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Country Commercial Guides for FY 2000: Nigeria Report prepared by U.S. Embassy Abuja, released July 1999 Note*

                    CHAPTER II: ECONOMIC TRENDS AND OUTLOOK

By maintaining "liberalization" policies, the GON hopes to continue the growth trend and negotiate a medium-term economic adjustment program (MTEP) with the International Monetary Fund, followed by some form of external debt relief and a resumption of concessional financing in 1998 and 1999. Discussions with the World Bank and IMF continue but as of this writing MTEP and Paris Club scheduling are not yet on the horizon.

Nigerian GDP grew by 4 percent in real terms in 1998, compared with a 2.4 percent rise in 1998. Official end-December 1998 figures showed 1998 inflation rose to 10 percent, compared with 8.5 percent in 1997.

AGRICULTURE

Nigeria is predominantly agrarian, with about 70 percent of the populace engaged in agricultural production at the subsistence level. The country enjoys a wide range of climatic variations from the tropical rainforest at the coast to the sahel zone of the north which makes it possible to produce a wide range of agricultural commodities. Agriculture supplies food for the teeming population and raw material for industry, while supplementing export earning from petroleum.

An estimated 70 percent of the country's population, live in the rural areas, deriving their livelihood primarily from agriculture. The fortune of the Nigerian agricultural sector is closely tied to the uncertainties of revenues from the oil sector. Agriculture suffered severely during the oil boom period of the 1970's as the terms of trade turned against the sector. Agriculture's contribution to GDP declined sharply from 50 percent to 25 percent between 1974 and 1980 and Nigeria in fact moved from being a large exporter to a major importer of agricultural products.

However, economic liberalization since the adoption of the Structural Adjustment Program (SAP) in 1986 has once again enhanced the competitive position of Nigerian agriculture. The devaluation of the Naira dictated by the liberalization has turned the terms of trade in favor of Nigeria's agricultural produce. The producer prices of the major agricultural commodities have increased considerably in Naira terms while imported food commodities have become less competitive against domestically produced food.

Agricultural production increased moderately in 1998 due largely to favorable weather conditions. Rainfall was adequate in terms of volume and distribution for extensive agricultural activities. Farmers intensified the planting of millet, sorghum, groundnut and cotton which are less fertilizer dependent. The agricultural sector accounted for 40 percent of the Gross Domestic Product (GDP) in 1998.

In furtherance of its stated policy of moving the country quickly toward achieving self-sufficiency in food production, the GON designed a number of policies and programs as articulated in the Fourth National Development Plan to increase the production of agricultural raw materials for domestic agro-based industries and export. To this end, the GON is focusing on sustainable agricultural extension services through the Agricultural Development Projects (ADPs), Fadama development, completion of ongoing irrigation projects and the maintenance of existing dams. The strategy is to achieve output growth to out pace growth in population.

Self-sufficiency in food production has remained elusive as policy implementation has been rather poor. Food production in Nigeria will continue to lag behind population growth unless the critical problems of the sector are properly addressed. Identified constraints to increased agricultural production include:

- deplorable condition of rural infrastructures, especially roads, which resulted in increased costs of farming operations and transportation of produce and inadequate storage facilities;

- the continued dominance of the smallholder farmers who depend almost exclusively on their labor and that of family members, thereby reducing area cultivated;

- Nigeria's rain fed agriculture is subject to the vagaries of weather and,

- inadequate supply and high cost of farm inputs, especially fertilizers.

The short to medium term outlooks of Nigeria's agricultural production appear mixed and will depend to a great extent on the improvement of the extension system, availability of fertilizers at affordable prices, and the level of adoption improved planting seed varieties by farmers. Nigeria's dependence on rain fed agriculture poses a threat to her fragile food supply situation. However, anecdotal reports suggest that Nigeria's overall food supply situation is within safe limits although some sectors of the population may remain vulnerable. For food supply to keep pace with population growth, agricultural production will need to grow at an average of 4 percent annually. Meanwhile, the newly inaugurated government has indicated that it will reintroduce the subsidy on fertilizers.

Nigeria is currently the fifth largest importer of U.S. wheat and there is considerable potential for U.S. exports of a variety of bulk and processed food products.

MANUFACTURING

The manufacturing sector recorded a 0.29 percent growth rate during 1998 down 0.01 percent from 1997. Nigeria's manufacturing capacity utilization decreased from 34.0 percent in 1997 to 32.4 percent in 1998.

OIL SECTOR

Petroleum continued to power the Nigerian economy in 1998. Oil exports accounted for over 97 percent of export earnings and 80 percent of federal government revenue.

The oil sector continued its dominance of the Nigerian economy, accounting for 11.6 percent of the GDP. However the sector, in 1998, declined by 7.6 percent, due to two main reasons: a general fall in world oil prices in 1998 due to excess supply and the closure of several wells in the Niger-Delta region due to communal clashes.

BANKING SECTOR

With the adoption of the Structural Adjustment Program (SAP) in 1986 the licensing of new banks was liberalized and more non-bank financial institutions were created. In accordance with this policy, the number of banks (commercial and merchant) rose sharply from 40 in 1985 to 120 at the end of 1993. However, following the liquidation of some banks between 1995 and 1998, total number of commercial and merchant banks in Nigeria fell to 89 in 1998. This was made up of 51 commercial and 38 merchant banks. The total number of registered finance companies remained at 279, while only 38 were in operations in 1998.

With the deregulation of interest rates in the last quarter of 1996, lending rates rose initially to 25 percent, but later dropped to 18 percent far below the former official 21 percent ceiling. The drop was attributed to the inability of manufacturing houses to borrow money due to huge unsold stock. Deposit rates also dropped to 3-5 percent thus discouraging savings. Investors now turned to the capital market. As a result, shares of many quoted companies rose significantly during the first quarter of 1997.

In an effort to meet a new statutory requirement of a minimum capital base of 500 million Naira for commercial and merchant banks, many banks turned to the capital market to raise funds. The new policy also stipulated that distressed banks re-capitalize by March 1997 or face liquidation. Mergers and acquisitions are favored options for the resuscitation of ailing banks. In 1997, two mergers took place. More mergers may be coming.

Unlike 1994 and 1995, no liquidation took place in 1996 although some distressed banks were taken over by the regulatory authorities. In 1997, 26 state banks were liquidated. The Nigerian Deposit Insurance Corporation (NDIC) is presently paying out funds to depositors of these 26 banks and has appointed ten banks as agents to carry out these payments.

EXTERNAL SECTOR

Available figures from the Central Bank of Nigeria show that the external sector of the Nigerian weakened considerably in 1998 due largely to the poor performance of the oil sector bought about by a fall in international oil prices. Although US $9.8 billion of oil export receipts was projected, actual earnings amounted to only US $6.7 billion leaving no room for planned accretion to external reserves.

In 1998, oil export revenues accounted for 95 percent of total exports. The portion of exports sent to Nigeria's largest customer, the United States, increased to 49 percent in 1998 (from 34.6 percent in 1997). India moved to the second position with a share of oil imports totaling 8.6 percent.

The stock of U.S. foreign direct investment in Nigeria is estimated at around $4 billion, largely in the petroleum sector.

TRADE WITH THE UNITED STATES

The U.S. recorded a larger trade deficit with Nigeria in 1998 of $5.7 billion, up from $5.0 billion in 1998. Total U.S. exports to Nigeria, led by oil equipment and wheat, modestly increased from $814 million in 1997 to $819 million in 1998, 9 percent increase.

Nigeria was the fifth largest supplier of crude to the U.S. in 1998 (behind Saudi Arabia, Canada, Venezuela and Mexico). Crude sales reached $3.5 billion, substantially below levels of the early 1990s, when Nigeria was the number two crude oil supplier to the U.S. Total U.S. imports from Nigeria decreased to $4.1 billion in 1998 from $6.3 billion in 1997.

INFRASTRUCTURE

Nigeria is Africa's most populous nation and the United States' fifth largest oil supplier. It offers investors a low-cost labor pool, abundant natural resources, and the largest domestic market in Sub-Saharan Africa. These advantages must be weighed against inadequate infrastructure, confusing and inconsistent regulations, and endemic corruption.

Nigeria's transport and communications networks constitute an important aspect of the country's development program. The current economic recession has reduced shipping traffic at Nigeria's principal ports, including Lagos (Apapa and Tin Can Island), Warri, Sapele, Port Harcourt and Calabar. Of the 167,800 kilometers of roads, only 34,300 kilometers are paved. Nigeria also has about 3,500 kilometers of railroad track. The rail system, suffering from years of neglect, is being rehabilitated by a Chinese civil engineering company. The state-owned airline, Nigeria Airways, has experienced prolonged financial and managerial difficulties. It is one of the public enterprises tentatively slated for privatization by the GON. The Federal Airports Authority of Nigeria (FAAN) manages 19 airports, several of which are not operating due to equipment shortages and low traffic volume.