May 2015 / N
o
19
Macroeconomics and Development
Introduction
With 180 million inhabitants, Nigeria is the most
­p opulous country in Africa. Its economy is also the
strongest. Just twice as large as France in size, its
­p eople are also very diverse: more than 250 distinct
ethnic groups call it home. The northern part of the
country is p­ rimarily Muslim, while the southern part is
primarily Christian. Along with such a hetero­g eneous
mix of ethnicities, and a tenuous balance of power, is a
wealth of energy resources that are unequally
­d istributed in favour of a few in the south west of the
country.
Exploitation of natural gas and oil reserves has p­ rovided
the financial basis for development in the country, but
income disparity has always been a significant issue. It
crystallises existing tensions that have been
­exacerbated even further by ethnic and religious
divides. For more than three decades, economic
growth has been fuelled by oil extraction. Since the
turn of the 21 st century however, there has been a shift
towards tertiary services which has meant a decrease
in the contribution of oil and gas to the wealth of the
country overall. Growth has ensued at a stable, regular
pace, and has enabled significant progression in terms
of income per capita, which in real terms has more
than doubled since the beginning of the decade (now
more than 3,000 USD).
Nonetheless the growth path of the Nigerian
­e conomy is only tangible for a lucky few. The sheer
number of people who live in poverty – 62% of the
population in 2010 made under 1.25 USD per day in
Nigeria:
The Restrained
Ambitions
of Africa’s Largest
Economy
Slim Dali
Department of Macroeconomic Analysis
and Country Risk
dalis@ afd.fr
terms of ­p urchasing parity power (PPP) – reveals the
acute income disparity in the country. Furthermore,
­i nequality is on the rise. Three central hubs of activity
have developed around Abuja (the administrative
­capital, in the centre of the country), Lagos (the
e conomic capital, in the south west), and Port
­
Harcourt (the oil region, in the south east), which has
­e xacerbated the polarisation of revenues. Over the
years, marked differences between the north and
south regions have appeared in terms of economic
disparity.
Potential drivers of growth do exist in Nigeria, ­h owever.
These cannot be unleashed without addressing the
shortcomings of power generation, reforming the oil
and gas sector, and solving the issues of institutional
corruption that beset the country. Such are the main
challenges for President Buhari, whose recent election
was an historical changeover, and who seeks to
­consolidate the country’s democratic regime. The first
part of the present study aims to describe the
s­ocio­-political context of Nigeria, and will enable us to
understand the second part, which focuses on ­e conomic
growth and its constraints. Then, the federal p­ ublic finances
will be a­ nalysed, and the effects of the dependence on oil
revenue will be made explicit. Finally, the fourth part of the
study shall present the country’s financial system, ending in
an inquiry into the external aggregates of the economy in
the context of low oil prices.
Index
INTRODUCTION1
4. BANKING SUPERVISION HAS IMPROVED
BUT THE FINANCIAL SYSTEMS REMAINS
EXPOSED
28
1.1. A fragile but strengthening democracy
3
3
4.1. A concentrated banking sector
that only modestly finances
economic activity
28
1.2. Dynamic economic growth is still accompanied
by exclusion
7
4.2. A profitable sector with high exposure
to the oil industry
29
1.3. Historical violence and tensions that aggravate
the socio-political landscape
9
4.3. Supervision of banks has been reinforced
but vulnerabilities remain
32
5A MONO-EXPORT ECONOMY EXPOSED
TO A DOWNTURN IN PRICES
35
1.REGIONAL DISPARITY AGGRAVATES ISSUES
OF VIOLENCE
2A DYNAMIC ECONOMY BUT DEPENDENT
ON THE OIL SECTOR
2.1. Sustained and less volatile growth
2.2. A more diversified economy but
with serious infrastructure shortcomings
2.3. Foreign trade is exposed to volatile oil prices
13
17
3.SATISFYING SOLVENCY BUT LIQUIDITY
PRESSURES REMAIN
20
3.1. A limited level of public debt that is partly held
by non-residents
20
3.2. A budget implementation that is vulnerable
and exposed to oil prices
22
3.3. The risk of non-sustainability of public debt
remains low but vulnerabilities are increasing
3.4. An unfavourable credit history
2
12
12
24
26
© AFD / Macroeconomics and Development / May 2015
5.1. Energy exports, determinants
of current account positions
5.2. Low external capital flows
5.3. External liquidity is under increasing tension
35
37
37
CONCLUSION39
LISTE OF ACRONYMS AND ABBREVIATIONS40
BIBLIOGRAPHIC REFERENCES41
1. Regional disparity aggravates issues of violence
Nigeria is a vast country – twice the size of metropolitan
France – inhabited by nearly 180 million people. Its
­tumultuous political history following the declaration of
independence led to the beginning of a democratic regime
in 1999. Every four years, the president of the republic is
elected by universal suffrage, as are the members of the two
parliamentary chambers, the thirty-six federal state
­governors, and the assembly for each state. Even so, Nigeria’s
political and institutional systems remain affected by several
fundamental issues.
1.1. Dynamic economic growth
is still a­ ccompanied by exclusion
A tumultuous political history
The deep-seated roots and routes of Nigeria’s history have
taken hold over the passage of caravans, and the kingdoms
of various ethnic groups. From the year 900 to 1500, the
country was composed of several different territories whose
borders were defined not by their present definition but by
traditional ethnic rule, such as Yoruba, Ibo, Hausa, Nupe,
Kanem, and the Borno, to name a few. The geographical
distribution of ethnic groups, however, was not much
­d ifferent from its present configuration (See Map 1). First
contact with Europeans took place in the fifteenth century,
when the Portuguese set to exploring the south west part
of the country (Uwechue, 1971). They were soon followed
by the English, who explored the coastlines from 1539
onwards, and who established their first colony midway into
the nineteenth century. At the same time, in 1804, the interests of Usman dan Fodio (of Fulani ethnicity) collided with
those of the Hausa kingdom, whom he accused of having
abandoned the precepts of Islam. [ 1] He founded the caliphate of Sokoto, whose influence extended throughout what
is now the north of the country. At the head of each conquered t­erritory, an emir was appointed. Following the
Berlin Conference in 1884-1885, which determined many of
the current boundaries of Nigeria, and which approved
English occupation of the country, in 1906 the English
Crown would administer both the north and the south as
two ­p rotectorates. These would later be merged in 1914, but
would retain a significant part of their autonomy, thereby
representing the starting point of an unified country with
federal system that was to be formally introduced by the
1946 constitution. [ 2 ]
As a result of the emergence of nationalist movements that
arose in the wake of World War II, Nigeria emancipated
itself from the British imperial administration in 1960 and
constitutionally became a republic in 1963. From 1966
onwards, a long, tumultuous period characterized by military coups d’état and a bloody secessionist conflict arose:
the Nigeria Civil War, or Biafran War (1967-1970). Pressure
escalated after the proclamation of the republic of Biafra in
three oil-producing states in the east of the country. Central
to the problem was ethnic tension against the Ibos
(who were originally from the regions in question, see
below), and the federal government’s increase in power
(which followed the administrative division of Nigeria from
four into twelve states just two months earlier). [ 3] More than
one million people perished in the civil war. Both Nigerian
society and the federal republic were beset with the dual
issues of ethnic antagonism and centralization of power
from the outset. Overall, the political history of Nigeria
from independence onwards can be said to be particularly
agitated, with the assassination of three heads of state, the
successful staging of six coups d’états (in addition to a
number of aborted attempts), the onset of a civil war, and
thirty years of military regime. Return to democracy in 1999
emerged in a context in which the country had been divided
[1] The introduction of Islam to Nigeria dates back from the 9th century and occurred via trade routes.
[ 2] The capital of the Federation of Nigeria was Lagos (which had a status of crown colony from the end of the 19th century until 1914), and the regions of the west, the east,
and the north, which were bounded by the Niger and Benué rivers.
[ 3] After a countercoup in July 1966, General Aguiyi-Ironsi, of Ibo ethnicity, was assassinated, mostly for having wanted to abolish the federal character of Nigeria and for his
incapacity to produce a constitution that would serve the interests of all regions. After this event, thousands of Ibos were massacred in the north of the country, dominated
by the Haussa-Fulani. The flight of hundreds of thousands of Ibo to the south east, where Ibos are dominant, has been one factor of Biafra’s secessionist impulses.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
3
into thirty-six i­ndividual states, each whose federal capital
was located in the center of the country (in 1999), and
whose political parties were no longer allowed to be based
on ethnic grounds.
A centralized federal government
for a diverse population
The creation of states and local administrative structures in
Nigeria – of which there are thirty-six states and 774 local
authorities – are an expression of two factors: the diversity
of the population (which is comprised of more than 250
distinct ethnicities), and the abundance of crude oil
resources. In fact, in response to changing historical
­
­c ircumstances, the adoption of a federal system has meant a
more consensual relationship to governance in the country.
For example, the first territorial redrawing of boundaries in
1967 was the result of a desire to reduce the amount of
power that was exerted by the three large geo-ethnic
­conglomerates, which represented nearly one third of the
total population in Nigeria (Hausa-Fulani, Ibo, and Yoruba)
[Bach, 2006]. At the same time, the existence of oil r­ esources
in certain regions, most notably in the south west, fuelled
their desire for autonomy. Such was the impetus for the war
of Biafra, and which from the end of the conflict onwards,
amplified the perceived need for constituency changes. The
creation of new states was funded by oil revenues, which
were considered to be nearly inexhaustible. It occurred as an
instrument for responding to the demands for autonomy or
for access to national resources (Bach, ibid. ). In the case of
Nigeria in particular, the multiplication of administrative
entities was accompanied by the reinforcement of
­centralized power, on which the regions highly depend –
especially when it comes to the distribution of oil revenues.
In fact, the centralization of financial resources by the
­federal government after independence meant that thirtysix ­p rogressively-created states would directly dependent
on national funds. Before independence, in the 1950s, this
was not the case: funds from import and export taxes were
directly paid back to the regions. Such a dual process of
reinforcement of the federal government, with its
­centralizing character accompanied by the multiplication of
states and local governments, forms the basis of the Nigerian
­federal system. It has been described as a form of “­federalism
by fission” (“ fédéralisme scissipare ” – (Bach, 1991).
The 1999 Constitution decreed that finances from oil
­revenues would be divided among the regions in the
­following manner: 39% to the federal state, 20% to the individual states, and 15% to the 774 local governments, and
13% to special funds. The oil-producing regions in the Niger
Delta in turn receive an additional 13% of fiscal resources, in
application of the “principle of derivation” (see Box 3 for
more details), [4] but this does not suffice to calm those who
feel that revenues should be returned directly to the
­territories in which they are generated. In their eyes, the
money is rightfully theirs (Bach, 2006). Instead, the funds are
allocated to various federal bodies, such as the states, and
the local governments, and are used in a discretionary
­fashion. Finally, another particularity in Nigeria is the existence of a legal pluralism at the heart of the federation, in
which courts for general or common law operate alongside
courts for Islamic law (for both civil and penal affairs) [5] in the
twelve northern states in which Sharia law is applied.
Map
1
Distribution of main ethnic groups in Nigeria
Source: Lamm (2014).
[ 4] Between 1969 and 1989, this share went from 50% to 1%, before going back up to 3% in 1992 (Sébille-Lopez, 2005).
[ 5] The application of Sharia law is rooted in an ancient historic tradition, revitalized in the early 19th century with the establishment of the Caliphate of Sokoto (Usman dan Fodio’s
jihad, see above). It was limited to civil affairs and it is its purview that has been extended to penal affairs starting in 1999. Common right upheld by federal courts always has
primacy over Islamic tribunals however.
4
© AFD / Macroeconomics and Development / May 2015
1. Regional disparity aggravates issues of violence
Consolidating a nascent democracy…
In favour of the 1999 Constitution, the fourth republic of
Nigeria introduced a federal parliamentary system based on
the separation of power and governed by a strong p­ resident.
Along with the 360 representatives of the lower chambers,
the 109 senators, the thirty-six governors of federated
states, the Assembly of each state (which includes twentyfour to forty elected officials), and the councillors of 774
local administrations, the president is elected by universal
direct suffrage for a mandate of four years, renewable only
once. More specifically, officials are elected by a singlemember majority constituency system – more commonly
known as a “winner-takes-all”, or “first past the post”,
­s ystem (Engelsen, 2011). In order to be elected in the first
round of the presidential election, the candidate must
­s imply receive the majority of the votes, in addition to 25%
of the votes in at least two-thirds of the thirty-six states and
the federal capital. This has been the case since 1999. State
governors are elected in the same way – they must obtain
25% of the votes in two-thirds of their constituency.
… in a context rife with corruption
Putting into place a reinforced centralised federal parlia­
mentary system at the same time as a division of regional
boundaries is ripe terrain for the development of ­corruption
in the political economy. Indeed, the political economy in
Nigeria has been characterized by a complex network of
cronyism – be it at the federal level, the state level, or at
other administrative levels. Equitable distribution of the
income from oil and gas sectors is a central challenge.
Allocated oil revenues are often used by governors and
presidents who can never completely be sure of being reelected (Fouchard, 2007). What gives rise to the r­ edistributive
and discretionary character of financial resources is the
inexistence of constitutionally-mandated checks and
­b alances on the budget. At the same time, the oil sector is
rife with corruption. To provide a specific example, the
­p revious president of the Bank of Nigeria and the Emir of
Kano, Lamido Sanusi (who was dismissed in February 2014)
accused the Nigerian National Petroleum Corporation
(NNPC) of having redirected 20 billion USD between
January 2012 and July 2013. [6] According to a 2015 estimation, corrupt practices account for 30% of the cost of all
business in Nigeria (HIS, 2015). Economic indicators
­d istributed by the NGO Transparency International, and the
World Bank, reveal the widespread nature of corruption and
the weaknesses of the administration. Nigeria, in fact, ranks
as the 35 th country with the poorest governance out of a
total of 210, according to 2013 World Bank figures. In the
year 2000 measures were taken to clamp down on such
activity in the public service, and anti-corruption laws were
adopted. These enabled the creation of the Independent
Corrupt Practices Commission (ICPC) and the Economic
and Financial Crimes Commission (EFCC). Nonetheless, the
power of the ICPC is restricted by the fact that deputies and
senators have amended the laws governing the institution: it
cannot press charges and it can only conduct an investigation after an official complaint has been filed in court. [7]
Politics driven by political parties
The gradual changes towards a centralized federal parliamentary system have enabled the representation of political
elites from each individual state, even if this type of
federalism has been ineffective at promoting the
­
­representation of minorities from every region (Fourchard,
ibid .). Since the return to democracy in 1999, Nigerian
political parties no longer lay claims to ethno-regional
­identities, something that is reinforced by the first-past-thepost polling system. They are instead transformed into
political vectors for the candidates in the different elections,
obliging the candidates to forge alliances outside their
ethno-­geographical persuasion. The fact that candidates
must now garner public support has deterred them from
basing their platforms on issues that could bring about
political, ethnic, or religious dissention (Bach, 2006) – at
least, when it comes to one party dominating the entire
political arena. In fact, since 1999 and until just recently
(2015), the People’s Democratic Party (PDP) has been in
power and has dominated Nigerian politics in the sense that
the candidates have found themselves systematically e­ lected
in every round of the elections (in 1999, 2003, 2005, 2007,
and 2011), and/or the majority in the assemblies (55.5% of
seats in the lower chambers and 65% in the higher ­chambers
in the case of the 2011 elections). The PAP generally follows
an implicit rule that the presidency will be occupied first by
a president from the north (which is primarily Muslim),
­followed by one from the south (which is primarily Christian).
In addition to this internal practice are other applications of
the federal doctrine, such as the inclusion of diversity in the
composition of the federal cabinet (in that there must be at
[ 6] An audit by PriceWaterhouseCoopers, certain conclusions of which have been made public, estimates that a minimum of 1.48 billion USD have been embezzled by the NNPC.
[ 7] For instance in March 2013, a former governor of the state of Bayelsa was pardoned by president Goodluck Jonathan after having been found guilty of corruption.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
5
least one minister from each of the thirty-six states), the
cabinet of governors, the presidential nominees, the
­composition of the armed forces, and the federal administra­
tions. This constitutional obligation is extended to each
state in the federation, and a federal commission is there to
ensure that the principle is followed. The federal doctrine is
based upon differences between what constitutes native
and non-native Nigerian citizens within each state
(or ­locality) (Bach, ibid .). However, the standard definition is
based on bloodlines, and not on residence (though a constitutional amendment adopted in 2005 made allowances for
ten-year residents). The simple fact that in many cases it is
impossible to prove what one’s state or region of origin
truly is means a significant number of people claim to be
stateless. They are thus excluded from the process of designating their government. Finally, the number of people who
have been displaced because of the violence of Boko Haram
in the three north-western states – which is estimated to be
approximately 1.5 million – adds to the proportion of
“­s econd-class” citizens. [8]
Electoral periods are systematically troubled
by violence
Between 1999 – when the country returned to a regime of
civil government in which parties were determined by
democratic vote – and 2015 – the date on which the
­e lections were peaceful –, elections in Nigeria have been
associated with violence. Historically, violence during
­election periods was orchestrated by the parties themselves, who would recruit a whole range of subcontractors,
including unions, political entrepreneurs, militias, associations, chiefdoms, and religious organizations (cf. Fourchard,
2007). These form an integral part of political strategy:
­p arties recruit gangs (often by way of intermediaries such as
entrepreneurs) to promote violence and extort money from
citizens by way of racketeering, thereby ensuring the party
of a source of revenue throughout the campaign. The
spring 2015 elections were an exception to the rule that
such activities tend to accompany the polling process – be it
through intimidation, controversy around ballot counts, or
that the number of actual ballots that exceeds the number
of people in the constituency, such as in 2007, for example.
Violence between groups of rivalling political interest, or
between the police and members of the opposition, is not
uncommon. Every election is followed by a number of court
appeals by the opposition, contesting the results. Finally, no
measures are taken to limit or to regulate the procedures of
financing elections. Common are the contributions made by
certain extremely wealthy people who are able to draw
upon personal resources, or those of the state, to finance
election campaigns or to support certain candidates. [9]
… Particularly due to the mobilization
of ethnic and religious sentiment
Despite the fact that the 1999 Constitution allows a leader
to serve two successive mandates, the PDP adheres to a
tacit agreement to alternate the presidency between the
north and the south. However, tension mounted when in
August 2013, Goodluck Jonathan – a Christian from the oilproducing region in the south Delta – announced his
­i ntention to seek renewal in the 2015 elections. Deep-seated
differences in opinion began to weaken party solidarity, and
led several members (of whom seven were members of the
state) to join forces with a coalition of four opposition
­p arties: the All Progressives Congress (APC). Formed in 2013,
the party unites Christians and Muslims, despite the fact
that the former fear that the latter may have more i­ nfluence.
Muhammadu Buhari, a general from the north was thus the
APC candidate during the primaries, before being elected
president in March 2015. A Muslim of Fulani ethnicity, he had
already been president once before, following a coup d’état
in 1983. Nigeria’s political landscape is thus moving towards
a two-party system that is likely to put an end to the hegemony of the PDP. In fact, following the last elections, the
composition of the two assemblies is for the first time equal
(225 seats for the APC, and 125 for the PDP, in the lower
chambers; 60 seats for the APC, and 49 for the PDP, in the
Senate). Such changes have been accompanied by the use of
ethnic and religious belonging as tools to foment political
sentiment in the general election campaigns of 2015
(International Crisis Group, 2014).
Towards the end of the democratic transition
that began in 1999
The results of the March 28 th, 2015 elections were a turning
point for the young Nigerian democracy, because they
resulted in the election of the opposition party candidate,
Muhammadu Buhari, in a context of very little violence.
[ 8] This political management of differentiated citizens is inspired by British rule, where it was used starting in 1911 – in each town of the former colony, certain neighbourhoods
were reserved to non-natives and equipped with specific municipal institutions. There has been no equivalent of such a policy in French West Africa (Fourchard, ibid.).
[ 9] According to a former programme manager at the International Foundation for Electoral Systems, in Washington, investing in politics earns higher yields that investing in the
economy (source: Jeune Afrique, February 2015).
6
© AFD / Macroeconomics and Development / May 2015
1. Regional disparity aggravates issues of violence
This was unlike the previous elections in 2007, 2011, and 2013.
Goodluck Jonathan, the president at the time, recognized his
defeat and stepped down even before the Independent
National Electoral Commission (INEC) c­ onfirmed the results.
He saluted the new president, who was inaugurated on May
29th, 2015. Such a victory of the opposition over the party
which has been in power since 1999 was made possible by the
APC coalition, which united the opposition parties into one
single candidacy. Another factor leading to such a defeat was
the model of governance in neighboring Lagos (whose population is 15 million) for fifteen years prior. The governing body
there is an opposition party, which has, in a way, paved the
way for political alternation. Such a change had not occurred
in the country since the democratic turn in 1999.
A rather clean-cut victory from the first round onwards was
had by Buhari, a Muslim from the north of the country. It
demonstrates that the sentiment of belonging to a united
federation can transcend ethnic and religious differences. The
secession of Biafra combined with the increase in risk that
Boko Haram represents have resulted in the development of
a sentiment of national unity in the majority of the population. People from the north have indeed voted largely in favor
of the new president, and those of the south have voted in
favor of Jonathan, the candidate from the south. Yet those of
the centre and the south west (Yoruba regions) have in large
part chosen the new president from the opposition, even if
he does not share their ethnic or religious background.
The INEC, which proved itself over the election process of
March 28 th, 2015, made the decision to change the date of
the elections that were to be held on February 14 th, in order
to better distribute the new electoral cards. Announcements
of the results of the elections were met peacefully, and the
president who stepped down was not reluctant to recognize
his defeat – even before the commission communicated the
official poll counts.
1.2. Dynamic economic growth
is still accompanied by exclusion
From the end of the Biafran War onwards, economic growth
in Nigeria has been dynamic, but volatile. After the changes
in the productive structure of the economy (see Part 2),
growth stabilized from the end of the 1990s onwards. The
progression that followed enabled a rise in the amount of
wealth per habitant, which from the beginning of the year
2000 more than doubled in real terms. It was evaluated at
more than 3,000 USD per person in 2013, which has
­c lassified Nigeria as a lower medium income country (LMIC).
Nonetheless, growth is uneven, and income is unequal. In
fact, the country is wrought with poverty: 62% of the population lives under the international poverty line (1.25 USD
per day). [10] In comparison with other countries with the
same level of income, the number of people in poverty in
Nigeria is among the highest (the average ­p overty rate at
1.25 USD per day among LMICs was 22% in 2011). The
­p roportion of Nigerians who live under the poverty line has
changed very little over the last decade, despite the
in­c reasing level of economic activity. Such is one of the
clearest indicators of the weak level of inclusion in the
­country’s growth: despite the fact that national wealth
­t ripled in real terms from 2000 onwards, the poverty level
was only reduced by a fraction (61.8% in 2004). At the same
time, the Gini coefficient, which reflects inequality in revenues, was 43 in the year 2010. [11] Between 2004 and 2010, it
even worsened. Significant income levels in Nigeria are
reserved for a lucky few: 20% of the richest households
account for a whopping 49% of the gross national income
(GDP), while 20% of the poorest account for only 5%.
Such inequality in income levels is a reflection of regional
differences: poverty rates in the north are at 72% and 52%
(with a poverty line of 1.25 USD per day). Disparity is the
result of uneven economic development, in which activity is
concentrated in just three main regions. These regions are
Abuja (the administrative capital, in the center of the
­country), Lagos (the economic capital, in the south west),
and Port Harcourt (the oil-producing region, in the south
east). Generating 32% of the total gross national product,
they have generated a significant discrepancy in income
levels. The differential between the northern and the
­s outhern states (aside from the capital of Abuja), is 2.8. [12]
Though the states in the south are the most populated,
wealth in the country is also concentrated there. Differences
between states have been evaluated on a scale of one to
three, between the states in the north and those in the
south. Over time, poverty rates in the north have evolved
un­favorably, while poverty rates in the south have decreased
(cf. World Bank, 2014). Maps 2 and 3 present the disparities
and trajectories of growth according to region.
[ 10] According to the World Bank, the poverty headcount ratio at 2 USD a day (in PPP) amounted to 82.2% of population in 2010.
[ 11] The more the Gini index is close to 100, the more income inequalities are high.
[ 12] The most recent dataset on state GDP dates from 2010. We will only refer to state GDP in relative terms and not in absolute terms given that the March 2014 revision of the
base year has changed this nominal dataset.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
7
Map
Map
2
3
Poverty rates in Nigeria
(poverty line at 1.25 USD a day in PPP)
Geographical distribution of wealth
per capita in Nigeria (in USD, 2010)
North West
74,2 %
North West
75,4 %
North Central
65,8 %
South West
47,9 %
South South South East
54,9 %
53,3 %
Sources: NBS (Harmonized Nigeria Living Standards Survey [HNLSS] 2009—2010)
and AFD.
Sources: Nigeria’s National Bureau of Statistics, AFD.
Compounding the problem of economic disparity are social
issues such as education (Map 4). Access to elementary
school in Nigeria, which has a primary education rate of
64%, is lower than in other Sub-Saharan African nations
(whose rate is 76%). Furthermore, the north differs from the
remainder of the country by more than ten percentage
Table
1
Primary and secondary school enrolment rate (net, in %), healthcare expenditures
(in % of government budget) and life expectancy at birth (in years)
Nigeria (2010)
LMC (2012)
Sub-Saharan Africa (2012)
Primary school enrolment rate
64 (2010)
87 (2012)
77 (2012)
Secondary school enrolment rate
26 (2010)
58 (2012)
32 (2012)
Healthcare expenditures
6.6 (2012)
8.7 (2012)
10.8 (2011)
Life expectancy at birth
52.1 (2012)
66.2 (2012)
56.4 (2012)
Source: World Bank, author’s calculations.
8
points (See Table 1). Children in rural areas are not registered
in schools nearly as often as children in urban areas. In 2013,
the education rate in rural areas was estimated at 51.8%, in
contrast to the rate in urban areas of 71.2% (see USAID et al .,
2013). During the harvest season, girls do not often go to
school (Renouard, 2010).
© AFD / Macroeconomics and Development / May 2015
1. Regional disparity aggravates issues of violence
Regional disparities in terms of education are related to
unemployment rates, which are much higher in the north.
Indicators of access to health services also reflect the weak
economic and social performance in the country. Compared
to countries with the same level of income, and the rest of
the African continent, public health expenditures are significantly lower in Nigeria (See Table 1). The regions in the
north are the most disadvantaged in terms of access to
health care and quality of treatment. Reviewing the rate of
infant mortality clarifies this point quite explicitly: 66 to 89
deaths per 1,000 births in the northern regions, versus 58 to
82 deaths per 1,000 births in the southern regions. Taking
into account the significant levels of population growth
(2.8% in 2013), Nigeria is likely to have a population of more
than 250 million people in 2050. In such a context, socioeconomic development is fundamental.
Map
4
Literacy rates in Nigeria (2013)
North West
47,2 %
North West
44,1 %
North Central
68 %
South West
70 %
South South
74,9 %
South East
81,4 %
Sources: Nigeria Demographic and Health Survey, 2013 and AFD.
1.3. Historical violence and tensions that
aggravate the socio-political landscape
Ever since independence in 1960, Nigeria has undergone
periods of violence. Tensions stem from the geographical
and ethnological specificities of the country: first of all, it is
physically large (twice as large as France), with a very diverse
population (more than 250 ethnic groups call it home, with
a relatively equal proportion of Christians and Muslims),
with physical geographical characteristics that coincide with
ethnic and religious boundaries, and with significant oil and
gas reserves in the south west. If it is the exploitation of such
reserves that has been the primary fuel of development in
Nigeria, it is unequal distribution of income and the increase
in the divide between haves and have-nots that have sowed
the seeds of conflict. Such conflicts include Biafra and the
Movement for the Emancipation of the Niger Delta (MEND)
in the delta region, and Boko Haram in the north. Sentiments
of ethnic and religious belonging have only exacerbated the
tension that stems from the issue of unequal distribution of
economic resources.
Polarization of tensions in the Niger Delta,
in the south of the country
More than one million casualties resulted from the Biafran
War, which was fought from 1967-1970. The source of
­conflict was the centralisation of federal power against the
Igbo minority, who lived east of the Niger Delta, in the oilrich regions. The secession of three states in the east of
Nigeria led to an armed conflict and a blockade, which
caused a series of famines.
Later, several other forms of violence sprung up around the
central issue of income distribution in the same oil and gas
regions, and it was the local populations that stood to gain
from the conflict. One example of this was the violence that
arose from disputes about oil in the Niger Delta between
1999 and 2004, in which more than one thousand people
perished (Hamilton et al ., 2004). The issue was industrial
pollution and the devastating consequences that it has for
human health (most notably, the flaring of excess gas and
the sentiment that local ethnic groups had (Ijaws and Ogonis
in particular) of being victims of economic injustice. When
MEND (a militant movement that formed in 2004), set out
to fight such issues, tensions increased. Kidnappings of
­e xpatriates with demands for ransom took place, bombs
were set off, pipelines were sabotaged, cargo ships full of
crude oil were hijacked… Occurrences of violence ­m ultiplied
from 2007 onwards, as authorities attempted to quell
MEND’s uprising (including the series of military actions
that they pursued in May 2009). In 2009, an amnesty agreement was signed, which smoothed over the tensions and set
out to undertake a number of initiatives that would ­b etter
allocate the revenues from the oil and gas industry: for
example, payment of royalties in the form of 10% of the
profits of joint ventures from oil transactions; i­mprovement
of social conditions for the inhabitants of the Delta, such as
the construction of schools, hospitals, and roads. At the
same time, under the pressure of well-organized and
­i nfluential unions, oil companies preferred to resolve i­ nternal
social politics, calling upon subcontractors and local agents
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
9
to implement local development initiatives around their production sites (Giraud and Renouard, 2010). Despite the
decrease in number and intensity of conflicts since the
amnesty was signed, violence has continued along with the
increase in the number of pirate activities perpetrated by
MEND, including the theft of oil from offshore rigs. Every day,
nearly 300,000 barrels of crude oil are stolen from the ocean
off the coast of Nigeria – in short, the equivalent of 20% of
national production (see Beyond Ratings, 2015).
A cycle of violence in the north brought
about by Boko Haram and army repression
In the north west of the country, it is the terrorist group called
Boko Haram that is antagonistic towards the state and its representatives in general, and which gains popularity from its
relationship to social revolt. A Salafist movement, it was
­created in 2002 following the scission between its founder,
Mohamed Yusuf, and the Izala movement, which appeared in
1978. Recruited are those who undergo economic ­hardship,
for whom an Islamic political agenda is nourished by the disillusionment that has accompanied the transition to democracy
from 1999 onwards. According to Yusuf, it is precisely because
Sharia law has been inaccurately applied (most specifically, in
the state of Borno), that inequality and social injustice have
persisted, and in some cases, increased.[13]. Until 2009 (see
below), the actions of the sect were focused on political
­confrontation, and their attacks were directed to govern­
mental organizations, government ­
representatives, and a
­certain part of the population who were considered to be
“bad Muslims” (who were the most fiercely targeted victims).
Repression by armed forces in 2009 caused the death of
more than 800 members of the movement in addition to
the arrest and filmed execution of Yusuf. Since, and with the
assumption of power by Abubakar Shekau, the movement
has become frenetically violent. [14] Over time, their
­geographical terrain has shifted outside the borders of
Borno, and the institutions that they have explicitly t­ argeted,
such as prisons, banks, mosques and churches, and civil
­p opulations (primarily Muslim and Christian) have brought
about considerable numbers of human fatalities. A s­ pecificity
of the Boko Haram movement as regards its precursors is the
number of suicide attacks it engages in (Pérouse de Montclos,
2012), and the vicious repression of the army, which together
have caused many deaths. Since 2006, more than 80,000
people have perished in attacks perpetrated by Boko Haram
(see Graph 1). Brutal initiatives on behalf of Nigeria’s armed
forces have taken place, which have reinforced the status and
legitimacy of the movement, seen by many as a protector of
the population (Pérouse de Montclos, 2012 a ). The fact that
Nigeria’s army is incapable of stopping the progression of
Boko Haram is due to two important factors. The first is that
the army has suffered from appropriations of the budget:
despite the 5.8 billion USD levied in 2014, only a few hundred
million USD were actually used to finance operations on the
ground (Pérouse de Montclos, ibid .). The second is a corollary of the first: the army has been beset by mutinies and
internal tensions, which have occurred between soldiers and
their hierarchy, and which are also linked to both a lack of
proper equipment and to repeated malfunctions.
Finally, another type of violence has been observed in the
Middle Belt (the central regions). It is linked to the competition
for access to land – most significantly, between farmers and
livestock breeders (the first being primarily Christian and the
second being primarily Muslim). Ethnic and religious differences
have been mobilized as the base of the conflict, yet fundamentally, it is land rights that have been at the heart of the matter.
The regional environment is also exposed to border tensions. Historically, and after the wave of African countries
achieving independence, all the armies of the region have
fought with Nigeria at a time or another, except for Niger’s:
interferences of Nigeria during Chad’s civil wars at the end
of the 1970s, 1994 conflict with Cameroon for a disputed
territory next to the oil-rich Bakassi peninsula (Pérouse de
Montclos, 2015). Today, the ripple effects of Boko Haram are
visible at the borders of Nigeria’s neighbouring counties.
The cultural and ethnic similarities, as well as the porosity of
borders, explain why Boko Haram is not limited to its Borno
state stronghold but also among the Adamawa peoples of
Cameroon and Kanem-Borno in Niger and Chad. The ramifications of the terrorist group towards the jihadist group
of the Sahel seem limited however. The internationalization
of the response to the terrorist threat, with the intervention
of Chad, Cameroon, and Niger, has contributed to extend
the scale to the Boko Haram movement and driven up
­b order tensions (Pérouse de Montclos, 2015). The successful
coordination of armies since February 2015 has nevertheless
made it possible to push Boko Haram back.
[ 13] Quoted from Pérouse de Montclos (2012): “In his book, Mohamed Yusuf most calls for disobedience and rising up against tyrannical and corrupt Muslims who do not properly apply Sharia law. There is no question of killing Christians or Jews.”
[ 14] Since 2009, Boko Haram has become fragmented with the creation of Ansura, a movement that condemns attacks on Muslim civilians.
10
© AFD / Macroeconomics and Development / May 2015
1. Regional disparity aggravates issues of violence
Map
•The continuing levels of extreme violence by terrorist organiza-
5
tion Boko Haram, though the victories claimed since February
by the military coalition formed by Nigeria, Chad, Cameroon,
and Niger, and the recent commitment of Nigerian Armed
Forces, seem to be able to limit the risk of a carry-over to the
rest of the country and neighbouring countries;
Boko Haram’s violence
JANUARY 2015
2 146 VICTIMS
SEPTEMBER 2014
1 319 VICTIMS
•In case tensions at the borders of the four concerned
JULY 2009
700 VICTIMS
Sequence of Boko
attacks and number
of victims
per month since 2009
2009-2010
2011-2012
THE CYCLE OF VIOLENCE IS TRIGGERED THE MOVEMENT RADICALIZES AND EXPANDS
2013
ON THE VERGE OF A NEAR CIVIL WAR SITUATION?
countries continue, risks of regional conflicts cannot be
discounted in the long-term. The new president,
Muhammadu Buhari, will give priority to the fight against
Boko Haram and will probably continue the successful
military cooperation initiated with Nigeria’s neighbours;
2014-2015
•The uncertainty of the electoral process seems to have
THE BLUEPRINT FOR A BLOODY CALIPHATE
Source: Grandin et al. (2015).
Violence is pervasive in Nigeria, which is one of the most
violent countries in the world (20 homicides per 100,000
inhabitants in 2012, see Graph 2). Given this turbulent
­s ituation, several factors seem to be particularly negative for
the stability of Nigeria’s socio-economic environment:
Graph
been largely checked thanks to a peaceful presidential
ballot on 28 March 2015 that confirms political alternation at the head of the federation;
•Finally, the potential questioning of the amnesty programme for MEND militants by the new president may
lead to renewed tensions and violence in the Delta.
Graph
1
Number of fatalities in violent public events
in Nigeria between 2006 and February 2015
2
Annual homicide rate for 100,000 people
(2012, international comparison)
25 000
25
20 000
20
15 000
15
10 000
10
5 000
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(Feb)
0
Nigeria
Sub-Saharan
Africa
LMIC
World
Sources: Nigeria Watch.
Source: World Development Indicators (WDI), author’s calculations.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
11
2. A dynamic economy but dependent
on the oil sector
2.1. Sustained and less volatile growth
Starting in the early 1970s, at the end of the Nigeria Civil war,
or Biafran War (1967-1970), Nigeria’s growth path was highly
dynamic, concurrent with a significant rise in oil ­p roduction,
one of the country’s major resources. The ­e conomic history
of Nigeria following independence, and then for more than
three decades, is thus intimately linked to oil. [15] Economic
growth maintained a fairly robust pace between 1970 and
2013, clocking in at 4.4%, but has experienced unbalanced
periods (Graph 3). The volatility of economic growth up to
the 2000s shows the extent to which Nigeria’s industry is
exposed to international oil prices.
Graph
3
Real GDP growth rate
and average annual growth rate (in %)
Note: Data from 1980 onwards has been retropolated by the
International Monetary Fund (IMF) following the GDP rebasing
calculations, as the updated dataset starts in 2010.
After achieving independence in 1960, Nigeria put in place an
import substitution policy – notably with initiatives to d­ evelop
the agrifood and textile industries and an emphasis on heavy
industry (oil, gas, cement, steel). The fourfold increase in oil
prices in 1973 put the finishing touches on the full shift from
this conventional accumulation model based on agricultural
exports to the dominance of the oil industry (Bach et al.,
1988). Since then, and up to the 2000s, Nigeria’s economic
growth has varied according to international oil prices and
does not seem to be particularly resilient to external shocks.
The emergence of a service economy unrelated to the oil
­sector at the end of the 1990s and particularly since the early
2000s has nevertheless made it possible to stabilize the growth
path. The average annual growth in the previous decade is
evaluated at 6.8% and seems much less erratic than in the past
(with a standard deviation of 2.2 between 2005 and 2013,
down from 7 between 1980 and 2000). The v­ olatility of the
growth path is now comparable to those of emerging
­economies such as Brazil, India or South Africa (Graph 4).
Graph
30
4
Standard deviation of the real growth rate
of GDP between 2005 and 2013 (in %)
25
20
3
15
10
2,5
5
0
2
-5
1,5
-10
-15
1
-20
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: WDI and World Economic Outlook (WEO); author’s calculations.
0,5
0
Nigeria
SSA
LMIC Indonesia Brasil
India
South Afr.
Sources: WDI and WEO; author’s calculations.
[ 15] Oil production in Nigeria started in 1958 – at a modest rate of 6,000 barrels per day, to be contrasted with the present production of upwards of 2 million barrels per day –
following the discovery of major oil deposits around the Niger Delta by Shell and BP (Sébille-Lopez, 2005).
12
© AFD / Macroeconomics and Development / May 2015
2. A dynamic economy but dependent
on the oil sector
The revision of Nigeria’s national accounts in March 2014
revealed that the country had become Africa’s largest
­e conomy and led to nominally revaluating GDP by nearly
90% in 2013 (up to 522 billion USD in current prices, see
Section 2.2 for more details). This has resulted in new, higher,
per capita income figures, evaluated at more than 3,000 USD
in 2013, and has achieved its goal of making Nigeria part of
the lower middle income countries (LMIC) group. [16] Nigeria’s
sustained growth path has thus enabled per capita income to
increase substantially, more than doubling in real terms since
the beginning of the decade starting in the 2000s decade
(Graph 5). Economic growth has partly enabled Nigeria to
converge with the average of the world’s economies since
then (Graph 6). Nigeria’s economy has grown at a less sustained rate than other countries of the same income bracket
but nevertheless grows faster than other African economies.
Graph
5
Graph
6
GDP per capita
(PPP, real terms, % of average GDP per capita)
Nigeria/MIC
Nigeria/SSA
Nigeria/World
180
160
140
120
100
80
60
40
20
0
1990
1994
1998
2002
2006
2010
Source: WDI, author’s calculations.
2.2. A more diversified economy but with
PGDP per capita index
(USD, PPP, real terms, base 100 in 1980)
serious infrastructure shortcomings
350
2.2.1. A growth model that has changed since 1990
300
The update in national accounts statistics, the results of
which were published in March 2014, hadn’t been carried
out since 1990. This revision highlights the structural changes in the Nigerian economy between 1990 and 2010 (the
base year of the new national accounts) that are important
to describe and to compare. The statistical retropolation of
historical data that will make the two “base years” converge
(1990 and 2010) has still not been fully achieved by the
National Bureau of Statistics (NBS) at the time of writing this
report (and dates back to 2010).
250
200
150
100
50
0
1980
1984
1988
1992
1996
2000
2004
2008
2012
Source: WDI, author’s calculations.
Despite the strong increase of GDP per capita at a national
level, regional growth trajectories seem to have progressed
in very distinct ways. Map 2 illustrates the unbalanced
­character of wealth creation in Nigeria. The development of
the three major economic centres of Abuja (the administrative capital in central Nigeria), Lagos (the economic capital,
in the south west) and Port Harcourt (oil region, in the south
east) has brought about a remarkable polarization of
incomes, with a contribution of over 32% of GDP. As a
result, although the southern states are the most populated,
per capita income is also much higher there, with records
showing incomes in southern states to be three times higher
on average than in northern states, see Part 1). [17]
Table
Sector
2 GDP sector composition
1990
2010
Oil and gas
35.8
15.5
Agriculture
31.5
24.0
Industry
(excluding oil)
7.7
10.3
25.0
50.2
Services
Source: NBS, IMF, author’s calculations — Data for1990 is from IMF’s Selected Issues
dated 15 September 1998.
[ 16] With a per capita income of 1,280 USD in 2011, Nigeria was already a part of this group of countries but was borderline with low income countries (1,025 USD).
[ 17] It must be noted that the macroeconomic impact of Boko Haram’s activities in the four most affected states (Yobo, Borno, Adawama, Gombe) is probably relatively low as
these states account for less than 8% of total population (according to the 2006 census) and 4% of total GDP.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
13
The structure of Nigeria’s economy has changed substantially – a fact that is startlingly clear in the above table. In
1990, the (primarily extractive) oil industry was the d­ ominant
sector and amounted to 36% of GDP. This share is still
admittedly high, but already at a lower level than in the
1980s (when it amounted to around 50% of GDP – IMF,
1998). The decline that began at the end of 1980s – notably
following the implementation of the IMF’s structural adjustment programme in 1986 [18]– then continued, with a
decrease of the share of the petroleum sector in the GDP
by nearly half, in 2010 (15.5% of GDP). At the same time, the
income of activities linked to the oil industry have fuelled
the growth of the service economy (and construction – see
Bach et al. , 1988), which has become the largest sector of
the economy and which amounts to more than 50% of
GDP. This has to be qualified for two reasons however.
Firstly, certain service activities existed in 1990 but were
either poorly accounted for or simply forgotten (such as
certain activities in relation to healthcare, information and
communication technologies, scientific and technical services). Thus, according to the IMF, had the service economy
that had previously existed been better accounted for,
Nigeria’s economy would not have registered the very fastpaced growth rate of 6% between 1990 and 2013 (retropolated, in real terms) but rather a slower pace of 3 to 3.5%
since 1990. Furthermore, the relative weakness of the oil
and gas extractive sector compared with its apex historical
levels must be qualified, as it does not take into account the
service economy associated with it – and these indirect
effects from the oil economy are difficult to evaluate
­a ccurately.
A thriving service economy
The recent revision of national accounts has revealed that
the economy is more diversified than it has been in previous
decades with the substantial and dominant contribution of
non-oil activities to total growth (see Table 3 and Graph 7).
This had already been observed before the rebasing calculations, since the end of the 1990s, but the introduction of
new service activities (entertainment and recreation,
research, patents, etc.), trade, and agrifood have accordingly
impacted the contribution of these sectors to GDP growth.
Table
3 GDP sector composition in 2012 (in %)
Sector
Former base year
(1990 base)
New base year
(2010 base)
Oil and gas
37.0
15.8
Agriculture
33.1
22.1
Manufacturing
1.9
7.4
Construction
1.3
3.1
Services
24.0
42.3
Other
2.7
9.3
Source: NBS, author’s calculations.
Graph
7
Contribution of sectors to GDP growth in 2013
(real terms, in %)
Source: IMF (Article IV Consultation).
More precisely, the service activities that have expanded
rapidly since the early 2000s are telecommunications (8.3%
of GDP in 2013) – in connection with the development of
mobile phone services –, real estate (7.7% of GDP), and
entertainment – film, music and other creative industries
account for 2% of GDP. The lesser contribution of the agricultural sector to economic growth is consistent with the
minor changes in poverty rates in rural Nigeria (see Part 1).
Thus, the analysis of the structural changes in Nigeria’s
economy highlights a major issue: the sustained growth of
(mostly urban) services activities, and the relative decline of
economic activities in rural areas, confirms the seemingly
inevitable polarization of active incomes. Authorities are
considering the implementation of public policies to help
develop the agricultural sector and the agrifood industry,
[ 18] The Nigerian government has implemented a set of recommendations by the IMF in 1986: de facto devaluation of the naira, liberalization of imports, and removing subsidies
on petroleum products.
14
© AFD / Macroeconomics and Development / May 2015
2. A dynamic economy but dependent
on the oil sector
based on comparative advantages, within a plan for industrial development, [19] as these sectors have very strong
potential for development according to the IMF. However,
both economic growth and the attempts to diversify
Nigeria’s economy are thwarted by structural constraints
that are linked to the level of education and regional disparities in the matter – which weigh on the productivity
gains on already existing industries – as well as constraints
due to the lack of infrastructure (see Section 2.2.2). The
decrease in oil revenues due to the sharp fall in oil prices
(which decreased by 50% between June 2014 and February
2015) has forced the federal government to defer social
expenditures (including education) as well as certain investments (see Part 3).
The oil and gas sector remains pivotal
In spite of the relative decrease of the petroleum industry in
national wealth creation, it is still essential for Nigeria and
represents more than 70% of the federal government’s
­f iscal revenue, and more than 90% of goods exports. Many
associated services are also dependent upon it. The oil
Graph
8
Oil production (million barrels per day)
and oil prices (spot price of Brent crude oil, USD)
3000
2500
Oil Production (million bpd, left scale)
Brent price (USD)
120
100
d­ rilling industry, which accounts for the bulk of the sector
due to a very low refining capacity, had generated a market
value of 55 billion USD per year between 2000 and 2013
(with an oil price assumption of 65 USD per barrel).
The ­federal government levies 55% of this value, the b­ alance
covering investments, operating costs and cash flow
­f inancing of all market participants. [20]
As a result, given the country’s energy resources – which are
primarily oil and gas –, Nigeria has a substantial potential for
development. The oil and gas reserves that are considered
proven represent respectively 40 and 150 years of current
production levels and several centuries in both cases at current levels of domestic demand. [21] Nigeria therefore ranks
among the top producers and exporters of fossil fuels.
Proven reserves and production sites are mostly concentrated in the Niger Delta and the region of Port Harcourt, as
well as the Gulf of Guinea (onshore and offshore sites).
Since the beginning of the 1970s, oil production has been
stagnating at 2 to 2.5 million barrels of crude per day (bpd),
which is significantly less than the estimated potential of
4 million bpd, according to Beyond Ratings.
Table
4 Estimates of thefts and losses for
different oil producing countries (2011)
Country
Thousand of
barrels per day
Principal method
Colombia
0,4
Theft from Ecopetrol pipelines
Indonesia
1
Theft from Pertamina pipelines
in South Sumatra
2000
80
1500
60
Iraq
10
Smuggling from Kurdistan into
Iran and (possibly) Turkey
1000
40
Mexico
10
500
20
Theft of condensate from
pipelines
Russia
150
Theft from Transneft pipelines,
esp. in Dagestan
Nigeria (2012)
250
Theft from transfer pipeline
0
0
1980 1984 1988 1992 1996 2000 2004 2008 2012
Sources: BP (formerly British Petroleum) and the International Energy Agency (IEA);
author’s calculations.
TOTAL
421,4
Source: IMF (from the 2014 Article IV Consultation).
[ 19] The development of agricultural and agrifood products laid down by this plan are, for instance, palm oil, rubber, sugar, and rice (Nigeria Industrial Revolution Plan, 2013-2017).
[ 20] Onshore production is organized under the form of joint venture partnerships between the national company NNPC (Nigerian National Petroleum Corporation) and multinationals (Shell, ExxonMobil, Chevron Total, Agip, etc.). The share of onshore production within the total tends to be decreasing while offshore drilling is increasing – offshore
drilling is subject to Private Sharing Contracts (PSC), which are less profitable for the Nigerian government (AFD, 2008).
[ 21] Industry estimates for ultimate resources of crude oil (i.e., the sum of recoverable resources from the past, present and future) to about 100 billion barrels, i.e., around 70
billion barrels still available given that about 32 billion barrels have already been recovered to date. For gas, reserves are estimated at 55 billions of barrel of oil equivalent, with
3.5 ­billion boe having been extracted to this day (Beyond Ratings, 2015).
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
15
9
Absolute and relative performances
of the power generation sector (in %)
Utilization rate (left scale)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2003
10%
0%
2002
20%
10%
2001
30%
20%
2000
40%
30%
1999
50%
40%
1998
60%
50%
1997
70%
60%
1996
80%
70%
1995
90%
80%
1994
100%
90%
1993
100%
1992
Rich in energy resources and arable land, Nigeria boasts an
underexploited potential for development. The lack of
infrastructure in Nigeria is a major limiting factor that
­inhibits economic growth and socio-economic development. The most fundamental constraint is probably the
deficient power generation sector, whose limited ­p roduction
capabilities and daily power outages inhibit economic
growth and the diversification of the manufacturing sector.
Indeed, electricity providers presently deliver between
4,000 and 5,000 MW, to be compared with an installed
capacity of nearly 9,000 MW. [22] Such a low production
capacity utilization rate is primarily due to a lack of inputs
(especially gas) fed to the electrical infrastructure (Graph 9).
The production capabilities of the power generation sector
are therefore not capable of meeting the demand for
­e lectricity (which is at least twice as high). Due to the lack of
a proper distribution network, more than 50% of the population has no access to electricity. At the same time, the
­s upply of electricity is of low quality as Nigeria shows the
highest values in the world in terms of the number of power
outages (twenty-five per month on average in 2007) and
their duration (more than eight hours on average). In this
context, 75% of companies consider the supply of ­e lectricity
to be a major constraint and 25% of the country’s total
electricity production was actually self-produced in 2013.
The quality of the supply of electricity in Nigeria is among
the world’s worst: the country ranks 141 st among 144
­countries in 2014 according to the World Economic Forum
(Graph 11). Yet, Nigeria’s gas resources are very abundant
Graph
1991
2.2.2. Lack of infrastructure is a major constraint
for potential growth
(estimated at 55 billion barrels of oil equivalent). The use of
these ­resources – and the largely underdeveloped potential
for natural gas liquefaction and hydroelectricity – combined
with the building of major infrastructure projects in
e lectricity p­roduction and transmission are key to
­
­a ccelerating the country’s growth path and helping diversify
the ­m anufacturing sector.
1990
This gap between actual oil output and potential oil output
is due to disruptions on the production sites – illegal oil
siphoning on onshore sites by the population of the Niger
Delta, paramilitary operations on offshore sites – and the
instability of the contractual framework. Lack of t­ ransparency
and operational management is also an issue. Indeed,
according to IMF estimates, losses and thefts have represented between 2003 and 2012 around 150,000 – 200,000
barrels per day – which is the highest amount of losses
among oil producing countries (see Table 4; IMF, 2014).
These losses amounted to 150,000 barrels per day in 2014
– yet are down from 250,000 in 2012 –, which represents a
loss of tax base for the federal government of no less than
5.4 billion USD (assuming an average Brent price of 99 USD
over the course of 2014).
World ranking – in percentile (right scale)
Source: Beyond Ratings calculations, based on Enerdata figures.
Source: Enerdata, Beyond Ratings calculations.
At the same time, refining capacity is low, despite the fact
that Nigeria produces light crude oil with low sulphur content, which is much easier to refine. Refining capacity is
capped at 440,000 bpd (for a production of around
2.5 ­m illion bpd). The level of utilization of operable refinery
capacity is among the world’s lowest at only 20%, and
Nigeria ranks among the 10% most inefficient, or even
“damaged”, countries in terms of oil refining (Beyond
Ratings, 2015). This rate has been continuously declining
during the past two decades and is the result of distortions
linked to subsidies on oil prices (Graph 10). Indeed, the low
prices of refined products on the domestic market require a
large flow of subsidies on behalf of the federal state to the
refining operators in order to maintain a level of product
that is in line with capabilities and demand. However, the
strong increase of oil prices on the international markets
since 2003 has multiplied the required amount of public
subsidies by ten, which has had the consequence of ­g radually
reducing the volumes of refined petroleum products for the
domestic market and accelerating the obsolescence of
refineries. Added to that, there is a powerful import lobby
that has no interest in having the three existing refineries in
[ 22] According to the Federal Ministry of Power, the power generation sector is projected to produce about 20,000 MW in 2020, thanks to independent power producers (IPP).
16
© AFD / Macroeconomics and Development / May 2015
2. A dynamic economy but dependent
on the oil sector
operation, so it becomes clearer why Nigeria finds itself
­h aving to import 80% of its domestic needs in terms of
petroleum products, imports that remain subsidized by the
federal government.
Graph
10
g­overnment body ICRC (Infrastructure Concession
Regulatory Commission) to finance this type of project, or
to reform the electricity sector (implemented in 2011), with
the privatization of electricity generation and distribution,
due to low fiscal capacity for the promotion of public
investments (see Part 3).
Absolute and relative performances
of the refining sector (in %)
Graph
100
100
90
90
80
80
70
70
60
60
50
40
30
30
20
20
10
10
0
0
Electric power production and price (2011)
10 000
8 000
20
kWh produced per Capita
Price US Cents/kWh
16
6 000
12
4 000
8
2 000
4
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
50
40
11
Utilization rate (left scale)
Source : calculs Beynond Ratings d’après Enerdata.
World ranking – in percentile (right scale)
0
0
Russia
Source: Enerdata, Beyond Ratings calculations.
The deficiencies that are prevalent in the energy sector also
apply to the other physical infrastructure of the country, as
is shown by the infrastructure quality index of the World
Economic Forum in its 2014 report: the country is indeed
ranked 134 th out of 144 (compared to Indonesia’s 56 th position and South Africa’s 60 th position). According to this
report, the lack of infrastructure is the major impediment to
economic activity for 26% of economic operations in the
country, before corruption and political instability.
The federal government is considering an extensive infrastructure investment programme, the National Integrated
Investment Master Plan (NIIMP), with requirements estimated at between 30 and 50 billion USD per year for five
years. This extensive plan is supported by the sovereign fund
dedicated to infrastructure management (the Nigeria
Sovereign Investment Authority, NSIA), which is endowed
with 1 billion USD, 40% of which are flagged for investments
in infrastructure. It calls for projects in several fields (refineries, gas pipelines, railway lines, ports, agriculture, healthcare,
and the like). However, as noted by IMF services, domestic
savings were only able to finance a third of this plan; the rest
will have to be financed by foreign funds. Indeed, the
national savings rate of Africa’s largest economy is low
(18.6% of GDP in 2013, with 16.8% of GDP coming from the
private sector), especially compared to other countries of
the same income bracket (see Graph 12 for more details).
The federal government has already ­implemented public
private partnerships (PPP) with the ­collaboration of the
South
Africa
China
Brazil
India
Nigeria
Source: IMF (2015 Article IV Consultation).
Graph
30
25
12
National savings rates and investment rate
in 2013 (% of GDP)
National savings rate
Investment rate
20
15
10
5
0
Nigeria
SSA
LMIC
Source: WDI, author’s calculations.
2.3. Foreign trade is exposed to volatile oil prices
Among demand-side factors influencing aggregate supply, it
is primarily the investments of the oil sector that fuelled the
phases of economic growth from the 1970s to the 1990s,
following their characteristic cycles. At the same time,
­foreign trade made a positive contribution to GDP growth,
apart from periods of exogenous shocks (such as the 1973
and 1979 oil shocks, the international financial crisis of
2008-2009, and the like). The terms of trade and GDP
growth tended to move together up to the 2000s, reflecting
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
17
the emergence of the contribution of other components of
demand in GDP (Graph 13). Net exports (the value of
exports of goods and services minus the value of imports)
nevertheless remain highly exposed to the variations in oil
prices due to the mono-export nature of Nigeria’s external
trade (Graph 14). From this vantage point, the diversification
of Nigeria’s economy as it is described in previous sections
seems deceptive.
Graph
25
GDP growth (% )
Terms of exchange (base 100 in 2000; right scale)
20
15
10
5
10
8
250
6
200
4
100
0
-5
50
-10
-15
1980 1984 1987 1990 1994 1997 2000 2004 2007 2010
0
Source: WEO, UN, author’s calculations.
50
40
Net exports (billion USD, real prices)
Brent price (USD, right scale)
2
0
-2
-4
-6
2011
Consumption-private
Investment
Real GDP
120
Graph
Share of demand-side factors in aggregate
demand (% of GDP, 2010—2013 average)
100
60
20
10
Net
exports
10
GFCF*
16
40
0
20
-10
-20
1981 1985 1988 1991 1994 1998 2001 2004 2007 2011
Public consumption
8
0
Source: WDI, EIA, author’s calculations.
* GFCF: gross fixed capital formation
Source: NBS, author’s calculations.
18
2013
Consumption-public
Net exports
16
80
30
2012
Source: IMF (2015 Article IV Consultation).
14
Net exports of goods and services (in billion USD,
real terms) and spot price of Brent crude oil
60
15
Contribution of demand-size factors
to GDP growth (in %)
150
Graph
Graph
13
Real GDP growth (in %) and terms
of trade index (base 100 in 2000)
30
Starting at the end of the 1990s, and especially from the
early 2000s onwards, internal consumption has become an
increasingly important component of Nigeria’s economy,
serving to stabilize the growth path. It is now the component with the highest contribution to economic growth
(Graph 15).
© AFD / Macroeconomics and Development / May 2015
Private consumption
66
2. A dynamic economy but dependent
on the oil sector
Box
1 Direct effects of the decline in oil prices
The sharp contraction in oil prices observed since 2014 – 50% between June 2014 and February 2015 – as well as consistently low
prices of crude oil, which will last in the medium run according to the IEA, puts Nigeria’s macroeconomic and financial framework/
environment at risk. Although extractive industries now only amount to 16% of GDP in 2013 (compared with 37% in 1990), the oil
sector is essential to the country that is the largest producer of the African continent – more than 70% of the income of the federal
government depends on oil and gas revenues; they account for more than 95% of exports of goods. In this context, the effects of a
lasting 50% drop in oil prices for Nigeria spread throughout (i) a decrease in the budgetary revenues from the energy sector and (ii)
a deterioration in the terms of trade and as a consequence in the balance of payments. According to the IMF, these simultaneous
effects translate into a GDP fall of 1.5 percentage point in 2015 (to 4.8% dropping from 6.1%; estimation based on an InputOutput model; IMF, Selected Issues, February 2015).
i. Effects spread through a contraction in budgetary revenues
This channel is particularly significant in the case of Nigeria as oil fiscal revenues are estimated to decrease from 5.8% of GDP in 2014
to only 3.4% of GDP in 2015. After the 2008 global crisis, Nigeria set up an oil stabilisation fund, which is supposed to act as a shock
absorber in case budgetary revenues are lower than expected. This fund’s balance is already declining – at the end of 2014, it was
estimated at 2 billion USD, i.e., 0.4% of GDP while it was 8.6 billion USD in 2012 and a very far cry from the 6.3 billion USD level
required to absorb a fourth of a standard deviation in oil revenues. As the fund is marginal, it will not make it possible for Nigeria to
cope with exogenous shocks. Although the budget deficit is limited (-2.4% in 2013), very few solutions are available to Nigeria: it
could either raise the budget deficit and increase the public debt ratio (which amounted to 10.6% in 2013), or cut federal government spending. Authorities – who lowered the oil price assumption to 65 USD in the 2015 budget – seem to favour the latter with
capital expenditure as their main target. IMF thus estimates that the contraction in prices could lower the federal government
capital expenditure by 40% (in real terms), which would lead to a GDP decrease of 0.5 percentage point in 2015. This impact is
estimated to amount to two thirds of a percentage point when the multiplier effects on private consumption are taken into account.
ii. Effects spread through a deterioration in the terms of trade
Because foreign trade is mainly based on a single export product – oil –, its performance highly depends on variations in oil prices.
The sharp contraction in oil prices observed since June 2014 thus impacts the value of exports. All things being equal, as a result of
the 50% drop in oil prices, the current account balance could decline by more than 10 percentage points of GDP and a current
account deficit of approximately 6% of GDP could emerge. Furthermore, given that the United States has stopped importing
Nigerian crude oil last June (for more details on that matter, see part 5), adding a volume effect to the value effect. Since oil export
revenues have been decreasing for several months, the Naira (NRN) – which is under a managed float regime – has been under more
pressure, leading the CBN to devaluate the currency by 8% in November 2014. However, the further decrease in oil prices as well as
resulting tensions on foreign-exchange reserves should lead the Central Bank to devaluate the currency again in the coming months.
Indeed, a depreciation of the exchange rate causes a negative revenue effect that in turn causes a decrease in domestic consumption
and ultimately translates into less economic growth. Furthermore, Nigeria appears resilient to this exogenous shock due to its low
external debt (1.7% of GDP in 2013). The IMF evaluates the effect of this shock on the terms of exchange (a decrease of 38% of
export revenues) on GDP growth at 1 percentage point.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
19
3. Satisfying solvency but liquidity pressures
remain
3.1. A limited level of public debt that is
partly held by non-residents
Total public debt in Nigeria – of both the federal ­government
and the state governments – is very low: it is estimated at
12.4% of GDP in 2014, with an external debt ratio of 1.7% of
GDP contracted at concessionary rates and on a l­ong-term
basis (from international financial institutions). [23] It does not
include the debt of public enterprises, such as the Nigerian
National Petroleum Company (NNPC), which has run into
high levels of arrears owed to private oil c­ ompanies that
operate within the country, pursuant to its contractual
­o bligations (see Box 2). Nigeria’s external debt ratio has significantly decreased since the mid-2000s, thanks to an
agreement with the Paris Club in 2005 (Graph 17).
Graph
This ­a greement has enabled Nigeria to cancel a debt stock
­e stimated at 18 billion USD, equivalent to 60% of its debt
(which is estimated at 30 billion USD owed to official
­b ilateral creditors – see AFD, 2008). Since then, Nigerian
authorities seem to want to bring external public debt
under ­control. Public debt mostly originates from within the
country: more than 85% of total public debt is held domestically and 46% is held by Nigeria’s commercial banks.
Authorities plan to balance the share of external debt to
40% of the total in the mid-term, compared to its present
level of 14%. However, the stock of total public debt should
be limited to 14% of GDP, which reflects the authorities’
aversion to external debt (see above) but also a limited
­a bility to repay, as the federal government’s debt service
amounts to 27% of its income (see Section 3.2).
Graph
17
Debt ratio of the federal government
(in % of GDP)
18
Total public debt of the federal government
(FG) and state governments (SG) (% of GDP)
80
14,0
70
12,0
60
10,0
50
8,0
40
External, SG
6,0
30
External, FG
20
4,0
10
2,0
0
0,0
2000
2002
2004
2006
2008
2010
2012
2014
Source: WEO, author’s calculations.
Internal, SG
Internal, FG
2013
2014
Source: Debt Management Office (DMO), author’s calculations.
[23 ] The state governments and local governments must receive the approval of the federal government to issue debt. Local governments cannot incur debt abroad. Finally,
the debt of state and local governments is guaranteed by the federal government.
20
© AFD / Macroeconomics and Development / May 2015
3. Satisfying solvency but liquidity pressures remain
Despite a low ratio of external public debt (1.7% of GDP for
the total in 2014, of which more than 95% by the federal government), almost 40% of the domestic debt of the ­federal
government is held by non-residents at the end of 2013
(Graph 19).[24] Since 2011, this share has been continuously
­rising and is an additional source of exposure on the external
liquidity of the country, which is already under pressure due to
the strong decrease in oil prices (see Box 1 and Part 5). At the
same time, the debt portfolio of the federal government
seems to be exposed to market risk. Indeed, 85% of the debt
Graph
stock is composed of government securities (primarily Nigerian
Treasury Bills and Federal Government of Nigeria Bonds),
which is a source of vulnerability to changes in market confidence, be they domestic or foreign, in case the interest rate is
changed or Nigeria’s sovereign risk is reappraised (see Graph
20). This risk is all the more significant in that 36% of the
­federal government’s domestic debt is short-term debt. In the
context of a shifting relationship between internal and external
debt, authorities are considering reducing the share of shortterm debt to 25% of the federal government’s domestic debt.
Graph
19
Domestic debt held by non-residents
20
Breakdown of federal government debt
(in %, end of 2014)
Percent of GDP (left scale)
Billion U.S. dollars (right scale)
Eurobonds; 3
Treasury bonds;
2
Multi and
bilateral; 15
Treasury bills; 29
Federal
Government of
Nigeria bonds; 51
Source: IMF, Haver; projections for 2014.
Source: DMO, CBN, IMF, author’s calculations.
Box
2
The NNPC, the public arm of Nigeria’s oil sector
The NNPC is the public body that manages and oversees the oil and gas sector of Nigeria. It was created in 1971 in order to better
control the petroleum industry – following a recommendation of the Organization of the Petroleum Exporting Countries [OPEC]
and with the objective of gradually nationalizing the sector by taking out increasing stakes in oil operators (from 35% in 1971 up to
60% in 1979). Now most oil “supermajors”, which are responsible for most of the production, operate with joint-ventures or joint
operating agreements (JOA). These partnerships give the Nigerian authorities a share of 60% of production revenues and leave 40%
for the private operators.
Within this system, the NNPC (and therefore the federal government) takes part in the financing of operations, or cash calls, which
helps oil companies absorb their high technical costs and share the commercial and operational risk. Due to eviction effects brought
on by these capital expenses cash flows, the federal government has developed another type of contract: the Production Sharing
Contracts (PSC), especially in the context of deep offshore sites (since 1999). These contracts aim to transfer the risks and financing
of exploration, as well as new site development costs, to the private oil companies, all the while including a bonus for the federal
government when the contracts are signed and a royalty calculated according to the oil revenue yield.
The contractual framework of joint-ventures remains dominant however. As a result, the NNPC is believed not to have fulfilled an important
number of its cash call obligations to private oil companies. The arrears run very high (several billion dollars) and can be considered contingent liabilities. Finally, it must be remembered that the NNPC is is an exemplary case of the opacity of Nigeria’s oil sector and is suspected to
be highly affected by corruption. After his dismissal, the former governor of the CBN, Lamido Sanusi, accused the NNPC of embezzling 20
billion USD between January 2012 and July 2013. An audit by the international auditing firm PriceWaterhouseCoopers evaluates the amount
of embezzled funds to a minimum of 1.48 billion USD. The audit concluded that the operational model of the NNPC was not sustainable.
Sources: Sébille-Lopez (2005); AFD and Beyond-Ratings (2015).
[24] External debt is considered a debt denominated in foreign currencies. A stock of debt held by non-residents can by denominated in foreign currencies or in the local
­currency.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
21
Graph
3.2. A budget implementation that
is vulnerable and exposed to oil prices
3.2.1. Low budgetary revenues that are dependent
on oil revenue
The nominal increase of the level of national wealth during
the rebasing calculations published in April 2014 (see Part 1),
has put debt ratios and budgetary balance in a more comfortable situation but has brought to light the vulnerabilities
of budget implementation. Indeed, although the budget
deficit is low (2.4% of GDP in 2013, compared to 4% before
the recalculation), total consolidated income of the federal
government represents only 11% of GDP in 2013 (compared
to the previous 24%). This income is highly dependent on
oil revenues – at a level of more than 70% on average – at a
time when non-oil revenues (or “independent revenues”)
represent less than 4% of GDP (see Graph 21). Non-oil fiscal
revenues of the federal government are among the world’s
lowest – 2.4% of GDP on average in Nigeria, compared to
10-15% for most oil-producing countries. Together with the
dependency on oil revenues, this is a major source of vulnerability for the country (see Graph 22). An increase in the
tax base is said to be slated for reform in 2015 (after the
general elections) by raising the value added tax (presently
at a standard rate of 5%, one of the world’s lowest rates)
and by improving tax collection (the informal sector is estimated at 60-65% of GDP). [25] Furthermore, the possible
adoption of the Petroleum Industry Bill (PIB) [26] would make
it possible to increase fiscal pressure on the oil sector and
make the organization of this sector more transparent,
among other things. However, the adoption of this law,
which has already been delayed several times, faces opposition from the oil supermajors as well as non-producer states
due to a lower planned redistribution of oil revenue for the
latter (see Box 3). A reform of the oil sector, and of its
­associated fiscal revenues in turn, therefore seems fairly
unlikely in the short term.
21
Total revenue of the consolidated government
(federal government and state governments,
in % of GDP)
20
Non-oil revenues (“Independent
revenues”)
Oil and gas revenues
18
16
14
12
10
8
6
4
2
0
2010
2011
2012
© AFD / Macroeconomics and Development / May 2015
2014
Source: WEO, author’s calculations.
Graph
30
22
Fiscal revenues of the central government
(2009-2013 average, in % of GDP)
25
20
15
10
5
0
Nigeria
LMIC
SSA
South Africa
Source: DMO, author’s calculations.
The strong decrease in oil prices that has occurred since the
summer of 2014 (more than 50% between June 2014 and
March 2014) automatically leads to a substantial reduction in
the fiscal revenues of the federal government and state
­governments. The Ministry of Finance has thus drafted ­several
successive versions of the 2015 budget bill according to
­different assumptions on the price of oil, and ultimately fixed
at 62 USD per barrel of crude oil. The final text was approved
in April 2015 and will be further restricted by 4 billion USD
(0.5% of GDP; according to the IMF, as the funding gap was to
be covered up to a price of 60 USD per barrel).
[25] The Ministry of Finance is receiving technical assistance of the cabinet McKinsey in order to increase the tax base of non-oil revenues.
[26] Three or four versions of the PIB are said to be circulating, which will not facilitate its early adoption.
22
2013
3. Satisfying solvency but liquidity pressures remain
Given the current oil revenue allocation rule (see Box 3), the
loss of 1 USD per barrel of crude oil represents a fall in
­revenues for the state and local governments of about
250 million USD according to IMF estimates. Thus, the
decrease to 62 USD per barrel of Brent crude oil (spot price)
in these past months will potentially cause a total revenue of
over 15 billion USD for the federated entities, amounting to
60% of their fiscal income (on average between 2012 and
2014, with all other things considered equal; author’s estimations). The authorities are considering making additional
adjustments of 15% in real terms to the budgets of these
federal bodies. At the same time, the federal Minister of
Finance noted that a large number of state governments will
not be able to service their debt in such a context of falling
oil revenues. Given the immense variety of situations, the
federal government offers technical assistance to states
(within training programmes) that have technical weak­
nesses, in order to implement the necessary budgetary
adjustments. This is not the case with Lagos and Kano.
Furthermore, the improvement of the efficiency of oil revenue collection is also critical. Indeed, the 2005 law allows
for the determination of the variation of oil revenues
according to the price of oil, to technical performance, and
thus to the profitability of projects. Indeed, the yield of oil
revenues, which is defined as the ratio of oil revenues
received to the gross value of oil production, is on a downward trend. This yield was estimated at 0.3 in 2014, compared to an average of 0.70 from 2000 to 2009. As an
example: in 2013 oil prices and oil production were higher
by respectively 12% and 10% compared to 2008, but budgetary revenues from oil had fallen by 20% (Graph 23). The
decrease in yields of oil revenues is caused by a number of
factors: ageing production sites, the increase of production
costs due to security incidents and supply issues (oil theft in
particular), but also embezzlement. On the top of this structural downward trend of oil revenue, the sharp drop in oil
prices that has occurred since the ­summer of 2014 with
consistently low oil prices (in the m
­ id-term) further increases the vulnerability of budgetary r­ evenues.
Graph
23
Changes in oil revenues (billion USD)
Oil revenue yields (right scale)
Non-oil revenues
Oil and gas revenues
Market value of oil production
120
100
0,8
0,7
0,6
0,5
80
0,4
60
0,3
40
0,2
20
0,1
0
0
2010
2011
2012
2013
2014
Note: Fiscal oil yields are defined as the ratio of the market value of oil production
on fiscal revenues from oil and gas.
Source: IMF, author’s calculations.
Finally, the fund created to stabilize oil revenues (the Excess
Crude Account, or ECA) had an estimated 2 billion USD
(0.4% of GDP) at the end of 2014 and will only very partially cushion the shock in revenues. [27] This fund was established in 2004 in order to smooth budgetary revenues in
case of a drop in oil prices: any revenue differential between
realized and projected revenue is transferred to an account
held at the Central Bank. Although this fund has occasionally been siphoned off to pay back part of the external
­p ublic debt owed to Paris Club members, it has only had a
limited positive impact on budget implementation (notably
due to lack of a constitutionally valid existence). This fund is
gradually being transformed into a sovereign fund (SWF ,
1 billion USD in 2014) whose legal framework will make it
­p ossible to better allocate expenditures (see below).
3.2.2. Expenditures constrained
by the debt service burden
Due to the low tax base, and, more generally to the low
budgetary revenues, the expenditures of the consolidated
government (federal government, state government, local
governments) are seemingly low, at 12% of projected GDP
in 2014 (Table 5). In particular, capital expenditures represent
on average 1% of GDP, which is one of the lowest rates in
the world (among countries of similar incomes and beyond).
These remain lower than energy subsidies (nearly 2% of
GDP on average), which are widely known to be inefficient.
[ 27] This fund was credited with 22 billion USD in 2008 and 8.6 billion USD in 2012. Around 7 billion USD in 2014 and 15 billion USD in 2013, are said to have been debited to
finance military operations against Boko Haram.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
23
Table
5
Budget implementation of the consolidated government
(federal government, state governments, local governments) (% of GDP)
2010
2011
2012
2013
2014*
12.6
17.9
14.3
11.0
9.9
of which revenues from the oil and gas sectors
8.8
14.0
10.4
7.1
5.8
Total Expenses
16.9
17.6
14.7
13.4
12.3
of which energy subsidies
1.5
2.8
2.2
0.9
0.7
Budgetary revenues
4.0
4.5
3.8
3.7
3.5
of which revenues from the oil and gas sectors
2.8
3.2
2.5
2.4
2.0
Consolidated government
Total Expenses
Federal government
Total Expenses
7.3
6.5
5.7
5.5
4.7
Current Expenses
5.6
5.3
4.7
4.4
4.1
of which labour costs
2.9
2.9
2.5
2.3
2.2
of which payment of interest
0.6
0.8
1.0
1.0
1.0
Capital Expenditures
1.6
1.1
1.0
1.0
0.6
Balance
-3.3
-2.0
-1.9
-1.8
-1.2
-11.6
-9.7
-8.1
-0.4
-2.4
-2.4
Non-oil primary balance (% of non-oil GDP)
Overall balance
-4.3
0.3
*: Projections
Source: IMF, author’s calculations.
Authorities seem to consider that the price of a barrel of
crude oil will remain low (at under 80 USD) and they
believe it necessary to continue reforming the system of
energy subsidies, as initiated in 2012. In the medium term, a
reform of energy subsidies will allow for the allocation of
0.5% of GDP to infrastructure investments, which the
country sorely lacks. Indeed, with such a limited tax base
and the ancillary structural difficulties in addressing the
infrastructure deficit, governing authorities intend to rely
on public-private partnerships (PPP) and therefore on private capital. This had been the case for the electricity
­s ector, when power generation and distribution were privatized in 2011. Such an aggravated deficit is one of the most
fundamental weaknesses of Nigeria’s social and economic
development. At the same time, and in order to manage
the implementation of projects linked to the Investment
Plan, the government has established a sovereign fund,
SWF, managed by the Nigeria Sovereign Investment
Authority (NSIA), with 1 billion USD in financing , 40% of
which is dedicated to an infrastructure investment fund.
The better defined legal framework than that of the ECA
24
© AFD / Macroeconomics and Development / May 2015
will make the management of these investments more efficient. However, the low amount allotted to this fund does
not seem sufficient enough to create enough leverage to
address Nigeria’s exceeding development challenges, in
particular regarding territorial disparities.
3.3. The risk of non-sustainability of public
debt remains low but vulnerabilities
are increasing
The exogenous shock caused by the fall in oil prices has
directly impacted the revenues of the federal government
and the revenues of foreign trade, in addition to hampering
the economic growth of the country (see Box 1). At the
same time, there has been a deterioration of the terms of
Nigeria’s financing , both on the domestic market and
abroad (Graphs 24 and 25). This is especially important for
the federal government given that it has regained access to
international markets (in the same way as other emerging
economies) after successfully raising 1 billion USD-worth of
3. Satisfying solvency but liquidity pressures remain
Eurobonds in 2013 (the first time since 2011), [28] but also due
to the increasing share of domestic debt held by non-­
residents (now 40% of government federal debt).
Nevertheless, Nigeria’s commercial banks, which are very
risk-averse (see Part 3) and hold 46% of public domestic
debt (at the end of 2013), have a strong inclination for
Treasury Bills. They seem positively inclined to purchase new
Treasury Bills should the federal government decide to
finance a growing budgetary deficit caused by the consequence of the fall in oil prices by issuing bonds locally.
Graph
600
24
Sovereign bond stripped spreads
(basis points)
EMBI Global
550
EMBI NIgeria
500
Despite the slowing economic growth and the exposure of
the economy, as well as the deterioration of the terms of
financing, Nigeria’s public debt situation remains favourable
(primarily a result of its low public debt ratio). Analyzing the
viability of public debt leads to the conclusion that the risk
of non-sustainability of the debt remains low (IMF, 2015 a ).
Nigeria’s Debt Management Office (DMO), in charge of
servicing public debt, also concludes, following several stress
tests including a pessimistic scenario (decreasing economic
growth and fiscal revenues, current accounts balance, and
the like) that the risk of non-sustainability remains low
(DMO, 2014). However, the prolonged deterioration of economic growth, financing terms (interest rates) and/or budgetary revenues can increase tensions on debt service. This
is among the major vulnerabilities of the federal government as it represents 27% of its budgetary revenues (and set
to amount to 36% of revenues in 2015 according to the IMF;
Graph 26).
450
400
Graph
350
26
Debt service (payments of the interest)
and capital expenditures of the federal
­government (in % of federal government revenues)
300
250
200
Month1-13
45
Month3-14
Debt service
40
Source: JPMorgan, author’s calculations.
Capital expenditures
35
30
Graph
25
25
20
Treasury yields (%)
and Brent price (USD)
25
20
Nigerian treasury bill yields (left scale)
Brent price (right scale)
15
10
140
5
120
0
100
15
80
10
60
40
5
20
0
0
2007 2008 2008 2009 2010 2011 2012 2013 2013 2014
Source: IMF, IEA, author’s calculations.
2010
2011
2012
2013
2014
2015p
Source: IMF, author’s calculations.
Over the long term, the consolidation of public solvency is
crucially dependent on the capacity of the government to
transform oil revenues into non-oil related assets. Under
these conditions, the main risk to be caused by a macro­
economic shock on public finances and the debt situation is
the impact on potential growth and the increase in regional
inequalities, which can be due to the decrease in public
expenditures brought about when oil revenues fall.
[28] 500 million USD at a 5-year horizon at a rate of 5.375% and 500 million USD at a 10-year horizon at a rate of 6.625%. The issue was oversubscribed four times. It aimed to
finance infrastructure projects, notably in the power generation sector.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
25
Graph
3.4. An unfavourable credit history
Having met Paris Club creditors five times to discuss the issues
that have arisen in servicing its debt, Nigeria has an un­favourable
credit history. Due to weaknesses in the way economic policy
was piloted in the past and the very significant exposure of the
country to variations in oil prices, the plummeting oil prices in
the 1980s resulted in a series of budget deficits and current
account deficits that have abundantly fuelled domestic and
external public debt. These deficits were mostly incurred by
the states and financed by commercial banking institutions at
variable rates and with the overarching guarantee of the federal government. After 1982, Nigeria was defaulting and undertook a number of measures to restructure and reschedule its
public debt to Paris Club and London Club members. Its last
agreement with Paris Club creditors in 2005 brought an overall
reduction of 60% of its public debt stock. Since then, external
public debt has varied more moderately and represented less
than 2% of GDP in 2013 (see Graph 27).
Box
3
External and guaranteed public debt (in %)
180
160
140
120
100
80
60
40
20
0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Source: WDI, author’s calculations.
How budgetary revenues in Nigeria are shared and the prerogatives of federated entities
Nigeria’s fiscal federalism allows for the distribution of
oil revenues to the different federated and administrative entities (as specified in the 1999 Constitution). Thus,
the statutory revenue allocation formula structures the
better part of Nigeria’s public finance and its breakdown
between entities can be updated every five years by the
National Assembly. Revenue is allocated based on:
(i) ­vertical distribution and (ii) horizontal distribution.
(i) Under vertical distribution, revenues are allotted to each
level of the federal structure: 38% of distributable revenue
for the federal government, 56% to the 36 states and the
774 local governments, and 6% for the special funds. For oil
revenues, an additional premium calculated according to
the derivation principle is allotted to oil-producing states
(13% of oil revenues). Only oil revenues from onshore drilling sites are subject to the derivation principle. As for the
revenues from offshore sites, they are fully distributed to all
states. Finally, it should be noted that, due to all these
issues, the vertical distribution key is at the centre of a set
of antagonistic claims. The potential adoption of the
Petroleum Industry Bill should make it possible to increase
the fiscal pressure on oil supermajors and increase the
­allocation linked to the principle of derivation for oil-­
producing states.
26
27
© AFD / Macroeconomics and Development / May 2015
(ii) Under horizontal distribution, revenues are shared
between states and local government according to the
principle of equality of states (40% is divided equally
among jurisdictions) and need (for the remainder of 60%
according to population, social development, land mass,
and internal revenue effort).
Graph
28
Sources of fiscal revenues
(in % of total revenues)
non-oil revenue
Source: IMF (2014 Article IV Consultation).
3. Satisfying solvency but liquidity pressures remain
The 1999 Constitution provides for the following
­distribution of responsibilities:
research, statistics and surveys, higher education, healthcare and welfare, etc.);
•an
•a concurrent list on which both states and local govern-
•a
• an exclusive list for local governments (including streets,
exclusive legislative list on which only the federal
government can act (including matters of national
concern such as defence, international relations,
­elections, roads and railways, etc.);
concurrent legislative list on which both the federal
government and states can act (including electricity,
industrial, commercial and agricultural development,
ments can act (including primary, adult and vocational
education, healthcare, agricultural resources and nonmineral resources, etc.);
public equipment, waste water, etc.).
Sources: Sébille-Lopez (2005) and IMF (2014 Article IV Consultation), AFD.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
27
4. Banking supervision has improved
but the financial systems remains exposed
4.1. A concentrated banking sector that only
modestly finances economic activity
Nigeria’s financial system is essentially limited to the ­banking
­sector, which is very concentrated as five banks control 56% of
total bank assets (FBN, Zenith Bank, UBA, GTB, Access Bank). The
concentration of Nigeria’s banking sector originates from (i) a
2004 reform by the Central Bank of Nigeria (CBN) that has
increased the minimum level of regulatory capital, decreasing the
number of banks from 89 to 25, then (ii) the 2009 banking crisis.
In the aftermath of the banking crisis, the sector was drastically
restructured: ten banks were nearly failing, three of which were
nationalized by the bad bank AMCON (Asset Management
Corporation of Nigeria). This structure, established to absorb and
isolate the sector’s “bad” assets, has contributed to stabilize the
banking system by absorbing 3,000 billion NGN of toxic assets
(15 billion EUR), has recapitalized three banks and has recovered
1,800 billion NGN (8 billion EUR) of non-peforming assets and
loans with high systemic risk (AfDB, 2014).
Graph
The 2009 banking crisis broke out due to the strong increase
of speculative-grade asset-backed credits in 2007-2008,
bank portfolio exposure to the oil and gas sector, as well as
the poor management of banking risks. The bursting of the
stock market bubble and the decrease in oil prices then triggered this systemic crisis.
The remarkable shock that has been the 2009 banking crisis
is now reflected in the limited size of the financial sector, the
assets of which represent 27% of GDP in 2014, which is a
level well beneath that of other countries of a similar per
capita income range as Nigeria. [29] Furthermore, the degree
of financial intermediation in Nigeria is stifled (domestic
credit to the private sector represented 11.5% of GDP in
2013), and particularly so by international standards,
­reflecting the low capacity of the banking sector to finance
economic activity (Graphs 29 and 30). Nevertheless,
Nigerian bank assets are the second highest in Africa and
amount to 1.5 billion USD in 2014.
Graph
29
Domestic credit to the private sector in 2013 –
an international comparison (% of GDP)
180
Domestic credit to the private sector (% of GDP)
45
40
160
Banking crisis
35
140
30
120
25
100
20
80
15
60
10
40
5
20
0
Nigeria
LMIC
SSA
South Africa
Source: WDI, author’s calculations.
0
1990 1993 1995 1997 1999 2001 2003 2006 2008 2010 2012
Source: WDI, author’s calculations.
[29] By way of comparison, financial assets in Indonesia, which are considered as limited, represent 68% of GDP.
28
30
© AFD / Macroeconomics and Development / May 2015
4. Banking supervision has improved
but the financial systems remains exposed
4.2. A profitable sector with high exposure
to the oil industry
4.2.1. Stable bank resources but an increase
of foreign currency deposits
The analysis of the structure of bank resources – that is, the
liabilities of the banking sector – clearly shows that most of
them, 70%, are deposits, and that this share is only getting
higher as years pass, which is a sign of stability of the
­b anking sector (52% in 2002, 62% in 2009, and 69% in
2014). At the end of 2014, foreign currency deposits represent 28% of total deposits, which is relatively high given the
exposure to foreign exchange risk resulting from the depreciation of the naira against the dollar. Although this share
does not seem to have changed since the beginning of the
decrease in oil prices in June 2014, it has followed a
­remarkable upward trend since 2011 (up from less than 9%
of deposits in 2011). Nigerian banks are seeking to diversify
their resources by issuing bonds on the international bond
market (nearly 4 billion USD of Eurobonds have been raised
since 2011).
c­ ountry in the lower middle income bracket as credits to the
private sector amount to no more than 12% of GDP in 2014.
The capture of the economy’s resources by the banking sector is inadequate in respect of the ratio of bank deposits to
the total liabilities (nearly 70% but 19.5% of GDP in 2014). At
the same time, since the end of 2013, the growth of credits
to the public sector is flagging, after h­ aving acted as a relay
to the private sector for four years. However, the large part
of credits to the public sector within total assets, on average
more than 25% since 2011, exposes the banking sector to
sovereign risk.
Graph
32
Compared growth of credit to the private sector
(in real terms), the base rate and the inflation rate
(year-on-year, in %)
140
120
100
Real credit growth (left scale)
Base rate (right scale)
Inflation rate (right scale)
80
40
8
0
31
4
-20
Contribution of the liabilities of commercial banks
to the total growth of liabilities (in %)
110
16
12
60
20
Graph
20
-40
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IFS, author’s calculations.
Debt to public sector
Deposits
90
Equity capital
70
Total liabilities
0
50
30
10
-10
2007 2007 2008 2009 2010 2011 2012 2012 2013 2014
Source: International Financial Statistics (IFS), author’s calculations.
4.2.2. Low financing of the economy by the banking
sector and exposure to the oil sector
The banking sector’s restricted financing
After the bubble that preceded the 2009 banking crisis,
credits to the private sector declined markedly and are
experiencing moderate growth since then (Graph 32). Also,
financial intermediation is still exceptionally low for a
The limited participation of commercial banks to the
­f inancing of economic activity is a tell-tale sign of the low
level of financial inclusion in Nigeria: 30% of adults own a
bank account in a financial institution and 60% of household savings is captured by the (disintermediated) informal
financial system (Carlson et al. , 2014). An international
benchmark shows that financial penetration is indeed low in
Nigeria, and contrasts with the world average of 50%, a rate
of 54% for South Africa and 42% for Kenya. All the more so,
this presents a major constraint on the development on
SMEs, which face difficulties to raise funds: bank loans to
SMEs are limited to only 5% of the total amount of loans
granted by commercial banks. The Central Bank of Nigeria
(CBN) has therefore implemented incentives to ensure that
banks finance SMEs more and diversify their exposure. The
establishment of a development bank and a fund for the
development of microentreprises and SMEs should also
foster development of SMEs and improve financial inclusion
– the objective is to bring the rate of financial exclusion
down to 20% by 2020.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
29
Graph
•Post-consolidation: this capacity has further developed
33
Contribution of the assets of commercial banks
to the total growth of assets (in %)
140
Other
120
to reach between 160 and 500 million USD per billion
USD, with syndicated loans pooling funds from several
banks. Some projects have even been financed without
any international funding.
Credits to the NBC
100
Credits to nonresidents
80
Credits to private sect.
60
Credits to public.corp.
Credits to gov.
40
Total assets
20
0
-20
-40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IFS, author’s calculations.
Credits concentrated in the energy sector…
Credits to the private sector are dominant in the activity of
commercial banks and are the main contributor to the
growth of bank assets, followed by deposits with the Central
Bank (Graph 33). Credits to non-residents remain low and
amount to 9% of bank assets. The share of bank credits
denominated in foreign currencies is high however at 21%
of overall credits (at the end of 2013), but the credit stock is
covered more than twice by foreign-currency deposits.
The activity of Nigerian commercial banks, which are very
risk-averse, is concentrated on key accounts (or their affiliates), especially those of the oil and energy sectors but also
those of the telecommunication sector. The financing of
the energy sector as a whole is constantly increasing, both in
absolute and in relative terms, and follows an array of incentives implemented by the monetary authorities in order to
improve the financing of businesses (especially Nigerian
ones) of the sector (establishment of specific funds after
2010). [30] These measures have lead to increase to capacity
of commercial banks to finance the energy sector ( Beyond
Ratings , 2015):
•Pre-consolidation (2010): the average participation of
Overall, the oil and gas industry is the main sector of the
economy financed by the banking system in 2014. Its credit
commitments amount to nearly 14 billion USD (at the end
of 2013), that is 24% of total amount of loans and have
experienced an increase of 72% in real terms compared to
2011 (CBN, 2014 a ). As for the electricity sector, its commitments to the banking system amount to 4% of total loans in
2014, i.e., about 2.25 billion USD, which brings the total
amount of commitments from the energy sector to 28% of
the total amount of loans (Graph 34). Under the terms of
the convention put forward by the International Standard
Industrial Classification of Economic Sectors of the United
Nations, to which the Central Bank of Nigeria is a signatory,
banks are considered “exposed” to an economic sector
(concentration risk) when it concentrates more than 20% of
total credit facilities.
Graph
18,0
34
Loans to the energy sector by Nigerian custodian
banks
16,0
25%
14,0
12,0
20%
10,0
15%
8,0
6,0
10%
4,0
5%
2,0
‐
30%
2010
2011
2012
Loan amount (billion USD)
2013
2014
0%
% of total bank loans
Source: CBN.
Nigerian banks amounted to about 60 million USD per
billion USD of investments of the oil sector;
[30] The Nigerian Content Development Fund, established in 2010, aims to improve the access to credit of Nigerian oil and gas companies as well as to develop their competencies; the Power and Airline Intervention Fund, established in 2012 and initially funded with 1.58 billion USD is intended to promote energy generation and airlines; the Shell
Kobo Fund and the Shell Contractor Finance Scheme (created in 2012) help Shell’s contractors raise funding by different means in partnership with several local banks.
30
© AFD / Macroeconomics and Development / May 2015
4. Banking supervision has improved
but the financial systems remains exposed
… and exposes banks to the falling oil prices
The free-fall in oil prices (these have decreased by more
than 50% since June 2014) is a source of vulnerability for
Nigerian commercial banks, due to their strong credit portfolio exposure to the oil and gas sector and energy
­g eneration (table 6). This concentration of both the banking
Table
6
sector and allocated credits reinforces this negative exposure, although the sector appears sounder and better regulated following the 2009 banking crisis (see Section 4.3.1 ).
Overall, Nigeria’s commercial banks are more exposed to
the oil and gas industry than Russian banks. [31]
Share of the energy sector in the loan portfolio of the six main Nigerian banks (in %)
Growth rate of the loan portfolio
2010-2013
Share of the oil and gas sector
in the loan portfolio (Dec. 2013)
Share of the electricity sector
in the loan portfolio (Dec. 2013)
Zenith bank
59
15
4
Guaranty Trust Bank
66
33
nd
First Bank
52
35
2
Ecobank (USD)
117
18
nd
Access Bank
76
30
1
UBA
43
19
8
Source: AFD-Beyond-Ratings.
Although the amount of loans denominated in foreign currencies that bank portfolios can hold are legally limited and
thus remain moderate (13% of the total amount of loans
and 9% of bank assets), the drop of oil prices, tensions on
the naira and the decreased performance of the Lagos stock
exchange, are as many sources of exposure (Graph 35) –
financing terms for banks are getting harsher and the local
financial market is increasingly volatile in a context where
the bonds issued by Nigerian banks on international markets
amount to nearly 5 billion USD since 2007. These sources of
exposure seem to have been taken into account by the
Central Bank of Nigeria, which has recommended to commercial banks at the end of 2014 to carry out stress tests on
the basis of several scenarios sent to them. At a price level of
the barrel of crude oil at 50 USD for instance – which is the
level around which the Brent Crude has been varying since
the beginning of the month of January 2015 –, the Central
Bank estimates that 65% of the share of the credit portfolio
of the oil and gas sector would be liable to be requalified as
non-performing loans (i.e., a total rate of non-performing
loans of 16%, compared with 3.2% in 2013).
Graph
35
Lagos stock index and crude oil prices (USD)
Price of crude oil (USD, left scale)
140
80
Lagos stock index
70
120
60
100
50
80
40
60
30
40
20
20
10
0
2000
2002
2004
2006
2008
2010
2012
2014
0
Source: IFS, author’s calculations.
4.2.1. A satisfying level of solvency and profitability
of the banking sector
After the decline of balance sheet ratios in 2010, following the
banking crisis, the recapitalization and the absorption of
degraded assets by bad bank AMCON seem to be gradually
restoring the solvency of the sector. At this stage, the capital
adequacy ratio, used to assess bank solvency and computed as
[31] The exposure of the three main Russian banks – OAO Sberbank, VTB Bank OJSC, and Gazprombank OJSC – to the oil and gas industry amount to 2.2%, 8.1%, and 16%
respectively (Beyond Ratings, ibid).
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
31
a ratio of a bank’s regulatory capital to its risk-weighted assets,
is at 17.1% (in 2013), which is higher than the regulatory requirements of Basel II and Basel III (respectively 8% and 10.5%), thus
enabling the sector to absorb shocks. It is indeed exposed to
the decline in oil prices due to the concentration of credits to
the oil and gas sectors and to foreign exchange risk (see above).
Following the stress test simulations, the Central Bank of
Nigeria (CBN) estimates that the banking sector is resilient to
shocks on credits (increase of non-performing loans, NPL), on
the interest rate and the exchange rate (CBN, 2014). The institution has decided in November 2014 to increase the reserve
requirement of private-sector banks from 15% to 20%. At the
same time, in order to limit the exposure of bank portfolios to
foreign exchange risk, the CBN has decreased the limits on
Table
7
foreign currency borrowing by funds from 200% to 75% and
has introduced measures to supervise and control banks on
their assets denominated in foreign currencies (October 2014).
Finally, the regional dimension of Nigerian banks is also a source
of exposure due to the deterioration in operational performance of some of their subsidiaries in the African countries
where they are established. There were 61 such subsidiaries in
June 2014 (52 of which on the African continent) and they
represent a systemic risk for the Nigerian banking system in the
event of a failure according to CBN. Furthermore, two sub­
sidiaries of Nigerian banks have been the subject of regulatory
measures and an intervention by the Central Bank of The
Gambia, and one of these subsidiaries is still under the direct
control of the supervisor according to the IMF.
Balance sheet ratios of the banking sector (in %)
2008
2009
2010
2011
2012
2013
2013 T2
Capital adequacy ratio (CAR)
21.9
4.1
1.8
17.9
18.3
17.1
16.4
Rate of non-performing loans
6.3
27.6
15.7
5.3
3.5
3.4
3.7
Provision rate for non-performing loans
45.2
78.9
70.6
49.6
52.7
45.0
Return on assets (ROA)
3.7
-8.8
3.9
0.2
2.3
2.3
2.5
Return on equity (ROE)
20.7
-222.8
266.0
2.2
21.1
18.9
20.7
Sources : CBN, IMF (Global Financial Stability Report), author’s calculations.
4.3. Supervision of banks has been
reinforced but vulnerabilities remain
4.3.1. A banking system that is better supervised since
the 2009 banking crisis
Established in 1959, the Central Bank of Nigeria (CBN) is in
charge of the supervision and monitoring of banking institution, of defining the regulatory framework, and of implementing monetary policy. After the banking crisis of 2010
that had revealed the governance failures of the banking
system, the CBN reinforced its prudential rules: risk management with a review of the credit portfolio (on a quarterly
basis), provision rules (including collective provision), corporate governance (with term limits for CEOs and directors)
and anti-money laundering provisions.
At the same time, the CBN has implemented regular in situ
controls at the leading banking institutions. Finally, the CBN
has reconsidered the model of the universal bank following
the banking crisis, by separating the so-called “traditional”
commercial banking activities from those of insurance and
asset management.
32
© AFD / Macroeconomics and Development / May 2015
According to the IMF’s updated analysis of the Financial
Sector Assessment Program (FSAP) in 2015, the supervision
and monitoring of the banking system of Nigeria have
improved since the 2009 banking crisis. The authorities have
taken additional measures to strengthen the prudential
framework in September 2014, focussed on the seven to
eight banking institutions deemed of systemic importance
(increase of the minimum required solvency ratio to 15%,
increase in Tier 1 capital, etc.). The CBN has also made the
application of IFRS (International Financial Reporting
Standards) accounting standards compulsory and initiated
the gradual implementation of the principles of Basel II/III
(still ongoing). Lastly, according to the CBN, the well-­
capitalized banking sector is resilient to shocks on credits
(increase of non-performing loans, or NPL), on the interest
rate and on the exchange rate.
In spite of these measures aiming to strengthen the
p rudential framework, banking institutions are still
­
­characterized by weak governance according to the FSAP
of the IMF. According to an assessment carried out by the
monetary authorities, only 35% of bank directors are
­considered to meet minimum qualification requirements
for their p­ osition.
4. Banking supervision has improved
but the financial systems remains exposed
4.3.2. Monetary policy’s many objectives interfere
with its clarity
Graph
The monetary policy of the Central Bank of Nigeria…
36
Exchange rate (NGN/USD) and sales of foreign
reserves by the CBN (billion USD)
The monetary policy of the Central Bank of Nigeria hinges
on pursuing multiples objectives: (i) maintaining the stability
of prices and the national currency, (ii) issuing the legal
­tender of the country, (iii) maintaining the level of currency
reserves in order to maintain the international value of the
legal tender (i.e., a change regime with a quasi-fixed exchange
rate), (iv) promoting a sound financial system, (v) to act as a
bank and provide economic and financial advisory to the
federal government.
The high number of objectives interferes with the clarity of
monetary policy and is confusing to market players. Thus,
after the 2009 banking crisis, this confusion led CBN not to
increase the interest rates when the solvency of banks was
jeopardized, which was in conflict with the increasing pressures on the currency and prices.
Furthermore, one of the major challenges that the CBN
must face is the management of excess liquidity in the
economy. This is caused by the oil and gas sector, and results
in generating volatility in the financial system and to fuelling
inflation. To manage the excess liquidity – inherent to oil
economies such as Nigeria’s and caused by the high exposure of banks to the oil sector and by the public enterprise
NNPC (in the context of its participation to oil operations,
see Box 2) –, the Central Bank has introduced an array of
instruments since 2007. Among them, the possibility of
intervening directly on the foreign exchange market and
carrying out sterilization operations by imposing fluctuation
bands on the naira – an instrument that is not unlike a ­p ublic
auction –, via the Retail Dutch Auction System (or rDAS,
which has replaced the WDAS in September 2013).
Nevertheless, reconciling the objectives of price stability
(inflation was an average of 12% since the beginning of the
2000 decade), of parity and liquidity management, in a
­context where the latter is highly linked to oil prices,
­g enerates structural volatility (IMF, 2013). Thus, monetary
authorities face structural liquidity cycles that can amplify
shocks and increase revenue transfer risks between various
federated entities (IMF, 2014).
Source: IMF (2015 Article IV Consultation).
The foreign exchange market is segmented between the
Inter-bank Foreign Exchange Market (IFEM ) and the Bureau
de Change, where rates are negotiated with a premium on
the rDAS (Retail Dutch Auction System), the CBN’s instrument to intervene on the foreign-exchange market (see
above). The existence of two exchange rates, as well as the
existence of a parallel market, creates market distortions
(Graph 36).
… when confronting the spinoff effects
of the downfall in oil prices
The decline of the price of oil has had the consequence of
significantly lowering the inflow of foreign currencies
through exports, which were virtually the only way the
Nigerian economy is generating foreign currencies (more
than 95% of the export value of goods, see Part 5). As a
result, the level of foreign-exchange reserves has fallen by
more than 30% between January 2014 and March 2015, to
less than 30 billion USD (i.e., less than five months’ worth of
imports of goods and services). At the same time, tensions
on the national currency are mounting (Graphs 37 and 38).
In order to address these pressures, the monetary ­a uthorities
decided in November 2014 to:
•Devaluate the naira by 8%. The fluctuation band has
been shifted from 150-160 USD/NGN to 160-176 USD/
NGN. The level of the naira before the devaluation was
considered overvalued compared to the market rate on
informal channels, where the going rate was 184 USD/
NGN.
•Increase the key rate by 100 basis points, to 13%
•Increase the reserve requirement ratio of private-sector
banks to 20%, up from 15%.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
33
Graph
37
Exchange rate and foreign-exchange reserves
210
USD/NGN exchange rate
200
Foreign reserves (billion USD, right scale)
55
50
190
45
180
40
170
(0.3 times M2), which is its lowest level since 2009 (Graph
39). This decrease in reserves was caused by the decrease in
currency inflows (decrease in the value of crude oil exports)
and the defence of the parity of the naira within its fluctuation band. At the same time, foreign currency deposits –
which had been increasing since 2012 (28% of total deposits
in 2014, see above) – are now markedly less covered by
­foreign-exchange reserves, with a coverage ration of only 1.3
at the beginning of 2015 (see Graph 40).
35
160
150
30
140
2013
25
2014
2015
Coverage of monetary mass by foreign-exchange
reserves (foreign-exchange reserves/M1)
1,4
1,2
38
1
Oil prices and foreign-exchange reserves
0,8
Bonny Light crude oil price (USD per barrel)
Foreign reserves (billion USD, right scale)
140
60
55
120
50
100
0,6
0,4
0,2
0
2009
45
80
40
60
Graph
30
2010
2011
2012
2013
2014
Source: CBN, author’s calculations.
Given the ongoing tensions, a new devaluation of the naira
should be considered, to the very least, especially given that
oil prices are now set to stay low for long and that the end
of the US unconventional monetary policy has led to a
gradual appreciation of the US dollar. [32] The inefficiency of
the November 2014 devaluation may lead the monetary
authorities to abandon the regime of semi-floating exchange
rates, the defence of which is taxing for foreign-currency
exchanges. The introduction of a more flexible exchange
rate system may happen gradually.
The decrease in foreign-exchange reserves since the
Summer of 2014 (by more than 30%) is such that these
inflows now cover only 0.7 times the M1 money supply
2011
2012
2013
2014
40
Coverage of foreign currency deposits
by foreign-exchange reserves (ratio of
foreign-exchange reserves to foreign deposits)
25
2009
2010
Source: CBN, author’s calculations.
35
40
20
2008
39
1,6
Source: CBN, author’s calculations.
Graph
Graph
9
8
7
6
5
4
3
2
1
0
2008
2009
2010
2011
2012
2013
2014
2015
Source: CBN, author’s calculations.
[32] The appreciation of the US dollar since April 2014 may explain part (up to half) of the downfall in oil prices (source: Olivier Rech, Beyond Ratings – quoted in an interview in
La Tribune of 9 October 2014).
34
© AFD / Macroeconomics and Development / May 2015
5. A mono-export economy exposed
to a downturn in prices
5.1. Energy exports, determinants
of current account positions
Nigeria’s current account balance is structurally positive
since 1980, except for the downturns on the international oil
market due to its mono-product export base (see below,
Graph 41). Also, since the early 2000s, the current account
balance is estimated at an average of 8% of GDP, even
though this surplus is seemingly declining since 2005.
Nevertheless, Nigeria’s external financing needs – the sum
of the current account balance minus external debt service),
estimated at an average of more than 24 billion USD since
2005, must be qualified due to:
(i) The very high level of the “Errors and omissions” item in
balance of payments – 4% of GDP on average since 2005
(Graph 42). This reveals weaknesses on part of the Central
Graph
Bank, which is in charge of drafting this statistical document,
in estimating Nigeria’s foreign transactions. [33] Thus,
­a ccording to the IMF, the surplus of the current account
­b alance is overvalued by a significant (but unknown amount);
(ii) The predominance of oil and gas exports in current
external trade and investment flows (exports of goods and
services, remittances, current transfers). These energy
exports are estimated to represent 97% of the exports of
goods on average since 2000 and, along with current transfers, determines the profile of the current account balance
(Graph 43);
(iii) The relatively limited openness ratio of the Nigerian
economy, which has been on a downward trend since the
beginning of the 2000s – it was estimated at 56% in 2000,
but only at 33% in 2013. [34]
Graph
41
Current account balance (% of GDP)
Note: external financing needs (EFN) and their coverage are not explicitly presented
because the data from the balance of payments are not robust enough.
25
25
42
Current account balance and Errors and omissions
(% of GDP)
Current account balance
20
20
Errors and omissions
15
15
10
10
5
5
0
0
‐5
-5
‐10
-10
‐15
-15
‐20
1980 1984 1987 1990 1993 1996 1999 2003 2006 2009 2012
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: CBN, author’s calculations.
Source: WEO, author’s calculations.
[33] CBN’s Balance of Payments Analysis Office has initiated improvements in data collection, notably by setting up statistical surveys of identified contributors.
[34] The openness ratio, or openness index, of an economy measures the place occupied by the rest of the world in the economy of a country. It is the ratio of imports and exports
of goods and services to the value of its GDP. It is equal to 46% on average for Nigeria between 2000 and 2013.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
35
Graph
43
Components of the current account balance
(% of GDP)
Current transfers
Income
Services
Goods
Current account
30
25
20
15
10
5
0
‐5
‐10
‐15
2000
2002
2004
2006
2008
2010
2012
Source: CBN, author’s calculations.
Due to the predominance of oil and gas in the exports of
goods, the performance of Nigeria’s external trade is, de
facto, very dependent on oil prices (Graph 44). The share of
oil and gas exports in the total exports of goods has
remained constant (in real terms) since the 1990s (at a level
Graph
of 97%), which suggests that Nigeria’s export sector is still
very concentrated and that the diversification of Nigeria’s
economy (see Part 2) is stymied by several limitations.
Nevertheless, the emergency of service activities in the
economy, and therefore targeted at the local market, has
decreased the the share of oil exports in the GDP. The latter
amounted to 27% of GDP in 2000 but less than 14%
en 2014.
The sharp drop in oil prices since the month of June 2014
therefore penalizes the value of the export base of the
country. Other things being equal, the fall in oil prices by
50% could lead to the deterioration of the current account
balance by more than 10 percentage points of GDP – along
with the emergence of a current account deficit of about
6% of GDP, notwithstanding the structurally elevated level
of the “Errors and omissions” item, which could increase the
impact of the shock even more. On top of this value effect,
there is a volume effect that seems more structural and
therefore more problematic. Indeed, at constant prices, the
quantities of crude oil exported from Nigeria have been
gradually dropping since 2011 (Graph 45).
Graph
44
Brent price and net oil exports
120
100
Brent price (USD per barrel)
Net exports of oil (billion USD)
Net oil exports and changes in the variation
of export volume of goods
40
35
Net oil exports (% of GDP)
35
Variations in the export volume of goods (%, right scale)
30
25
30
80
20
25
60
15
20
10
40
15
5
20
10
0
1995 1997 1999 2001 2002 2004 2006 2008 2009 2011 2013
Source: WEO, EIA, author’s calculations.
36
45
© AFD / Macroeconomics and Development / May 2015
0
-5
5
-10
0
-15
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: WEO, author’s calculations.
5. A mono-export economy exposed to a downturn in prices
This alarming situation can be linked to the large decrease in
crude oil imports by the United States these past years
(46% of the total in 2008 but only about 4% in 2014), in link
with the formidable increase in production of non-­
conventional oil since 2005 (more than 10 million barrels per
day in 2014). Last June, the United States, which were until
then Nigeria’s largest trading partner, have stopped
­importing oil from Nigeria. The loss in market share of
Nigerian crude oil is particularly alarming because it comes
with the exposure to the volatility of oil prices, at least until
the ­country finds other trading partners.
Graph
46
External capital flows (% of GDP)
3,5
3,0
Net FDI
Net portfolio investments
2,5
2,0
1,5
1,0
0,5
0,0
5.2. Low external capital flows
The financial account balance, which is in deficit since the
beginning of the 2000s due to the increase in repayments of
international credits, is gradually shrinking since 2005.
External capital flows seem low given the size of the Nigerian
economy (Graph 46). In particular, net inflows of foreign
direct investment (FDI) remain very low (at an average of
1.3% of GDP since 2010), even though the inflows are
­evaluated at 7 billion USD per year. These inflows are
­concentrated in the energy and natural resources sectors
(mostly in the oil sector), for a share exceeding 50% of total
investment. However, FDI in the telecommunications and
­construction industries are experiencing strong growth.
They primarily proceed from the United States (14%), South
Africa (11%) and the United Kingdom (11%).
As for portfolio investments, they have strongly increased
in the past five years, experiencing a three-fold increase.
Their volatile character and their predominance compared
with FDI is a source of exposure for Nigeria. Also, p­ reliminary
data for 2014 seems to indicate that portfolio investments
have strongly receded. Among the factors outlined by the
financial community, investor concern and uncertainty
regarding the electoral context as well as the trend reversals
linked to the end of the US unconventional monetary
­p olicy.
2010
2011
2012
2013
Source: WEO, author’s calculations.
Finally, it must be added that it is quite difficult to interpret
the data from Nigeria’s balance of payments due to the
imbalances in statistical estimations of the data, as it suggested by the very high level of the “Errors and omissions”
item (see Graph 42).
5.3. External liquidity is under increasing
tension
The fall in export revenues from oil for the past few months
has led to increased tensions on the naira, which based on a
managed float regime. To defend the parity of the naira in
its target band of fluctuation, the Central Bank has drawn
from its foreign-exchange reserves to inject several billion
dollars in the economy starting in the month of September
2014, before resorting to devaluate the naira by 8% (the
band of fluctuation has gone from 150-160 USD/NGN to
160-176 USD/NGN in November 2014). Overall, between
CBN’s withdrawals and the decrease in oil export revenues,
foreign-exchange reserves have gone down by more than
7 billion USD between July 2014 and March 2015, i.e., by
more than 30%. In 2014, they were at a level considered
satisfying, allowing for the coverage of more than six months
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
37
Graph
Graph
47
Foreign-exchange reserves
Reserves (billion USD, left scale)
Reserves in months of imports of goods and services
60
50
16
14
12
40
10
30
20
10
0
2000
2002
2004
2006
2008
2010
2012
1600
1400
6
800
4
600
2
400
0
200
of imports of goods and services, but with the rapid depletion of foreign-exchange reserves (29 billion USD at the end
of the month of March 2015), these would only enable to
cover less than five months of imports of goods and services
at last year’s levels (see Graph 47). The now durably low oil
prices on the medium run, the loss in market share of crude
oil exports to the United States, as well as the nature of the
© AFD / Macroeconomics and Development / May 2015
Foreign reserves / Total external debt
1200
1000
Source: World Bank, CBN, author’s calculations.
38
Foreign-exchange reserves coverage
of the external debt (in %)
8
2014
48
0
2005 2006 2007 2007 2008 2009 2009 2010 2011 2011 2012
Source: World Bank, author’s calculations.
e­ xchange-rate regime in place, should increase the tensions
on the f­ oreign-exchange reserves in the coming months.
External solvency remains satisfying however due to the low
level of external debt ratio, at 1.7% of GDP. External debt has
primarily been contracted from funding agencies and seems
securely covered by the foreign-exchange reserves (last data
point in 2012, Graph 48).
Conclusion
The macroeconomic and sociopolitical history of Nigeria is
first and foremost a history of oil and the distribution of
income that accompanies it. After the end of the Biafran War
in 1970, and the tumultuous shifts of an economy that was
volatile and dependent on the fickle changes in the oil and gas
industry, the growth rate became stable. This was made possible by the changes that were made to the economic growth
model, which followed from the emergence of a service
economy that developed from the end of the 1990s into the
beginning of the twenty-first century, and which included
telecommunications, banks, entertainment, and the like. The
Nigerian economy grew at a significant pace (7% per year, on
average) and became the largest economy on the African
continent. Nonetheless, forms of diversification of the productive sector came up against certain constraints. One of
the most significant of these structural limits was the generation of electricity. When compared to other countries, it is
easy to see why the quality of electricity in Nigeria is often
said to be among the worst. This hampers the attractiveness
of the country in the eyes of foreign companies, and as a
c­orollary, the diversification of productive activity in the
country. Both the private and the public sectors are largely
dependent on oil and gas as sources of revenue.
If certain aspects of the infrastructural deficits in the country
can indeed be overcome, and growth can continue, institutional issues and corrupt practices are still an inhibiting factor.
The resolution of constraints such as these is fundamental to
creating an atmosphere of inclusive development in the
country of Nigeria. Previous governments have neglected
the problem of territorial disparity, and have only manager to
alternate the dynamic of concentration of revenue in three
geographical areas. The persistence of such a public policy
will continue to impact the sociopolitical context. Amongst
the imminent measures to be taken by the new president is
the quelling of the Boko Haram m
­ ovement, which significantly affects some of the most disadvantaged regions in the
country. This fact in itself could constitute one of the most
compelling motivations for rising to the challenge of promoting an inclusive model of development in the heart of
such a vast an rich country as Nigeria.
/ Nigeria: The Restrained Ambitions of Africa’s Largest Economy /
39
List of acronyms and abbreviations
AMCON
Asset Management Corporation of Nigeria
IPP
Independent Power Producers
APC
All Progressives Congress
JOA
Joint Operating Agreement
bpd
barrels of crude per day
LMIC
Lower Middle Income Country
CAR
Capital Adequacy Ratio
MIC
Middle Income Country
CBN
Central Bank of Nigeria
MWMegawatts
DMO
Debt Management Office
NBS
Nigeria’s National Bureau of Statistics
ECA
Excess Crude Account
NNPC
Nigerian National Petroleum Corporation
EFCC
Economic and Financial Crimes Commission
NRN
Nigerian Naira
EFN
External Financing Needs
NSIA
Nigeria Sovereign Investment Authority
FDI
Foreign Direct Investment
OPECOrganization of the Petroleum Exporting
Countries
GDP
Gross Domestic Product
PDP
People’s Democratic Party
GFCF
Gross Fixed Capital Formation
PPP
Purchasing Power Parity
IEA
International Energy Agency
PPP
Private-Public Partnership
IMF
International Monetary Fund
PSC
Private Sharing Contracts
HNLSS
Harmonized Nigeria Living Standards Survey
rDAS
Retail Dutch Auction System
ICPC
Independent Corrupt Practices Commission
ROA
Return on Assets
ROE
Return on Equity
SME
Small and Medium Enterprises
ICRCInfrastructure Concession Regulatory
Commission
40
IFEM
Inter-bank Foreign Exchange Market
SSA
Sub-Saharan Africa
IFRS
International Financial Reporting Standards
USD
US Dollar
IFS
International Financial Statistics
WDI
World Development Indicators
© AFD / Macroeconomics and Development / May 2015
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MACRODEV (“Macroeconomics and Development”)
This collection was launched by AFD’s Research Department to present the
work produced in the field of development macroeconomics by AFD’s
­Macroeconomic and Country Risks Analysis Unit (RCH/AMR) and AFD
Group economists. It publishes studies that focus on countries, regions or
development-related macroeconomic issues.
The analyses and conclusions in this document are the sole responsibility of
the authors, and do not necessarily reflect the viewpoints of the Agence
Française de Développement or its partner institutions.
42
© AFD / Macroeconomics and Development / May 2015
Directrice de la publication :
Anne PAUGAM
Directeur de la rédaction :
Gaël GIRAUD
Translator :
Dupont and Smith
Agence Française de Développement
5, rue Roland Barthes – 75598 Paris cedex 12
Tél. : 33 (1) 53 44 31 31 – www.afd.fr
Dépôt légal : 2nd quarter 2015
ISSN : 2266-8187