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U.S. Department of State

Department Seal Advisory Committee on International Economic Policy
Priority Democracy: Nigeria Economic Outlook and Prospects

Background Paper
Released by the Bureau of Economic and Business Affairs
U.S. Department of State, Washington, DC, October 26, 2000
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Since gaining its independence in 1960, Nigeria has been ruled almost exclusively by military regimes. After the death of ruler General Abacha in June 1998, Nigeria began its democratic transition. Through an election that reflected the will of the electorate, Chief Olusegun Obasanjo became Nigeria's first democratically-elected President on 29 May 1999. Since then, Nigeria has also made significant strides toward respecting civil liberties. Under the current government, free speech and association are enforced by Nigerian courts, and trade union rights, and the independent press have been restored.

Nigeria is gradually liberalizing its state-dominated economy. Nigeria's economy is based on the exploitation of the country's abundant energy resources; Nigeria's crude oil and gas exports account for 80% of government revenues and 34.5% of GDP. High oil prices, in fact, are the reason for Nigeria's relatively strong macroeconomic performance (GDP is expected to increase by 4% in 2000).

This wealth has not, however, trickled down to most Nigerians, who are significantly worse off than they were twenty years ago. While GDP growth has increased, the share of income received by the poor has declined. Today, 66% of the population lives below the national poverty line, versus 27% in 1980. Such discrepancies have caused social unrest and frustration, principally in the Niger Delta region and Northern States.

Nigeria's substantial debt burden is a result of indiscriminate borrowing and corruption by previous regimes and the subsequent failure of the Government of Nigeria to service those debts over several years. A large percentage of Nigerian debt consists of arrears and penalties for non-payment. The Obasanjo Government has made debt relief a top priority. As a precondition for negotiations on debt rescheduling with Paris Club creditors -- to whom the bulk of Nigeria's U.S. $30 billion debt is owed -- Nigeria adopted an IMF program and standby arrangement in August 2000. The United States has been a strong advocate of generous debt rescheduling for Nigeria; President Clinton has promised to support future debt relief if Nigeria remains in good standing with its IMF program, and continues to implement economic reforms. Negotiations began October 25th to reschedule Nigeria's debt payments to the Paris Club creditors.

Private Sector Business Climate

Private sector activity occurs throughout the economy and in a variety of sectors. The government's commitment to privatization has been spotty; small steps have been taken toward the privatization of the banking, manufacturing, transport, and telecommunication sectors, including public utilities. However, these efforts have often been incomplete, nontransparent, and subject to frequent reversals. Large, inefficient, state-owned industries such as the Nigerian Electric Power Authority (NEPA), the Ajaokuta steel complex, the Nigerian National Petroleum Company, and the state-owned telecommunication companies (NITEL), continue to drain Nigeria's fiscal accounts and hinder economic growth.

Foreign Direct Investment (FDI) in Nigeria is minor considering its resource potential, and has occurred mainly in the form of multinational corporations investing in oil production. The current government has taken steps to improve the business climate -- and thereby encourage private investment in Nigeria -- through economic liberalization, access to foreign exchange, and the signing of an investment treaty with Germany; but much remains to be done.

Despite some progress on reform, private investment has been lacking, contributing only 6.5% of GDP. This weakness can be attributed to several constraints: a weak legal and regulatory framework; poor governance and excessive corruption; inadequate infrastructure, limited access to finance, and high cost of services. Along with risks of political instability, these factors are obstacles to opportunities for new business development in Nigeria.

Major Constraints to Development

There are several primary roadblocks to Nigeria's further development:

Lack of physical infrastructure. With one phone line per 330 people and electricity available to only 1/3 of the nation, Nigeria's physical constraints must be addressed before the investment climate improves.

Macroeconomic/Institutional weaknesses. With no consistent economic framework and a large debt burden, Nigeria's macroeconomic policy is highly uncertain. In addition, the high level of corruption in all levels of government must be addressed before the investment climate can be enhanced.

Sectoral constraints. Heavily dependent on the oil sector, Nigeria is extremely vulnerable to the volatility of the international oil market.

Sources

African Development Bank. September 2000. Nigeria: Country Strategy Paper 1999-2001.
The Economist Intellegence Unit. August 2000. Nigeria Country Report.
Overseas Development Council. March 2000. "Reviewing US-Nigeria Relations: New Links to Reinforce Democracy."

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