Report No. 6716-UNI

The Nigerian Structural Adjustment Program:Policies, Impact, and Prospects

September 30,1988

Africa Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Calendar 1985 Calendar 1986 Calendar 1987 September 1988

Currency Unit Naira (N) N N NUS$1 NO.89 W1.35 N4.01 N4.67Nl - US$1.12 US$0.74 US$0.25 US$0.21

ABBREVIATIONS AND ACRONYMS

CBN - Central Bank of NigeriaFEM - Foreign Exchange MarketPOS - Federal Office of StatisticsNEPA - Nigerian Electric Power AuthorityNITEL - Nigerian Telecommunications LimitedNNPC - Nigerian National Petroleum CorporationNRC - Nigerian Railway CorporationSAP - Structural Adjustment ProgramSPEM - Second-Tier Foreign Exchange Market

FISCAL YEAR

January 1 - December 31

FOR OMCIL USE ONLY

ABSTRACT

Faced with an acute economic crisis as a result of collapsing oilrevenues and rising foreign debt service obligations, the NigerianGovernment embarked on a far-reaching Structural Adjustment Program (SAP)covering the period from mid-1986 to mid-1988. The most important step inthe progran was the shift to a market-determined exchange rate systemcentered around a foreign exchange auction. In flanking measures, theimport licensing system and virtually all price controls were abolished.Substantial progress was also made in harmoniing and reducing tariffrates.

Implementation of the program's structural measures was good, andthe economy's supply response has been favorable. But public expendituresincreased rapidly under SAP. Coupled with the softening of world oilmarkets this year, which reduced both forAign exchange availability andbudgetary revenues, this produced downward pressure on the exchange rate,which the authorities resisted. As a result, a large differential openedup between the exchange rates on the auction and the interbank market.

Recently, the authorities have indicated their intention to adopta more restrained stance of policy, and initial steps have been taken totighten both monetary and fiscal policy. These should help reduce pressureon prices and the exchange rate. However, they need to be complemented byactions to permit the exchange rate to find its own level. Meanwhile, theauthorities have announced other measures designed to continue andconsolidate the structural reform process begun under SAP by improving theregulatory climate for the private sector with a view towards promotingprivate investment.

The weakening of world oil mark. ts since 1980 has reduced oilexport revenues in real terms -- below their pre-oil boom level. It hashad a similar effect on incomes, with GNP per capita in 1987 estimated atUS$370. Reflecting these developments, the World Bank has recentlydeclared Nigeria IDA-eligible and believes there is a strong case forconcessional aid from bilateral donors. Such inflows would allow theGovernment to finance its population policy and human resources developmentprogram, inter alia, which will be critical for increasing per-capitaincome in the long run, without reducing the availability of foreignexchange needed to sustain imports and growth over the near term.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disckosed without World Bank authorIation.

THE NIGERIAN STRUCTURAL ADJUSTMENT PROGRAM:

POLICIES. IMPACT. AND PROSPECTS

TABLE OF CONTENTS

Page No.

NIGERIA BASIC DATA

SUMMARY AND CONCLUSIONS ..................... ............... i

I. INTRODUCTION .................

II. BffACKGROUND 2

A. Overview 2

B. Legacy of the Oil Boom ............... n............. 3

III. THE STRUCTURAL ADJUSTMENT PROGRAM: POLICIES ANDEXTERNAL FINANCING 7

A. Introduction ..... 7

B. Policies ....... 7

1. Exchange Rate Policy 72. Trade Policy ................................... 103. Fiscal Policy 124. Monetary Policy ................................ 15

C. Foreign Debt and External Financing 17

IV. IMPACT OF THE ADJUSTMENT PROGRAM 29

A. Introduction ... 29

B. Domestic Output . .. ... 29

1. Overview M............ 292. Agriculture ................... 303. Manufacturing .... 32

Pate No.

C. Prices. Employment, and Wages ...................... 33

1. Overview ........................................ 332. Prices ............ *. . ... .. * ................ 343. Labor Markets ........................... ..... .. 36

D. Social Impact ..... ........... ...... * ...... *..... ...... 39

Z. External Effects ** *....... ....................... 40

V. POLICY AGENDA AND ISSUES .... ............................ . . . . . 46

A. Assessment of SAP ............. ****....................**** 46

B. Macroeconomic Management .................... 47

C. Medium-Term Policy Issues ..................... * 48

1. Private Sector Incentives ..................... 492. Public Sector Policies ........................ 503. Resource Mobilization ......................... 53

D. Longer-Term Issues ................................ 54

1. Population .................................... 552. Human Capital Development ..................... 553. Environment ........... .................................. 56

VI. MACROECONOMIC PROSPECTS AND FOREIGN FINANCING REQUIREMENTS 59

A. Overview .... ...................................... 59

B. Macroeconomic Projections ......................... 59

1. Short-Term Prospects ............ .. ........ .. 592. Medium-Term Prospects . .... .................. 60

C. Uncertainties and Risks ...... .................... 62

D. Foreign Financing **...... ***................ 62

STATISTICAL ANNEX

MAP

LIST OF TEXT TABLES AND CHARTS

Tables Page No.

2.1 Macroeconomic Aggregatess 1980-1987 ........................ 5

2.2 Economic Indicatorst 1980-1987 ....... ...................... 6

3.1 SFEM/PEM Auction Rates: Sept.1986-Sept.1988 ................ 19

3.2 Nominal Protection Ratess 1984-1994 .... .................... 20

3.3 Federal Government Budget: 1985-1988 ....... ................ 21

3.4 Federal Government Capital Expenditures: 1986-1987 ......... 22

3.5 Monetary Aggregatest 1985-1988 .............................. 23

3.6 Reschedulings: 1986-1987 . ......... .. . . ....... ....... 24-25

4.1 Shares of Agricultural GDPt 1981-1986 ...................... 41

4.2 Consumer Price Indices: 1985-1988 .......................... 42

4.3 Structure of Unemployments Dec.1983-Mar.1988 ... oooooo ...... O 43

4.4 Real Household Incomes of Key Groups; 1980181-1986/87 ...... 44

5.1 Oil Production, Domestic Consumption, Exports, andPrices, 1980-88 ............... 58

6.1 Key Macroeconomic Variables: 1984-1995 .................... 64

6.2 Balance of Payments: 1986-1995 ............................. 65

Charts

3.1 Nominal Exchange Rates 999999999999999999................... 26

3.2 Authorized Dealers' Sources of Foreign Exchange ............ 27

3.3 Allocation of Foreign Exchange Across Uses ................. 28

4.1 Composite Consumer Price Index ............................. 45

NiwlaJataJ

Social Indicators:

Are: .9 2j.8 Popltions 10.7 bDnaitj 1tS(1,100 ke) (mlliIon 1087) (per kin)

Rate of growths 3.4

Population Charact.riletirs Health:Crude birth rote (per 1,O0)t U Inftnt mortality: 104Crudo death rate (per 190M)s 16 (pet 11 "l births)Life *xpectency (yearo)s 61 Populotlon per phylclan (1,000): 9.4

Populatlon per hospital bed (1,906): 1.4Access to safe water: Matornal *ortality: 15X of population - urban: U0 (per 1,01 let" birtho)

- rural: If

Nutritiont EducationsCalori, Intakes 2180 Primry school enrollment rates 75XPor caplta protein Intake (s/day)t 45

09 per e pit* (US, 1067): 87

GROSS NATIONAL PRODUCT: AN! AEI.L RATE OF OROWTH (X. consant prices)

USSUIn J 190771 jfl.-8f 18o7 (ProJ)

ONP at Market Prices 28511 10.9 -8.6 0.1 -5.5Gross Domestic Investment 8084 10.7 2.7 -17.6 2.8Cross National Saving 882 15.0 -S.4 5.9 -2.8Current Account Balance - s0o 2.9 -16.3 - -Export of Goods, NFS 778 82.9 4.0 -1.8 -12.6Import of Goods, NFS 6706 26.5 6.$ -20.0 -26.0

OUTPUT. EMPLOY9ENT. AND PRIOuCTIlms

Labor Foro -.A Per WorkerA I Sif X X'X

Agriculture 7408 20.7 25.0 289 44Petroloum 7907 81.7 0.4 1 19760 8US?Manufacturlng 21n7 6.0 8.7 is S1 91Construction 881 1.8 0.5 1 662 102Service Ga1 26.7 7.5 20 087 187

Total/Average 24484 87.6 651

O YWERNMT FINANCE:

r l2iJ22j~~ Federal GovernmentIN via) a or NWt N of") X of719@ 19Wt l8 low7 1987 _198

Current Receipts 26.8 26.4 21.7 14.2 14.8 12.0Current Expenditure 21.0 22.9 15.0 14.8 14.4 7.0Current Surplus 4.5 4.6 6.7 -0.1 0.1 6.0Capital Expenditures 14.4 14.6 16.7 9.9 19.0 12.7

MONEY. CREDIT & PRICES: 1905 1966 1987 June 1989

(millions of Noire, end of period)

Money Supply (M2) 23702 24844 29079 U8186Sank Credit to Public Sector 18661 17844 19474 19m9onok Credit to Private Sector 14SJ0 16811 19748 26W79

(Percentage or Index Numbers)

M2 as of CDP 29 as 30 --Consumer Price Index (1907 a 190) / 474 688 591 768

Annual percentgeo cabnge In:Consuer Price Index 3/ 1 14 8onok Credit to Public Sector 1 8 19 7

Bank Credit to Priveto Sector 9 29 18 28

BALANCE OF PAYMENTS:

1984 1986 1986 1987 MERCHANDISE EXPORTS (AVERAGE 1984-87)(miTTons e USt) US$ Min X

Exports of Goods, CNFS 12,824 12,851 6,978 7,786 Petroleum Product. 9,388 96(of which Petroleum 2) 11,68 12,208 6,371 0,776 Cocoa 232 2Import of Goods, OWN 19 749 9 910 6,89 6 799 Manufactured Goods 62 1Resource Cap (deficit= _) 1,7l 1 -T,111 U!7 All other commodities 122 1

~~~ ~~~~ ~Tote l 9,799 IIntoret Payment. (net) 1,829 1,612 100 1,259Other Factor Pdymet. (net) 811 190 191 17B EXTERNAL DEBT (12/81/67)Not Transfers -882 -286 -197 -276 US MlnBalance on Current Account -697 679 -2,004 -082Direct Private Forelgn 199 860 868 886 Public Debt, lncl. Guarnteed andInvestment Non-Guaranteed Privet. Debt

Net MLT Borrowing -155 -1,218 811 544 Total Outetanding & Disbursed 26,238Disbursements 2,960 1,660 1,268 898Amortisation -2 216 -2 686 948 -849 IDRD/IDA LENDINGsubtotal ±555 18 -TIli -2 I8RD IDA

Other Capital (net) Out.t-Anding A Disbursed 2989.81 82.26and Capital n-... 1 838 268 476 -786 Undlebursed 988.91 0

Increse In Reserves (*) 47 1 29 RI -1 4 Outstanding Inel. Undisbureed 1928W22 82 28

Groes Resrve. (end year) 1,692 1,890 1,144 642 NET DEBT SERVICE RATIO FOR 1987 y

Public Debt, lnl. Guarenteed andNon-Guarentoed Private Debt

EXCHWNCE RATE: Total Outstanding A Disbursed 20.9

Annual Averaes End Period1966 190 Jan-Jun 1906 Sej**198

USl1.OO a N 1.85 4.01 4.20 4.67Nl.0 * US$ 0.74 0.25 4.67 0.21

End of period.Crwd and derivatives.Poet-rescheduling debt service, net of int.rest earned on foreign exchange reserves, as a percentage ofExports Goode, NFS. Includes undisbursed payments into Bank of England special account for the 1988Paris Club rescheduling agreaemnt.

SUMM4ARY AND CONCLUSIONS

A. Background

1. Buoyant oil revenues in the 1970s provided Nigeria with the basisfor large increases in Government expenditures designed to expand infra-structure and non-oil productive capacity. Some important successesnotwithstanding, many public investment projects were undertaken withoutsufficient attention to their economic viability or to the capacity ofGovernment agencies and public enterprises to implement them. Furthermore,the resources needed to accommodate the expansion of construction and urbanservices associated with the increase in public expenditure came at theexpense of non-oil traded goods. Traditional agricultural exports wereparticularly hard hit, since the exchange rate was allowed to appreciatesubstantially. Import-competing production was affected less, as importrestrictions and an ineffective system of price controls allowed prices ofthese goods to be maintained well above world levels. Import-basedconsumer goods industries, which contributed little domestic value-added,prospered.

2. When the oil market weakened in the early 19809, size&bleexternal and fiscal imbalances emerged. The current account deficitreached 6 percent of GDP in 1983 and the fiscal deficit fully twice that.These deficits were financed by public sector borrowing, a rundown ofinternational reserves, and a large-scale accumulation of arrears onexternal trade payments. In 1984, the authorities began to implementmeasures to redress the deficits. Budgetary expenditures were slashed andadministrative controls over imports -- in the form of import licenses andprohibitions against import- of many items -- were tightened, resulting indrastic reductions in import", but at the same time also multiplying theinefficiencies that had developed during the period of strong oil revenues.Production in most sectors fell sharply.

B. Policies under the Structural Adiustment Program

3. On coming to power in August 1985, the Babangida Governmentrecognized the need to approach the problem through structural adjustmentand initiated measures to arrest the deterioration of the economy. Thehalving of world oil prices in early 1986 increased the urgency of reform.Recognizing this, the Government responded with a far-reaching and broadlybased Structural Adjustment Program (SAP), covering the period from July1986 to June 1988. The centerpiece of the program was the adoption inSeptember 1986 of a market-determined exchange rate system and theelimination of import licensing. These steps constituted a radical breakwith the previous policy framework, which had relied on administrativecontrols and had fostered corruption and rent-seeking behavior at theexpense of productive activity. The program included initial steps toreform tariffs and export policies. In order to forestall excessivepressure on the exchange rate and prices, monetary and fiscal restraintplayed an important role in the program's design. Financing for the largeforeign exchange gap in 1986-87, which resulted from the steep drop in oilrevenues in 1986 and large debt service obligations and outstandingarrears, was provided from the World Bank Trade Policy and Export

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Development Loan and reschedulings from the London and Paris Clubs. Therewas stand-by arrangement with the International Monetary Fund, although nodrawings were made under this facility.

4. Exchange Rate Policy. Under the new exchange rate system, theSecond-tier Foreign Exchange Market (SFEM) -- which included an auction forofficial foreign exchange receipts and an interbank market based onautonomous inflows of foreign exchange to the private sector -- covered alltrade transactions, while the official (first-tier) exchange rate waspreserved for foreign debt service obligations. A large depreciation ofthe exchange rate accompanied the inauguration of SFEM, followed byprogressive downward adjustments of the official rate. The two rates wereunified in July 1987, replacing SFEM with the Foreign Exchange Market(FEM). Foreign exchange is reaching the productive sectors, withindustrial raw materials and capital goods absorbing over 70 percent ofauction funds, compared with some 60 percent of official allocations in thepre-SFEM period. Until recently, FEM had been working well. However,downward pressure on the exchange rate has sharply increased thedifferential between the exchange rates on the auction, where thedepreciation has been suppressed, and the interbank market where the ratehas been free to respond to market pressures.

5. Trade Liberalization. Virtually all price controls and importlicensing requirements were abolished at the start of SFEM, and the importprohibition list was reduced. The Government also abolished the 30 percentimport surcharge and adopted an interim import duty and excise schedule,which reduced the dispersion of protection and average nominal rates, from33 percent to 23 percent. Following the completion of a tariff study, anew tariff regime was announced in the 1988 budget. Import duty rates werespecified for a seven year period, thus providing producers and consumerswith a longer policy time horizon within which to make decisions. The newschedules provide somewhat higher nominal rates of protection than theinterim tariff. But, as compared with the pre-SFEM situation, the newtariff provides less protection, both because the duty rates are lower, andbecause in most cases it was the restricted availability of imports underthe licensing system that determined the degree of protection in thepre-reform period.

6. Fiscal Policy. The substantial devaluation of the naira hassharply increased the value of petroleum receipts in naira terms, andfederal revenues from customs duties have also risen. These effects onrevenues have, however, been offset by higher naira costs of debt servicepayments and expenditures with high import content and large budgetaryoverruns, mostly on capital expenditures and transfers to parastatals. In1987, the federal budget deficit on a commitments basis amounted to 10percent of GDP, of which domestic financing provided 4 percentage points.The thrust of the 1988 budget, announced in early January, wasreflationary, with provisions for a reflation fund and an increase infederal pay scales. However, in the face of continuing weakness in worldoil markets and pressure on the exchange rate, the authorities have adopteda more restrained fiscal stance. Warrant releases through July, coveringthe first three quarters of 1988, were only 69 percent of budgeted amounts

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for ministerial capital expenditures, and only 23 percent for the reflationfund. In early April, the Government increased domestic prices forpetroleum products, as a first step in a program to bring them broadly intoline with international prices.

7. Monetary Policy. Monetary policy was to be tight under theprogram to contain the wage and price pressures that might otherwise resultfrom the devaluation. In 1986, broad money (M2) grew by only 3 percent,inflation was half the level that had been projected, and there wasconsiderable upward pressure on interest rates. But there was a sharpacceleration in M2 growth in 1987, to over 20 percent, fueled by rapidcredit expansion. Lending and deposit rates were deregulated onAugust 1, 1987, leaving banks free to charge market rates of interest. Atthe same time, the Central Bank of Nigeria (CBN) raised the discount ratefrom 11 percent to 15 percent in an effort to contain private sector loandemand. Despite this tightening, credit to the private sector grew by18 percent in 1987, compared with 7.5 percent envisaged under the creditguidelines. In line with the more expansionary stance of the government'smacroeconomic policies envisaged at the beginning of the year, the 1988credit guidelines set the ceiling for private sector credit expansion at12.5 percent, and reduced the CBN minimum rediscount from 15 percent to12.75 percent. Private sector credit grew at an annual rate of 30 percentin the first five months of the year. On August 15, the authoritiesincreased banks' cash reserve requirements.

8. External Financing and Foreign Debt. The authorities sought theassistance of external creditors to help finance the adjustment program.In November 1986, Nigeria reached agreement with the London Club,representing commercial creditor banks, to reschedule US$1.7 billion inmedium- and long-term (MLT) maturities falling due between April 1, 1986and December 31, 1987 and US$2.2 billion in arrears on letters of credit(LCs) outstanding as of September 26, 1986. Disbursement of US$320 millionin new money was delayed pending Nigeria's reaching agreement with the IMFon a program for 1988. The commitment expired in April 1988. Agreementwith the Paris Club, representing creditor governments and officiallyguaranteed debt, covering US$3.3 billion in MLT maturities andUS$0.5 billion in LCs, as well as US$2.8 billion in arrears on insuredtrade credits dating back to 1982-83 was reached in December 1986. Newmoney inflows from the Paris Club have also been delayed, pending thesigning of the individual bilateral agreements -- most of which have nowbeen signed -- payment of moratorium interest, and agreement with the IMF.In January 1988, agreement was reached to reschedule US$4.8 billion ofoutstanding arrears on uninsured trade credits dating from 1982-83, over 22years with 2 years grace at 5 percent interest.

C. Program Effects

9. Introduction. There is considerable evidence throughout theeconomy of changes in the incentive framework associated with the program'smeasures. Domestic currency prices for exports have risen sharply, andthere is now a more economically-rational allocation of foreign exchangeacross competing uses. The replacement of the import licensing system and

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foreign exchange controls with a system of protection based on amarket-determined exchange rate and tariffs has greatly rationalized theincentive framework. In turn, these changes have produced notableresponses. Tree crop cultivation has witnessed a resurgence, andmanufacturers are taking advantage of the new relative price structure.Output, investment, and employment in the export sector have picked up.Producers in all sectors are increasingly seeking ways to economize onimported inputs and to source their input needs locally. The shift inrelative prices is also changing consumer demand patterns. But the mosttangible results have been in non-oil exports and the recovery, albeitmodest, of the manufacturing sector, despite a sharp compression ofimports, reflecting the increased share of productive inputs in totalimports and shifts to local sourcing.

10. Domestic Output. As the implementation of the program began latein the third quarte, of 1986, its effects on activity levels were small inthat year. The evolution of non-oil GDP was largely influenced by a sharpcompression of imports, reflecting the repercussions of weakening world oilmarkets and collapsing oil revenues on foreign exchange availability, andtight demand conditions. Still, in 1986, because of good performance inagriculture, non-oil GDP is estimated to have increased by about 3 percentand overall GDP by 2 1/2 percent. The available evidence suggests thatnon-oil GDP may have fallen by about 3 112 percent in real terms in 1987,and overall GDP by about 5 percent. There was a significant drop in crudeoil output, related to OPUC production quotas, and agricultural productionfell by almost 8 percent because of adverse weather conditions. Staplefood production was particularly hard hit. But the cash crops were alsoadversely affected, offsetting somewhat the favorable effects of theprogram on production incentives. The strengthened incentives to lse localraw materials resulting from the policy changes under the SAP permitted arecovery in the manufacturing sector, despite a further compression ofimports. It also reflected a pickup in demand in the second half of theyear, following the sharp rise in public sector spending. The recovery ofmanufacturing continued in the first half of 1988, and, based on favorableweather conditions, the short-term outlook for agriculture is good.

11. Airiculture. The program's measures to revitalize agricultureand traditional exports center on the changes in trade policy, the exchangerate reform, and the abolition of the Commodity Boards, which previouslyset domestic prices for oil palm, cocoa, rubber, cotton and groundnuts.The combined effect of the policy changes on production incentives hasvaried across products. The exchange rate change led to large domesticprice increases for most cash crops, and adverse weather conditionsnotwithstanding, production increased by an estimated 6 percent in 1987.By contrast, the immediate impact of SFEM/PEH on producer prices for foodcrops, which for the most part are not traded internationally, wasnegligible. However, food prices have risen in recent months, reflectingthe sharp weather-related decline in output and SAP-related demand shiftsto locally produced food. This trend was reinforced by farmers'diversification into cotton and groundnut production and manufacturers'increasing shift to local sourcing of raw materials.

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12. Manufacturing. The exchange rate adjustment and accompanyingmeasures to liberaiize trade have led to far-reaching changes in theincentive structure for manufacturing. SAP has greatly improved incentivesfor all export activities. For producers of import substitutes, however,there have been some positive effects and some negative effects, accordingto the relative impacts of devaluation and trade liberalization. Overall,the competitiveness of the more efficient, local resource-based activitieshas been enhanced, and the policy changes have also strengthened incentivesto use local raw materials. Import-intensive assembly operations forconsumer durables have suffered. On balance, the available data suggest abroadening recovery in the manufacturing sector beginning in the firstquarter of 1987. While the index of manufacturing output fell by 4 percentin 1986, it rose by 5 percent in 1987 and by a further 4 percent in thefirst six months of 1988.

13. Prices. There had been some concern that the introduction ofSFEM would trigger an inflationary spiral. Instead, consumer pricesactually fell in late 1986 following the introduction of SFEM and remainedfairly flat through early 1987, but began to rise after that. Still, theCPI at the end of 1987 was only 9 1/2 percent above the level recorded 16months earlier at the opening of SFM. More recently, inflation hasaccelerated sharply, and by May the annual inflation rate was 35 percent.This performance mirrors the behavior of food prices, which carry a 75percent weight in the composite CPI and which rose by only 8 percent overthe course of 1986, and remained flat in the early part of 1987. But,against the normal seasonal pattern, food prices increased in the latterpart of 1987 because of weather-related declines in agricultural productionand higher prices for bread and bread-substitutes, as pre-SAP stocks ofwheat and other imported food stocks were depleted. In May 1988, foodprices were 50 percent higher than in May 1987. In contrast, prices forhousehold goods and other purchases, had shown much sharper increases inthe earlier period -- 48 percent from end-1985 to end-1986 -- reflectingtheir large import component. But given the size of the change in theexchange rate even this increase was quite moderate. This is explained bythe fact that many of these prices already reflected the scarcity value offoreign exchange. Following the opening of SFEM, these prices fluctuatedaround a rising trend through early 1987, when they began to decline,reflecting weak demand conditions.

14. Labor Markets. A key aspect of the austerity period thatpreceded SAP was a sharp rise in unemployment, but labor was furtherinjured by a steep erosion of purchasing power, as the price controls wereunable to forestall increases in consumer prices. But since theintroduction of the adjustment program, export prices have risendramatically relative to wages, thus raising the demand for labor in thatsector. The labor market seems to be responding to this change in theenvironment, with the earlier rapid inflow of labor into urban areas nowreplaced by return migration of workers taking advantage of better ruralemployment opportunities. SAP has also improved competitiveness in theurban sector. Initial declines notwithstanding, the available evidencesuggests a 3 percent annual rise in overall employment since the start ofthe program, largely attributable to better rural employment opportunities.

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As employment needs to rise by 3 percent per year simply to keep pace withlabor force growth, the overall unemployment rate has remained broadlyunchanged. Following the upward revision of federal pay scales earlierthis year, nominal wages in the urban sector have begun to rise, erodingsome of the real exchange rate depreciation secured in 1986 and 1987.

15. Social ImDact. Distributional effects are an inevitable part ofthe process of adjusting to the realities imposed by lower oil revenues,and indeed carry with them important information about the desireddirection for future investment and consumption decisions. Some of theseeffects should be mitigated as the rearrangement in the economy set intrain by the program take shape, but will inevitably have otherdistributional consequences. For example, food producers initially facedincreased input costs without commensurate increases in output prices. Therecent recovery of food prices, though largely due to the effects ofadverse weather on supply, also reflected adjustment-related substitutioninto cotton and groundnuts, inter alia, and greater local sourcing of rawmaterials. Thus, while the program's initially adverse effect on foodproducers has begun to be reversed, it has been at the expense of the urbanand rural poor, for whom over 75 percent of expenditures are for food. Butby far the largest distributional impact of the program has been associatedwith the exchange rate reform. Indeed, the exchange rate reform has alsotransferred a major source of monopoly rents from those who previously hadprivileged access to foreign exchange to the Government. Through therevenue sharing system, this has led to large increases in the revenues ofstate and local governments and will permit a restoration of essentialsocial services, which in the post-oil boom period had been severelyreduced.

D. Policy Agenda and Issues

(a) Short-Term Macroeconomic Issues

16. The Structural Adjustment Program has clearly producedfundamental changes in the economic environment, and major signs ofadjustment are evident throughout the economy. Nevertheless, there remainsan undercurrent of dissatisfaction with the program in Nigeria, reflectingits close association with the sharp depreciation of the naira, which hasboosted prices for imported goods and services, and the perception that thepace of the recovery has been too slow. This has put pressure on theGovernment to pursue more expansionary policies and to resist furtherchanges in the exchange rate. Partly reflecting this pressure, publicexpenditures increased rapidly during the program, and the 1988 budget wasdesigned to be expansionary. 'While the Government has subsequently adopteda more restrained fiscal stance and kept capital spending below budgetedlevels, new federal pay scales have resulted in a sharp rise in laborcosts, which have been partially mirrored in private sector wagesettlements. Coupled with the rapid expansion in credit to the privatesector, these developments put downward pressure on the nominal exchangerate. But, as that pressure intensified earlier this year, the auctionrate was prevented from depreciating. The interbank rate, however, which

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is free to find its own level, depreciated sharply, opening up a largedifferential between the two rates.

17. The Government has little room to maneuver on the macroeconomicfront, as Nigeria's limited access to foreign capital markets and the lowlevel of international reserves imply that the domestic economy must bearthe brunt of the further adjustment required in the face of lower oilprices. The essential question is how to set macroeconomic and exchangerate policy so as to minimize the costs of that adjustment. In order tokeep the demand for foreign exchange consistent with the reduced supply,Government can permit the price of foreign exchange to rise and/or adoptmeasures to restrain the overall level of economic activity. If it doesneither, the resulting excess demand for foreign exchange will inevitablynecessitate a return to administrative rationing, with the associatedproblems that characterized the pre-reform era. Nor, as that era amplydemonstrated, will artificially capping the exchange rate shield theeconomy from inflationary pressures. In the cir:umstances, the urgent needis to consolidate the changes in the real exchange rate achieved under SAP,by correcting the misalignment in the nominal exchange rate that hasdeveloped this year and adopting macroeconomic policies designed tostabilize prices and wages even as that correction is made.

18. Macroeconomic mianagement issues will continue to be importantover the longer run. The fundamental uncertainty surrounding world oilprices coupled with Nigeria's experience with foreign exchange andbudgetary management over the last 15 years, suggests that if oil pricesrecover, Government expenditures should not be permitted to rise paripassu. Rather, a portion of any incremental oil revenues should be setaside as reserves, which could then be used to buffer subsequent decreasesin oil revenues. In addition, it will be important to develop flexible taxinstruments, so that in the event that deficit correction measures areneeded in the future, tax increases can complement expenditure decreases.For the latter, it will be important to implement the concept of a core andnon-core investment program, so that if expenditure cutbacks are needed, itwill be clear which public investment projects are to be put on hold. Ofequal importance is the need to increase the Government's capacity toanalyze the economic contributions of competing projects and sectors and toset budget priorities accordingly. Finally, given the importance ofexchange rate flexibility for maintaining macroeconomic balance in the faceof variability in oil receipts, it will be critical to strengthen the roleof market forces in determining the level of the exchange rate. To thisend, the authorities have signalled their intention to move away from theauction system and to introduce a "managed float,' whereby the Central Bankwould intervene in the foreign exchange market through the interbankmarket, letting that market determine the rate.

(b) Medium-Term Policy Issues

19. Beyond these macroeconomic measures, which are necessary toensure the sustainability of the economic recovery program, the policyfocus should be on investment. To promote private investment, theadministrative climate needs to be supportive, foreign investment needs to

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be encouraged, and price signals need to reflect Nigeria's comparativeadvantage. Public expenditures at all levels of government will need to bedirected towards supporting private sector growth. The financing for thedesired public and private sector investments will need to be secured bytapping both domestic and foreign savings.

(i) Investment Policies

20. Reaulatory Climate. A resumption of private sector investment isessential both for growth in output and employment and for restructuringthe productive capacity of the economy. SAP envisaged that theGovernment's role would focus on establishing a more stable and certainpolicy environment, providing needed infrastructure and support services,and eliminating the impediments to investment created by restrictive andcumbersome regulations governlag investment. A key concern is to encourageinvestments which bring their own foreign exchange, hence it is importantto create an attractive environmennt for foreign equity investment. Oneconsequence of SAP has been improved access to foreign exchange forremittances of dividends. But the Government has also taken action toliberalize foreign ownership rules and to improve the cverall climate forprivate investment, through amendments to the Nigerian Enterprise PromotionDecree, and the creation of the Industrial Development CoordinatingCommittee as a one-stop agency for initial investment approvals. Therecently adopted debt conversion scheme should also play a role inencouraging investment.

21. Trade Policy. The actions taken by the Government with respectto trade and exchange rate policies have improved incentives for investmentactivity geared towards developing new markets, products, and productionmethods in line with the SAP's emphasis on improving efficiency. The newtariff structure, reductions in arbitrary features of the protectionstructure resulting from concessions and discretionary exemptions, andactions to improve duty collection, will contribute to a more certainincentive environment. In addition, a Tariff Review Board has beenestablished to review requests for changes in protection.

22. Productive Sectors. Taken as a whole, these changes in theregulatory environment for investment and in trade policy will play acritical role in helping to realize the Government's objectives withrespect to manufacturing and agriculture, the key non-oil sectors producingtradeable goods. Maintenance of a favorable incentive framework, togetherwith appropriate exchange rate policies will encourage a reduction inimport dependence in industry and an acceleration in the development anduse of local technology, raw materials, and intermediate inputs. This inturn will improve the competitive position of small-and-medium scaleenterprises, which are relatively more intensive users of local inputs, andwhich the Government expects to play a key role as a source of growth,employment generation and industrial development. In agriculture, thefocus of policy is shifting away from food security, supported by strongpublic sector involvement, toward private sector growth and diversificationof the export base. Appropriate trade and exchange policies, accompaniedby actions to streamline the export marketing system and improve delivery

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of inputs through an increased role for the private sector, will thereforebe necessary to provide a framework for pursuing the objective ofencouraging efficient and sustainable import substitution (particularly infoodgrains), while fostering export crops.

23. Public Investment. Notwithstanding the reduced role for thepublic sector envisaged by SAP, the Government has a critical role inproviding a supportive environment for private sector expansion through theprovision of adequate infrastructure and other essential public services.Because of the severe budgetary constraints, the stock of infrastructurecapital has deteriorated so badly in recent years that inadequateinfrastructure is a major impediment to the private sector's supplyresponse. Rehabilitation and maintenance of existing assets, therefore,have a high economic return and should be accorded highest priority withinthe public investment program. While some new investments would beeconomically viable because of recent changes in the exchange rate, thesevere constraints on capital resources imply that, for the next few years,new projects can be undertaken only on an exceptional basis and mainly inorder to alleviate bottlenecks, for example, in power andteleconraunications. One area where new investments may be warranted isnatural gas, which can make a substantial direct contribution to Nigeria'snet export earnings through substitution for petroleum products currentlyused for power generations and industry. The continuing tight resourceconstraints will require special attention to unfinished projects, some ofwhich are of doubtful economic viability even on a sunk-cost basis. A fewprojects, such as Ajaokuta Steel, pose special problems since theircompletion would preempt large amounts of investable resource over themedium term, and, given projected growth in demand, would have low capacityutilization rates once completed.

24. Privatization and Commercialization. The Government has embarkedupon a program of privatization/commercialization of a wide range of publicenterprises, as specified in the Privatization and Commercialization Decreeof 1988. The Decree defines commercialized enterprises as profit-makingcommercial ventures operating without subventions from the Government, andgives them the power to set prices, capitalize assets, and borrow money.The mwjor parastatals, which for the most part have been operating withhuge deficits which in turn have adversely affected services, are allslated for either full or partial commercialization. The success of thethis program will clearly hinge on instilling financial discipline in theseenterprises through rigor in the budgetary process supported by costcutting and revenue enhancement measures. Enterprises will thus need thefreedom to control levels of employment and wages in addition toprice-setting powers. The privatization program provides opportunities toraise additional local and foreign resources for the targeted enterprisesand to inject new technologies and skills, but complex issues concerningthe distribution of ownership will need to be resolved.

(ii) Resource Mobilization

25. External Debt Strategy. The Government's strategy for financingSAP was predicated on the assumption that sufficient external financing

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would be forthcoming to permit Nigeria to run current account deficits andthereby to achieve higher import levels and growth rates than wouldotherwise be possible. The approach was thus to seek reschedulings and newexternal borrowings, with some consequent growth in debt, albeit at aslower rate than projected export growth, allowing creditworthiness to berestored over time. The experience gained over the past two years,however, has tilted the Government's strategy away from new money per setowards greater emphasis on easing the foreign exchange burden of servicingexisting debt, though more favorable interest rate terms and the debtconversion program. For new money, the authorities are looking primarilyto project financing. To effect this strategy, concerted efforts need tobe made to increase external financing for sound investment projects.Central coordination of this process is essential to get the best financingpossible for the good projects and to intercept, at an early stage,financing negotiations for low priority projects. Based on guidelinesissued in February, ministries are now expected to seek external financingfor viable projects, with these efforts to be coordinated by the FederalMinistry of Finance and Economic Development.

26. Taxation. In line with the recommendations of the recentlycompleted tariff review, the Government has established the basis fortaxing consumption in a protection-neutral fashion. The new import dutyschedule adopted in the 1988 budget incorporates an implicit landing chargecorresponding to excise duties on comparable local production. Over time,the coverage of the landing charge/excise tax combination can be extendedto a wider range of products. Developing this instrument is of criticalimportance, as the inherent variability of oil revenues suggests the needfor a broad-based, flexible tax instrument, for which the rate of taxationcould be adjusted according to the Government's revenue needs. TheGovernment will also need to undertake a more comprehensive study of taxpolicy and administration to identify reforms which may be needed to makethe tax system more equitable and to bring it into conformity with theprinciples underlying SAP and improved revenue collections. The studyshould also consider changes needed to rationalize the division of taxinstruments between different levels of government.

27. Savings. The financial sector will have an important role toplay in mobilizing private savings and intermediating them to efficientinvestment projects. The liberalization of interest rates last year was animportant step in increasing the efficiency of the allocation of creditacross competing investment projects. Such a step should also reduce theprevious bias against term lending and lending to small industrialenterprises and agricultural units, as it will allow banks to charge higherinterest rates in line with the higher risks and processing costsassociated with such lending. But it needs to be complemented by a changein the way that control over the monetary and credit aggregates isexercised, which now relies on ceilings on the expansion of credit byindividual banks. A more indirect approach to controlling the aggregates,which would encourage banks to compete for deposits and loans, would bedesirable. Such an approach could involve restricting to money the assetsthat count towards banks' required reserves and using open market

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operations in treasury bills to achieve targeted changes in the monetarybase.

(c) Lonaer Term Issues

28. Population. Without a substantial lowering of the populationgrowth rate, currently estimated at 3.4 percent per year, most of Nigeria'ssavings and development effort will be absorbed in simply maintainingpresent per capita income levels. Nigeria has recently adopted anambitious policy aimed at reducing population growth to 2 percent by theyear 2000 and the challenge will be to implement and strengthen it.Support for the program within Government is high, but strong actions areneeded to ensure that it is preserved regardless of budgetary constraints.A prioritized set of interventions needs to be agreed and an implementationprogram launched. The priority areas aret expanded family planning servicedelivery, especially in the context of the national primary health careprogram; information and education activities geared to key audiences; andmonitoring and evaluation. The Federal Government, which has provided theessential leadership in developing the policy, now needs to establish astrong planning and coordination capacity and to galvanize the state andlocal agencies and personnel that will be implementing the policy.

29. Human Resources Policies. Improved health and education for thepopulation are important development goals in their own right, but they arealso important for improving labor productivity and increasing incomes.During the early 1980s, there was a sharp deterioration in the educationand health systems, which are primarily the responsibility of stategovernments, stemming from reduced public expenditures, which in turnderived from the dramatic drop in oil-related revenues. With the increasein state revenues following the devaluation of the naira, allocations formaterial supplies such as schoolbooks and drugs in recurrent budgets shouldbe substantially increased in order to enable schools and health facilitiesto deliver essential services. Within the school system, state usercharges should be designed in such a way that they do not negatively affectenrollment ratios, while at the federal level, the share of expenditure foreducation going to primary schools should be increased. In the healthsector, the Government's long-term objectives rightly accord priority toprimary care. The investment emohasis should continue to be away from newconstruction and toward maintenance and rehabilitation of existingfacilities, with expansion of the network of teaching hospitals constrainedto those nearing completion.

30. Environment. Nigeria faces a number of environmental problems,including industrial pollution, soil erosion, and desert encroachment.A start has been made in addressing some of these issues, but the task ofarticulating and implementing a comprehensive environmental policy remains.Environmental problems tend to arise because of institutional arrangementsin which decision-making entities do not bear the full costs of theiractions. The first step therefore should be to identify measures forensuring that both the public and private sectors take proper account ofany environmental costs of their actions. Where public sector decisionsare not based on commercial principles, policy should be based upon an

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assessment of the costs of possible remedial measures compared to thereduction in the costs of the environmental damage they are projected toachieve. Where essentially commercial decisions are involved, policyshould focus on establishing incentives for individuals and enterprises tofactor the environmental costs of their actions into their decision-making.This may require regulatory, tax, or subsidy measures. It may also requireactions to change the institutional setting within which such decisions aremade. For e ample, the soil conservation issue may be partly tackled byactions to clarify the land rights of the concerned parties, therebyr.roviding incentives to take a longer term view of the effects of theiractions and thus value the benefits of erosion control more highly. Thatthe effectiveness of alternative measures must be carefully assessed isdemonstrated by the debate surrounding the productivity of expenditures onthe fertilizer subsidy, sometimes seen as a way of maintaining soilfertility, because of the extent to which subsidized fertilizer finds itsway across the country's borders.

E. Macroeconomic Proiections

31. Nigeria's projected 3.4 percent rate of population increaserequires that GDP grow by 4 percent per annum for per capita consumption torise by even marginal amounts. The macroeconomic forecast suggests thatsuch a growth rate is feasible in the period to 1995, given World Bankprojections for the oil market, provided that Nigeria implements the policyreforms discussed above, and that international creditors support theprogram through generous rescheduling and financing terms and new money.This would involve a cumulative increase in the debt stock of US$5 billionfrom end-1987 to end-1991, when an accelerated return to full commercialcreditworthiness -- via net repayments of foreign debt -- would begin.However, under these assumptions, per capita income remains under US$300 1Ithroughout the forecast period. Should world oil markets not strengthen asprojected, per capita income would be even lower.

32. The foreign exchange constraint is expected to remain extremelytight in the near term. A 9 percent decline in real imports is forecastfor 1988, with a further marginal decline projected for 1989. Despitethis, recent developments point to a continuation of modest real growth inmanufacturing this year, based on continued efforts by producers toincrease domestic sourcing of inputs as a consequence of the exchange rateadjustment. Combined with the projected rebound of agriculture, thisshould permit a 4 percent growth in non-oil GDP in 1988, thus preventing afurther decline in real per capita GNP. However, in 1989, a small drop in

l/ Although GNP per capita is forecast to rise in real terms, itsubsequently falls below the Atlas methodology's estimate ofUS$370 in 1987, as the full effects of the exchange ratedepreciation in 1986 are reflected in the factor for translatingGNP in local currency into U.S. dollars.

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per capita income is forecast, as agriculture resumes its projected trendrate of growth and manufacturing growth slows under the continuingcompression of imports.

33. In subsequent years, import growth could exceed 6 percent peryear in real terms. Under these assumptions and with full implementationof the program, the annual rate of growth of non-oil GDP would averagenearly 5 percent over the period 1990-95, and per capita GNP would rise byone percent per annum. However, given that oil revenues supply over85 percent of export proceeds, any shortfall from the underlying oil priceor volume assumptions would lead to a reduction in resources available forimports and, in turn, for growth. In 1989, for example, the loss in GDPgrowth from a 20 percent drop in oil prices would be 2.7 percentage points.If that 20 percent shortfall persisted but did not worsen, the rate ofgrowth in subsequent years would improve but would remain below the basecase projections, because lower imports would mean continued lowerinvestment over the period.

34. The forecast is based on conventional financing terms. However,there is clearly a strong case for concessional aid to Nigeria. The WorldBank has recently declared Nigeria IDA-eligible, reflecting the drop in percapita GNP to US$370 in 1987. Nigeria is saddled with a large debt stock,with interest payments alone absorbing US$17 billion over the period 1988to 1995. These obligations absorb foreign exchange that could otherwise bedirected toward growth-enhancing investments. Concessional aid would allowthe Government to finance its population policy and human resourcesdevelopment program, which will be critical for increasing per capitaincome in the long run, without reducing the availability offoreign-exchange-intensive investment funds that are needed to sustaingrowth over the near term. It would also provide a cushion for maintainingper capita income in the face of major uncertainties about the oil market.

I. INTRODUCTION

1.1 The last grey cover Country Economic Memorandum (CEM) on Nigeria,Macro-Economic Policies for Structural Change (Report No. 4506-UNI), wasdistributed to the Board in August 1983. That report argued that thedeterioration in Nigeria's domestic and external financial situation, whichhad commenced when the international oil market began to weaken in mid-1981,was basically caused by structural factors. It recommended that economicpolicy be formulated with a view to broaden the resource base and lessendependence on oil. Such a strategy would require an appropriate incentiveframework and entail changes in exchange rate and trade policies. Aggregatedemand would also need to be restrained, largely through appropriate publicexpenditure and revenue policies. The need for a change in the compositionof public investment and for more flexible interest rate policies tostimulate the productive sectors were also flagged.

1.2 Against the background of the sharply deteriorating economicsituation, in 1983, the Government initiated discussions with the Bank abouta possible structural adjustment loan and with the IMF about a program underthe Extended Fund Facility. The negotiations broke down, however, and themilitary government that took power on December 31, 1983, adopted a strategyof economic austerity, buttressed by administrative controls andregulations.

1.3 Throughout this period, the Bank continued to work with theGovernment to develop alternative economic policies. A policy change camewith the new military government that took power on August 27, 1985, underthe leadership of President Babangida. Initial reforms were announced inthe 1986 budget, and the full program was enunciated in the StructuralAdjustment Program (SAP) adopted by the Government in June 1986. Theprogram was described in the Trade Policy and Export Development LoanPresident's Report (No. P-4359-UNI), proposing IBRD support for the program.

1.4 The Structural Adjustment Program has now formally ended, althoughthe Government intends to continue with its reform program and toconsolidate the gains achieved so far. While it is too early to provide adefinitive assessment of the effects of the structural measures, certaintrends have emerged. This report summarizes these trends and highlights theoutstanding short-term and long-term policy issues. The focus is on theshort-term, as the implementation of the program over the next 18 monthswill be critical in establishing a firm foundation for sustained growth anddevelopment.

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II. BACKGROUND

A. Overview

2.1 Nigeria is a country of considerable mineral wealth and potentialfor diversified development. It is a major oil producer, with petroleumaccounting for 13 percent of total GDP and about 90 percent of exports.There are also vast reserves of natural gas, although little is beingexploited at present. Crop production accounts for about 30 percent of GDPand provides employment for over half the labor force. Yams, cassava, andfood grains together account for about 85 percent of GDP derived from thecrop sector. Food crops are primarily based on small-scale farming, andproductivity is generally low. Cocoa, oil palm, rubber, groundnuts, andcotton are the principal cash crops, which account for less than 10 percentof crop-based GDP. Although availability of land is becoming a problem insome parts of the country, there are underpopulated areas in differingclimatic zones that offer the potential for a variety of agriculturalproducts. Manufacturing production increased rapidly during the 1970s, butbecause of tariff-distorted incentives, much of the expansion was in importdependent, assembly-type activities that contributed little to local value-added and employment. The sector accounts for less than 10 percent of totalGDP and employment. Services, which account for over 25 percent of GDP, aredominated by wholesale and retail trade.

2.2 In terms of many socioeconomic indicators, Nigeria is close to therest of Sub-Saharan Africa. Based on the World Bank Atlas methodology 1/GNP per capita in 1985 was estimated at some US$760 -- about twice theaverage for sub-Saharan Africa. However, with the drop in oil prices andthe sharp depreciation of the naira in 1986 to correct for its previousovervaluation, per capita GNP fell to US$370 in 1987 and is expected to beabout US$280 in 1988 and US$230 in 1989, as the effect of the exchange ratedepreciation is more fully reflected in the factor for converting the nairavalue of GNP into U.S. dollars. The growth rate of population, currentlyestimated at 3.4 percent per annum, and the crude birth rate of 50 perthousand, are among the highest in the world. At this rate, the populationwill reach 200 million by the year 2010. The infant mortality rate is over100 per thousand live births. Population per physician is 12,000, and maleand female life expectancies are a meager 48 and 52 years, respectively.Large strides were made in primary education during the oil boom, with thenationwide enrollment ratio reaching 92 percent; however, with the cutbacksin budgetary financing associated with the drop in oil revenues, theenrollment ratio has fallen to 75 percent. Geographic disparities persist,with large areas reporting enrollment rates in the 30-60 percent range.

1/ The World Bank Atlas methodology uses the three-year average of theexchange rate for converting GNP measured in local currency into U.S.dollars.

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B. Legacy of the Oil Boom

2.3 The sharp increases in oil revenues in 1973/74 -- and again in1979/80 -- had a pervasive effect on the Nigerian economy. These revenueswere used to finance an ambitious public investment program intended to healthe wounds of the civil war that had ended in 1969 and to translate risingoil revenues into infrastructure and productive capacity that would serve asthe basis for diversified growth and development. Some important successesnotwithstanding, many public investment projects were undertaken withoutsufficient attention either to their economic viability or to the capacityof Government agencies and public enterprises to implement them.

2.4 The rapid growth of the public sector -- and the construction boomthat accompanied the massive public investment program -- altered theprevailing pattern of relative prices and wages and changed the underlyingstructure of the economy. High wage and price increases secured theresources needed to accommodate the expansion in demand in non-traded goods,but they depressed the non-oil traded goods sectors. An exchange ratepolicy that allowed the naira to appreciate with rising oil revenues, incombination with rising domestic costs, meant a sharp deterioration ininternational competitiveness. The impact of these policies on theagricultural sector -- the major source of GDP and export revenues beforethe oil boom -- was particularly severe: by 1980 its share in non-oil GDPhad fallen to 30 percent, from around 50 percent in the early 1970s. Whilenon-oil exports stagnated, a protective import regime, based on a systen oflicenses and quantitative controls, was used to insulate domestic industriesfrom foreign competition. Import-based consumer goods industries, whichcontributed little to domestic value-added, prospered.

2.5 Throughout the oil boom years, budgetary expenditures had morethan kept pace with rising oil revenues. But as the oil market weakened inthe early 1980s, with oil exports falling to less than half their 1980 levelin 1983 (Table 2.1), federal and state governments reacted slowly to theaccompanying decline in budgetary revenues. Sizeable external and fiscalimbalances emerged, with the current account deficit reaching 6 percent ofGDP in 1983 and the fiscal deficit fully twice that. These deficits werefinanced by public sector borrowing, a rundown of international reserves,and a large-scale accumulation of arrears on external trade payments. ln1984, the authorities began to implement measures to redress these deficits.Budgetary expenditures were slashed and administrative controls over imports-- in the form of import licences and prohibitions against imports ofcertain items -- were tightened, resulting in drastic reductions in imports,but at the same time also multiplying the inefficiencies that had developedduring the period of strong oil revenues. Fiscal austerity wascharacterized by across-the-board cuts, in many cases without taking accountof the relative priorities of different types of expenditure or the stage ofproject completion. Outlays on supplies, spare parts, and routinemaintenance were also generally cut back, even as significant sums were setaside to cover operating deficits of parastatals.

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2.6 The austerity measures were successful in bringing about a rapiddecrease in the fiscal and external deficits, but their bluntness exacted aconsiderable economic toll (Table 2.2). Production in most sectors fellsharply, and urban unemployment rose. Investment in 1985 was reduced toabout one-third its 1981 level in real terms. Construction and the servicesectors were particularly hard hit by the cutbacks in public expenditures.Much reduced supplies of raw materials and spare parts to theimport-dependent industrial sector led to widespread plant closures, asubstantial drop in capacity utilization, and extensive layoffs of theworkforce. The downturn was aggravated by a drought-induced decline inagricultural production in 1983 and 1984, although there was a recovery in1985.

2.7 For most of the period, the Government geared its exchange ratepolicy to appreciation, in an effort to damp domestic inflationarypressures. Notwithstanding the 33 percent depreciation against the U.S.dollar between December 1980 and December 1984, largely reflecting the shsrpincrease in the value of the dollar vie-a-vis other major currencies, thenaira posted a 20 percent appreciation in trade-weighted terms over the sameperiod. Foreign exchange was rationed, and domestic prices of importedgoods rose sharply, with large scarcity rents accruing to those who weresuccessful in getting access to cheap imports at the official exchange rate.The measured inflation rate rose to 23 percent and 40 percent, respectively,in 1983 and 1984. Combined with the appreciation of the nominal effectiveexchange rate, the effective appreciation between 1980 and 1984 exceeded80 percent (Table 2.3), leading to a further deterioration in thecompetitiveness of non-oil exports.

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TABLE 2.1s MACROECONOMIC AGGREGATES, 1980-87(Annual Rato of Change, Percent)

1980 1981 1982 1988 1984 1985 1988 1987

Real Production and Expenditure

Gross Dometic Product 4.6 -9.1 0.5 -4.1 -6.7 7.9 8.2 -4.6Non-Oil CDP 10.3 -2.8 2.8 -4.2 -9.4 7.8 4.2 -8.1

Agriculture 7.6 -5.8 8.1 0.1 -0.7 14.8 9.2 -7.7Industry 0.4 -25.1 -2.1 -14.8 -6.8 9.6 -2.8 -4.7Manufacturlng 84.1 -87.5 8.7 -21.9 -14.2 18.2 -6.1 6.1Construction 19.9 4.8 -7.8 -28.8 -49.6 -1.? 7.7 1.0

Services 8.2 7.0 9.4 1.8 -7.0 0.2 1.8 -0.4petroleum -10.6 -81.6 -10.5 -4.1 11.7 6.4 -1.4 -12.8

Consumption 1.9 -2.9 8.6 -4.9 -7.2 4.4 1.8 -6.0Grocs Investment 14.1 26.7 -18.0 -26.8 -47.4 26.0 -4.7 2.8Export of ONFS 25.8 -28.8 -19.8 -6.2 15.5 11.9 -2.6 -12.6Imports of GWNS 27.6 22.8 -14.8 -22.6 -20.2 -8.8 -81.9 -26.0

Money and Prices

Money Supply (M2) 1/ 48.9 15.7 10.6 12.8 11.8 8.9 2.7 22.7

Conasumer Price Index 2/ 9.9 18.4 9.9 28.2 89.6 6.6 6.4 10.2GOP Deflator 18.8 14.7 6.4 9.2 18.4 4.4 -2.0 28.4

Exchange Rate (NI u USS) 8/ 1.88 1.03 1.49 1.38 1.31 1.12 0.74 0.26

1/ Excludes merchant banks until 1986.2/ Average price level In current year over average price level In preceeding year.8/ Annual Average.

Sources: Federal Office of Statistics (FOS), Central Sank of Nigeria (C8N), and staff estimates.

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Table 2.2: ECONOMIC INDICATORS, 1980-87

19890 1981 1932 1985 1984 1985 1986 1987

Iac wibv Indicator*

1. Real Effective Exchange Rot.1.1 Index 1986.199 190 111 114 134 185 166 91 291.2 Annual Change (X) n.o. 11.0 2.6 18.1 87.8 -11.$ -46.2 -B7.7

2. Rea IInterent Rates (I)2.1 Savings Deposlta -8.8 -9.6 -1.3 -22.6 -10.7 8.8 -3.6 2.12.2 Loans and Advance -4.0 -4.9 6.4 -18.5 -7.8 11.8 1.2 7.6

8. Index of RArl Wa9ge (19890106)8.1 Urban 100 88 B0 6s SO 60 45 428.2 Rural 100 89 8$ 76 52 54 61 47

4. Ratlo of DomesticPrice to International Price4.1 Cocoa 0.98 1.01 1.11 0.92 0.82 0.8a 1.25 1.884.2 Palm Oil 1.6 1.88 1.57 1.29 1.04 1.28 2.20 1.464.8 Gasoline 9.78 9.66 0.77 0.88 O.9" o.7 1.66 0.61

External Trade Indicators

S. Volum Index of Major Export.t.l Petroleum 190 64 58 so 57 66 a6 665.2 Coo" 199 61 66 119 66 6 61 695.8 Rubber 100 148 1098 62 n9 lo 119 189

6. Manufactured Export.0.1 Value (Millon, 1980 US$) 78 71 26 61 54 42 86 450.2 Share of Total .a 0.4 0.2 0.6 0.4 0.8 0.6 O.7

Export. (U)

t. Commodiy Tram of Trade7.1 index 1969=199 1N 96 e8 77 70 71 84 897.2 Annual Chang (X) 4.2 -4.4 -18.6 -7.2 1.1 -7.9 -52.9 14.7

Sources: Central Bank of Nigeria (CN) and staff ostimates.

III. THE STRUCTURAL ADJUSTMENT PROGRAMs

POLICIES AND EXTERNAL FINANCING

A. introduction

3.1 In the face of a continuing weak oil market, the BabangidaGovernment, which came to power in August 1985, declared its intention tomove from austerity alone to austerity with structural adjustment' and toseek support from the international financial community for its program.Initial reforms announced in the 1986 budget included removal of thefinancial subsidy on energy products and a commitment to phase out thefertilizer subsidy. In addition, a temporary across-the-board importsurcharge of 30 percent was introduced to serve as an implicit devaluationon the import side.

3.2 The halving of world oil prices in the first quarter of 1986increased the urgency of reform. Recognizing this, the Governmentformulated a Structural Adjustment Program (SAP) covering the period fromJuly 1986 through June 1988. The program combined exchange rate and tradepolicy reforms aimed at promoting economic efficiency and long-term growthwith stabilization policies designed to restore balance of paymentsequilibrium and price stability. Considerable stress was laid on shrinkingthe size of the public sector and improving its efficiency. Requests forfinancial assistance in the form of debt reschedulings and new money fromthe Paris and London Clubs accompanied the adoption of the program. TheWorld Bank supported the program with a Trade Policy and Export DevelopmentLoan (TPED) in the amount of US$452 million, and the If endorsed theprogram with a stand-by arrangement of SDR 650 million (US$820 milliLn),although no drawings were made under this facility. The evolution of theprogram -- in terms of policy implementation and financing -- is describedbelow.

B. Policies

1. Exchange Rate Policy

(i) Background

3.3 Prior to the introduction of the Second-Tier Foreign ExchangeMarket (SfEM) in September 1986, the allocation of foreign exchange hadbeen subject to stringent but arbitrary quantity rationing, as demand forforeign exchange at the official exchange rate far outstripped supply. Toobtain permission to import goods to be financed by foreign exchange, apotential importer had to obtain an import licence. Such licenses wereissued in the context of an overall foreign exchange budget, under whichlimits were placed on the value of imports of different categories ofgoods. With the introduction of SFEH, this cumbersome and inefficientadministrative process was replaced by a floating exchange rate system inwhich the price mechanism allocates foreign exchange across competing uses.

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3.4 Since July 1987, the market-determined exchange rate has beenunified with the official first-tier rate, replacing SFEM with the ForeignExchange Market (FEM). FEM comprises foreign exchange dealings between theCentral Bank of Nigeria (CBN) and authorized foreign exchange dealers andin turn with the public (through the auction of official foreign exchangereceipts), and between dealers and the public, and among dealers themselves(through the interbank market). Prior to the unification of the exchangerate, public sector foreign debt service payments and payments tointernational organizations and embassies had been made at the officialexchange rate, which was allowed to depreciate more slowly than the auctionrate. Since unification, CBN still allocates foreign exchange directly forthese purposes, but the foreign exchange is valued at the auction rate.Other public sector foreign exchange requirements were also met directly bythe CBN, but at the auction rate since the inception of SFEM. The 1988budget announced that henceforth such requirements would be met throughpurchases on FEH, although approvals for such purchases are needed from theForeign Exchange and Trade Relations Department of the Ministry of Financeand Economic Development.

(ii) Central Bank of Nigeria Cash Flow

3.5 CBN foreign exchange receipts totaled US$5 billion in 1987. Ofthis, US$0.2 billion derived from disbursements from the World Bank TPEDloan and US$4.5 billion from crude oil export earnings. On the uses side,US$2.3 billion was utilized for auction funding and US$1.9 billion for debtservice payments and arrears. Public sector uses of foreign exchange forgoods and services absorbed US$1.2 billion. The difference between thevalue of crude oil exports (US$6.7 billion) and CBN receipts from oilcomprised production costs for crude oil (US$1.2 billion), company profits(US$0.3 billion), and funds set aside in crude oil and condensatededication accounts (US$0.7 billion). The oil dedication accounts -- withthe exception of the one for LNG -- were closed at mid-year, with thefunding of these projects now taking place through regular budgetarychannels. However, the Nigerian National Petroleum Corporation has beenusing a portion of export proceeds from the sale of condensates to directlyfund priority gas projects, such as the Escravos-Lagos Pipeline.

3.6 During the first half of 1988, CBN foreign exchange receiptstotaled US$2.8 billion, of which US$2.7 billion accrued from oil exportrevenues. Of these receipts, US$1.5 billion was allocated to the foreignexchange auction, which averaged US$118 million per fortnight over theperiod. US$1.1 billion was used to service external debt relatedobligations and to repay outstanding arrears. US$0.2 billion was absorbedby other public uses.

(iii) Developments on the Foreign Exchange Market

3.7 At SFEM's inaugural auction on September 26, 1986, the value ofthe naira was discounted by 66 percent relative to the official first-tierrate. Vis-a-vis the U.S. dollar, the naira traded on SFEH at US$0.24, orUS$1 = N4.7, against a first-tier rate of US$0.64, or US$1 - N1.6. Thenaira subsequently firmed, and the average rate through end-December 1986was US$1 - N3.7. The naira weakened during 1987 (Table 3.1 and Chart 3.1),

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reaching US$2 - N4.1 by the end of the year, in real effective terms (i.e.taking into account relative rates of inflation), some 75 percent below itspre-SPEM level. At the September 15, 1988 auction, the rate wasUS$l - N4.7. In 1986, the size of the auction averaged US$70 million perweek. In 1987, the average fell to US$45 million on a weekly basis,although, given the shift in April to the fortnightly auction, the averagesize of each auction has been larger. in the first nineteen auctions in1988, funding has averaged US$59 per week, reflecting the expansion of FEMto include public sector transactions.

3.8 In April 1987, the authorities introduced a "Dutch auction"system, whereby banks pay their bid prices, in place of the earlier systemin which each successful bank paid the marginal rate that exhausted thetotal amount of foreign exchange offered. This affected banks' profitsfrom their foreign exchange operations and their auction biddingstrategies. By September, the spread of auction bids had been greatlyreduced, with the winning and losing bids now typically separated by lessthan NO.1 per US$. The Dutch auction principle was extended in Decemberwhen the authorities announced that, henceforth, winning dealers would beobliged to sell foreign exchange purchased on the auction to their clientsat the rate that the clients had bid, rather than at the rate paid by thebank. All excess profits on these sales are in turn to revert to the CBN.

3.9 Foreign exchange inflows from autonomous private sources comprisenon-oil export earnings, invisible receipts, and other inflows (Chart 3.2).Autonomous inflows amounted to US$1.3 billion in 1987 and US$0.7 billion inthe first half of 1988, i.e., almost 50 percent of the total size of theCBN auction. Of autonomous inflows in 1987, half derived from non-oilexport receipts, equally divided between outright purchases and deposits indomiciliary accounts (see para. 3.17). Autonomous inflows from invisibles-- i.e., service transactions -- contributed an additional 20 percent oftotal autonomous inflows. 'Other' autonomous sources accounted for therew'ining 30 percent. In the first six months of 1988, however, therelative proportions changed, with non-oil export receipts contributing75 percent of autonomous funds, and 'other' sources shrinking to5 percent. The share of receipts from invisibles has remained at20 percent. Inflows from non-oil exports had fallen off in the spring of1987, from US$43 million per month in the first quarter to US$31 millionper month in the second and third quarters. However, following theimplementation of measures to monitor export developments and sanctions toenforce the repatriation of funds, these inflows recovered. US$64 millionper month was recorded in the fourth quarter of 1987, US$90 million permonth in the first quarter of 1988, and US$70 million per month in thesecond quarter of 1988.

3.10 When the interbank market was first introduced, all transactionshad to be carried out at the rate established at the most recent auction,adjusted for a dealing margin which allowed a maximum buy-sell spread ofone percent. In January 1987, however, price setting in the interbankmarket was liberalized. The price of foreign currency obtained from allsources could then respond to shifts in the balance of supply and demand,althot.gh banks were required to both buy and sell at their quoted rates,except for the one percent buy-sell spread. Further changes in regulations

- 10 -

announced on June 15, 1987, required that banks' bidding on the auctionreflect specific customer demand, implying that the free interbank ratewould henceforth apply only to funds obtained from autonomous sources.Between that time and early April 1988, the differential between theauction rate and interbank rate tended to hover below N0.50 per US$. Morerecently, however, the differential has increased to over N2 per US$, asthe interbank rate has depreciated sharply even as the authorities haverelied on moral suasion to prevent a corresponding depreciation of theauction rate.

3.11 The allocations of foreign exchange under the auction 2epresent asignificant improvement -- in terms of efficiency in the allocation to therea economy -- over the previous system. Since the commencement of SPIM,over 90 percent of total allocations for trade have gone for visibletransactions, as compared with 76 percent in the 12 months preceding theopening of SPEM. Moreover, under the auction, disbursements for rawmaterials and capital goods have accounted for over 70 percent of totalvisible imports (Chart 3.3), compared with 66 percent in the pre-SFEMperiod.

2. Trade Policy

(i) Import Policies

3.12 The trade policy regime was previously dominated by quantitativeimport controls, mainly in the form of a comprehensive licensing system andoutright bans on agricultural and manufacturing products. While in manycases, the Government itself imported banned goods or gave special permitsto private firms to import banned goods in order to address domesticscarcities, this approach tended to insulate relative prices in Nigeriafrom those on world markets. The effect on resource allocation of thesecontrols, in combination with the overvalued exchange rate, overshadowedthe role of customs and excise duties in shaping the incentive environment.To a large extent, customs duties served only to transfer scarcity rentsfrom importers to the Government, rather than affecting the price at whichimports were sold.

3.13 In conjunction with the opening of SFEM, the import licensingsystem was abolished and the import prohibition list was reduced. The30 percent import surcharge, which had been introduced in January 1986, wasalso eliminated, leaving only surcharges totaling 6 percent of customsduties whose funds are earmarked largely for port development. Recognizingthat dismantling import and foreign exchange controls would mean thatcustoms duties and excise taxes would become more important determinants ofthe structure of incentives, the Government sought to overhaul theseschedules as an integral part of the adjustment program. The first step inthe process was the implementation in October 1986 of an interim customsand excise tariff schedule in conjunction with the launching of SFEM. Thismeasure reduced the average nominal rate of protection on legallyimportable goods from 33 to 23 percent, with most duty rates falling in therange of 10 to,30 percent, although some of the reductions were rolled backin early 1987 following complaints by local producers. The second step was

- 11 -

to undertake a comprehensive tariff study, with a view to establishing amore permanent structure of customs and excise duties.

3.14 Following the completion of the tariff study, the Governmentannounced a new tariff regime in the 1988 budget, enacted as the Customs,Excise Tariff, Etc., Consolidation Decree, 1988. Under the decree, importduty rates have been specified for a seven year period, thus providingproducers and consumers with a longer time horizon within which to makedecisions. The overall effect of the changes embodied in the customs andexcise duty schedules has been to increase average nominal rates ofprotection compared to the interim schedules. For goods not subject toimport prohibition, the unweighted average nominal rates of protection --implied by the interaction of statutory import duties, excise taxes, andthe import surcharge -- increased from 23 percent in 1987 to 28 percent in1988. However, this is still lower than the average of 33 percent accordedby the 1984 schedules that the interim tariff replaced, and it largelyreflects increases in duties on intermediate products that were at the lowend of the interim tariff spectrum. (Table 3.2).

3.15 The decree also introduced the concept of a landing charge toserve as an implicit tax on imports equivalent to the excise oncorresponding domestic output, thus providing the basis for a consumptiontax, which can be used to raise additional revenues without changingprotection. In addition, the system of General Concessionary Rates of dutyon imports of certain inputs for particular categories of producers wasterminated; customs duty rates for inputs imported by producers wereunified across all regions of the country; and discretionary dutyexemptions, especially for Government and parastatal imports have beencurtailed. Finally, the prohibition list was revised to delete footwearand unfinished wood but to add barley and malt for brewing, aluminumsulphate, and used tires. Shortly after issuing the decree, the Governmentintroduced new procedures for assessment and collection of import duties.Their purpose was to redress the problem of undercollections and erosion ofprotection experienced after the advance-payment-of-duty system was scaledback. The new procedures link assessment to preshipment inspection andinvolve the Tre4sury more closely in the collection of revenues.

(ii) Exwort Policies

3.16 Since January 1986, the Government has taken a series of measuresto promote export development. The SFEH decree stipulated that non-oilexporters could retain 100 percent of their foreign exchange earnings inthe form of domiciliary accounts. Exporters are free to convert exportproceeds held in such accounts into naira at their convenience, althoughforeign exchange use is subject to the same rules that apply to fundspurchased on the auction -- with the exception that expenditures for exportpromotion are treated more liberally. Moreover, as these funds do not passthrough the auction, exporters receive the premium on foreign exchange inthe interbank market. To further encourage non-oil exports, the Governmentabolished export prohibitions -- although exports of grains weretemporarily banned in the aftermath of the poor harvest last year -- andsignificantly reduced export licensing requirements. Other measures

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introduced to promote exports include a duty drawback scheme and a schemefor Central Bank rediscounting of short-term bills for exporters.

3. Fiscal Policy

(i) Overview

3.17 The public sector in Nigeria consists of the federal government,21 state governments, and more than 300 local authorities. Federallycollected revenue, of which oil revenues contribute about 80 percent, ispaid into a federation account for disbursement among the three levels ofgovernment, with 55 percent allocated to the federal government, 35 percentto the state governments, and the remaining 10 percent to the localgovernments. Federal revenues and expenditure trends tend to be broadlymirrored at the state and local levels through the revenue sharing formula.Moreover, since state and local governments have mainly borrowed throughthe Federal government, the latter's deficit has tended to includeonlending to these entities. The public sector also includes researchbodies, nonlrofit organizations, universities, and hospitals, as well asabout 100 commercially-oriented enterprises in which the federal governmenthas equity participation. The financial operations of these enterprisesare covered in what follows only to the extent that there are nettransactions between them and the federal government.

(ii) Federal Budget

3.18 Following declines in the federal deficit from about 10 percentof GDP in 1983 to 5 percent in 1984 and 3 percent in 1985, it was expectedthat the adjustment program would lead to a further improvement in thebudgetary position, largely through the effect of the devaluation of thenaira. About 75 percent of federal government retained revenues derivesfrom oil export receipts, hence, they tend to be highly sensitive toexchange rate changes. Expenditures, on the other hand, tend to be lesssensitive, because of the wage component and local sourcing of manygovernment purchases, although foreign debt service and arrears paymentsdepend directly on the exchange rate. In the event, the sharp depreciationin the exchange rate in 1986 did not restore fiscal balance. Instead,there was a small rise in the deficit to GDP ratio in 1986 and a sharp risein 1987, reflecting increases in domestic and foreign debt serviceobligations, decreases in domestic tax effort, and increases inexpenditures for imported supplies and equipment.

3.19 Developments in 1986. The plummeting of world oil prices at thebeginning of 1986 reduced oil export revenues in U.S. dollar terms by50 percent compared with 1985. However, the impact on naira revenues wasoffset by the exchange rate depreciation in September 1986. Federallyretained revenues were further boosted as none of the higher revenues fromthe resulting increase in domestic petroleum prices made at the beginningof 1986 was passed on to the states. In addition, the oil revenues setaside for the extra-budgetary dedication accounts bypassed therevenue-sharing provisions of the federation account. Including thesefunds in both revenues and expenditures of the federal government, totalfederally retained revenues rose by 44 percent over the 1985 level; but

- 13 -

both current and capital expenditures also expanded rapidly -- by39 percent and 54 percent over their respective 1985 values. As a result,the Federal budget deficit increased to 4 percent of GDP (Table 3.3).

3.20 Developments in 1987. The situation worsened in 1987.Preliminary estimates put the actual deficit at 10 percent of GDP on acommitments basis and 7 percent of GDP on a cash basis, i.e., subtractingfinancing by arrears, compared with only one percent in the 1987 budgetprojections. Domestic financing amounted to 4 percent of GDP. Budgetrevenues including dedication accounts were 11 percent above the levelsestimated in the budget. But expenditures outstripped budgeted amounts byover 50 percent and exceeded 1986 levels by 65 percent. Interest paymentswere 30 percent over budgeted amounts and more than double their 1986level, reflecting increases in external interest obligations arising fromthe exchange rate adjustment. Meanwhile, expenditures for goods andservices rose by 25 percent, compared with a budgeted decline of25 percent, and capital expenditures (including special projects,dedication accounts, and net lending to states and parastatals) increasedby over 100 percent, compared with a budgeted rise of 7 percent. Majorsources of the overrun on capital expenditures were large subsidies topublic utilities and the extra-budgetary expenditures on dedication accountprojects, mostly in the steel and oil and gas subsectors (Table 3.4).

3.21 One of the principal elements of SAP was increased emphasis onthe economic efficiency of public investment. With limited budgetaryresources, the program recognized that maintenance of existing operationsand completion of high priority, nearly completed projects should takeprecedence over investments in new projects. Evidence of improvedintra-sectoral allocation of public investment can be seen in severalsectors. For example, in agriculture, budgetary allocations for newirrigation projects, which have had disappointing rates of return, havefallen, although a very large portion of federal spending for agriculturehas continued to be devoted to subsidies for fertilizer purchases. Inhealth, there has been increased emphasis on vitally needed primary healthcare, while expenditures for new hospitals have been trimmed. Inmanufacturing, the emphasis in official policy has changed from beginningnew ventures to rehabilitating existing operations and completing some ofthe more promising and largely completed projects. For example, Onnefertilizer and Oku-Iboku newsprint have come into operation, while lesspromising ventures such as Iwopin paper have been deprived of funds. Inthe steel sector, however, the federal government has continued to incurvery large expenses in an effort to complete the Ajaokuta steelworks, evenas Delta steelworks has been starved of working capital and spare parts andis operating at less than 30 percent capacity as a result.

3.22 The 1987 budget included NO.4 billion in federal loans toparastatals. However, actual transfers exceeded N1.5 billion. Despitesubstantial budgetary support, Nigerian Telecommunications (NITEL),Nigerian Electricity Power Authority (NEPA), Nigeria Airways, and NigerianRailways Corporation (NRC) operated well below installed capacity anddemand. Although commitments have been made in principle to commercializeparastatals producing essential public services, these parastatals havecontinued to operate without sufficient funds to maintain equipment.

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Services have deteriorated, partly through poor internal management in somecases, but largely because of their inability to charge enough to covercosts, which in turn has inflated demand.

3.23 The 1988 Budget. The thrust of the 1988 budget, announced inearly January, was expansionary, including upward revisions in federal payscales and N2.5 billion for a reflation fund. Staff ostimates suggest thatin the absence of policy changes, the federal deficit would have been over113 billion on a commitments basis, and, assuming payment of arrearscarried over from 1987, N14 billion on a cash basis -- roughly 11 percentof projected GDP. The budget projected total federally collected revenues-- assuming an exchange rate of US$1 - N4 and US$16 per barrel for crudeoil exports -- at N29.6 billion and federally retained revenue at118.2 billion, compared with N14.2 billion in 1987. Taking into accountunderbudgeting for interest payments and wages and the likelihood ofoverruns on loans to parastatals, it is estimated that, on unchangedpolicies, actual expenditures would have been over 129 billion, compared to124 billion in 1987. But as the weakness in world oil markets haspersisted and as domestic inflation has picked up, the authorities havealtered their fiscal strategy and adopted a more restrained stance.Warrant releases through July, covering the first three quarters of 1988,were only 69 percent of budgeted amounts for ministerial capitalexpenditures, and only 23 percent for the reflation fund. Meanwhile, inearly April, the Government increased domestic prices for petroleumproducts, as a first step in a program to bring them into line with theiropportunity cost in international markets.

(iii) State Finances

3.24 The states' financial situation improved in 1987, after worseningprogressively in previous years and reaching crisis proportions in early1986. Specific features of these problems were large arrears tocontractors and unfulfilled debt obligations to the federal government andexternal creditors. On the expenditure side, capital spending and thematerials component of the recurrent budget were cut back severely in favorof maintaining wages and salaries. As with the federal government, thesefinancial difficulties stem from sharply reduced oil revenues, which arethe principal source of funding for the federation account and federalrevenue-sharing. 1/ Despite efforts to mobilize additional domesticresources in recent years, internally generated revenue for the states

1/ Of the 35 percent of federation account revenues allocated to thestates, 32.5 percentage points are distributed across states accordingto the following criteria: (i) 'minimum responsibilities', consideredto be equal for all states (40 percent of the total amount distributedto the states); (ii) size of population (40 percent of total); (iii)school enrollment (15 percent of totalj; (iv) domestic revenuegeneration effort (5 percent of total). In addition, 2.5 percent offederation account revenues are allocated to mineral-producing statesfor specific uses.

- 15 -

taken together averaged only 28 percent of total revenue in 1985, and onlyabout 10 percent for the poorer states. An exception is Lagos State,which, thanks to a strong local revenue base, mobilizes aboutthree-quarters of its revenues through its own efforts. The states'budgeting procedures are weak, as are revenue collection mechanisms, withrealizations generally well. below projections.

3.25 A rescheduling plan, covering N6.2 billion of internal statedebt, has recently been formulated. The plan calls for a three-yearmoratorium, starting in 1988, during which period only interest will becollected, with principal to be recovered over the subsequent seven years.States are expected to service their external debt according to the termsreached by Nigeria with external creditors and all outstanding contractorsarrears are to be cleared expeditiously. Routine issue of Federal bonds onbehalf of the states has been stopped, and the federal government isencouraging states that are financially sound to float their own bonds inthe case of credit needs. Procedures for bond issues on the domesticcapital market by the states are under preparation and expected to beapproved by the Government shortly.

3.26 Given their heavy reliance on federation account allocations, theincrease in the naira equivalent of oil export rvenues as a result of thedevaluation has given a substantial boost to state revenues, which areestimated to have been about 75 percent higher in 1987 than in 1986. Whilethe states will continue to receive increased naira inflows as a result ofthe devaluation, certain categories of state expenditures have alsoincreased. Service obligations on foreign debt have increased, but otherexpenditure categories have also been affected. The costs of capitalprojects are estimated to have increased by as much as 60 percent, assuminga direct import content of 20 percent in state investments and a fullpass-through of devaluation to the price of imports. Materials andsupplies for health, education and other sectors also have substantialimport content which has now become more expensive in naira terms. Theseincreases have reduced the net gains to state governments from thedevaluation.

3.27 The state budgets for 1988 are much larger than in 1987, withbudgeted expenditures increasing by 50 percent. The bulk of the increaseis in capital expenditures, which are planned to more than double, whilerecurrent expenditures are budgeted to increase by only 15 percent. The1988 budgets show a slightly smaller collective deficit as a percentage oftotal expenditures than was registered in 1987.

4. Monetary Policy

(i) Overview

3.28 Monetary policy has a dual role in the adjustment program. Forstabilization policy purposes, monetary policy was to remain tight over theprogram period in order to contain demand for foreign exchange and avoidinflationary pressures. But monetary policy also has a structural

- 16 -

component, involving the movement towards a more market-oriented financialsystem designed to facilitate the mobilization of financial savings and toencourage more efficient allocation of financial resources.

(ii) Recent Developments

3.29 Develoiment in 1986. In line with the program's demandmanagement objectives, the Government intended to restrict the growth ofdomestic credit, reflected in ceilings on the increase in commercial banks'loans and advances of 8 percent in 1986. In the event, overall domesticcredit rose by 11 percent in 1986. Bank credit to the private sectorincreased by over 29 percent, partially offset by a 3 percent decline incredit to the public sector (Table 3.5). Although CBN guidelinesstipulated penalties in cases of noncompliance with the ceilings, nopenalties were actually imposed on the many banks that overshot the limits.

3.30 Notwithstanding the substantial private sector credit increase in1986, the money supply (M2) rose by only 3 percent over the year. This waspartly because of a drop in net foreign assets of the banking system,reflecting the substantial decline in international reserves over the year.But it also reflected specific policy actions by CBN designed to rein inliquidity. In August, CBN had recalled from banks the naira counterpart ofexternal obligations in arrears. Banks had been supposed to be collectingthe naira cost of imports from their clients at the time of the underlyingtrade transactions, even though the shortage of foreign exchange at CBN waspreventing foreign suppliers from being paid. But in some cases, the bankshad never received the deposits, and their customers, when forced to makepayments so that the banks could comply with the new CBN regulation, neededloans to cover the new deposit requirements. In addition, CBN requiredadditional payments to recover the intervening rise in the naira value ofthe arrears. Thus credit rose rapidly, even while liquidity in the handsof the public remained unchanged, because, in effect, most of the creditcovered the CBN liquidity withdrawal and the banking system's loss ininternational reserves. Indeed, when the funds were withdrawn, banks hadto scramble to mobilize deposits and to cut back on lending in an attemptto restore their liquidity ratios. As a result, deposit and lending ratesrose substantially. This represented a significant change from the pre-SAPsituation, in which the prevailing interest rate structure coupled withweak credit demand, had encouraged banks to stay well above their requiredliquidity ratios and discouraged them from mobilizing deposits.

3.31 Developments in 1987. At the beginning of 1987, new creditguidelines were announced. The ceiling on commercial bank loans andadvances was retained at 8 percent, excluding advances for agriculturalproduction, manufacturing for export, and export financing. The maximumlending rate was set at 15 percent. Reflecting the Government'srecognition that banks need greater flexibility in their credit operations,the sector-specific credit distribution targets, which had been reduced to8 in 1984/85 and to 4 in 1986, were replaced by a simplified two-sectorcategorization, with at least 50 percent of credit to be allocated to highpriority sectors. Agriculture was to account for 15 percent of commercialbank loans and 10 percent of merchant bank loans, while manufacturingenterprises were to be allocated 35 percent and 40 percent, respectively,

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from the commercial and merchant banks. At least 15 percent of bank loanswere reserved for small-scale enterprises wholly owned by Nigerians.

3.32 Further measures were introduced on August 1, 1987. In asignificant departure from previous policies, lending and deposit rateswere deregulated so that banks are free to charge market rates of interest.Furthermore, the limits on credit expansion were reduced to 7.5 percentconcomitantly with an increase in the penalties for exceeding these limits.The minimum liquidity ratio was raised from 25 percent to 30 percent and,in line with the tightening of policy, the discount rate was raised from11 percent to 15 percent and the Treasury Bill rate from 10 percent to14 percent. Interest rates rose substantially as a result of the measures,with banks paying 13 to 17 percent on deposits and charging 17 percent toprime borrowers. Despite the tightening of policy, net domestic credit ofthe banking system grew by 14 percent in 1987. This was partly due to the12 percent increase in credit to the Federal Government, associated withthe federal budget deficit, but private sector credit grew by 18 percent.Fueled by the increase in overall credit, monetary growth accelerated in1987, with M2 growing by over 22 percent in 1987 compared with 3 percent in1986. Part of the associated decline in velocity was to the higherinterest rates on deposits.

3.33 Develonments in 1988. In line with the more expansionary stanceof macroeconomic policy, the 1988 credit guidelines set the ceiling forprivate sector credit expansion at 12.5 percent and reduced the CBN minimumrediscount rate from 15 percent to 12.75 percent. As a result, interestrates fell, with banks paying 11 to 15 percent on deposits and charging15 percent to prime borrowers. The expansion of credit in the first partof the year was more rapid than intended, with private sector credit risingat an annual rate of 30 percent from January through May. The Central Bankannounced new measures on August 1, including an increase in the cashreserve requirement on all banks and the extension of the credit limitsthat previously applied only to commercial banks to the merchant banks aswell.

C. Foreign Debt and External Financing

3.34 Nigeria's stock of foreign debt is estimated to have totalledUS$27 billion at the end of 1987. Of this, 21 percent was due tocommercial banks, 42 percent to the Paris Club and creditors guaranteed byParis Club participants, 11 percent to the IBRD, and 18 percent touninsured trade creditors. Most of the remainder was due to other officialcreditors. The U.S. dollar value of the debt stock doubled between 1982and 1987. The increase mostly took the form of arrears on tradetransactions, incurred in 1982 and 1983 on insured and uninsured suppliers'credits and in 1986 on commercial bank letters of credit. Valuationchanges for debt denominated in currencies other than U.S. dollars furtherboosted the stock of debt.

3.35 The authorities sought the assistance of external creditors tohelp finance the adjustment program. This was necessary, as scheduled debtservice payments threatened in 1986 to absorb as much as 75 percent of thesharply reduced export receipts. In November 1986, Nigeria reached

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agreement with the Steering Committee of the London Club, representingcommercial creditor banks, to reschedule US$1.7 billion in medium. andlong-term (MLT) maturities falling due between April 1, 1986 andDecember 31, 1987 and US$2.4 billion in arrears on letters of credit (LCs)outstanding as of 3eptember 26, 1986 (Table 3.6). The package alsoincluded US$320 million in new money. But disbursement was delayed pendingthe signing and effectiveness of the overall London Club agreement, whichtook place late in 1987, and agreement with the DMF on a new program. Thecomnitment expired in April 1988.

3.36 Agreement with the Paris Club was reached in December 1986. Thatagreement covered US$3.3 billion in MLT maturities and US$0.5 billion inLCs, as well as US$2.8 billion in arrears on insured trade credits datingback to 1982-83. New money was to be agreed in bilateral negotiations withindividual official creditors. In the event, new money inflows from theParis Club have also been delayed, pending the signing of the individualbilateral agreements -- most of which have now been signed -- payment ofmoratorium interest, and agreement with the IMF. There have, however, beensome disbursements on previously committed loans for ongoing projects.

3.37 There was also a large stock of outstanding arrears on uninsuredtrade credits dating from 1982-83. Under a previous agreement, promissorynotes were to be issued when the underlying claims were reconciled andaccepted by CBN. Late interest was to be paid when the notes were issued,and the notes were to be payable over the period from July 1986 toDecember 1990. In the event, the authorities announced that they would beunable to meet the terms of the original agreement and sought to reschedulethese claims as well. In January 1988, agreement was reached with thesecreditors to reschedule claims totalling US$4.8 billion, over 22 years with2 years grace at 5 percent interest.

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Table S. 1t SFEM/IM WEEXLY AUCTION RATES(September 1986-September 1988)

Market Loveet HLihestRate Bld Did Mllliom Million

---------------------------- Dollars DollarsDate Natra Per US Dollar Offered Bid

1986 09/26 4.66 2.50 5.13 50.0 84.910102 5.11 3.00 5.60 50.0 99.110109 3.50 2.71 5.35 75.0 75.510/16 3.91 3.34 4.80 80.0 93.610/23 4.18 3.75 4.80 75.0 88.010/30 3.85 3.50 4.60 86.0 90.611/06 3.60 3.60 4.36 69.3 69.3II/13 3.50 3.50 4.20 75.0 76.711/20 3.46 3.31 4.00 75.0 81.311/27 3.49 3.45 3.88 75.0 79.712/04 3.00 3.00 3.61 75.0 60.912/11 3.20 2.99 3.50 75.0 75.312/18 3.30 3.20 3.65 50.5 52.2

1987 01/08 3.43 3.38 4.00 50.0 55.401115 3.54 3.50 3.99 50.0 61.501/22 3.68 3.60 4.26 50.0 64.601129 3.87 3.79 4.40 55.0 64.102105 3.92 3.69 4.31 75.0 94.002112 3.00 3.00 4.32 75.0 75.002119 3.91 3.50 4.22 50.0 68.502/26 3.91 3.50 4.30 53.0 63.403/05 3.81 3.81 4.28 50.0 38.403/12 3.90 3.90 4.20 50.0 46.003119 4.00 3.65 4.25 50.0 65.804/02 3.70 3.53 4.06 80.0 102.204/16 3.90 3.75 4.02 70.0 96.004/30 4.00 3.95 4.15 70.0 100.705/14 4.12 4.02 4.25 85.0 125.006/04 4.32 4.21 4.66 100.0 150.006/19 3.70 3.70 4.60 70.0 64.407103 3.95 3.89 4.40 70.0 78.707/16 3.50 3.50 4.40 100.0 79.207131 3.86 3.50 4.36 100.0 111.008113 4.00 3.90 4.26 100.0 109.608127 4.08 4.01 4.21 100.0 117.409110 4.15 4.12 4.25 100.0 116.409/24 4.18 4.17 4.27 100.0 118.810/08 4.21 4.20 4.30 100.0 117.310122 4.26 4.23 4.30 100.0 118.011105 4.30 4.30 4.31 100.0 118.211119 4.19 4.19 4.35 100.0 118.812103 4.15 4.15 4.35 100.0 118.512117 4.10 4.00 4.22 100.0 118.6

19E8 01107 4.11 3.93 4.23 100.0 116.801/21 4.16 4.14 4.20 115.0 137.702/04 4.19 4.17 4.22 115.0 138.902/18 4.25 4.22 4.31 120.0 143.603/03 4.25 4.22 4.35 120.0 144.503/18 4.32 4.30 4.36 120.0 145.403/31 4.25 4.20 4.35 120.0 143.704/14 4.17 4.16 4.20 120.0 142.404/28 4.15 4.15 4.20 120.0 143.205/12 4.13 4.13 4.16 120.0 145.805126 4.00 4.00 4.15 120.0 145.806109 4.03 4.03 4.15 120.0 142.206/23 4.26 4.43 4.27 120.0 146.607/07 4.43 4.41 4.61 120.0 143.407121 4.70 4.55 5.00 120.0 144.708/04 4.50 4.50 4.65 120.0 143.508/18 4.57 4.57 4.60 120.0 110.309/01 4.70 4.70 4.73 120.0 119.909/15 4.67 4.67 4.71 120.0 115.8

Source: Central Bank of NLgeria (CBN).

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Table 8.2: NOMINAL PROTECTION RATES ACCORDED BYCUSTOMS AND EXCISE TARIFFS, 1984-94

1964 Oct. 1998 1986 1994(Interim) (Seven-year schedule)

Agricultural Goods 40 28 82 St

Manufacturing Goods 8s 26 82 Siof which:

Capital Goods 29 21 16 20Intermedite Goode 81 22 26 29Conswmr Goods 48 86 47 89

Food, Beverages and Tobacco 48 87 41 86Textile, Leather 46 42 61 46Paper, Printing Materials 29 28 81 soChmicals., Petroleum 29 19 26 sMetal Products, Machinery so 29 24 24Baslc Metal Industrles 29 1? 26 26

Average Unweighted Tariff Rate(Including Goods Under Ban) 85 25 82 so

Average Unweighted Tariff Rate(Excluding Goode Under Ban) 88 28 28 26

Note: Nominal proteetion Is calculated by adjusting the customs duty + surchargefor the effect of the xelse on comparable domestic products.Unwighted average baeed on tariff code Item. Estimted tariff-equvlalentsare used for goods under ban In 1986, when no rates were scheduled.

Sources: Federal Republic of Nigeria. Official Gaette, No. 45, Vol. 71, July 81, 1964;Customs, Excise, etc. (Misellaneous) Provision. Decro No. 2, 1986; andCustoms, Excise Tariff, etc. (Consolidation) Decre No. 1, 1966.

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Table $.3s FEDERAL GOVE N BUDGET, 1965-88(BilIlona of NWars, Current Prices)

1986 1"? 19t

Preliminary Prellisinary Staff1986 Outeom Budget Outcome Budget Estimates n/

Revenues b/

Petroleum Revenues 16.0 6.5 17.8 c/ 18.2 21.1 21.7Other Federal Revenue. 4.4 7.3 4.5 0.1 6.6 d/ 6.1lses State and Local

Government's Share 0.1 5.1 0.6 10.1 11.4 11.9

Fedor-a I GovernmentRetained Revenue. 86. 10.7 15.5 14.2 16.2 15.9

Expenditures b/

Wgep and Salaries 1.0 1.7 2.0 2.1 2.1 8.7Goods and Supplies 1.6 2.0 2.1 8.6 4.7 4.8Dometic Interest Paymnt. 2.1 2.7 2.? 2.? .9 5.60Foreign Interest Paymnt. */ .08 1.0 4.9 0.0 8.9 4.8Capital Expenditure. t/(including Not Lending toStates and Paraostatls) 4.8 5.1 5.0 9.9 0.6 12.0

Total Expenditures 1.8 14.7 15.8 24,2 28.8 29.3

Deficit (Commitments) -2.0 -2.6 -9.8 -16.9 -5.1 -13.4

Not Reduction In Arrers 0.6 9.8 0.? -8.O 0.5 0.6

Cash Deficit -2.0 -8.0 -1.0 -7.0 -5.0 -14.2

Memorandum Item:Cash Deficit as Percent of GOP -2.5 -38. -1.0 -7.2 -4.5 -11.4

a/ These estimates astum no change In the policel announced In the 1968 budgotduring the course of the yer; thus, they do not Include the revenue imact of the April 11,1986 adjustment In petroleum price nor the effect of satual budget relasees.

b/ Excludes NNPC joint venture transactions and dedication account revenues/expenditure.c/ Includes contingency revenues froe oil pries change.d/ Includes budgeted Ref lation Fund revenus of N2.5 billion.o/ Post-rescheduling basis.f/ Includeu foreign financed expenditures.

Sources: Federal Ministry of Finance and Economic Development, IVF, and World Bank staff *.tiatee.

- 22 -

Table 8.4t FEDERAL GOVERNMENT CAPITAL EXPENDITURES, 1986-07(Porcentage Distrlbut)on)

1988 1987Budget Budget PlusOutcome Plus Dedication

Budget Dedication Accounts andBudget Outcome Accounts Budget Specaln Projects

Productlve Sector U9.8 82.6 48.2 88.9 66.0

A6riculture 10.9 11.9 10.0 10.6 7.9Industry 27.4 20.6 88.2 20.4 47.1oil and Gas 9.4 6.0 10.8 4.7 18.9mining 2.1 1.0 1.t 2.4 1.8Steel 8.0 0.9 18.6 4.7 26.0Other 7.9 6.1 4.8 8.0 4.7

Int:setruature $1.1 88.5 26.2 40.5 20.8

Power 2.9 2.8 1.9 1.6 0.8Telecommunilatlon 2.8 1.5 1.8 2.4 1.1Transport 9.9 10.7 9.0 14.1 7.tSFRRO / 10.2 18.8 11.2 1890 10.8Otbhr 5.8 5.7 4.6 4.4 6.1

Social Sector 12.8 16.6 18.6 9.4 8.0

Education 10.4 18.9 11.7 8.8 4.1Helth 1.9 2.1 1.8 8.1 8.9

Other Seocors 18.4 17.9 16.1 18.2 10.7

Total lEa.o0 . 100.0 10.0 la

Directorat of Food, Rural Road. and Infrastructuro.

Note: Budgeted eXpenditure net of foreign financing.

Soure : Federal Ministry of Finance snd Economic Developmnt.

Table 8.5: MONETARY AGEQATES, 198S-B8(mlI lons of Meire)

1986 1C66 1917 1991 -Dec. March June Sept. Doe. Marh June Sept. Dec. March June O/

Net Foreign Assets b/ -2652 -8oa6 -8791 -5017 -19020 -26682 -2480 -28969 -28655 -28366 -261

Not Doeatic Credit 88081 82962 82967 85756 16686 88512 89916 87764 41924 48824 45607Credit to Government 18651 17725 17264 16499 16067 19199 18716 17116 19764 10198 19927Credit to Private Sector 14680 15226 15664 17269 16769 19818 20869 20649 22141 24182 26079

Money and quasi Money (12) 28702 2B819 28140 28948 24844 28970 24642 26948 29678 80727 88186

Other Deposits (Ext. Paymsent) 8620 85608 8652 579 262 819 810 216 210 68 6

Capital and Re_erves 168" 1076 1762 1697 2868 2624 2109 2698 2994 8227 8246

Other Item (Not) 5544 5589 61OW 7822 6994 775w 68 a652 82O5 110S8 11226

(percentage Change Over Previoue Year)

Neb Domestic Credit - - - - 11.4 16.9 19.0 5.6 18.8 12.6 15.1Credit to Government - - - -2.6 9.8 6.9 -7.5 9.5 -0.0 0.5Crdit to Private Sector - - - 29.2 26.0 80.1 19.6 16.0 26.9 2S.1

Money *nd quas oney (M2) -- - - 2.7 1.5 6.1 6.4 22.? 26.2 85.0

Note: Including Merchant Sanks.

*/ Preliminary estimates.b/ Includes refinancing of trade arrears.

Sources: Control Book of Nigeria and nIF staff estimates.

Table 3.6: RESCC 3ULINS, 1986-87

(Millions of US Dollars)

Amount Rescheduled

Pre-1986 1986 1987 Late Repay4nt Interest ofArrears Maturities Maturities Interest Terms Rate Late Interest Status

Paris Club:

Public and Publicly 426 1,070 1,501 129 To be repaid Bilateral Excluded from the Bilateral agreementsGuaranteed 3L6 over Nov. 1992 agreement consolidations to be have been signed vlth

100 percent of all arrears and to may 1997. repaid by a date to be all participants exceptcurrent maturitites up to end- agreed in bilateral Brasil, Israel. and1987 on lo*- comitted before negotiations. Italy.October 1, 1985.

Private Nonguaranteed 140 140 -- 27 To be repaid Bilat*ral S a as above. Sae as above.MLT over Nov. 192 agreement

100 percent of all arrears out- to May 1997.standing at end-September 1986.

Letters of Credit -- 473 -- 50 10 percent to Bilateeal To be repaid by Nov. 15, Sam as above.and Other Credits be paid by agreement 1987.

Nov. 15S 1987.90 percent tobe repaid over1988 to 19n.

Cash Arrears -- 50 -- -- To be repaid Same as above.by Sept. 30,1987.

Insured Trade Arrears a/ 2,363 -- -- 483 To be paid Bilateral Capitalized to Same as above.over 1990 to agreement end-1986. Repayment1994. terms same as for

principal.

at Estimated values at end-September 1987.

Table 3.6: VZSCWDULZNSS, 1986-87(MiliLons of US Dollars)

Ao,mt Rescheduled

Pre-1986 1986 1987 Late epayMent Interest ofArrars Maturities Maturit Les Interet Tera late Late lnterest status

London Club.

3L. -- 822 873 -- To be repaid I.pn0 + Arrears of interest *Ad Agreement sinedover April 1 1J4 late Intrest repald Noywmber 1987 and1990 to Maorh before effectiveness. effetiveo Decmber1996. 1987. To be rplacd

by maw ireammt. bi

Letters of Credit -- 2,380 120 534 Pricipal to be LIBR + Payable Debts nm- Agresment sitacdrepald over 1 114 Lnterest-bearLngs November 1967 and1968 to 1990. to be repaid accordin effective December 1987.

to the following Three installments ofschedule: 1987- Dec. 10 payable debt paid,perent 1988: Jan. - no payments on stock ofMarch three equal LCos. To b replaced bypayments of 10 percent$ now aegreeent. biremaining 60 percent tobe paid in equalinstallments betweenApril and October 1988.

Other

Uninsured Trade 3,702 -- -- 1,148 Notes to be S Capitalsed to eand-1987. Agreement reachedArrears# Promissory repaid over Repaynt som as for vith creditors in

Notes el 1990 to 2010. principal. January 1988 stillto be signed.

Non-Paris Club Negotiationsofficial creditors anderway

bI Following negotiations with the Steering Comeittee of the London Club banks, the following proposal has been submittedto creditor banks for consideration:(1) L. -- all maturities to be repaid 1992-2008; interest rate equal to LIDOR plus 718.(2) LCs -- to be repaid 1992-2004, interest rate equal to LhBOR plus 13116 percent.(3) Payable debt -- S1 dowA payment at signing: payable through 1991, no interest.

cJ Estated values at end-December 1987.

- 26 -

Chat 31: NOMINAL MECHANGM RATES(January 186- eptember 1986)

S'S

4

2

w~~~~~~~~~~ oP

1- 1

01 02 0s 04 01 02 03 04 01 02 03

N4as: Mu41dNo*erS. IN. m. w

- 27 -

Chart 32: AUTHORIZED DEALERS SOURCES OF FOREIGN EXCHANGE(October 1986 - July 1986)

450

4c.

250

150

500

so

0O N D J F M A M J J A SO N D J F M A M J J

18S 1907 1988

ONN CMN MM E N C WM w

SXMs COWa Barh1 dNo t(_ ). SOUMM4b

- 28 -

Chalt 3.3: ALLOCATION OF FOREIGN EXCHANGE ACROSS USES(Otober 186 ^ July 1986)

so .-

70 -900

60

940

930

90

10

O N DJ F M A M J J A 8 0 N D J F M A M JJ1986 1987 1988

0 bddUSIa8K + °Wdd Good odu

S8mC a eap a Nft (Mo. Uo@

- 29 -

IV. IMPACT OF THE ADJUSTMENT PROGRAM

A. Introduction

4.1 The Structural Adjustment Program (SAP) has fundamentally changedthe incentive framework in the Nigerian economy. Domestic currency pricesfor exports have risen sharply, and foreign exchange is allocated on thebasis of price rather than influence, permitting a more economically-rational allocation across competing uses. The replacement of the importlicensing system and foreign exchange controls vith a system of protectionbased on a market-determined exchange rate and tariffs has greatlyrationalized the incentive framework. In turn, these changes have producednotable responses. Tree crop cultivation has witnessed a resurgence, andmanufacturers are taking advantage of the new relative price structure andare aggressively seeking further opportunities. Output, investment, andemployment in'the export sector have picked up. In a reversal of previoustrends, producers in all sectors are now looking for ways to economize onimported inputs and to source their input needs locally. The shift inrelative prices is also changing consumer demand patterns. But the mosttangible results have been in non-oil exports and a broadening recovery ofthe manufacturing sector, despite a sharp compression of imports,reflecting the increased share of raw materials and spare parts in totalimports and the shift to local sourcing.

B. Domestic Output

1. Overview

4.2 As the implementation of the program started late in the thirdquarter of 1986, its effects on activity levels were small in that year.The evolution of non-oil GDP was largely influenced by further importcompression, reflecting the repercussions of weakening world oil marketsand collapsing oil revenues on foreign exchange availability, au.d tightdemand conditions. Still, in 1986, because of good performance inagriculture, non-oil GDP is estimated to have increased by about 3 percentand overall GDP by 2 1/2 percent. The rise in GDP notwithstanding, it isestimated that real consumption fell by about half a percent. Meanwhile,fixed investment rose by 4 percent, largely reflecting increases in thepublic investment program.

4.3 It is still too early to have final statistical data on the 1987outturn, but the available evidence suggests that non-oil GDP may havefallen by about 3 1/2 percent in real terms in 1987, and overall GDP byabout 5 percent. There was a significant drop in crude oil output, relatedto OPEC production quotas, and agricultural production fell by almost8 percent because of adverse weather conditions. Staple food production,which accounts for almost 90 percent of agricultural GDP (Table 4.1), wasparticularly hard hit. But the cash crops were also adversely affected,offsetting somewhat the favorable effects of the program on productionincentives. The service sector is also estimated to have fallen, driven bya drop in retail trade. But the strengthened incentives to use local rawmaterials resulting from the policy changes under SAP permitted a recoveryin the manufacturing sector, despite a further compression of imports.

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Consumption fell further in 1987, although the effect of the sharp drop inagricultural output was buffered by a depletion of stocks. Fixedinvestment rose by 12 percent, led by the steep rise in federal capitalspending.

4.4 Based on preliminary evidence, the short-term outlook for realGDP is favorable. Well-distributed rains earlier this year point to astrong recovery of food production, although the gains will be tempered byrecent flooding in some areas. Official estimates suggest a 12 percentincrease in production of staples in the first half of 1988. Inmanufacturing, the recovery that began last year is continuing. Surveyevidence suggests that capacity utilization was 4 percentage points higherin the first half of 1988 than the corresponding period of 1987 andindicates further import substitution for productive inputs. Overall, theCentral Bank of Nigeria index of manufacturing production in the first halfof 1988 was up 8 percent on the corresponding period of 1987. Meanwhile,the volume of crude oil production has also increased relative to 1987levels, contributing to the projected bouyancy of real GDP, although theterms of trade loss associated with the weakening of oil prices suggests asmaller rise in real national income.

2. ALriculture

4.5 SAP's measures to revitalize agriculture and traditional exportscentered on the price-formation process, by way of changes in trade policy,the exchange rate reform, and the abolition of the Commodity Boards, whichhad previously set domestic prices for oil palm, cocoa, rubber, cotton, andgroundnuts. The impact of these policy changes has varied across productsamong the major export crops. The exchange rate change initially led to athree-fold increase in the domestic price of cocoa, whose price hadpreviously been set in line with world market conditions. The rise wassomewhat smaller for rubber, as the pre-SFEM marketing board price had beenabove the border price at the old exchange rate. Pre-SFEM prices forcotton, which is imported, were also above world market prices, hence theyrose by less than four-fold with the devaluation. Notwithstanding adownward trend in world prices, the price of cocoa continues to be highdomestically, and new plantings as well-as rehabilitation of mature treesare continuing. Domestic prices of rubber, palm oil, and cotton continueto exert a strong positive impact on farmer incentives.

4.6 By contrast, the immediate impact of the devaluation on producerprices for food crops was negligible, largely because food stocks wereplentiful at the time of the opening of SFEM and the fact that most foodproducts are 'non-traded goods' in Nigeria. However, food prices for manyitems rose sharply from mid-1987 to mid-1988. To a large extent thisreflected the weather-related drop in output which affected yams andcassava particularly adversely. But bread prices doubled in 1987,reflecting the effects of the wheat ban introduced at the beginning of theyear, which shifted demand to locally produced food and raised prices.These effects on prices were reinforced by farmers' diversification intocotton and groundnut production, and from manufacturers' greater relianceon local sourcing of raw materials.

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(i) Cash Crops

4.7 Cocoa accounted for over 90 percent of non-oil exports in 1985.The tripling of the producer price following the opening of SFEH led tosharp competition among private traders, and much cocoa was exportedwithout proper handling, reducing quality and lowering the internationalreputation of Nigerian cocoa. Discounts as high as 20 percent from worldmarket prices were recorded, in contrast to the previous quality premiumpaid for Nigerian cocoa. Domestic prices rose further during the course of1987, and notwithstanding the drought in some areas during the 1987flowering season, cocoa production is estimated to have increased by5 percent. New trees are being planted, while plantations burnt some yearsago have been largely replanted. Use of fungicide to control black-pod hassubstantially increased, despite the devaluation-related rise in thechemical's price. The recent softening of world prices notwithstanding,the revitalization of the Nigeria cocoa sector should continue, as itremains highly profitable in domestic currency terms.

4.8 For rubber, in contrast to cocoa, the producer price set by theRubber Board in 1986 was already 60 percent above world prices at theprevailing official exchange rate. Thus, the immediate impact of thedevaluation on domestic rubber prices was smaller than for cocoa. Even so,it has been substantial, accentuated by the recent firming of rubber priceson world markets. Many abandoned rubber holdings have been rehabilitated,and planting of new trees in large estates is more extensive. Pr.aliminaryestimates point to a 25 percent rise in production in 1987 and a furthersurge in 1988.

4.9 Among the other cash crops, cotton is especially important as analternative crop to grains for farmers in some of the northern states.Lint and seed cotton prices rose by only 40 to 50 percent in the wake ofthe exchange rate change, as the price of lint prior to the devaluation wasdouble the border price. Nevertheless, the price rise was large enough toinduce farmers to expand cotton production at the expense of maize andother grains, for which prices were weakening due to the bumper harvests in1985 and 1986. Production in the 1986/87 season is estimated at2 1/2 times the level of 1985/86. This trend should continue, followingthe recent strengthening in prices.

4.10 Prices for Qroundnuts and oil Palm, two other important cashcrops, were well above their respective import prices even before theexchange rate change due to the ban on vegetable oil imports, Even so,prices for palm oil and palm kernel have risen, and oil palm production isnow undergoing a revival. Farm-gate prices for groundnuts have onlyrecently begun to rise, and production has increased marginally. Climaticconditions over the last two years have lessened the severity of theRosette disease, giving a positive boost to output.

(ii) Food Production

4.11 Favorable weather conditions and the return of retrenched workersfrom urban areas made for a large supply response in 1985 and 1986. Output

- 32 -

of staples rose, and, with restrained domestic demand, farm-gate prices inmany areas fell below the levels recorded over the previous three years.Adverse weather conditions, coupled with adjustment-related supply shiftsinto cash crops, caused a decline in output levels of food grains and rootsduring 1987. Declines were recorded for yams, cassava, millet, maize andsorghum. However, while sorghum production declined in some states, itrose in others, reflecting increased hectarage. On balance, total foodcrop production is estimated to have been some 10 percent below the 1986level. At the same time, there is evidence of shifts in consumer demandpatterns to locally grown food, following the sharp rise in bread pricesover the course of 1987. Some food processors have also shifted to locallygrown grains as raw materials. Favorable weather conditions are nowpointing to a recovery of production this year. In the first half of theyear, output was 12 percent above the level recorded in the first half of1987 and 6 percent above the level recorded in the first half of 1986.

3. Manufacturing

4.12 Available data suggest a broadening recovery in the manufacturingsector beginning in the first quarter of 1987. While the index ofmanuftcturing output fell by 4 percent in volume terms in 1986, estimatespoint to an increase of about 5 percent in 1987, and a further increase of8 percent in the first half of 1988 compared with the first half of 1987.CBN survey results suggest a small but steady rise in capacity utilizationin 1987, and a further rise -- by 4 percentage points over thecorresponding period of 1987 -- in the first half of 1988. Analysis ofreturns by the Manufacturers' Association of Nigeria (MAN) from its membercompanies and other industry sources corroborate these trends. While thesechanges in capacity utilization are indicative, the reported levels ofcapacity utilization -- only 40 percent in the first half of 1988 -- needto be Interpreted with caution. Under the import licensing system,licenses had been allocated on the basis of capacity. Hence there had beenan incentive both to overbuild and to overstate capacity. Moreover, withthe dramatic change in relative prices, some installed capacity is nolonger economically viable.

4.13 The exchange rate adjustment and accompanying measures toliberalize trade have dramatically altered incentives in manufacturing.Previously, the sector tilted heavily in the direction of importsubstitution -- protected by tight limitations on competing imports --while the overvalued exchange rate discouraged export production. SAP haseliminated much of the previous bias against export activities. For importsubstitutes, however, there have been positive effects and some negativeeffects, depending on the relative importance of devaluation versus tradeliberalization in the particular lines of production. Exchange ratedepreciation raises the price of imports of both final goods and inputsinto production processes, with the net impact on profitability dependingon the share of local costs in total production costs. Tradeliberalization, on the other hand, tends to reduce prices of imports andimport substitutes selectively, according to the changes in the overallstructure of protection. Profitability is thus affected by the changes inindividual tariffs on inputs and outputs.

- 33 -

4.14 Survey data indicate that the combined effect of the exchangerate and trade policy changes has been to boost the competitiveness ofactivities relatively dependent on local resources. Indeed, companiesinvolved in production of tires and tubes, certain textiles, woodfurniture, tanneries, paper, and cement have been doing well. Exportactivity in some of these sectors has picked up, and some companies havesignificant plans for expansion and new investment. Low value-addedactivities have benefitted less from the exchange rate change and also weresubject to a greater reduction in effective rates of protection under thenew tariff regime. Assembly operations for consumer durables have beenparticularly affected by the new environment. In the pre-SFEM environment,they typically had privileged access to import licenses for the necessaryproduction inputs, which kept their production costs and selling pricesdown. Meanwhile, demand has been affected by the loss in purchasing powerof middle- and upper-income households associated with the exchange ratechange.

4.15 The exchange rate and trade policy changes have strengthenedincentives to use local raw materials, a trend which was already apparentbefore SAP because of the difficulty in securing imports. This trend isprevalent in most industrial branches. In some areas, however, importbans, especially on raw or partially processed materials, are driving upcosts for finished goods and are discouraging consumers from switching todomestic suppliers. A case in point is palm kernel oil, which is twice asezpensive in Nigeria as on the world market due to the import ban onvegetable oils. Soap based on domestic palm kernel oil is therefore moreexpensive than imported soaps. In other areas, such as flour milling, banson imported inputs are hindering the recovery of downstream processingactivities. These sectors have uot shared in the recovery of themanufacturing sector.

4.16 SAP has also had an effect on inventories and employment. In thepast, companies held large stocks of imported inputs, raw materials, andspare parts because the import licensing system made supplies uncertain.They also kept large employment rolls for those periods when supplyavailabilities permitted production surges. Under FEM, manufacturingcompanies -- including smaller firms which had been disfavored under theimport licensing system -- have easier access to foreign exchange for thepurchase of raw materials and spare parts. The more certain and regularavailability of supplies under the new system has allowed companies torationalize their inventories and employment levels. As a result, theyhave reduced average input stocks substantially, as compared with pre-SFEMholdings, and shed labor. The CBN survey points to a drop of 6 percent inthe manufacturing labor force in 1987 and a further 2 percent drop in 1988-- despite the output and capacity utilization gains recorded over theperiod, reflecting major rationalization exercises in many sectors.

C. Prices. Employment, and Wages

1. Overview

4.17 The program's initial effects on prices, wages and employmentwere moderate. Consumer prices rose by 14 percent over the course of 1986

- 34 -

and by 10 percent in 1987. Meanwhile, nominal wages were flat, as the wagefreeze introduced in 1982 continued, resulting in further decreases in realwages. Intervening fluctuations notwithstanding, employment rose by about2 1/2 percent per annum in 1986 and 1987, but, given the estimated3 percent per annum growth in the labor force, the unemployment rate roseby 1 percentage point over the period.

4.18 The picture changed at the beginning of this year. Consumerprices began to rise sharply, led by steep increases in food prices. Atthe same time, the relaxation of the Government wage freeze boosted nominalwages in the public sector and generated pressure for catch-up wageincreases in the private sector. Meanwhile, reflecting the expansionarypolicy stance adopted in late 1987, labor demand in the urban sector haspicked up, and the unemployment rate has fallen. Given the evidence oncontinued labor-shedding in the formal manufacturing sector, this suggestsstrong growth in services and the informal sector.

2. Prices

4.19 Relative Prices. During the oil boom, the relative pricestructure changed dramatically. As domestic demand increased, prices fornon-tradeable goods rose sharply and drew resources away from the food andtradeable producing sectors. This trend began to be reversed in 1984, asthe oil slump and restrictive domestic policies contained the demand fornon-tradeables. At the same time, because of cutbacks in import supplies,prices for imports and their domestic substitutes rose faster than theirrespective world parities converted at the official exchange rate,reflecting the inclusion of a foreign exchange scarcity premium. Thisphenomenon intensified in the first half of 1986 in the face of the furthercompression of foreign exchange availability and imports. But the reversalwas only partial, since domestic prices of exportables remained depressed.It was only with the opening of SFEM that there was a major correction ofthese prices. Since then, export prices in terms of naira have quadrupledon average, reflecting both the exchange rate depreciation and the phasingout of the agricultural Commodity Boards.

4.20 Ex-Factory Prices. Prior to the opening of SFEM, the Governmenthad attempted to limit domestic price increases through an elaborate systemof ex-factory price controls for larger firms, administered by the Prices,Productivity and Incomes Board (PPIB). In general, however, the controlswere not effective in maintaining price stability. The application ofPPIB's rules provided considerable scope for price adjustments, and smallerfirms were left to set prices on their own. Even for those products forwhich controls on ex-factory prices were effective, retail prices reflectedmarket values, and incorporated scarcity rents. The opening of SFEMresulted in significant increases in the costs of production for industrialfirms via increased naira prices for imported inputs. This was especiallymarked for highly import-dependent firms, such as motor vehicle assemblyplants, where production costs rose by an estimated 140 percent betweenSeptember 1986 and June 1987. Reflecting these cost increases, manyindustrial firms raised ex-factory prices, although these adjustments weremuch lower on average than the change in production costs.

- 35 -

4.21 Consumer Prices. There had been some concern that theintroduction of SFEM would trigger an inflationary spiral. Indeed, thecomposite CPI rose by 7 percentage points between June 1986, when the SAPwas announced, and September 1986, when SFEM opened. But in the followingmonth, the CPI actually fell and the year finished with the CPI below thelevel recorded in August, limiting the measured price increase betweenend-1985 and end-1986 to 14 percent (Chart 4.1). 1I Consumer pricesremained fairly flat through April 1987, but rose by almost 9 percentagepoints over the next seven months. Still, because of the virtual pricestability earlier in the period, the CPI at end-September 1987 was only 6percent above the level recorded 12 months earlier at the opening of SF11.Reflecting rising food prices, the measured inflation rate in the twelvemonths through end-December was 10 percent. The annual inflation rateaccelerated to over 35 percent in the next 5 months.

4.22 To a large extent, this performance mirrored the behavior of foodprices, which carry a 75 percent weight in the composite CPI. The fineharvests of 1985 and 1986 kept food supplies relatively abundant and theoverall domestic price level in check. Indeed, food prices rose by only8 percent over the course of 1986. Food prices followed their normalseasonal pattern in the first part of 1987, remaining flat in the earlymonths and picking up in the spring. But rather than leveling off inAugust and seasonally declining through February and March, they jumped by20 percentage points over the next seven months, reflecting weather-relateddeclines in agricultural production and food stocks and by an additional17 percentage points in April and May.

4.23 The behavior of prices for household goods and other purchaseshas been very different. These prices showed much sharper increases --48 percent from end-1985 to end-1986 -- reflecting their large importcomponent. But given the size of the change in the exchange rate -- fromabout Nl - US$1 to N4 - US$l over the same period -- even this increase wasquite moderate. This is explained by the fact that many of these pricesalready reflected the scarcity value of foreign exchange. 2/ Following theopening of SFEM, these prices fluctuated around a rising trend throughMarch 1987 when they began to decline, reflecting weak demand conditions.In May 1988, they were 3 percentage points below their September 1986level.

1/ Taking the average price level in 1986 over the average price level in1985, the increase was only 5 percent. To some extent the differencebetween the two measures reflects the declining price trend recordedin the second half of 1985.

21 Staff calculations of implicit exchange rates suggest that, by early1986, consumers were already paying prices for most importscorresponding to an implicit exchange rate of about 13 US$l.Although for some products, such as motor vehicles and assembly parts,for which generous import licenses had previously been granted, theimplicit exchange rate had been much lower.

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4.24 It is clear that the behavior of the CPI as a measure of thenaira's purchasing power depends on the weights assigned to the prices ofthe underlying items, particularly as between food and household items. Asnoted, the composite CPI is based on a 75 percent weight for food and a7 percent weight for household items. While this closely mirrors theweights of the rural CPI, in the urban CPI, the weight of food is lower andfor household items, higher. Reflecting the sharp increases in prices forhousehold items in 1986 and their relatively larger weight, the urban CPIincreased faster than the rural in 1986. And in Lagos, the rise was evenhigher than the national urban average, with prices of market basketspurchased by middle income groups rising the most. Reflecting the sharperincreases in food prices in 1987 and 1988, the rural CPI increased fasterthan the urban CPI. These differential effects were particularly marked inthe fij.t five months of 1988, when the CPI rose by 27 percentage points inrural areas and 20 percentage points in urban areas. During this period,price increases were lower in Lagos than the national average, with thelowest income groups facing the sharpest acceleration (Table 4.2).

3. Labor Markets

4.25 A key aspect of the austerity period that preceded SAP was thesharp rise in unemployment. But labor was further injured by a steeperosion of purchasing power, as the price controls were unable to forestallincreases in consumer prices. With fairly flat nominal wage developmentsover the austerity period, real wages fell; however, these real wagedecreases did not induce increases in labor demand, because of the effectsof the austerity measures and the increasingly overvalued exchange rate.But since the introduction of the adjustment program, real wages as seen byexport producers have dropped dramatically, thus raising the demand forlabor in that sector.

4.26 The labor market has responded to this change in the environment,with the earlier rapid inflow of labor into urban areas now replaced byreturn migration of workers taking advantage of better rural employmentopportunities. Sharp intervening fluctuations notwitstanding, FOS laborforce surveys suggest a 3 percent annual rise in employment since the startof the program, largely attributable to better rural employmentopportunities. Even so, unemployment remains a problem. Overallemployment needs to rise by 3 percent per year simply to keep pace withlabor force growth. Hence the estimated rise in employment has not beenadequate to reduce the unemployment rate.

Mi) Unemoloyment

4.27 During the oil boom, Nigeria had experienced a relative declinein the rural labor force, as employment opportunities increased rapidly inurban markets, notably in the public sector and in construction activities.But the decline in oil revenues and real public sector expenditures since1981, and the subsequent contraction in urban employment, fundamentallychanged the situation. The urban unemployment rate rose sharply over thisperiod, from 7 percent at end-1983 to 11 percent in June 1986, with someage and educational groups faring worse than others. Secondary schoolleavers, and university graduates faced very sharp rises in unemployment --

- 37 -

to over 45 percent for those with secondary education -- while theunemployment rate for those with less than secondary education remained low-- under 5 percent -- throughout the period. More recently, SAP hasimproved incentives in the agricultural export sector, in turn increasingthe demand for labor in some rural areas. In the urban sector, the initialimpact of SAP on unemployment was unfavorable, particularly for schoolleavers whose unemployment rate reached 57 percent in June 1987. But theurban unemployment rate has since fallen (Table 4.3), despite thecontinuation of labor-shedding by the large-scale manufacturing sector,suggesting considerable buoyancy in the informal sector and new enterprisesnot covered in existing sample surveys. By March 1988, the urbanunemployment rate was down to 7 percent, compared with 9 percent inMarch 1986, with the unemployment rate for school leavers at 31 percent.For those with primary schooling or no formal education, it was below3 percent.

4.28 Some of the explanation for the low unemployment rate among theless educated and for the declining urban unemployment rates seems to bethat retrenche4 construction workers and other urban laborers have returnedto agricultural production. Indeed, as mentioned above, urban unemploymentrates are highest for those with secondary education and/or those under20 years old -- i.e., those less likely to migrate to the villages becausethey were born in the cities and lack farm skills. This trend was alreadyapparent in farm labor surveys taken in 1985. The data collected in thesesurveys suggest that return migration from urban to rural areas followingthe onset of the oil crisis resulted in an estimated 24 percent increase inthe rural labor force. Most migrants returned to their original villages,and the survey suggests that return migrants gained access to landrelatively easily. The majority went into farming on their own account oron their fsather's farm, while the agricultural wage-labor market absorbedat most 20 percent of returning migrants. Family land allocationmechanisms thus seem to have been able to accommodate the re-entry process.The migration survey also revealed no tendency for the duration of absencefrom the village to influence the decision to take up farming again,suggesting that land rights decay only slowly. While the survey found thatmost returned migrants were oriented towards food crops, that was in thepre-SFEM era. With the now greatly changed incentives, there is likely tobe a shift in the rural labor force towards tree crops, which tend to beclose to the major urban centers.

4.29 Factors on both the demand and the supply side of the labormarket explain the unemployment problem facing young people. Theovervalued exchange rate and austerity policies led to a significant dropin demand for labor. SAP, while improving demand for labor in some areas,has made firms more cost conscious and significant steps to reduceovermanning are underway. Young workers, as new entrants to the labormarket, are entirely dependent upon the rate of new recruitment (as opposedto the level of employment) for access to jobs. At the same time,educational data indicate that the supply of urban school leavers increaseddramatically during the early 1980s, with, for example, the number ofchildrez. in Lagos secondary schools doubling between 1979/80 and 1983/84.Furthermore, the minimum-wage laws probably keep wages of new entrants tothe labor market higher than what firms are prepared to pay on economic

- 38 -

grounds (even though average earnings of experienced workers are well abovethe minimum wage), thereby constraining employment opportunities for youngworkers.

4.30 Graduate unemployment is much lower than that for secondaryschool leavers. The urban unemployment rate for this group was 7 percentin December 1987. Graduate unemployment, although aggravated by therecession, is largely the consequence of a very rapid expansion of highereducation. Indeed, the number of graduates from Nigerian universities in1984 was 145 percent higher than in 1978, although there is some evidencethat this growth has now come to a halt. Even if the flow is onlymaintained at its present levels, the continuing supply will forcegraduates to enter jobs of a status and remuneration well below that oftheir predecessors. The problem is aggravated by the fact that theeducational skills of most new graduates do not match the specific skillsneeded in a restructured economy.

(ii) Wages

4.31 The Federal Government tends to act as a wage leader for themodern sector. Prior to the revision of pay scales in the 1988 budget,federal salary scales had been frozen since 1982, with further measurestaken in 1985 to trim fringe benefits. Even allowing for grade creepwithin the salary structure, there was clearly a substantial erosion ofpurcbsAR"g power of public sector employees. Private sector wages werealso frozen, beginning in 1984, although fringe benefits were allowed torise. The 1988 increase in civil service wages is estimated to have addedabout 28 percent to the federal budget for personnel costs, which can betaken as a rough measure of nominal wage increases for federal workers.Such an increase would offset the real wage effects of the 27 percent risein the urban Consumer Price Index over the 23 months from June 1986 toMay 1988, and restore federal workers' real wages to their immediatepre-SAP level. Private sector wage settlements have generally been at alower level -- in the 15 percent range according to the Manufacturers'Association of Nigeria -- suggesting a 10 percent drop in real wages duringthe SAP period.

4.32 The income data shown in Table 4.4 suggest a drastic fall in realwages -- and shrinking income differentials between urban and rural sectors-- over the 1980/81-1985/86 period. The real standard of living for urbanwage earners halved during this period. The group with the sharpest dropin real income (over 50 percent) was the urban self-employed who, by theend of the oil boom, enjoyed a significantly higher standard of living thantheir rural counterparts. The group with the lowest real income in theearly 1980s, the rural self-employed, experienced the smallest reduction inincome between 1980/81 and 1985/86, although even their real standard ofliving fell by one-fourth over this period. Taking into account the highercost of living in urban areas (about 12 percent by mid-1986, according toFOS data), living standards for rural workers were probably somewhat higherthan for urban workers at the outset of SAP. These conclusions, based onhousehold data, are supported by fragmentary survey information about wagesin different sectors. Thus, the wage differential in favor of urbanworkers that had opened up during the oil boom, had apparently been eroded

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before the introduction of the adjustment program and was further eroded atthe start of SAP as the rural CPI rose more slowly than the urban CPI.More recently, however, as the rural CPI has increased faster than theurban CPI and urban wages have risen, the previous differential in favor ofurban workers has probably reopened.

D. Social ImDact

4.33 In assessing the program's social impact, it is important todistinguish between the effects of shocks that necessitated the program andthe effects of the program itseif. The collapse of oil revenues, fromUS$25 billion in 1980 to US$6 billion in 1986, precipitated a sharp cutbackin imports, which in turn boosted prices and reduced real wages. Theprogram, by contrast, includes the stance of macroeconomic policy, theexchange rate change, and the shift to a marked-based foreign exchangerationing system.

4.34 The foreign exchange situation and the desire to prevent theemergence of a wage-price spiral and accompanying pressure on the exchangerate initially constrained the stance of overall macroeconomic policy. Assuch, economic activity in many sectors of the economy improved little fromthe depressed levels that characterized the pre-reform period. However,this stagnation neither derived from the adjustment process per se norsignaled that the program was not working. It rather reflected theperceived necessities imposed by the sharply reduced availability offoreign exchange that resulted from the successive weakening of world oilmarkets.

4.35 Some groups have borne a disproportionate share of the costs ofadjustment to the realities imposed by lower oil revenues. Distributionaleffects are an inevitable part of the adjustment process, and indeed carrywith them important messages about the desired direction for futureresource flows. Some of these adverse effects should be mitigated as therearrangements in the economy set in train by the program take shape, butwill inevitably have other distributional consequences. For example,following the introduction of SFEM, food producers initially facedincreased input costs without commensurate increases in output prices. Therecent increase in food prices, though largely due to the effects ofadverse weather, also reflected adjustment-related substitution out of foodcrops into cotton and groundnuts, inter alia, and greater local sourcing ofraw materials. Thus, vhile the program's initially adverse effect on foodproducers has begun to be reversed, it has been at the expense of the urbanand rural poor, for whom over 75 percent of expenditures are for food.

4.36 But the largest distributional impact of the program has beenassociated with the shift from an arbitrary administrative system forallocating the Government's oil-related foreign exchange earnings, to amarket-based system, which has transferred a major source of income fromindividuals who previously had privileged access to foreign exchange to theGovernment. Reflecting this transfer, the impact of the adjustment programon public spending in the social sectors should ultimately be favorable.Many of these activities -- primary and secondary schooling, primary healthcare and water supply -- are concentrated at the state and local government

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levels. In the post-oil-boom period these sectors had experienced severecutbacks in funding for maintenance and recurrent expenditures, while newcapital spending virtually stopped. But through federal revenue sharing,the depreciation of the naira has led to large increases in the revenues ofstate and local governments, which, in turn, should increasingly permit arestoration of essential social services.

E. External Effects

4.37 Balance of Payments. The balance of payments is dominated bydevelopments in the oil market, debt service, and capital inflows. In 1986oil exports, which account for 90 percent of total exports, totalled anestimated US$6.4 billion, i.e., little more than one-fourth and one-halftheir respective 1980 and 1985 values. They rose marginally toUS$6.8 billion in 1987. Non-oil exports are estimated at US$0.4 billion in1986 and US$0.7 billion in 1987. Following successive drops since 1981,imports fell in 1986 to US$6.7 billion, representing a drop in real termsof over 30 percent from 1985, and in 1987 to US$5.8 billion, a further dropin real terms of some 23 percent. This was some US$0.4 billion less thanhad been assumed in the program for 1987. Debt service payments (excludingarrears) are estimated at US$1.7 billion in 1987, while disbursements onforeign credits are estimated at US$0.9 billion. Import coverage of freelyuseabie foreign exchange reserves was only one month at end-1987.

4.38 These broad trends continued in the first six months of 1988.Non-oil export performance strengthened further, totalling someUS$0.6 billion in the first half of 1988. But while crude oil exportvolumes (including condensates) have been buoyant, prices have been weak.Oil export values are estimated to have totaled US$3.4 billion in the firsthalf of the year, closely mirroring performance in 1987. The value ofimports in the first half of 1988 was broadly unchanged from 1987, but,reflecting the 8 percent estimated increase in import prices, thistranslates into a further compression of import volumes. Debt servicepayments totaled US$0.7 billion, disbursements on foreign credits areestimated at US$0.3 billion, and payments of arrears totaledUS$0.3 billion.

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Table 4.1: SHARES OF AGRICULTURAL ODP(Percentages o.sd on Constant 1984 Prices)

1901 1982 1988 1984 1986 1988

Food Crops 81.28 84.09 88.30 88.91 88.06 87.92of which: ----- ----- --

Millet 11.58 10.46 12.41 7.62 10.88 9.95Guinea Corn 18.83 14.82 14.64 11.52 12.96 18.86Maize 2.50 2.28 8.58 4.09 4.91 4.04RICe 1.44 1.28 0.68 1.42 1.12 2.80Sean. 4.82 4.67 2.95 2.77 8.10 5.89YOM 86.10 86.48 80.48 87.60 86.28 84.71Ceassva 9.84 18.58 17.28 17.49 16.69 15.89Melon 0.85 0.21 S.89 0.85 0.88 0.77Cocoyas 1.14 0.75 0.67 0.75 9.95 1.40Soya Sen. 0.18 9.18 0.07 0.07 0.07 0.098Sonised O.09 9.08 9.6 9.98 9.9 9.6695

C5sh Crops 9.28 7.85 8.06 8.51 8.99 6.69of which: -- -- - ---- -- --

Cocoa 1.69 1.U6 1.20 1.19 1.97 0.72Groundnut 2.76 2.82 8.41 8.12 2.89 2.71Cotton 9.81 9.88 0.78 0.82 0.12 9.86Rubber 1.57 0.80 0.26 1.15 1.08 0.76Palo Oil 1.97 1.67 1.86 1.80 1.56 1.46Palm Kernel 0.76 0.72 0.64 0.77 0.64 O.55Others 0.17 0.16 0.16 0.15 0.15 0.18

Other Crop. 9.49 8.56 8.66 7.58 8.98 5.89

Total 100.99 109.99 100.99 190.99 199.9 100.00

Source: 'Estimates of Cross Domestic Product of Nigeria, 1981-1088',G. Mejumdar, February, 1988 and staff calculations.

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Table 4.2: CONSUMER PRICE INDICES(Percentage Change Over Previous 12 Months)

National Index Lago* Area Index

Upper Income Middle Incom Lower IncomeComposite Urban Rural Group Group Group

Jan 86 22.60 28.81 22.46 18.10 18.92 20.51Feb 22.49 21.08 22.69 17.98 19.68 21.19Mar 19.94 16.78 20.42 17.23 17.97 19.77Apr 12.94 9.88 18.07 12.97 14.52 14.48May 3.88 2.82 4.07 7.65 9.21 7.62Jun 3.73 6.67 3.48 7.19 8.13 8.80Jul -0.21 -2.94 0.23 4.87 6.65 3.71Aug -2.99 -7.25 -2.86 8.65 4.76 2.15Sep -4.93 -. 94 -4.48 2.96 3.96 0.89Oct -1.72 -8.76 -0.97 5.91 5.88 2.42Nov -4.13 -3.93 0.42 6.22 5.30 2.42Doe 1.07 -4.06 1.88 6.78 6.09 3.16

Jan 86 -2.40 -4.49 -2.10 6.18 4.'6 2.02Feb 0.13 2.27 -0.19 7.48 6.21 4.31Mar -3.47 4.33 -4.60 6.70 6.17 3.22Apr -3.64 6.61 -4.99 6.06 6.69 8.17May 1.46 9.51 0.27 9.74 10.62 7.72Jun 2.93 10.50 1.84 11.18 12.14 9.08Jul 8.07 11.81 7.62 14.85 16.44 12.98Aug 11.01 13." 10.68 24.15 25.01 19.16Sep 12.87 16.89 12.30 25.02 28.62 19.82Oct 11.65 18.76 10.81 22.40 26.08 18.06Nov 12.86 17.84 12.21 23.21 26.46 19.11DOC 18.68 16.94 13.12 24.21 26.61 20.29

Jan 87 15.68 18.38 15.68 21.99 24.86 19.33Feb 18.07 9.00 13.67 19.78 22.58 16.86Mar 14.56 6.94 15.46 19.40 21.81 18.66Apr 14.01 5.82 16.35 20.05 20.62 16.76May 10.31 2.68 11.61 16.50 16.37 12.62Jun 9.02 2.72 9.99 14.90 14.66 11.83Jul 7.62 6.44 7.82 13.39 12.47 10.80Aug 5.15 6.61 4.92 4.44 4.14 4.60SeP 6.40 5.79 6.60 4.71 8.44 4.73Oct 8.99 7.12 9.28 7.38 6.20 7.48Nov 9.60 7.99 10.17 7.39 6.68 7.86DeC 9.71 7.48 10.03 6.86 4.51 6.98

Jan s8 12.91 11.03 13.18 9.78 7.01 9.99Feb 16.74 13.61 17.21 9.71 7.19 10.76Mar 22.12 16.62 23.12 12.60 9.64 18.81Apr 81.70 22.09 33.20 18.08 14.56 20.53May 35.77 27.44 37.00 20.24 16.69 28.18

Note: The Lagos Area Index is constructed on the basis of FOS co dity weights for the given Incoegroups, *nd FOS data on the price changes for each commodity as given in tho Individual componentsof the National Urban Index.

Sourco: Federal Office of Statistics (FOS).

Table 4.8: STRUCTURE OF UNEMPLOYMENT, DECEMBER 1988 - MARCH 1986

(Percent)

Percent of Labor Force Percent of Unemployed Unemployment Rate

Dec. Dc. June June Dec. June Dec. Mar Dec. June June Dec. June Dec. Mar

1983 1983 1986 1986 1996 1987 1987 1988 198a 1986 1986 1986 1987 1987 1988

A. Unemployment Rate National 4.3 6.1 5.8 6.0 7.e 5.1

Unemployment Rate Rural 8.o 6.9 4.6 4.9 8.1 4.8

Unemployment Rate Urban 7.8 8.7 11.0 9.1 16.6 9.8 7.8

S. Male Urban Unemployment by Age Group

Age Groups 41

15-19 6.9 21.1 27.1 88.0 29.6 26.6 25.6 26.7 20.6 89.0 68.6 45.7 47.6 42.5 88.6

20-24 10.2 54.6 89.5 82.6 40.8 89.8 88.0 45.7 81.6 82.9 88.0 86.4 41.4 86.5 82.7

26-44 60.2 16.6 26.6 86.2 25.4 28.8 81.5 20.7 1.5 8.7 8.0 8.6 5.6 5.1 2.6

46-64 19.8 5.7 8.1 2.1 1.4 4.4 4.9 5.2 1.7 1.4 1.8 6.7 2.4 2.5 2.0

65-69 4.8 2.9 4.8 2.1 2.6 1.0 2.0 1.7 8.9 6.5 5.6 5.9 2.6 4.6 2.9

C. Urban Unemploymnt by Education (Both Sexes)

EducationNone 41.8 8.8 12.4 12.5 18.2 9.4 17.0 12.2 1.6 2.9 8.6 2.9 2.6 4.0 2.2

Primary 81.9 22.1 20.1 16.1 16.8 7.5 9.6 13.7 5.1 6.1 6.6 4.5 2.9 2.9 8.1

Secondary 18.6 67.7 81.1 64.7 87.4 78.1 68.5 89.6 29.6 86.7 48.4 W8.9 67.4 89. 308.6

Post-Secondary 10.2 1.5 8.6 8.7 8.6 5.6 7.6 4.5 1.1 8.2 7.6 8.2 8.0 6.7 8.2

Source: Federal Office of Statistics (FOS) Labor Force Survey for aggregate unemployment rates and distribution of unemployed.

Unemploymnt rates by age group and education are calculated from these data.

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TABLE 4.4: INDEX OF REAL HOUSEHOLD INCOMES OF KEY GROUPS, 1980/81 - 1m6/87(Rural Self-employed In 1980/81 a 109)

1980/81 1981/82 1982/88 1988/84 1984/85 1985/86 1988/87

Rural Salf-employod 100 18 95 86 78 74 65Rural Wage Earners 178 169 147 185 92 96 84All Rural Households 16 107 09 89 74 84 74

Urban Self-employed 156 124 108 94 69 69 81Urban Wage Earners 203 177 184 140 101 101 90All Urban Households 166 142 129 109 89 80 71

Sources: National Integrated Survey of Households (NISH), Federal Office of Statistics (FOS)consumer prico data, and staff estimates.

- 45 -

Chart 41: COMPOSITE CONSUMER MCE INDEX(Jmnuwty 1983 - Aprl 1i88)

0i0197b1OO>

SW -w

I -

3m

gm0 .......... ..............................1983 19114 1985 1986 1987 1988

OAMf +Food HC0We Good

Sl n Fal alie d rFOS,L EloStd

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V. ASSESSMENT AND POLICY AGENDA

A. Assessment of SAP

5.1 The Structural Adjustment Program has produced fundamentalchanges in the economic environment, and the dynamic and entrepreneurialspirit of the Nigerian people has responded well to the shift to a moremarket-oriented incentive framework. Major signs of adjustment ere evidentthroughout the economy. Tree crop cultivation has witnessed a resurgence,and manufacturers are seeking opportunities to exploit the new relativeprice structure. Output, investment, and employment in the export sectorhave picked up, and non-oil exports have risen sharply. These gainsnotwithstanding, there remains an undercurrent of dissatisfaction with theprogram in Nigeria. For the most part, this reflects its close associationwith the sharp depreciation of the naira, which has boosted prices forimported goods and services, and the slow pace of the recovery. This hasput pressure on the Government to pursue more expansionary policies and toresist further changes in the exchange rate.

5.2 Partly reflecting this pressure, public expenditures increasedrapidly during the program. While some of the rise was due to the effectof the depreciation of the exchange rate on the naira value of foreigninterest payments, there was also a sharp increase in capital expenditures.In the first part of the period, these were concentrated in projectsfinanced by the so-called oil dedication accounts, outside normal budgetarychannels. But even after most of these accounts were closed in mid-1987,the works that had been financed by these accounts continued, though oftenwithout payment, resulting in a large build-up of international arrears.There were also overruns on spending in other areas, and the budgetaryposition ws aggravated by large operating subsidies to federalparastatals. Much of the overspending in 1987 occurred late in the year,and the associated money creation left a large overhang of liquidity in theeconomy.

5.3 The impact of the fiscal stimulus on domestic output and priceswas small in 1987. Inflation registered 10 percent, and activity levels inthe non-oil, non-agricultural sector staged a very modest recovery. Tosome extent this was because the policy impact was delayed until this year,and indeed activity levels in the urban sector show signs of a broadeningrecovery. But to a large extent, the limited impact was because much ofthe extrabudgetary spending was concentrated in foreign-exchange-intensiveexpenditures, which were financed by reserve use and an accumulation ofarrears on foreign payments, exacerbating the already very difficultexternal position.

5.4 The 1988 budget was designed to be expansionary, with provisionsfor large increases in capital spending, including a reflation fund, and anincrease in federal pay scales. While the Government has subsequentlyadopted a more restrained fiscal stance and kept capital spending andexpenditures under the reflation fund below budgeted levels, the wagepackage has resulted in a sharp rise in labor costs. These increases havealso affected private sector pay scales, as the Government tends to act asa wage leader in labor negotiations in the urban sector. While private

- 47 -

sector settlements are running below the rise in federal salaries, they dopoint to an erosion of some of the real exchange rate depreciation andimproved competitiveness secured by the program in 1986 and 1987. Coupledwith a rapid expansion in credit to the private sector in the openingmonths of this year, they put downward pressure on the nominal exchangerate.

5.5 The danger in these macroeconomic developments lies in the threatthey pose to the core of the program, viz., the adjustments in the realeconomy induced by the shift to a market-determined exchange system.Indeed, as pressure on the exchange rate intensified earlier this year, theauction rate was prevented from depreciating. The interbank rate, however,which is free to find its own level, depreciated sharply, opening up alarge differential between the two rates. In the circumstances, the urgentneed is to consolidate the changes in the real exchange rate achieved underSAP by correcting the misalignment in the nominal exchange rate that hasdeveloped this year and adopting macroeconomic policies designed tostabilize prices and wages even as that correction is made.

B. Macroeconomic Management

5.6 The Government has little room to maneuver on the macroeconomicfront, as Nigeria's limited access to foreign capital markets and the lowlevel of international reserves imply that the domestic economy must bearthe brunt of the further adjustment required in the face of lower oilprices. The essential question is how to set macroeconomic and exchangerate policy so as to minimize the costs of that adjustment. In order tokeep the demand for foreign exchange consistent with the reduced supply,Government can permit the price of foreign exchange to rise and/or adoptmeasures to restrain the overall level of economic activity. If it doesneither, the resulting excess demand for foreign exchange will inevitablynecessitate a return to administrative rationing, with the associatedproblems that characterized the pre-reform era. Nor, as that era amplydemonstrated, will artificially capping the exchange rate shield theeconomy from inflationary pressures.

5.7 But even with perfect nominal exchange rate flexibility, thereare prudential limits to the desired degree of fiscal stimulus -- in viewof the possibility of sparking a vicious circle of exchange ratedepreciation and inflation. Critical parameters in determining theappropriate fiscal strategy are the ease with which domestic output cansubstitute for imports, both in production and in consumption, and thesensitivity of nominal wages to exchange rate changes. For example, ifdemand substitution is easy and nominal wages are insensitive to exchangerate developments, then small nominal exchange rate changes can effectlarge changes in the import intensity of domestic production andconsumption, thus facilitating large domestic output and small priceeffects from fiscal expansion. On the other hand, if substitution isdifficult, largei changes in the exchange rate are necessary to induce thesame shift in import intensity, which, in the meantime, may lead to wageand price increases that erode the benefits of the initial exchange rate

Iii _ t ?i4d& wdtv - -s -1- --tuausr lo sourcing, inLdued t b isA ctihe structuvde oce productionetminstoward local sourcing induced by SAP, the structure of production remains

- 48 -

rooted in the past and will change only over time as investment takesplace. Moreover, the wage increases this year point to the difficulty ofkeeping a lid on wages in the face of exchange rate changes. Thus, whileit might be desirable on a priori grounds to use fiscal stimulus as Q'%instrument for increasing the level of capacity utilization and employwbsnt,it is doubtful that the Nigerian situation presents a fertile ground forsuch a strategy.

5.8 In order to preserve and protect the important adjustment gainsmade so far, fiscal policy will have to be set in a manner that reconcilesthe availability of foreign exchange for funding the market with the degreeof movement in the exchange rate that is judged to be politicallysustainable. The first step in the short-term, which the authorities arein the process of taking, is to set new fiscal spending limits consistentwith available resources and inflation targets. The second critical stepwill be to ensure that this program will be implemented. This will requireboth information systems to monitor revenues and expenditures with aminimum of delay and enforcement mechanisms to discipline ministries orparastatals that are spending beyond these limits. At the same time,given the importance of exchange rate flexibility for maintainingmacroeconomic balance in the face of variability in oil receipts, it willbe critical to strengthen the role of market forces in determining thelevel of the exchange rate. To this end, the authorities have givenindications of their intention to move away from the auction system and tointroduce a 'managed float," whereby the Central Bank intervenes in theforeign exchange market through the interbank market, letting that marketdetermine the rate.

5.9 Macroeconomic management issues will continue to be importantover the longer run. The fundamental uncertainty surrounding world oilprices coupled with Nigeria's experience with foreign exchange andbudgetary management over the last 15 years, suggests that if oil pricesrecover, Government expenditures should not be permitted to rise paripassu. Rather, a portion of any incremental oil revenues should be setaside as reserves, which could then be used to buffer subsequent decreasesin oil revenues. In addition, it will be important to develop flexible taxinstruments, so that in the event that deficit correction measures areneeded in the future, tax increases can complement expenditure decreases.For the latter, it will be important to implement the concept of a core andnon-core investment program, so that if expenditure cutbacks are needed, itwill be clear which public investment projects are to be put on hold. Ofequal importance is the need to increase the Government's capacity toanalyze the economic contributions of competing projects and sectors and toset budget priorities accordingly.

C. Medium-Term Policy Issues

5.10 Beyond these macroeconomic measures, which are necessary toensure the sustainability of the economic recovery program, the policyfocus should be on investment. To promote private investment, theadministrative climate needs to be supportive, foreign investment needs tobe encouraged, and price signals need to reflect Nigeria's comparativeadvantage. Public expenditures at all levels of government need to be

- 49 -

directed towards supporting private sector growth. The financing for thedesired public and private sector investments will need to be secured bytapping both domestic and foreign savings. These issues are covered below.

1. Private Sector Incentives

5.11 Regulatory Environment. The Government is aware that a revivalof private investment spending is likely only as the recovery gathersmomentum, which in turn depends crucially on the availability of foreignexchange. Thus for the immediate future, investments which bring their ownforeign exchange without adding to the already heavy debt serviceobligations -- i.e., foreign equity investments -- are particularly sought.To this end, the rules for foreign investment have been liberalized,through amendments to the Nigerian Enterprise Promotion Decree, which setsthe prescribed limits for foreign ownership in different activities. Butthe Government has also initiated a number of measures to improve theoverall investment climate. These are being spelled out in a Statement ofIndustrial Policy, which is to be promulgated soon. Most important amongthe new measures are the streamlining of the regulatory environment for newinvestments through the establishment of the Industrial DevelopmentCoordinating Comnittee as a one-stop agency for all initial investmentapprovals, the introduction of a Debt Conversion Program, and efforts toenter into tax treaties with countries that are major sources of foreigninvestment. These actions will complement business tax incentivesintroduced in the 1987 and 1988 budgets and the improved access to foreignexchange for remittance of dividends that has characterized the operationof FEM.

5.12 Trade Policy. The speed of the adjustment process will dependcrucially on a resumption of investment activity geared to developing newmarkets, products, and production methods, in line with SAP's emphasis onefficiency. Major uncertainties previously associated with the protectionsystem have now been removed and should speed the recovery of investment.The new tariff structure narrows the range of rates and results in moderate-- less than 30 percent -- average levels of nominal protection that aresubstantially lower those levels prevailing before the reform program. Ithas also introduced a number of changes that remove arbitrary aspects ofthe previous protection structure. It terminated the system ofconcetsionary rates of duty on selected imports, unified customs duty ratesthroighout the country, and curtailed discretionary duty exemptions. Inaddition, the GovernmenL. has taken important steps to strengthen customsprocedures, which had previously resulted in significant under-collectionsof import duties, by introducing a new import system, which links dutyassessment to pre-shipment inspection. The Government has also establisheda Tariff Review Board to review the structure of protection and to evaluaterequests for revisions therein.

5.13 Productive Sectors. These changes in the regulatory and tradepolicy environment for investment and in trade policy will play a criticalrole in helping to foster a recovery of private investments inmanufacturing and agriculture, the key non-oil sectors producing tradeablegoods. Maintenance of a favorable incentive framework, together withappropriate exchange rate policies will encourage a reduction in import

- 50 -

dependence in industry and an acceleration in the development and use oflocal technology, raw materials, and intermediate inputs. This in turnwill improve the competitive position of small-and-medium-scaleenterprises, which are relatively more-intensive users of local inputs, andwhich the Government expects to play a key role as a source of growth,employment generation, and industrial development. In agriculture, thefocus of policy is shifting away from food security supported by strongpublic sector involvement, toward private sector growth and diversificationof the export base. Appropriate trade and exchange policies, accompaniedby actions to streamline the export marketing system and improve deliveryof inputs through an increased role for the private sector, will thereforebe necessary to provide a framework for pursuing the objective ofencouraging efficient and sustainable import substitution -- particularlyin foodgrains -- while fostering export crops.

2. Public Sector Policies

5.14 Public Expenditures. Despite the reduced role for the publicsector envisaged by SAP, it will clearly have a continuing role inproviding a supportive environment for private sector expansion through theprovision of essential public services and adequate infrastructure. Afteryears of neglect, reflecting tight budgetary constraints and protection ofwages and salaries, the stock of infrastructure capital has so deterioratedthat it threatens the private sector's supply response. Rehabilitation andmaintenance of existing assets, therefore, have a high economic return andshould be accorded the highest priority within the public investmentprogram. In addition, attention will need to be given to the level andcomposition of recurrent expenditures, and, in many sectors, greateremphasis should be placed on the non-wage component in order to facilitateimproved utilization of existing facilities and better delivery ofservices. At the federal level, the critical need is to boost expendituresfor rehabilitation and maintenance of roads and highways and completion ofongoing projects. At the state level, water supply systems, highways,feeder roads, and rural electricity transmission and distribution equipmentare in particular need of rehabilitation. All levels of government need toreview their portfolios of unfinished projects, some of which are ofdoubtful economic viability even on a sunk-cost basis. A few projects,including Ajaokuta Steel, pose special problems since their completionwould preempt large amounts of investable resources over the medium term,and, given the projected level of and growth in domestic demand, would havevery low capacity utilization rates once completed.

5.15 While some new investments would be economically viable, thesevere constraints on capital resources imply that, for the next few years,new projects can be undertaken only on an exceptional basis and mainly inorder to alleviate bottlenecks. One area where new investments arewarranted is natural gas, which can make a substantial direct contributionto Nigeria's net export earnings over the next decade through substitutionfor petroleum products currently used for power generation and in industry.Since OPEC quotas are levied on production, crude ~.il saved through gassubstitution can be exported. In the near term, about. 10 thousand barrelsper day of domestically consumed oil will be saved by the commissioning ofthe Escravos-Lagos Pipeline, which will eliminate the Egbin power station's

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reliance on fuel oil. In the longer term, another 100 thousand barrels perday of domestically consumed petroleum could be freed up for additionalcrude oil exports through domestic substitution into gas. Beyond theseinvestments vhich will indirectly increase exports, the Oso condensatefield offers a promising investment opportunity for direct exports in themedium-term and LNG has considerable long-run potential -- if foreignmarkets can be assured.

5.16 Parastatals. Major problems beset the federal parastatals thatprovide essential services for the private sector. In the power sector,neglect of maintenance, partly for lack of spare parts, is rapidly erodinggenerating capacity. Without urgent efforts to stem this decline, there isa great risk that the Nigerian Electric Power Authority (NEPA) will beunable to meet demand for power even at presently low levels. Investmentsin rehabilitation of power-generating and distribution facilities are thushigh priorities in order both to free enterprises from the expensesassociated with the installation of backup capacity and to prevent powersupply problems from becoming a constraint on industrial production.Reliable phone and telex services are also vital, but telecommunications inNigeria are inadequate to meet demand, and those in place do not operateefficiently, increasing road traffic for courier services at much highercost. To remedy this, considerable investment will be needed. But beforeNigerian Telecommunications (NITEL) launches major new investments,improvements should be made in its current operations and a comprehensiveplan of sequenced and coordinated expansion should be formulated. Thetransport parastatals are also facing serious problems. The NigerianRailway Corporation's (NRC) equipment has been crippled by lack ofmaintenance. The deterioration is pervasive, affecting tracks,locomotives, and rolling stock. If this decline is not stopped, there is areal danger that NRC will cease to operate altogether, placing greaterstrains on the nation's already overtaxed highway system. Despite largefederal subsidies, Nigeria Airways has continued to have difficultymaintaining service on its routes.

5.17 Public Sector Pricing. To a large extent, these problems havederived from the failure of prices for public sector services to keep pacewith costs, with many public sector prices effectively frozen between 1980and 1986. Under SAP, however, the Government has begun to take correctiveaction. Tariffs for Nigeria Airways and the Nigerian Railways were raisedlast year, although further increases are necessary even to cover operatingcosts. Charges for overseas telephone calls were increased by 450-600percent earlier this year. Partial commercialization of NEPA and fullcommercialization of NITEL have been approved in principle. Implementationof these reforms will permit long-overdue increases in domestic telephoneand electricity tariffs, which in turn will substantially reduce the needfor federal subsidies, as well as generating revenues for the neededrehabilitation of capacity and the expansion of services.

5.18 The pricing of domestic petroleum products raises a differentpolicy issue, as the National Petroleum Corporation (NNPC) is a net sourceof revenues to the Government. The question is how to set domesticpetroleum prices in view of their potentially important impact on budgetaryrevenues and the desirability of encouraging substitution towards

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natural-gas-based fuels. In a departure from previous policy, domesticprices for petroleum products were raised in early 1986, and, with theexception of household kerosene, reached levels that were fairly consistentwith their respective border price equivalents (at the official exchangerate) plus destribution costs, and as world oil markets weakened, came tobe well in excess of import parities. But with the depreciation of thenaira in September 1986, large implicit subsidies reemerged. InMarch 1988, NNPC was fully commercialized and vested with power to setdomestic petroleum prices broadly in line with those prevailing on worldmarkets, while recognizing the need to phase in the new prices with dueregard for their social impact. A first step in this direction was takenin April 1988, when prices for gasoline, diesel fuel, kerosene, and fueloil were increased by 15 percent on average and by 375 percent for aviationfuel. While kerosene is still priced at only 20 percent of the importparity, domestic prices for gasoline, diesel fuel, and fuel oil range from50 to 75 percent of their respective world market equivalents. (Table 5.1)

5.19 Commercialization. Work on the rationalization of other publicenterprises with a view to commercialization/privatization as appropriateis underway, in accordance with the Privatization and CommercializationDecree issued in July 1988. The Decree identifies 14 companies forcommercialization -- including NEPA, NRC, and the Ajaokuta Steel Company --and 11 companies for full commercialization -- including NNPC, NITEL, andthe Nigerian Ports Authority. The Decree defines commercializedenterprises as profit-making commercial ventures operating withoutsubventions from the Government, and gives them the power to set prices,capitalize assets, and borrow money. The success of the commercializationprogram will clearly hinge on instilling financial discipline in theseenterprises through rigor in the budgetary process supported by costcutting and revenue enhancement measures. Enterprises will thus need thefreedom to control levels of employment and wages, in addition toprice-setting powers.

5.20 Privatization. Sixty-seven companies, mostly agro-processing andinsurance companies, have been identified for full privatization, and anumber of important industrial companies have been marked for reduction inthe Federal Government's ownership share below 50 percent. Theprivatization process is to be supervised by a Technical Committee, whichis also charged with making recommendations to the Government on the modeof sale, although the presumption is that they will take place throughshare placements on the Nigerian Stock Exchange. The implementation of theprivatization program raises a number of complex policy issues, and theCommittee is to take into account the need for balance in Nigerian andforeign ownership. But while preserving ethnic and regional balance inshareholding as well as indigenous ownership are important considerations,they need to be weighed against the need for new technology, improvedmanagement, and additional capital. The issue of foreign direct investmentin these entities needs to be addressed, with participation limits set atlevels that will attract investor interest. Such foreign investments wouldcontribute essential technology and skills, as well as injecting additionalforeign exchange into the economy.

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3. Resource Mobilization

5.21 External Debt Strategy. The Government's strategy for financingSAP was predicated on the assumption that sufficient external financingwould be forthcoming to permit Nigeria to run current account deficits andthereby to achieve higher import levels and growth rates than wouldotherwise be possible. The approach was thus to seek reschedulings and newexternal borrowings, with some consequent growth in debt, albeit at aslower rate than projected export growth, allowing creditworthiness to berestored over time. The experience gained over the past two years,however, has tilted the Government's strategy away from nelr money per setowards greater emphasis on easing the foreign exchange burden ofservicing existing debt. For example, the promissory note reschedulingearlier this year entails an effective interest rate of 5 percent onUS$4.9 billion of outstanding debt. In addition, the recent London Clubnegotiations point to a narrowing of the interest rate spread onrescheduled debt from LIBOR plus 1 1/4 percent under the 1986-87 agreementto LIBOR plus 13/16 percent for the letters of credit (LCs) and LIBOR plus7/8 percent for medium- and long-term maturities. Meanwhile, the payabledebt, i.e., late interest on the LCs, is to continue as anon-interest-bearing facility until it is fully paid down in 1991. Theauthorities have also introduced a debt conversion program, which willpermit holders of Nigerian external debt to convert it into naira forinvestments in priority sectors. Originally restricted to the promissorynotes, the program is being expanded to include commercial bank debt.

5.22 For new money, the authorities are largely looking for projectfinancing, given that new inflows of balance of payments support from theconmercial banks are unlikely to be forthcoming for some time. To effectthis strategy, concerted efforts need to be made to increase externalfinancing for sound investment projects. Until recently, arranging forexternal financing for public investment projects had been largely theresponsibility of the implementing ministries and project sponsors. Insome cases, viable projects that would have been eligible for externalfinancing were financed from the Government's own supply of foreignexchange. In other cases, projects with large external financingrequirements were approved, despite low or negative rates of return,largely because of the availability of foreign financing. Given the verytight foreign exchange position, central coordination of this process isessential to get the best financing possible for the good projects and tointercept, at an early stage, financing negotiations for low priorityprojects. Based on guidelines issued in February, ministries are nowexpected to seek external financing for viable projects, with these effortsto be coordinated by the Federal Ministry of Finance and EconomicDevelopment.

5.23 Taxation. In line with the recommendations of the recentlycompleted tariff review, the Government has established the basis fortaxing consumption in a protection-neutral fashion, through incorporationin the new import duty schedule adopted in the 1988 budget of an implicitlanding charge corresponding to excise duties on comparable localproduction. Over time, the coverage of the landing charge/excise tax

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combination can be extended to a wide-range of products. Developing thisinstrument is of critical importance, as the inherent variability of oilrevenues suggests the need for a broad-based, flexible tax instrument, forwhich the rate of taxation could be varied according to the Government'srevenue needs. The Government will also need to undertake a morecomprehensive study of tax policy and administration to identify reformswhich may be needed to make the tax system more equitable and to bring itinto conformity with the principles underlying SAP and improved revenuecollections. Priority areas for the study include identification ofactionss to ensure that company and personal income taxes encourageefficient saving and investment decisions; to expand the coverage of thepersonal income tax to ensure a more equitable sharing of the tax burden;to investigate the efficiency of taxation of petroleum products inextracting resource rents while promoting exploration and development; andto strengthen and modernize tax administration, with particular emphasis onimproved information processing, enhanced coordination and data sharingbetween different tax agencies, and efforts to encourage greatercompliance. The study should also consider the efficiency of the presentdivision of tax administration between different levels of government.

5.24 Savings. The financial sector plays an important role to play inmobilizing private savings and intermediating them to investment projects.The liberalization of interest rates last year was an important step inincreasing the efficiency of the allocation of credit across competinginvestment projects. This should also reduce the previous bias againstterm lending and lending to small industrial enterprises and agriculturalunits, as it allows banks to charge higher interest rates in line with thehigher risks and processing costs associated with such lending. But itneeds to be complemented by a change in the way that control over themonetary and credit aggregates is exercised, which now relies on ceilingsfor the expansion of credit by individual banks. If the ceilings areunenforced, as last year, there is no control, but if enforced, theydiscourage competition among banks to mobilize savings, since banks thatattract more deposits cannot commensurately expand their credit activities.A more indirect approach to controlling the aggregates, which wouldencourage banks to compete for deposits and loans, would be desirable.Such an approach could involve restricting to money the assets that counttowards banks' required reserves and using open market operations intreasury bills to achieve targeted changes in the monetary base.

D. Longer Term Issues

5.25 Increasing per-capita income and consumption over the longer termwill ultimately depend on the evolution of labor productivity, which, inbroad terms, will depend on the evolution of the capital-labor ratio. Thisinvolves a number of issues. First, in order to ensure that savings andinvestment are sufficient to make possible a steady increase in thecapital-labor ratio without unduly suppressing consumption standards, therate of population growth has to be decreased from the present 3.4 percentper annum. Second, adequate levels of health care and education must beprovided for the population so as to establish a labor force equipped withbasic skills and physical stamina; and third, taking action to stemirreversible degradation of the environment with associated losses to the

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economy's productive base and to ensure that environmental costs arefactored into economic decision-making.

1. PoRulation

5.26 Without a substantial lowering of the population growth rate,most of Nigeria's savings and development effort will be absorbed in simplymaintaining present per capita income levels. Nigeria has recently adoptedan ambitious policy aimed at reducing population growth to 2 percent by theyear 2000. The targets include making family planning services, along witha broad program for information and education, available to half of allwomen of childbearing age by 1995 and to 80 percent by 2000. A number ofsmall-scale family planning activities are already underway, butcontraceptive use is still extremely low, with about one percent offamilies using modern methods and another 4 percent using traditional ones,although a contraceptive marketing scheme has recently been introduced,thereby making services and supplies more accessible to a wider segment ofthe population.

5.27 Although there is support for the population policy withinGovernment, strong actions are needed to broaden consensus, deepencovmitment, and protect budgetary provisions for implementing the policy.An important step has been taken with the announcement of the NationalPopulation Policy and the establishment of the National Office for Planningand Coordination of the Population Program within the Federal Ministry ofHealth. A clear set of objectives and a strengthened capacity for planningaud coordination at the national level will enable the Government tomarshal more effectively its own resources, as well as external assistance,and also to develop effective mechanisms for the development of strongstate-level programs. Population size plays a central role in the formulathat determines the allocation to states from the federation account,discouraging states from adopting effective population programs; one way toaddress this issue would be to freeze the revenue sharing formula atcurrent population levels.

2. Human Capital Development

5.28 Health. While better health is an objective of development inits own right, it also makes an important contribution to school attendanceand learning and to the productivity of the labor force. During the 1960sand 1970s, Nigeria considerably expanded its public health care system.There were significant improvements in access to preventive and curativefacilities, and safe drinking water and sanitation facilities became morewidely available. As a result, life expectancies rose. But during the1980s, there has been a severe deterioration in the health care deliverysystem, stemming from reduced public expenditures. Recurrent budgets havebeen constrained, and personnel costs have absorbed a growing share,leaving little or no funding for the provision of drugs and other medicalsupplies. This has increased the vulnerability of the population todebilitating illnesses. The Government's long-term objectives rightlyaccord priority to primary health care, designed to improve the-safety ofmotherhood, facilitate birth spacing, encourage development of healthychildren, and prevent illness. The thrust of public expenditure policy is

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thus to support investments in rural health care facilities, programsfocused on child survival such as immunization and oral rehydrationtherapy, of voluntary family planning, and training for community healthworkers. The investment emphasis should continue to be away from newconstruction and toward maintenance and rehabilitation of existingfacilities, with expansion of the network of teaching hospitals constrainedto those nearing completion.

5.29 Education. During the 1970s, buoyant oil revenues provided thebasis for rapid quantitative and qualitative improvements in the provisionof education, resulting in enrollment ratios at all levels that arerelatively high for Sub-Saharan Africa. But expenditures have not beensustained in the 19809, resulting in a serious decline in the sector'squantitative and qualitative performance indicators. Problems stemmingfrom the financial cutbacks have been aggravated by an imbalance in theallocation of public expenditures across educational levels, with thelion's share absorbed by higher education, despite the fact that the bulkof the returns there are privately captured. Basic literacy and numeracyincrease individual productivity, as well as health, nutrition, and thesocial skills necessary for personal and socioeconomic development. Thisis recognized in the Government's objective of providing at least six yearsof universal basic education. And, although primary education has thehighest social rate of return in the sector, it receives little fundingrelative to higher levels, with public expenditures per pupil at theuniversity level over 50 times at the primary level. By shifting resourcesfrom higher education, the Government should aim to stem and reverse thepre-SAP declines in both the quality of primary education -- throughincreasing provision of textbooks and other instructional materials andupgrading teacher qualifications -- and the primary enrollment ratio.Government policy, which emphasizes the education of currentlyunder-represented groups, should also be reinforced, particularly forfemales, whose education is related to lowered fertility and improved childhealth, nutrition, and life expectancy.

3. Environment

5.30 Nigeria faces a number of environmental problems, which, ifignored will intensify with development and population growth. Inindustry, environmental pollution derive from hazardous waste storage,transport, and disposal, especially from the large petroleum industry.While in agriculture, rapid population growth is generating pressure forcontinuous cultivation and deferral of fallow periods, currently the mainway of restoring soil fertility. The danger is particularly evident in theSouth, where there has been a steady decline in soil fertility, reflectingthe absence of technology for continuous cultivation. In the North, theadvance of the Sahara desert has been aggravated by declining rainfall andincreased farming and livestock activities of the growing population.Rapid deforestation is also underway in many areas, threateningbio-diversity, while social conflicts have erupted as migrating nomadgroups have encroached on land claimed by settled communities. Severegully erosion is also emerging as a problem in some states, exacerbated byfaulty road planning and drainage.

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5.31 A start has been made in addressing some of these issues. Anecology fund has been established, earmarking one percent of federationaccount revenues for dealing with ecological problems, and NNPC has adoptedan environment policy for the petroleum sector. But the task ofarticulating and implementing a comprehensive environmental policy remains.Environmental problems tend to arise because of institutional arrangementsin which decision-making entities do not bear the full costs of theiractions, The immediate policy objective should therefore be to identifymeasures for ensuring that both the public and private sectors take properaccount of any environmental costs of their actions. 'Where public sectordecisions are not based on commercial principles, policy should be basedupon an assessment of the costs of possible remedial measures compared tothe projected reduction in the costs of the environmental damage they aredesigned to achieve. Where essentially commercial decisions are involved,policy should focus on establishing incentives for individuals andenterprises to factor the environmental costs of their actions into theirdecision-making. This may require regulatory, tax or subsidy measures: itmay also require actions to change the institutional environment withinwhich such decisions are made. For example, the soil conservation issuemay be partly tackled by actions to clarify the land rights of theconcerned parties, providing incentives to take a longer term view of theeffects of their actions and thus value the benefits of erosion controlmore highly. That the effectiveness of alternative measures must becarefully assessed is demonstrated by the debate surrounding theproductivity of expenditures on the fertilizer subsidy, which has oftenbeen seen as a way of maintaining soil fertility, because of the leakage ofsubsidized fertilizer across the country's borders.

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TALE 8.12 OIL PRODCION, OOTIC CONSAWTION, iORS m0 PRICE, 1980-4

1960 1981 1982 1988 1984 1988 1986 1987 1988 */

OIL PRIJCTION (16/0) 2.06 1.44 1.28 1.24 1.89 1.50 1.47 1.29 1.87

caOu1rC Cs/DTP (N43/) 0.21 0.22 0.27 0.81 0.80 0.25 0.25 0.25 0.25

#iT i#P (NO/D) 1.91 1.28 1.00 0.94 1.09 1.25 1.22 1.04 1.12

O-- IC CUSPTGN. TOTAL (1000 SEtRIC TOM) 74t8 9000 11001 10t08 9294 8859 9160 12752 n.x.

OF *04

GASOLNE 2951 $576 4487 4067 4012 8788 8659 600 n.m.

ie8 1202 1428 1628 1788 1724 1521 1875 8168 n.n.

aS OIL 1944 2298 2801 2919 2S24 1t83 2018 2149 n.n.

FUEL OIL 789 924 1420 1868 627 1118 1173 1840 n.n.

1968

-- Quartero -- April

_- a 4 ____

OITC SAIL" PRICE (AS Pi3C1 OPt WORLD PRICE) b/

GASOLDE 72.8 84.6 77.5 86.8 92.8 77.8 184.6 72.0 61.0 60.8

i08EE 52.7 48.8 48.2 49.6 49.7 42.1 52.0 18.2 17.1 29.2

GAS OIL 62.5 57.1 58.6 57.8 88.8 48.4 161.4 58.9 49.2 56.6

LW P0* FUEL OIL 88.7 44.6 45.1 42.1 36.8 86.8 192.1 60.4 S8.8 n.m.

IHI1i P01.6 FIAL OIL 22.7 18.9 19.1 17.8 15.6 15.5 192.1 58.8 J8.9 70.1

n/ preliminacry

b/ Official excihnge rates have ben umed in comparing Nigerian petroleum product price. with international (dol tor)

prie. betden 1940 and the third quarter of 1986. Secau*o af the sionificant overvalustion of the nairx during this

period, thlo method exaggrate. Nigerian price.. The second-tier foreign exchange market (SFBEVFEl) rate, which became

operative en Septber 26, 1986. has been used in converting fourth quarter 1986 and 1987 domeetic price. Into

internatinal price.. Nigerian petroleum product price which were unchanged between 1980 and 1986, were raised In

January 1988 (except keroene) and In Apr; I 1986.

Sourc* Nig*rIan National Petroleus Corporation (!PC), Central Sank of Nigeria (CUN), and World BSank, Commodity and

Price Trend. 1966' 'Price, af Crudo Petroleuo and Petroleum Product. Second Quarter 1988'.

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VI. MACROECONOMIC PROSPECTS AND EXTERNAL FINANCING REQUIREMENTS

A. Overview

6.1 Nigeria's projected 3.4 percent rate of population increaserequires that GDP grow by about 4 percent per annum for per capitaconsumption to rise by even marginal amounts. The forecast presented belowsuggests that such a growth rate is feasible, given World Bank projectionsfor the oil market, provided that Nigeria implements the policy reformsdiscussed above, and that international creditors support the programthrough generous rescheduling and financing terms and new money. This wouldinvolve a cumulative increase in the debt stock of US$5 billion fromend-1987 to end-1991, when an accelerated return to full commercialcreditworthiness -- via net repayments of foreign debt -- would begin.However, even under these assumptions, per capita income remains underUS$300 11 throughout the forecast period. Should world oil markets notstrengthen as projected, per capita income would be even lower. There isthus a strong case for concessional aid to Nigeria.

B. Macroeconomic Proiections

6.2 An extended version of the World Bank's standard macroeconomicprojection ("RMSM') model, adjusted to the specific characteristics of theNigerian economy, has been used to forecast developments through 1995. Theprice of Nigerian crude oil, taking into account its higher-than-averagequality, is assumed to average US$15.60/b in 1988 and 1989, rising toUS$17/b in 1990 and gradually increasing thereafter to US$25/b in 1995.Crude oil production, in accordance with Nigeria's OPEC commitments, isassumed to increase by 3 percent per year from 1.3 mb/d in 1988 to1.63 mb/d in mid-1990. Key results are summarized in Tables 6.1-6.2.

1. Short-Term Prospects

6.3 The foreign exchange constraint is expected to remain extremelytight in 1988 and 1989. External financing will remain difficult tosecure, and annual oil export revenues (including condensates) areprojected to stay below US$6.6 billion in 1988 and 1989, i.e., one quartertheir 1980 level. As a result, a 9 percent decline in real imports isforecast for 1988, with a further marginal decline forecast for 1989. Evenso, continued efforts by producers to increase domestic sourcing of inputsas a consequence of the exchange rate adjustment, coupled with reducedabsorption of imports by the public sector, should make it possible tocontinue recent trends in manufacturing -- with annual real growth in the5 percent range. Combined with the projected rebound of agriculture from

1/ Although GNP per capita is forecast to rise in real terms, using theAtlas Methodology, it falls below the 1987 estimate of US$370, as thefull effects of the exchange rate depreciation in 1986 are reflectedin the factor for translating GNP in local currency into U.S. dollars.

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the drought-related contraction in 1987, this should permit a 4 percentgrowth in non-oil GDP in 1988, thus preventing a further decline in realper capita GDP. However, in 1989, a small drop in per capita income isforecast, as agriculture resumes its projected trend growth rate andmanufacturing growth slows under the continuing compression of imports.Consumer prices are projected to increase by 25 percent in 1988, reflectingsome moderation in the increases for staple food products experienced earlythis year. The inflation rate Ia forecast to decline to 15 percent in1989.

2. Medium-Term Prospects

6.4 Import Growth. The fozecast rise in oil prices to US$17/b in1990 should ease the foreign exchange constraint somewhat, permitting arebound of merchandise imports to US$6.4 billion, an increase in real termsof 5 1/2 percent which is sustained in 1991 and 1992. Beginning in 1993,real import growth could exceed 8 percent. Under these assumptions, theannual rate of growth of non-oil GDP would average nearly 5 percent overthe period 1990-95. Overall GDP will grow more slowly than non-oil GDP, asthe petroleum sector is outpaced by the other productive sectors. However,since prices for petroleum are forecast to increase relative to otherprices through 1995, its share in GDP rises in terms of current prices.

6.5 Agriculture. Underlying the projected growth in non-oil GDP arerather different prognoses for the agricultural, industrial, and servicesectors. Agriculture is fairly insensitive to import growth, with climaticand institutional considerations by far the more important determinants.Assuming continuation of the conditions of recent years in the former andsome progress in the latter -- particularly on research, extension, ruralmarkets, and credit -- agriculture is projected to grow at about3 1/2 percent per annum over the period. The increase from the 2 percentannual average scored from 1980 to 1986 in part reflects the effects of thereform program both in encouraging export-oriented agricultural developmentand in stemming the out-migration of labor from rural areas. There hasalready been a noticeable revival of production on previously unexploitedcocoa and oil palm plantations, and considerable private sector interesthas been evident in rubber, cotton, and groundnuts. At the same time,production of grains, primarily for subsistence, is expected to keep pacewith population growth.

6.7 Industry. In contrast to agricultural production, industrialproduction is quite import sensitive. While limitations on imports willconstrain performance in the short run, the projected rebound in imports in1990 should fuel a substantial recovery. As noted in Chapter IV,preliminary evidence at the plant level suggests already significant shiftsto high-value-added production based on domestic resources. There isconsiderable scope for expansion in consumer and intermediate goodsproduction which, respectively, account for some 70 percent and 25 percentof manufacturing value added. Although there have been some plant closuresand corresponding losses of output from reduced protection from imports,these are concentrated in low-value-added lines of production. With somerestructuring, other lines can be expected to expand. In contrast to the

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continuous decline of manufacturing output over the past five years, agrowth rate approaching 10 percent per annum through 1995 is feasible.Projected growth in the service sector reflects forecast increases in theprovision of public sector services and rapid growth in the financialsector, offsetting somewhat further adjustment-related consolidation of theretail and wholesale trade network.

6.8 Social Indicators. Per capita GNP is forecast to rise by over1 percent per annum over the period 1989-95. Per capita consumption isforecast to rise at almost the same rate despite the increased share ofincome going to investment and the improvement in the current account,because of the projected improvement in the terms of trade. Thedistribution of income will also change, along the lines of the incentiveframework introduced by the structural adjustment program and theelimination of the previous bias against exports. This means betterincomes, profits, and employment opportunities in the agricultural exportsector and in high-value-added industrial production. On the whole, therewill be a redistribution of income from urban to rural areas, particularlyin the south where tree-crop cultivation predominates, and from consumersof previously subsidized products to those who gain from the expansion ofemployment opportunities in the export sector.

6.9 Investment and SavinRs. Measured in constant 1987 prices,investment throughout the rest of the 1980s and during the early 1990s isexpected to average about 15 percent of GDP reaching 17 percent by 1994.This is considerably below historical levels, but higher than 1984-1986.Nevertheless, the projected growth in GDP is feasible, partly because ofthe very depressed level of capacity utilization at the start. There isalso considerable scope for increasing the efficiency of investment throughthe greater selectivity with respect to public investment projectsenvisioned under the policy reforms. In order to finance the projectedgrowth in investment and paydown in foreign debt, the nominal domesticsavings rate will need to rise from about 18 percent of GDP in 1988-90 toabout 26 percent in 1995. However, the forecast improvement in the termsof trade due to higher oil prices should provide the basis for thisincrease, and even permit a decline in the savings rate out of non-oil GDP.

6.10 Fiscal Outlook. The fiscal picture mirrors these developments.Based on staff estimates of projected increases in real government spendingfor current uses, the revenues resulting from the forecast rise in oilprices should be sufficient to finance the posited level of publicinvestment for the period as a whole. However, until 1991, there willcontinue to be a need for revenue mobilization measures, as the publicsector deficit remains quite high for that period. The estimates alsoindicate a considerable redistribution within the public sector, with thefederal government remaining in deficit until 1995, and the collectivestate budgetary position returning to surplus by 1990. This suggests thedesirability of reviewing the allocation of revenue sources and expenditureresponsibilities among the levels of government.

6.11 External Outlook. Developments in the balance of paymentsreflect the expected growth in imports, the evolution of oil revenues, and

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the foreign debt and rescheduling situation. The current account isprojected to move into surplus in 1993, reflecting increasingly largesurpluses on the trade account. Over the period 1990-95 as a whole, thevalue of merchandise imports grows by 9 percent per year, whereasmerchandise exports grow by 12 percent, reflecting price and volumeincreases for oil and modest increases in non-oil exports. The debtservice ratio fluctuates between 30 and 35 percent over the period.International debt peaks in 1991 and then begins to be paid down in netterms. While external debt in 1989 is projected to exceed 400 percent ofreceipts from exports of goods and non-factor services, the correspondingratio is down to 200 percent by 1995. International reserves increasesteadily, and by 1995, the import coverage of reserves is 2 months.

C. Uncertainties and Risks

6.12 Oil Revenues. Given that oil revenues currently supply over85 percent of export proceeds, any shortfall from the above oil price orvolume assumptions would lead to a reduction in resources available forimports and, in turn, for growth. Thus, a 20 percent drop in the oil pricestarting in 1989, leaving the projected rate of growth unchangedthereafter, would reduce the financeable level of imports by more than20 percent per annum. This would lower the level of GDP and per capitaincome. In 1989, for example, the loss in GDP growth would be2.7 percentage points. Thus the projected 3.3 percent increase in GDP inthe base case would fall to 0.6 percent, if the price of oil turned out tobe 20 percent below forecast. If that 20 percent shortfall persisted butdid not worsen, the rate of growth would improve in subsequent years butwould remain below the base case projections because lower imports wouldmean continued lower investment over the period. In addition, because ofthe lower export levels, the standard creditworthiness indicators wouldworsen.

6.13 Domestic Political Risks. While commitment to the program at thehighest levels of Government remains strong, the political coalition thatsupports reform is fragile, and there is increasing pressure for a morerapid recovery and reduction in unemployment. The weakening of oil pricesthis year has made the task of delivering on these goals in the short runthat much harder, as the Government's ability to maintain funding of theforeign exchange market at levels consistent with a rapid recovery has beenseverely reduced. Over the medium term, the concern is with theconstraints imposed by low import levels on investment and productivitygrowth. Pressures to abandon the program and to stop servicing externaldebt will undoubtedly intensify, unless sufficient external resources canbe mobilized to improve domestic production levels and living standards.

D. Foreisn Financing

6.14 A critical ingredient in sustaining the program will thus be thesupport of external creditors. The forecast presented above has been basedon conventional financing terms. However, there is clearly a strong casefor concessional aid to Nigeria. Indeed, the World Bank has recentlydeclared Nigeria IDA-eligible, reflecting the drop in per capita GNP to

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US$370 in 1987. Nigeria is saddled with a large debt stock, with interestpayments alone absorbing US$17 billion over the period 1988-95. These ,obligations absorb foreign exchange that could otherwise be directed towardgrowth-enhancing investments. Concessional aid would allow the Governmentto finance its population policy and human resources development program,which will be critical for increasing per capita income in the long run,without reducing the availability of foreign-exchange-intensive investmentfunds that are needed to sustain growth over the near term. It would alsoprovide a cushion for maintaining per capita income in the face of majoruncertainties about the oil market.

- 64 -

Table 6.1: KEY M&CROECONMHIC VARIABLES: 1984-1995

Current Shares of Gross Domestic Product (from current price data)US$ ----- ___________________-- -- _

Billions Historical Est. Projected

A. National Accounts 1987 1984 1985 1986 198? 1988 1989 1990 1995

Gross Domestic Product m.p. 24.9 100.0 100.0 100.0 100.0 100.0 200.0 100.0 100.0Net Indirect Taxes 0.5 1.9 2.3 2.5 1.8 2.3 2.4 2.3 2.1Non-Oil GDP 16.6 83.1 82.1 86.4 66.5 71.1 71.3 67.1 61.4Agriculture 7.4 35.1 34.3 35.4 29.7 32.1 32.1 30.1 25.7Manufacturlng 2.2 10.6 11.6 12.4 8.8 9.4 9.5 9.3 10.5Construction 0.3 1.7 1.7 2.3 1.3 1.4 1.3 1.2 1.3Services 6.7 35.8 34.5 36.4 26.7 28.2 28.4 26.5 23.9

Petroleum 7.9 15.0 15.6 11.1 31.7 26.6 26.3 30.5 36.4

Resource Balance 1.0 1.7 3.3 -1.8 4.1 3.6 1.9 4.4 9.1Exports of GNFS 7.7 13.2 14.2 11.4 31.0 26.8 26.4 28.5 34.3Imports of GNFS 6.7 11.5 11.0 13.2 26.9 23.2 24.5 24.0 25.2

Total Expenditures 23.9 98.3 96.7 101.8 95.9 96.4 98.1 95.6 90.9Consumption 20.0 92.0 88.8 91.9 80.1 81.8 85.0 81.7 74.7Gross Domestie Investment 3.9 6.4 7.9 10.0 15.8 14.6 13.1 13.9 16.2

Gross Domestic Savlng 5.0 8.0 11.2 8.1 19.9 18.2 15.0 18.3 25.3Gross National SavLng 3.5 5.8 9.2 7.0 14.2 13.7 9.3 10.6 19.4

Percentage Growth Rates at Constant Prices------------------------------------------------------------- __-

1984 1985 1986 1987 1988 1989 1990 1995

Gross Domestic Product m.p. -7.4 8.3 3.4 -5.0 5.3 3.3 4.3 4.8Net Indirect Taxes -34.0 32.2 11.4 -25.4 30.9 3.3 4.3 4.8Non-Oil GDP -9.4 7.8 4.2 -3.1 4.5 3.6 4.3 5.0Agrioulture -6.7 14.3 9.2 -7.7 5.5 3.6 3.6 3.6Manufacturing -14.2 13.2 -5.1 5.1 5.0 4.0 8.3 9.6Construction -49.5 -1.7 7.7 1.0 0.4 -4.3 9.2 7.4Services -7.0 0.2 1.6 -0.4 3.5 3.8 3.4 4.7

Petroleum 11.7 8.4 -1.4 -12.3 6.1 1.2 4.5 3.2

Resource Balanee -153.8 153.6 67.1 -0.0 20.0 3.9 7.2 1.8Exports of GNFS 15.5 11.9 -2.6 -12.6 7.4 2.3 6.6 4.0Imports of CNFS -20.9 -8.8 -31.0 -25.0 -9.3 -0.5 5.5 7.5

Total Expenditures -11.5 5.8 0.8 -5.3 4.2 3.2 4.1 5.0Total Consumption -7.2 4.4 1.3 -6.0 4.9 4.4 3.4 4.6Gross Domestte Investment -47.4 26.0 -4.7 2.8 -3.8 -12.4 14.2 9.9

Gross Domestic Saving -10.2 52.7 20.3 1.5 7.5 -3.8 10.2 5.7Gross National Saving -19.4 80.4 36.5 -2.3 9.6 -5.1 7.4 6.2

CurrentUS$

Billions Shares of Gross Domestic Product (from current price data)

B. Public Finance: 1987 1984 1985 1986 1987 1988 1989 1990 1995

Revenues 6.6 19.9 18.9 21.5 26.3 25.0 23.4 28.2 33.8Current Expenditures 5.5 18.3 15.0 17.5 22.0 20.4 20.6 22.1 18.6Publie Investment 3.7 5.0 6.1 8.3 14.7 10.7 7.8 8.7 10.8

C. Other Indicators: 1984 1985 1986 1987 1988 1989 1990 1995

Exchange Rate (Ni = US$) 1.309 1.120 0.750 0.250 0.222 0.192 0.178 0.117Consumer Price Index (X change in annual average) 39.6 5.5 5.4 10.2 25.0 15.0 10.0 10.0GDP Deflator (2 Change) 18.4 4.4 -2.0 28.4 22.0 11.8 13.5 11.8Investment Deflator (I change) 7.6 11.8 33.9 87.8 24.0 17.5 10.0 10.0

Population Growth Rate (2) 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4

Import Elasticity (MGNFSIGDPmp) 2.8 -1.1 -9.0 5.0 -1.8 -0.2 1.3 1.7

ICOR (1 yr. floating base) -1.5 0.8 2.0 -3.2 4.6 5 0 3.7 4.3

* Average annual growth rate: 1990-1995

- 65 -

Table 6.2: BALANCE OF PAYMENTS, 1986-95(Millions of USS)

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Current Account -1978 -680 -608 -1436 -1406 -870 -208 150 569 1009

Resource Balance -1116 1027 1022 543 1386 2102 2860 3299 3719 4105

Exports 6973 7736 7615 7522 8870 10088 11382 12675 14035 15454Merchandise (Fob) 6770 7475 7334 7268 8570 9747 10997 12247 13560 14931

Petroleum 6371 6775 6534 6368 7S70 8622 9722 10822 12000 13231Other 399 700 800 900 1000 1125 1275 1425 1560 1700

Non-Factor Services 203 262 281 254 300 341 385 429 475 523

Imports -8089 -6709 -6593 -6979 -7484 -7986 -8522 -9376 -10315 -11349Merchandise (Fob) -6744 -5774 -5674 -6006 -6441 -6873 -7334 -8069 -8877 -9766Non-Factor Services -1345 -935 -919 -973 -1043 -1113 -1188 -1307 -1438 -1582

Factor Services -691 -1429 -1287 -1611 -2395 -2565 -2651 -2721 -2712 -2648Profits -191 -173 -170 -180 -193 -206 -220 -242 -266 -293Interest CredLcs 96 50 31 44 49 45 49 61 83 122Interest Debits a/ -596 -1306 -1147 -1475 -2251 -2404 -2480 -2539 -2529 -2477

Transfers -171 -278 -343 -368 -397 -407 -417 -428 -438 -449

Capital Account 1127 189 718 1645 1298 896 277 50 -240 -420

Direct Investment 368 386 355 400. 447 469 492 517 543 570Net Official Transfers -26 0 0 0 0 0 0 0 0 0Net LT Borrowing 310 544 708 1245 851 427 -215 -467 -783 -990Other Items (Net) b/ 475 -740 -345 0 0 0 0 0 0 0

Overall Balance -851 -491 110 209 -109 26 69 200 330 588

Change in Reserves (-) 851 491 -110 -209 109 -26 -69 -200 -330 -588

Memorandum Itemst

Oil ExportsPrice (US$/b) 14.28 17.83 15.94 15.21 17.00 18.60 20.20 21.80 23.40 25.00Volume (Mb/d) 1.22 1.04 1.12 1.15 1.22 1.27 1.32 1.36 1.41 1.45

Current Account/GDP (X) -3.3 -2.7 -2.2 -5.0 -4.7 -2.7 -0.6 0.4 1.4 2.4

Debt Outstanding and Disbursed c/ 24710 28233 29721 31918 33032 33597 33481 33081 32335 31363

Debt Outstanding (% of Exports GNUS) 354.4 365.0 390.3 424.3 372.4 333.0 294.2 261.0 230.4 202.9Debt Outstanding (X of GDP) 40.7 113.5 108.9 111.7 109.8 103.6 95.7 88.1 80.4 73.1

Debt Service Payments 1539 1656 1651 1935 3099 3244 3899 4191 4461 4686of which: Interest 596 1306 1147 1475 2251 2404 2480 2539 2529 2477

Debt Service Ratio (X of Exports GMS) 22.1 21.4 21.7 25.7 34.9 32.2 34.3 33.1 31.8 30.3Debt Service (As X of GDP) 2.5 6.7 6.1 6.8 10.3 10.0 11.1 11.2 11.1 10.9

Interest Payments (As X of Exports GMS) 8.5 16.9 15.1 19.6 25.4 23.8 21.8 20.0 18.0 16.0Interest Payments (As X of GDP) 1.0 5.2 4.2 5.2 7.5 7.4 7.1 6.8 6.3 5.8

Stock of Reserves (End of Year) 1144 642 752 961 852 879 948 1148 1477 2066of which: Gold d/ 269 334 334 334 334 334 334 334 334 334

a/ Actual payments on long- and short-term debt.b/ Includes net short-term borrowing, arrears on trade and all other capital transactions not

recorded elsewhere.c/ Includes both long- and short-term public and publicly guaranteed debt as well as private non-guaranteed debt.

Post rescheduling.d/ Valued at world market prlces.

Sources: Staff estimates and projections.

STATISTICAL ANNEX

Table A.1 Gross Domestic Product at Current Factor Costs by IndustrialOrigins 1977-86

Table A.2 Gross Domestic Product at Constant 1984 Factor Costs byIndustrial Origins 1977-86

Table A.3 Implicit Price Deflators for Gross Domestic Product at FactorCosts by Industrial Origins 1977-86

Table A.4 Expenditure on Gross Domestic Product at Current Pricess 1977-86

Table A.S Expenditure on Gross Domestic Product at Constant 1984 Pricess 1977-86

Table A.6 Implicit Price Deflators for Expenditure on Gross DomesticProduct: 1977-86

Table A.7 Exports of Major Commodities: 1977-86

Table A.8 Imports by End-Uses 1977-86

Table A.9 Imports by S.I.T.C. Category: 1977-86

Table A.10 Balance of Payments: 1977-87

Table A.ll External Debt: 1980-87

Table A.12 Public Finances: 1982-87

Table A.13 Monetary Survey: 1977-1987

Table A.14 Summary Accounts of the Central Banks 1977-87

Table A.15 Summary Accounts of the Commercial Banks: 1977-87

Table A.16 Selected Interest Rates: 1980-87

Table A.17 Composite Consumer Price Index: 1977-87

TABLU A.t GRMS$ DCMSTIC PRODUCT AT CURRBNT FACTOR COSTS BY lNDUSTRIAL ORIGIN(Naira Million)

OfficLal Estimates | Provisional Estimates

1977 1978 1979 1980 1981 I 1981 1982 1983 1984 1985 1986------- _-------------------------------__-----------__-----------_-___-------__-_--------

AGRICULTURE, TOTAL 7402 8034 9213 10011 12883 14448 17010 20071 24998 27624 28964AGRICULTURE 5097 SOS5 5548 6607 8958 10088 11274 12870 16920 19729 20442FISHING 768 1386 1866 1219 1589 1591 1990 2531 2340 1709 2087FORESTRY 298 299 307 315 322 1062 1068 1159 1264 1344 1440LIVESTOCK 1239 1315 1493 1871 2014 1707 2679 3510 4474 4842 4995

INDUSTRY 12690 14508 18757 24090 21042 22030 22178 19096 19454 23303 21045MINING AND QUARRYING 7905 8387 11550 15012 13331 12639 11311 9928 11080 12978 9598CRUDE PETROLEUM 7072 7539 10688 14137 12442 11824 10446 9205 10722 12566 9044OTHER MINING 833 848 862 875 889 815 865 723 358 412 554

MANUFACTURING 1696 2916 3816 5162 3400 6110 7450 6323 6656 8427 9116LARGE SCALE 1518 2626 3458 4659 3053 475 5845 5S032 5293 6632 7246SMALL SCALE 178 290 358 503 347 1325 1605 1291 1363 1795 1870

UTILITIES 99 128 200 245 310 455 483 544 515 519 467BUILDING AND CONSTRUCTION 2991 3077 3192 3671 4002 2827 2933 2301 1203 1379 1863

SERVICES 11429 11998 14004 15530 17690 20124 21295 24127 25498 27849 29732HOUSING 1081 1136 1217 1310 1398 1572 1666 1977 1874 1998 2109TRANSPORT 987 1139 1350 1636 2009 2790 2401 2286 2518 3508 3606COMMUNICATION 52 59 65 70 74 256 283 249 257 291 303WHOLESALE AND RETAIL TRADE 6772 7021 8726 9617 10450 8362 9186 11270 12339 13018 14121GOVERNMENT SERVICES 1677 1765 1746 2015 2570 4216 4366 4884 4606 4836 5027FINANCIAL INSTITUTIONS 691 689 695 662 955 1603 1933 1970 2366 2642 2856HOTELS AND RESTAURANTS 67 84 96 106 115 702 739 714 689 738 811OTHER SERVICES 102 107 111 11S 120 623 720 778 849 818 900

GDp AT FACTOR COSTS 31520 34540 41975 49632 51615 56602 60483 63293 69950 78776 79740

INDIRECT TAXES LESS SUBSIDIES 1227 1544 1176 1216 1597 2221 2240 1736 1356 1871 2043INDIRECT TAXES 1245 1611 1234 1424 1887 253S 2483 1985 1613 2063 2200SUBSIDIES 18 68 58 207 290 314 243 249 257 192 157

GDP AT MARKET PRICES 32747 36084 43151 50849 53213 58823 62723 65029 71306 80647 81783

MEMORANDUM ITEM:

NON-OIL GDP AT FACTOR COSTS 24449 27001 31287 35495 39173 44778 50037 54088 59228 66210 70696

Source: Official data refers to the Federal Office of Statistics (FOS) national accounts estimates for 1977178-85 issued in1986. The provisional estimates are FOS estimates for tbe period 1981-86 prepared in July 1988.

TA8LE A 2 ROSS DOCMSTIC PRODUCT AT CONSTANT 1984 FACTOR COSTS BY INDUSTRIAL ORIGIN(Nair& Million)

Official Estimtes | Provisional Estimtes

197? 1976 1979 1980 1901 1981 1982 1983 1964 1985 1986_________________________________________________________________________________________-

AGRICULTURE, TOTAL 26104 23467 20927 &2526 21215 25962 26759 26782 24999 28568 31205AGRICULTURE 18877 16237 13205 14683 13174 17840 18247 17724 16920 20977 23345FISHING 3152 3243 3348 2999 3103 3105 3229 3370 2340 1512 1771FORESTRY 879 356 350 344 336 1279 1215 1239 1264 1286 1426LIVESTOCK 3697 3631 4023 4500 4602 3737 4068 4449 4475 4793 4663

INDUSTRY 25559 23930 2789S 27795 20825 24894 24359 20753 19454 21328 20739MINING AND QUARRYING 18085 15799 19136 17113 12082 12149 10927 10346 11080 11978 11755

CRUDE PETROLEUM 16853 14843 18209 16104 11028 11172 10004 9595 10722 11623 11376OTIER MINING 1232 956 926 1010 1054 977 923 751 358 355 379

NANUFACTURING 2866 3666 4393 5891 3684 8876 9830 7468 6656 7696 7343LARGE SCALE 2565 3300 3981 5317 3308 6956 7717 5913 5293 6064 5795SMALL SCALE 301 365 412 575 376 1920 2113 1555 1363 1632 1548

UTILITIES 179 205 254 264 314 479 475 556 515 473 367BUILDIn AND CONSTRUCTION 4430 4260 4116 4527 4746 3390 3127 2384 1203 1182 1273

SERVICES 23990 21738 21138 22863 24452 26971 2707S 27421 25498 25558 25956HOUSING 2299 2335 2039 2080 21S2 1813 1832 1854 1874 1894 1914TRANSPORST 2216 2285 2176 2624 3144 4206 3288 2657 2518 3077 2705COIMUNICATION 73 $1 83 82 87 290 273 245 257 241 242WHOLESALE AND RET4IL TRADE 15668 13294 13377 14618 14674 11448 11887 12823 12339 11693 12079GOVRNMT SERVICS 2295 2367 2157 2298 2930 4790 4744 4950 4606 4838 5020FINANCIAL INSTITUTIONS 1020 947 895 810 1106 2397 3054 3043 2366 2276 2422HOTELS AND RESTAURANTS 72 88 99 109 118 1014 980 860 689 701 698OTHER SERVICES 348 341 311 243 210 1014 1020 990 849 837 877

CDP AT FACTOR COSTS 75653 69134 69962 73185 66492 77827 78196 74956 69950 75454 77900

INDIRECT TAXES LBSS SUBSIDIES 3930 4261 2898 2724 2957 3054 2896 2056 1356 1792 1996INDIRECT TAXES 3987 4446 3040 3189 3495 3486 $210 2351 1613 1976 2149SUBSIDIES 57 187 142 465 538 432 314 295 257 184 153

GDP AT KMAIEM PRICES 79583 73396 72860 75909 69449 80880 81092 77011 71306 77246 79895

MEMORDUM ISTI:

NON-OIL GDP AT FACTOR COSTS 58800 54291 51753 57081 55464 66655 68192 65361 59228 63831 66524

Sourcet Official data refers to the Fderal Office of Statistics (FOS) national accounts estiates for 1977178-85 issued in1966. The provisional esti-tes are Fm estimates for the period 1981-86 prepared In July 1988.

TAULS A. 3: DIPLICIT PMCE D8JLATORS FO COSS D(NU8ZIC PRODUCT AT FATACT COSTS BY MDUSTUIAL ORUCD(Index 1984d100)

Offilotal stimates Provisional Bst imates

1977 1978 1979 1980 1981 I 1981 1982 1983 1984 1985 1986

AGRCULTURE, TOTAL 28 34 44 44 61 56 64 75 1OO 97 93A6UCULTURB 27 31 42 45 68 57 62 73 100 94 88FISHINO 24 43 56 41 51 51 62 75 100 113 118FORESTRY 79 84 88 92 96 83 88 94 100 105 101LIVZSTOc 34 36 37 42 44 46 66 79 100 101 107

INDUSTRY 50 61 67 S7 101 U 91 92 100 109 101HIUNING AND qUARRYiNG 44 53 60 88 110 104 104 96 100 108 82

CRUDE PZTROLU)4M 42 51 59 88 113 106 104 96 100 108 s0OTII MINING 68 89 93 8? 84 83 94 96 100 116 146

AIUWACTURING 39 80 87 88 92 ';9 76 85 100 109 124LARGE SCALE 59 80 87 8 92 d9 76 85 100 109 125SMALL SCALE 59 79 87 88 92 69 76 83 100 110 121

UTILITIES 55 62 79 93 99 95 102 98 100 110 127BUILDING AND CONSTRUCTION 68 72 78 01 84 83 94 97 100 117 146

SE VICBS 48 55 66 68 72 75 79 88 100 109 115NOOSING 47 49 60 63 64 87 91 107 100 105 110TRASPORT 45 so 62 62 64 66 73 86 100 114 133CONMDICATIOU 71 72 78 85 85 88 104 102 100 121 125WHOLBSALE AND RETAIL TRADB 43 53 65 66 71 73 77 as 100 111 117GCovDUCKE SEVICSS 7s 75 81 88 88 88 92 99 100 100 100FlyANC AL INSTITUTIONS 68 73 78 82 86 67 63 65 100 116 118HOTELS AMD RESTAURANTS 93 95 96 97 97 69 75 83 100 105 116OTE SERVICS 29 31 36 47 57 62 71 79 100 98 103

CDP AT FAUCTR COSTS 42 SO 60 68 78 73 77 84 100 104 102___________________

INDIRECT TAXES LESS SUBSIDIES 31 36 41 45 54 73 77 64 100 104 102INDIRECT TAXES 31 36 41 45 54 73 77 84 100 104 102

SUiSIDIES 31 36 41 45 54 73 77 84 100 104 102

CDP AT ARUT PRICES 41 49 59 67 77 73 77 84 100 104 102____________________

H1EOKANDUtt ITZM:

NON-OIL CDP AT FACTOR COSTS 42 50 60 6O 71 67 73 83 100 104 106

Soures Offictal data reftrs to the Foderal Office of Statistics (10) national accounts esti-tes for 1977178-85 issued in1986. The provisional estimats are OS **tlmates for the period 1981-86 prepared to July 1988.

TABLE A.4t EXPENDITURE 0 GROSS DOMESTIC PRODUCT AT CURRENT PRICES(Naira Million)

Official Estimates | Provisional Estimates

1977 1978 1979 1980 1981 1981 1982 1983 1984 1985 1986______________.____._._..___.._.._______________________________________________________-

EXPORTS GOODS AND NON-FACTOR SERVICES 8370 6882 10990 14308 11585 11362 8528 7768 9418 11474 9298

IMPORTS GOODS AND NON-FACTOR SERVICES 8433 10024 8243 11636 15723 13405 12356 10003 8215 8848 10785

GROSS DCMESTIC INVESTMENT 9922 9886 9594 11431 15020 12770 10636 8014 4534 6385 8149INCRZASE IN STOCKS 501 500 500 590 673 211 174 137 72 645 132GROSS FIXED CAPITAL FORMATION 9421 9386 9094 10841 14347 12559 10462 7877 4462 5740 8017

CONSUMPTION 22888 29340 30809 36746 42331 48095 55914 59251 65568 71636 75122GOVERNMENT 3827 4999 4882 5051 5504 5708 6684 7941 8792 7474 8876PRIVATE 19061 24341 25928 31695 36827 42387 49230 51310 56776 64162 66246

GDP AT MARKET PR1CES 32747 36084 43151 50849 53213 58822 62722 65030 71305 80647 81784NET FACTOR INCOME -475 -474 -616 -1090 -910 -1402 -953 -1246 -1635 -1609 -921

GROSS NATIONAL PRODUCT 32272 35610 42535 49758 52303 57420 61769 63784 69670 79038 80863

MEMORANDUM ITEMS:

GROSS DOMESTIC SAVINGS 9859 6744 12341 14102 10882 10727 6808 5779 5737 9011 6662

Notet Official data refers to the Federal Office of Statistics (FOS) national accounts estimates for 1977/78-85 Issued in1986. The provisional estimates are World Bank staff estimates for the period 1981-86 prepared in March 1988 on thebasis of vork done under a World Bank financed Technical Assistane project and on IKP staff estimates.

Sources Federal Office of Statistics (FOS) and staff estimates.

TABLU A.51 8XP8NDITUR 05 GROS DOtMSTIC PRODUCT AT CONSTANT 1984 PRICES(weir, Mlillon)

Offietal Est mates Previslmal Est nLtes--------------------------- -------------------------------------------- _____*.__

1977 1978 1979 1980 1961 1981 1982 1995 1964 1965 196

EXPORTS GOOD8 ND NON-FACTORI SEVCES 12668 10l59 15410 19511 14804 106)$ 8692 8152 9418 10544 10269

IMPORTS GCODS AND NOM-FACTOR SVICES 17122 18279 13641 17386 21262 15756 15429 10387 8215 7491 5169

GROSS DOMESTIC INVESTMENT 16144 14885 12520 14288 17956 14138 11593 8622 4554 5711 5445INCREASE IN STOCKS 647 629 576 675 730 2S4 190 147 72 577 88GROSS FIXED CAPITAL FORMATION 15296 14256 11945 1)614 17226 13904 11403 8475 4462 51)4 5555

CONSUMPTION 67894 66431 58571 59696 57951 71665 74238 70625 65568 69482 695$5GCOVERNENT 7541 8128 6205 5107 5774 11152 11496 11086 8792 7064 7982PRIVATE 60553 5830) 52365 54590 52177 60515 62742 59539 56776 61396 61570

CDP AT MARXET PRICES 7958) 75396 72860 75909 69449 80880 81094 77012 71S05 77246 79895NET FACTOJ R INCOM -751 -756 -977 -1594 -1226 -1648 -1036 -1294 -165) -1362 -442

GROSS NATIONAL PRODUCT 78852 72639 71882 74315 68223 79232 80058 75718 69670 75884 7945)

MDIORANEDUN ITU(S:

GROSS DOMESTIC SAVINGS 11690 6965 14289 16213 11496 9215 6856 6187 5757 8764 10545

Notes Official dta refers to the Federal Offiee of Statistics (FOS) national aeconets estimates for 1977178-85 issued la1986. The provisional estimates are World Back staff estimtes for the period 1981-86 prepared in March 1988 on thebasis of work done under a World Bank financed TSecnical Assistance project ad on SMF staff estimtes.

Sources Federal Office of Statistics (FOS) mad staff estimtes.

TABL8 A. 6: IMPLICIT PRICE DEFLATORS FOR E3MDITUU 0a GR5O8 DQH8STIC PRODUCT(Index 19844100)

Official astimates | Provisional Estimates_______ __ ............................... ___...... _ _______________________________________________

1977 1978 1979 1980 1981 1981 1982 1983 1984 1985 1a86------------- _---------------------------_--__-__-__--_-_---_-__-_______-----___-_---__--

EXPORTS GOODS AND NON-FACTOR SERVICES 66 66 71 74 78 105 98 95 100 109 91

IMPORTS GOODS ARD NO-FACTOR SERVICES 49 55 60 67 74 85 92 96 100 it8 209

GROSS DONZSSIC IN VESTME 61 66 77 80 84 90 92 93 100 112 150INCRSASE IN STOCKS 59 80 87 se 92 90 92 93 100 112 150GROSS FIXED CAPITAL FORMATION 62 66 76 80 83 90 92 93 100 112 150

CONSPH1TIOU 34 44 53 62 73 67 75 84 100 105 108GOVERMER3T 51 62 79 99 95 51 58 72 100 106 111PRrVATE 32 42 50 58 71 70 78 86 100 105 108

GDP AT MARKSE PRCS 41 49 59 67 77 73 77 84 100 104 102NET FACTOR INCOO 65 63 63 68 74 85 92 96 100 118 208

GROSS RATIONAL PRODUCT 41 49 59 67 77 72 77 84 100 104 102

HEMORANDUM ITMS:

8ROSS DOMESTIC SAVIUOS 84 97 86 87 95 116 99 90 100 103 63

Notes Offioial data refers to the Federal Office of Statistics (FOS) national accounts estimates for 1977178-85 issued in1986. The provisional estimates are World lank staff estimates for the period 1981-86 prepared in March 1988 an thebsis of work done under a World Bank flnanced Technical Assistance project and on IMP staff estimates.

Sources Federal Offies of Statistics (FOS) nd staff stimates.

TABLE A.?: EXORTS OF KAJO CUOIOTIU(Mlilloas of Naivr)

1977 1978 1979 1980 1981 1992 l18 1984 1985 1986 1987---- _-----------------------------------------------------------------------------------

PITROLU 7 454 6005 9437 12801 10681 8003 7201 8841 11224 8369 28739COCOA $11 S78 432 si 143 150 226 18S 182 S71 847PAIX RUL S 33 13 12 14 18 11 17 8 6 8 30RUIBBB (NATURAL) 11 1i is 14 18 16 15 17 4 29 61OROUNDNUTS 0 0 0 0 0 0 1 0 0 0 0

COOA B3UTT 39 16 21 20 75 16 29 24 47 45 54TiN 13 9 11 14 27 0 0 0 4 1 SoM!SCLLAMIOUS 116 196 181 181 62 10 14 16 254 99 480

TOTAL (HIMA) 7977 6632 10107 13355 11024 6206 7503 9086 11721 8921 30240TOTAL (U88) */ 12376 10442 16769 24436 17960 12189 10371 11892 13134 6623 7548

NDEOUAUDU ITNI:

TOTAL GOOD8 UCORUS (US$) 12376 10444 16767 25956 17718 12154 10370 11891 12566 6770 7475ACOOUDI; TO BALANCI OFPAThENTS BL8ATS88

*I Cil naira estIM&teS ooUVort*d Lnto dollars at O551.1.1 oawh=ge Vates for 1977-1965 ad gt aVoraetoffloLal/SFlU rates thergfter.

Sources Central Sank of Nigeria (CBN) and staff estLmates.

TABUE A.8s llPORTS BY END-USE(Millions of Nalra)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

CONSUMSR GOODS 2036 2380 2104 3602 5736 4481 3701 2657 2069 1758 4305DURABLE 594 697 620 810 1576 862 859 633 247 303 840NON-DURABLE 1442 1683 1484 2792 4160 3619 2842 2024 1822 1455 3465

CAPITAL COODS AND RAW MATERIALS 5051 5822 5358 5485 7170 6236 5194 4441 4979 4175 13552CAPITAL 000D8 3410 3909 3632 3047 4018 3533 2886 2307 2486 2423 7568RAW MATERIALS 1641 1913 1726 2438 3152 2703 2308 2133 2493 1752 5984

MISCEILANBEOS 7 11 11 10 13 55 9 81 14 6 5

TOTAL (NIRA) 7094 8213 7473 9097 12919 10772 8904 7178 7063 5939 17862T8AL (US$) a/ 11006 12931 12398 16645 21048 16001 12308 9393 7914 4409 4458

IEMORANDUM IT3M:

TOTAL GOODS IMPORTS (US$) 9965 11610 11844 14735 18390 14879 11451 8882 8279 6744 5774ACCORDING TO BALANCE OFPAYMENTS ESTIMATES

a/ CBN naira estimates *oaverted into dollars at official exchange rates for 1977-1985 and at averageofficialis5lM rates thereafter.

Sources Central Bank of NLgerla (CBN) and staff estimates.

TABLE A.9s IMPORTS B 8.I.T.C. CATEGORY(Million. of Naira)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987-----------.- __---.-.-----_---.----_--_---__---------_-_-----_--_--__--------__----_----

0. FOOD AND LIVE ANIMALS 736 1021 767 1438 2115 1756 1341 1052 1200 802 15741. BSEVERACES AND TOBACCO 133 71 50 12 37 11 9 7 9 15 392. CRUDE MATERIALS 79 108 112 157 202 172 168 144 351 194 8803. MINERAL FUEL8 129 175 207 155 176 151 132 111 61 42 874. OILS AND FATS 47 73 52 115 123 129 97 85 71 125 655. CHEHICALS 498 648 540 914 1256 1013 963 852 1108 1039 29236. MAWUFACTURED GOODS 1565 1850 1524 1982 2641 2165 1928 1242 1612 1237 46487. MACHINBRY AND TRANSPORT 3387 3588 3792 3650 5407 4653 3666 3257 2414 2278 70358. MISC. MANUFACTURES 510 665 415 645 953 711 582 418 225 246 6069. MISC. UNCLASSIFIED 10 14 14 29 29 12 18 11 12 6 6

TOTAL (NAMlA) 7094 8213 7473 9097 12919 10773 8904 7179 7063 59C4 17862TOTAL (US$) */ 11006 12931 12398 16645 21048 16002 12308 9394 7914 4443 4458

MEMORANDUM ITSM:

TOTAL GOOD8 3MORTS (US$) 9965 11610 11844 14735 18390 14879 11451 8882 8279 6744 5774ACCORDING TO BALANCE OFPAYMENTS ESTIMATES

a/ CBN naira estimates converted into dollars at official exchange rates for 1977-1985 and at averageofficial/SFEM rates thereafter.

Source: Central Bank of Nigeria (CBN) and staff estimates.

table £.1Os EULA43B O PA73ENSS 1977-1987(NliIllGoaef Us$)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Current Accoust -561 -3711 1820 5174 -6039 -7473 -5179 -861 913 -1978 -682.......... ...... ,._...................... .,,,,,,,,,,,,,,,........................................... ,,.... ________.____

Resource Dlano. 1224 -2389 4088 9358 -S326 -5685 -3089 1575 2941 -1116 1027

Exports 12957 11096 17301 27006 18511 12668 10738 12324 12851 6973 7736Nerchendise (1.3) 12376 10444 16767 25956 17718 12154 10370 11891 12566 6770 7475

pJtroleum 11564 9455 15655 24942 17162 1188U 9954 11568 12203 6371 6775Other 812 989 1112 1014 556 266 416 323 363 399 700

Non-factor Service. 582 652 864 1050 793 514 368 433 285 203 262

imports -11733 -1$465 -13543 -17648 -21839 -18353 -13827 -10749 -9910 -8089 -6709trerhandise (1.D) -9965 -11610 -11844 -14735 -18390 -14879 -11451 -8882 -6279 -6744 -5774

Won-factor Services -1769 -1875 -1699 -2913 -3449 -3474 -2376 -1867 -1631 -1345 -9S5

Net Factor Services -1605 -1071 -1922 -3774 -2284 -1416 -1723 -2140 -1802 -691 -1431Profits -1510 -869 -1578 -S259 -1494 -521 -401 -311 -190 ^191 -173Interest Credits 216 158 188 395 368 356 110 116 122 96 S0Interest Debits / -312 -360 -532 -911 -1158 -1251 -1432 -1945 -1734 -596 -1509

Not Private I-easfers -180 -250 -347 -410 -428 -373 -367 -296 -226 -171 -278

Capital Aceo%t -257 1489 1620 -629 -161 5106 4534 1336 -617 1127 191

Not Direct Invemseent 382 211 305 -739 165 430 365 189 350 368 $86Net Official Transfers -5 -19 -41 -167 -139 -36 -28 -36 -34 -26 0Net LT Dorroving 55 1627 1284 1482 2455 2943 1897 -155 -1216 311 275Net Other Items bI -689 -330 72 -1206 -2641 1790 2300 1338 283 475 -470

Overall 9alaan -818 -2222 3440 4545 -6200 -2367 -645 475 296 -851 -491…__ ----------------------------------------------------------------------------------------

Changes in R.et Reserves M-) 818 2222 -3440 -4545 6200 2367 645 -475 -296 851 491

Memorandum Items:

OLl Exports:Price (US8/b) 14.80 14.08 21.00 36.40 38.90 32.44 29.16 28.91 26.89 14.28 17.83Volume (Mb/d) 2.14 1.84 2.04 1.88 1.22 1.00 0.94 1.09 1.24 1.22 1.04

Current Account/CDP (X) -1.0 -5.9 2.3 5.0 -6.3 -8.0 -5.8 -0.9 1.0 -3.3 -2.7

Debt Outstandins and Disbursed e/ 3146 5091 6235 8888 12039 12908 18586 18612 19465 24710 28233

Debt Outstandins (X of Exports CRY8) 24.3 45.9 35.4 32.9 65.0 101.9 173.1 151.0 151.5 354.4 365.0Debt OutstandLag (I of GOP) 5.6 8.1 7.9 8.6 12.6 13.9 20.7 19.9 21.5 40.7 113.5

Debt Service Payments e/ 398 442 646 1151 1793 2077 2593 4161 4600 1539 1656of whiLh: Interest 312 360 532 911 1158 1251 1432 1945 1734 596 1306

Debt Service Ratio (2 of Exports 031S) 3.1 4.0 3.8 4.3 9.7 16.4 24.1 33.8 35.8 22.1 21.4Debt Service Ratio (Z of CDP) 0.7 0.7 0.8 1.1 1.9 2.2 2.9 4.5 5.1 2.5 6.7

Interest Payments (X of Exports 0NF5) 2.4 3.2 3.0 3.4 6.3 9.9 13.3 15.8 13.5 8.5 16.9Interest Payments (X of GOP) 0.6 0.6 0.7 0.9 1.2 1.3 1.6 2.1 1.9 1.0 5.2

Stock of Reserves (End of Year) 4429 2135 5864 10697 4695 2244 1463 1692 1893 1144 642of which: Gold d/ 104 142 352 405 274 313 262 212 225 269 334

a/ Actual paymeats on lons- and short-tern debt.bl Includes net short-term borrowing, arrars on trade ad all other capital transactions not recorded elsewhere.cl Includes both long-tern ad short-term publie and publicly guaranteed debt as well as private

non-Suaranteed debt. Post rescheduling.di Valued at world market priees.

Sourcess DO, World Dank Debtor Reporting System and Central Daok of Nigeria (CMI).

Table A.Ils BXSENAL DST, 1980-87(millions of U88 Ind of Year Estimtes)

1980 1981 1982 1983 1984 1985 1986 1987-.--- ____-.-__..-__.._-___-_-_-_------------___--_------

MEDIUM AND LONG-TIRE DEBST PUBLICAND PUBLICLY GUARANTEED 4238 6268 9076 12237 11524 13133 20574 25707

LONDON CLUBt IEDIMU- AND LONG-TERM DEJS */ 2705 3397 4293 4333 3809 3123 5323 5924

PARIS CLUB, MHDIQU- AND LONG-TSRE DEBT bI U1 1424 2883 3558 3858 5088 9891 11554

)WLTILATZRAL 571 023 742 884 953 1408 2185 2985OF NUCI, IBRD 517 562 674 824 1044 1267 2137 2939Or F B1CO IDA 38 37 37 36 36 35 34 32

OTME c/ 81 824 1158 3461 2904 3514 3175 5244

LONG-TERM DEBT. PRIVATENOW-GUARANTEED 1097 1347 1313 1300 1400 1416 400 350

SOmT-TEoN DNT di 33553 4424 2519 5049 5688 4916 3736 2176

TOTAL TEXBRNAL DET 888U 12039 12908 18586 18612 19465 24710 28233

Sources World Bank Debtor ReportinS System and staff estlmtes.

as Includes full stock of LCs outstanding at ead-198 and end-1987. Excludes late interest onLos in 1986, which is ounted below in shost term debt. for 1987, ncludes late interst, i.e.,the payable debt, in an amunt of US8481 million.

b/ She increase between 1985 and 1986 reflects the 1986 rescheduling agreement. The estimates for1986 and 1987 inloude the Insured trade arrars (US$2763 at mnd-1986 and US$3041 at end-1987),rescheduled interest an publically guaranteed hLT, and rescheduled arrears on non-guaranteedclaims. Arrears an the resoheduling aoreement ase Included in chort-tern debt.

./ Includes, inter alia, uninsured tres arrears for AhLih premissery notes have been issued --US81489 million at end-1986 and US$3191 at end-198l. Other reconclled claims and lateinterest are included in shost-tern debt.

a/ Includes shost term payments due under the Paris Club rescheduling, totalling US$206 million atend-1986 and US$150 million at mnd-1987. The latter is net of US$433 million in deposits inthe Bank of England special account established under the 1986 rescheduling agreemet.Also includes US$3050 million in reconciled uninsured trade arrers in 1986 and US$1659 in 1987,and an estimated US$240 mllioen in late Interest due the London Club in 1986 and US$37 millionin 1987.

TASL! A.12: YUBLSC FINANCI(NaLra MIlltonJ)

1982 1983 1984 1985 1986 1987.____.________________________________________________

FEDERALLY COLLECTED REVENUE 12048 10748 11460 14418 15714 24285OI WuXC8t PETROLEUW REVENUE 7560 6299 8328 10212 8460 18224

FEDERAL FINACES

FEDERALLY RETAINED REVENUE 7254 6749 6529 3319 10630 14234

CURRBNT EI DITURE 4224 6799 6402 5971 6518 14342DEPAR$THBRAL XPNDITURB 2864 4229 3713 3085 4533 5629TRANSFPRS TO STATES 0 525 82 0 60 0DOMESTIC INTREBST 1014 1429 1846 2060 27S6 2739FOREIGN INTERNS? 546 616 761 826 989 5974

CAPITAL, TRANSFERS AND SUSIDIES 7692 6094 3042 4347 5052 9939

DEFICIT (1COMIWTHNT) -4662 -6144 -2915 -1999 -2740 -10047

ARJEARS (- - PAYNNS) 0 0 0 0 -300 3036

DEFICIT (CASH BASIS) -4662 -6144 -2915 -1999 -3040 -7011

rFNANCING 4662 6144 2915 1999 3040 7011OF WHIC8t NET FOREIGN 264 174 -95 -379 -252 3494

STATE AND LOCAL _OVERUNS FINANCES

REVENUE 5869 5698 7686 6945 6917 12040

CURRENT EXPENDSTURE 4850 4900 6650 6108 5861 7405

CAPITAL EXPENDITURE 2416 1994 1106 1520 1446 4435

OVERALL DEFICIT -1397 -1196 -70 -683 -390 200

FINACIG 1397 1196 70 683 390 -200OF WHICH, FOREIGN 670 570 480 -75 U.A. n.e.

Note: Elxcudes NPC Joint venture transations mi dedicatLon aountrevemses/l.mpdtures of N1.3 billion and N2.9 billion in 1986and 1987, respectively.

Souroe: World Bank Staff "timtes.

TALE A. 13. MONMTARY SURVgY(NaLra millin)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1; I

FOREIGN ASSETS (NET) 2961 1420 3228 5607 2549 977 -3547 -2951 -2975 -19620 -28367

ASSETS 2961 1420 3345 5872 3094 1560 1261 1628 2101 5863 5597LIABILITIES 0 0 -117 -265 -545 -583 -4808 -4579 -5076 -25483 -33963

DOMESTIC CREDIT (NET) 6010 7705 6348 8843 15017 20759 26841 29507 30810 36767 43673

CLAWS ON GOVEUNMINT 2452 3143 1673 1825 5828 10059 15234 17433 17675 18067 21595CLAIMS ON PRMVATE SECTOR 3558 4562 4673 7018 9189 10700 11607 12074 13135 18700 22078

MONEY AND QUASI MDNEY 7P13 7521 8409 12524 14484 16021 18068 20107 21900 24351 29880

moNEY 5558 5101 5161 7747 8984 9669 10512 11312 12502 11754 13613QUASI MONEY 2255 2420 3248 4777 $500 6352 7556 8795 9398 12S97 16267

OTHER DEPOSITS 199 114 187 96 87 2021 3684 2561 3520 282 2:0

P109 DEPOSITS 199 114 187 96 87 117 1280 664 371 282 210DEPOSITS FOR EXTERNAL PAYMENTS 0 0 0 0 0 1904 2404 1898 3149 0 0

VALUATION ACCOUNTS -- -- -186 -423 -1134 -8821 -14071

UNCOVERED EXTERNAL LIABILITIES -- -- -- -- -- -- -2621 -2945 -3069 -7944 -11928

CAPITAL AND RESERVES -- -- 443 540 )05 893 1097 1255 1499 2363 2994

OTtER ITEMS (MET) -- -- 1537 1290 2296 2802 2953 5679 5119 6916 8221

Note: Data *eoludes merchant banks.

Source: Central Bonk of Nigeria (CIN) *a4 IHY staff *Stimates

TABLE A. 14t SUfHARY AMCOUNTS OF TSH CENTRAL UANK

(Nire million)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

NET FOREIGN ASSETS 2756 1339 3056 5435 2411 962 592 1023 1561 2398 855

FOREIGN ASSESM 2766 1355 3106 5612 2825 1313 918 1216 1686 2957 1310

EXTERNAL RESERVES AND SECURITIES 2439 991 2808 5263 2317 1283 897 1208 1685 2956 1309

RESERVE POSITION IN THE FUND 269 308 218 257 331 -- -- -- -- -- --

SD BUILDINGS 58 56 80 92 177 S0 20 8 1 1 1

FOREIGN LIABILITIES -10 -16 -50 -177 -414 -351 -326 -193 -125 -559 -455

NES DHEESTIC CREDIT 1044 2984 1605 1193 5430 8447 11438 10502 10454 16365 17792

CLAIMS ON FEDERAL GOVERNMENT (NET) 629 2377 871 436 4520 7571 10451 9297 9096 14819 16076

of VMCBI:

ADVANCES 1226 1166 -- -- -- -- -- -- -- -- --

TREASURY BILLS 161 27 23 1 3410 5553 6508 5197 6184 11585 14215

TREASURY CERTIFICATES 80 1177 1087 1591 1114 936 3594 4334 3724 4518 3432

GOVERNMENT DEVELOPMENT STOCKS 216 827 1411 1268 1529 1659 1769 1537 1613 1618 1550

LESS DEPOSITS -1054 -820 -1650 -2424 -1533 -576 -1420 -1772 -2426 -2903 -4932

CLAIMS on STATS coVERamTS (NET) -- -- -- -225 -143 -43 -76 -99 -66 -81 -202CLAIS ON LOCAL GOVERMENS (NET) -- -- -- -- -- -- -- -- -- -- --

CLAIMS ON NOP-BANK PRIVATS SECTOR 415 607 734 757 910 918 1063 1305 1424 1626 1917

OF VUICHs CLAIMS ON MUAR ING BOARDS 511 620 615 742 957 1053 1253 1306

LIABILITIES TO COMERCIAL RANKS 1190 742 734 1691 1235 2131 1392 1114 954 1824 2656

CURRENCY IN COMCIAL BANKS 191 225 353 404 486 506 456 464 465 518 556

SAKRS'DEPOITS 999 517 381 1209 678 1496 810 568 340 944 1637

LOAN SHORTFALL DEPOSS -- -- -- 78 71 129 126 81 149 361 463

LIfAILITIES TO tERCHANT BANKS -- -- -- -- - - -- -- 46 129 295

CUECY in MCN BANKS -- -- -- -- -- -- -- -- 0 1 1

BAMRS'DEPOSITS -- -- -- -- -- -- -- -- 46 128 207

LOMN SBORTFALL DEPOIs -- -- -- -- -- -- -- -- -- -- 87

CURIRECY AND DEWAND DEPOSIT LIILITIES 1971 2382 2351 4042 4820 5068 5320 5732 6831 6267 6762

CURREWCY OUTSIDE BANKS 1971 2382 2351 3186 3862 4223 4843 4884 4910 5177 6298

DEAI DEPSPITS (NOW-BANK PRIVATE) -- -- -- 856 958 846 477 848 1921 1090 464

ImPORT DEPOSITS -- 96 83 975 1280 664 371 282 210

CAPITAL ACOUNTS (INCL. SDR ALLOCATION) 27 82 59 69 124 225 252 289 370 873 1194

VALUATION ACCOUNS -- -- -- -- -- -- -190 -447 -1205 -9160 -15114

UNVRED COUNTRPART OF EXTERNA S -- -- -- -- -- -- -2622 -2944 -3069 -7944 -11619

IMPTEMD COUNTERPART OF XTERNAIL AR -- -- -- -- -- -- -3949 -3699 -3105 -12157 -14358

COUNTRPJART OF o XTRNAL AMARS -- -- -- -- -- -- 1327 755 36 4213 2739

OTM8 lOIS (TET) 163 341 723 438 1363 1009 2078 2504 3028 2390 1879

Sources Central Bank of Nleria (011).

TABLE A. 15: SIM(ARY ACCOUNTS OF TIE COIOEaCWIL BANKS(Nat:r Million)

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987.____________________________________________________________________________

NET FOREIGN ASSETS 200 114 189 161 128 16 81 319 153 921 2109ASSETS 225 178 236 249 259 247 344 413 415 1741 2991LIABILITIES -25 -64 -67 -88 -131 -231 -263 -93 -261 -820 -882

RESERVES 852 742 798 1533 1376 2002 1267 1032 805 1462 2193CURRENCY 222 225 353 404 486 506 457 464 465 518 556DEPOSIT AT CENTRAL BANK 630 517 445 1129 890 1496 810 568 340 944 1637

NET DOMESTIC CREDIT 4322 5195 5775 7755 9519 12313 15403 19005 20356 18091 22222

CLAIMS ON FEDERAL GOVERSMENT (NET) 2004 1490 2153 2583 2027 2778 4961 8433 9605 4025 6866TREASURY BILLS 296 512 1307 1601 918 2190 4362 7297 7991 3062 5251TREASURY CERTIFICATES 858 441 837 834 857 629 779 1430 2264 1361 2322GOVERNMENT DEVELOPMENT STOCK 243 144 272 525 362 329 302 272 396 546 537STABILIZATION SECURTTIES 262 273 0 0 0 0 0 0 0 0 0BANKERS' UNIT FUND 3S 99 125 19 19 21 18 19 19 18 9DIRECT ADVANCES 21 21 22 28 50 46 72 62 80 41 143DEPOSITS 0 0 -410 -424 -179 -437 -571 -646 -1143 -1001 -1395

CLAIMS ON STATE GOVERNMENT (NET) -731 -372 -581 -879 -411 -190 -27 -69 -716 -716 -1132CLAIMS 0 0 137 115 220 318 465 480 450 444 474DEPOSITS -731 -372 -718 -994 -631 -508 -492 -549 -1166 -1160 1606

CLAIMS ON LOCAL GOVERNMENT (NET) 0 0 -142 -91 -164 -58 -75 -128 -245 -204 -332CLAIMS 0 0 7 17 39 64 52 38 21 so 27DEPOSITS 0 0 -149 -108 -203 -122 -127 -166 -265 -234 -359

CLAIMS ON MARKETIN BOARDS (NET) 0 0 -126 -120 -212 -492 0 0 0 0 0

CLAIMS ON PELVATE SECTOR 3049 4077 4471 6262 8279 9782 10544 10770 11711 14985 16820

MONETARY AND QUASI-MONETARY LIABILITIES 5235 5303 5769 8364 9452 10952 12749 14375 15023 15743 19727DEMAND DEPOSITS 2980 2701 2521 3666 4094 4601 5192 5581 5671 5487 6841SAVING DEPOSITS 930 1076 1284 1590 1979 2321 2836 3354 3699 4269 3199TIME DEPOSITS 1325 1526 1964 3108 3379 4031 4721 5440 5653 5987 7685

DEPOSITS ON EXTERNAL PAYMENTS ARREARS 0 0 0 0 0 1046 2404 1898 3149 1241 1550

CAPITAL AND RESERVES 192 267 328 389 497 668 845 967 1129 1299 1545

VALUATION ACCOUNT n.a. - .s. a.&. n.-. n.e. n.a. 4 21 71 171 382

OTHER ITEMS (NET) 669 852 850 695 1073 1793 875 3175 2092 2381 3783

Source: Central Bank of Nfteris (CBN).

TABLE A. 16: SELECTED INTEREST RATES

1980 1981 1982 1983 1984 1985 1986 1987.______.__._______________________________________________________

TEASURY BILL RATE 5.0 5.0 8.0 7.0 8.5 8.5 8.5 11.8 1/

DISCOUNT RATE 6.0 6.0 8.0 8.0 10.0 10.0 10.0 12.8 2/

SAVINGS DEPOSIT RATE 6.0 6.0 8.5 7.5 9.5 9.5 9.5 12.0

LENDING RATE 11.5 11.5 14.0 13.0 13.0 13.0 15.0 18.0

INFLATION (3nd-year over end-year) 16.2 17.2 7.1 38.7 22.6 1.1 13.6 9.7

REAL SAVINGS DEPOSITS RATE -8.8 -9.6 1.3 -22.5 -10.7 8.3 -3.6 2.1

MEAL LENDING RATE -4.0 -4.9 6.4 -18.5 -7.8 11.8 1.2 7.6

Notet On July 31, 1987, interest rate controls were eliminated, permitting banks to set lending ratesaccordLng to market criteria. The lendlng rate for 1987 La n estimate of sverage market ratesat the end of the year. Inflation during a year is measured as the percentoge rate of changein the eonsueer price index (CPI) between December of that year end December of the previous year.

it 14 percent from August 1, 1987 to December 28, 1987.2/ 15 percent from August 1, 1987 to December 28, 1987.

Source: Central Bank of Nigeria (CBN) *nd DIM, International Finance Statietios, various issues.

TABLE A.17: COfPOSMTE CONSUHE MUCE INDEX(1975-100)

1977 1978 1979 1980 1981 1982 1983 1984 19"8 1986 1987_______________.,_________________________________._________________________________________________

FOOD 148 172 186 200 250 272 356 480 499 499 542

DRINKS 140 134 176 188 193 208 236 290 380 421 458

TOBACCO 183 186 203 229 265 278 S1A 436 549 673 768

ACCOMODATION AND FUEL 127 131 167 170 173 180 240 270 258 363 378

CLOTHING 141 176 219 270 314 335 398 560 610 704 759

TRANSPORT 141 158 196 197 202 224 271 316 357 422 478

OTHER PURCHASES 137 147 156 182 193 213 328 516 542 709 839

OTHER SERVICES 143 157 178 235 283 296 357 496 612 834 1016

CONSUMER PRICE INDEX 143 167 186 205 243 267 328 458 484 510 562

MEMO ITEMS:

URBAN INFLATION 14.0 24.3 11.1 11.4 20.9 7.5 20.0 41.2 2.9 10.1 7.0

RURAL INFLATION 15.6 15.5 11.9 9.7 20.8 7.7 23.7 39.4 5.9 4.7 10.7

TOTAL INFLATION 15.5 16.6 11.8 9.9 18.4 9.9 23.2 39.6 5.7 5.4 10.2

Note: The inflation rates denote annual percentage rates of change in the *vert pruce leel.

Source: Federal Office of Statistics (FOS).

NICAERIA

ADMINISTRATIVE DIVISIONS

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