current account balance (Graph 43); (iii) The relatively limited openness ratio of the Nigerian economy, which has been on a downward trend since the beginning of the 2000s – it was estimated at 56% in 2000, but only at 33% in 2013. [34]

Graph

Current account balance (% of GDP) Note: external financing needs (EFN) and their coverage are not explicitly presented because the data from the balance of payments are not robust enough.

Current account balance and Errors and omissions (% of GDP) Current account balance

Errors and omissions

0 ‐5

-5

‐10

-10

‐15

-15

‐20 1980 1984 1987 1990 1993 1996 1999 2003 2006 2009 2012

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: CBN, author’s calculations.

Source: WEO, author’s calculations.

[33] CBN’s Balance of Payments Analysis Office has initiated improvements in data collection, notably by setting up statistical surveys of identified contributors. [34] The openness ratio, or openness index, of an economy measures the place occupied by the rest of the world in the economy of a country. It is the ratio of imports and exports of goods and services to the value of its GDP. It is equal to 46% on average for Nigeria between 2000 and 2013.

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

Components of the current account balance (% of GDP) Current transfers Income Services Goods Current account

30 25 20 15 10 5 0 ‐5 ‐10 ‐15

2000

2002

2004

2006

2008

2010

2012

Source: CBN, author’s calculations.

Due to the predominance of oil and gas in the exports of goods, the performance of Nigeria’s external trade is, de facto, very dependent on oil prices (Graph 44). The share of oil and gas exports in the total exports of goods has remained constant (in real terms) since the 1990s (at a level

Graph

of 97%), which suggests that Nigeria’s export sector is still very concentrated and that the diversification of Nigeria’s economy (see Part 2) is stymied by several limitations. Nevertheless, the emergency of service activities in the economy, and therefore targeted at the local market, has decreased the the share of oil exports in the GDP. The latter amounted to 27% of GDP in 2000 but less than 14% en 2014. The sharp drop in oil prices since the month of June 2014 therefore penalizes the value of the export base of the country. Other things being equal, the fall in oil prices by 50% could lead to the deterioration of the current account balance by more than 10 percentage points of GDP – along with the emergence of a current account deficit of about 6% of GDP, notwithstanding the structurally elevated level of the “Errors and omissions” item, which could increase the impact of the shock even more. On top of this value effect, there is a volume effect that seems more structural and therefore more problematic. Indeed, at constant prices, the quantities of crude oil exported from Nigeria have been gradually dropping since 2011 (Graph 45).

Graph

Brent price and net oil exports 120 100

Brent price (USD per barrel) Net exports of oil (billion USD)

Net oil exports and changes in the variation of export volume of goods 40 35

Net oil exports (% of GDP) 35 Variations in the export volume of goods (%, right scale) 30 25

0 1995 1997 1999 2001 2002 2004 2006 2008 2009 2011 2013 Source: WEO, EIA, author’s calculations.

0 -5

-10

-15 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: WEO, author’s calculations.

5. A mono-export economy exposed to a downturn in prices

This alarming situation can be linked to the large decrease in crude oil imports by the United States these past years (46% of the total in 2008 but only about 4% in 2014), in link with the formidable increase in production of non- conventional oil since 2005 (more than 10 million barrels per day in 2014). Last June, the United States, which were until then Nigeria’s largest trading partner, have stopped importing oil from Nigeria. The loss in market share of Nigerian crude oil is particularly alarming because it comes with the exposure to the volatility of oil prices, at least until the country finds other trading partners.

Graph

External capital flows (% of GDP) 3,5 3,0

Net FDI Net portfolio investments

2,5 2,0 1,5 1,0 0,5 0,0

5.2. Low external capital flows The financial account balance, which is in deficit since the beginning of the 2000s due to the increase in repayments of international credits, is gradually shrinking since 2005. External capital flows seem low given the size of the Nigerian economy (Graph 46). In particular, net inflows of foreign direct investment (FDI) remain very low (at an average of 1.3% of GDP since 2010), even though the inflows are evaluated at 7 billion USD per year. These inflows are concentrated in the energy and natural resources sectors (mostly in the oil sector), for a share exceeding 50% of total investment. However, FDI in the telecommunications and construction industries are experiencing strong growth. They primarily proceed from the United States (14%), South Africa (11%) and the United Kingdom (11%). As for portfolio investments, they have strongly increased in the past five years, experiencing a three-fold increase. Their volatile character and their predominance compared with FDI is a source of exposure for Nigeria. Also, p reliminary data for 2014 seems to indicate that portfolio investments have strongly receded. Among the factors outlined by the financial community, investor concern and uncertainty regarding the electoral context as well as the trend reversals linked to the end of the US unconventional monetary p olicy.

2010

2011

2012

2013

Source: WEO, author’s calculations.

Finally, it must be added that it is quite difficult to interpret the data from Nigeria’s balance of payments due to the imbalances in statistical estimations of the data, as it suggested by the very high level of the “Errors and omissions” item (see Graph 42).

5.3. External liquidity is under increasing

tension

The fall in export revenues from oil for the past few months has led to increased tensions on the naira, which based on a managed float regime. To defend the parity of the naira in its target band of fluctuation, the Central Bank has drawn from its foreign-exchange reserves to inject several billion dollars in the economy starting in the month of September 2014, before resorting to devaluate the naira by 8% (the band of fluctuation has gone from 150-160 USD/NGN to 160-176 USD/NGN in November 2014). Overall, between CBN’s withdrawals and the decrease in oil export revenues, foreign-exchange reserves have gone down by more than 7 billion USD between July 2014 and March 2015, i.e., by more than 30%. In 2014, they were at a level considered satisfying, allowing for the coverage of more than six months

/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /

Graph

Foreign-exchange reserves Reserves (billion USD, left scale) Reserves in months of imports of goods and services

60 50

16 14 12

30 20 10 0 2000

2002

2004

2006

2008

2010

2012

1600 1400

800

600

400

200

of imports of goods and services, but with the rapid depletion of foreign-exchange reserves (29 billion USD at the end of the month of March 2015), these would only enable to cover less than five months of imports of goods and services at last year’s levels (see Graph 47). The now durably low oil prices on the medium run, the loss in market share of crude oil exports to the United States, as well as the nature of the

Foreign reserves / Total external debt

1200 1000

Source: World Bank, CBN, author’s calculations.

Foreign-exchange reserves coverage of the external debt (in %)

2014

0 2005 2006 2007 2007 2008 2009 2009 2010 2011 2011 2012 Source: World Bank, author’s calculations.

e xchange-rate regime in place, should increase the tensions on the f oreign-exchange reserves in the coming months. External solvency remains satisfying however due to the low level of external debt ratio, at 1.7% of GDP. External debt has primarily been contracted from funding agencies and seems securely covered by the foreign-exchange reserves (last data point in 2012, Graph 48).

Conclusion The macroeconomic and sociopolitical history of Nigeria is first and foremost a history of oil and the distribution of income that accompanies it. After the end of the Biafran War in 1970, and the tumultuous shifts of an economy that was volatile and dependent on the fickle changes in the oil and gas industry, the growth rate became stable. This was made possible by the changes that were made to the economic growth model, which followed from the emergence of a service economy that developed from the end of the 1990s into the beginning of the twenty-first century, and which included telecommunications, banks, entertainment, and the like. The Nigerian economy grew at a significant pace (7% per year, on average) and became the largest economy on the African continent. Nonetheless, forms of diversification of the productive sector came up against certain constraints. One of the most significant of these structural limits was the generation of electricity. When compared to other countries, it is easy to see why the quality of electricity in Nigeria is often said to be among the worst. This hampers the attractiveness of the country in the eyes of foreign companies, and as a

cÂorollary, the diversification of productive activity in the country. Both the private and the public sectors are largely dependent on oil and gas as sources of revenue. If certain aspects of the infrastructural deficits in the country can indeed be overcome, and growth can continue, institutional issues and corrupt practices are still an inhibiting factor. The resolution of constraints such as these is fundamental to creating an atmosphere of inclusive development in the country of Nigeria. Previous governments have neglected the problem of territorial disparity, and have only manager to alternate the dynamic of concentration of revenue in three geographical areas. The persistence of such a public policy will continue to impact the sociopolitical context. Amongst the imminent measures to be taken by the new president is the quelling of the Boko Haram m Â ovement, which significantly affects some of the most disadvantaged regions in the country. This fact in itself could constitute one of the most compelling motivations for rising to the challenge of promoting an inclusive model of development in the heart of such a vast an rich country as Nigeria.

/ Nigeria: The Restrained Ambitions of Africaâ&#x20AC;&#x2122;s Largest Economy /

List of acronyms and abbreviations AMCON

Asset Management Corporation of Nigeria

IPP

Independent Power Producers

APC

All Progressives Congress

JOA

Joint Operating Agreement

bpd

barrels of crude per day

LMIC

Lower Middle Income Country

CAR

Capital Adequacy Ratio

MIC

Middle Income Country

CBN

Central Bank of Nigeria

MW Megawatts

DMO

Debt Management Office

NBS

Nigeria’s National Bureau of Statistics

ECA

Excess Crude Account

NNPC

Nigerian National Petroleum Corporation

EFCC

Economic and Financial Crimes Commission

NRN

Nigerian Naira

EFN

External Financing Needs

NSIA

Nigeria Sovereign Investment Authority

FDI

Foreign Direct Investment

OPEC Organization of the Petroleum Exporting Countries

GDP

Gross Domestic Product

PDP

People’s Democratic Party

GFCF

Gross Fixed Capital Formation

PPP

Purchasing Power Parity

IEA

International Energy Agency

PPP

Private-Public Partnership

IMF

International Monetary Fund

PSC

Private Sharing Contracts

HNLSS

Harmonized Nigeria Living Standards Survey

rDAS

Retail Dutch Auction System

ICPC

Independent Corrupt Practices Commission

ROA

Return on Assets

ROE

Return on Equity

SME

Small and Medium Enterprises

ICRC Infrastructure Concession Regulatory Commission

IFEM

Inter-bank Foreign Exchange Market

SSA

Sub-Saharan Africa

IFRS

International Financial Reporting Standards

USD

US Dollar

IFS

International Financial Statistics

WDI

World Development Indicators

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MACRODEV (“Macroeconomics and Development”) This collection was launched by AFD’s Research Department to present the work produced in the field of development macroeconomics by AFD’s Macroeconomic and Country Risks Analysis Unit (RCH/AMR) and AFD Group economists. It publishes studies that focus on countries, regions or development-related macroeconomic issues. The analyses and conclusions in this document are the sole responsibility of the authors, and do not necessarily reflect the viewpoints of the Agence Française de Développement or its partner institutions.

Directrice de la publication : Anne PAUGAM Directeur de la rédaction : Gaël GIRAUD Translator : Dupont and Smith Agence Française de Développement 5, rue Roland Barthes – 75598 Paris cedex 12 Tél. : 33 (1) 53 44 31 31 – www.afd.fr

Dépôt légal : 2nd quarter 2015 ISSN : 2266-8187