2

Background to Nigeria’s Economic Reform Program…

In May 1999, President Obasanjo’s democratically-elected government inherited key development challenges.

Economicand

ProductivityDecline

Economicand

ProductivityDecline

Infra-structural

and Institu-tionalDecay

Infra-structural

and Institu-tionalDecay

PoorEconomicManage-

ment

PoorEconomicManage-

ment

Wide-spread

Corruption

Wide-spread

Corruption

DebtOverhang (external

and domestic)

DebtOverhang (external

and domestic)

LowInvestor

Confidence

LowInvestor

Confidence

HighPovertyLevels

HighPovertyLevels

KeyDevelop-

mentChallenges

KeyDevelop-

mentChallenges

3

GDP and Productivity decline…Sharp decline in per capita GDP since 1980s. Real GDP Growth stagnant or negative for most of 1990s.

0

100

200

300

400

500

600

700

800

GDP P

er Ca

pita (

US$)

1960 1980 1999 2000 2001 2002

Year

Nigeria: Trends in GDP Per Capita (USD)

Declining Productivity Trends in Total Factor

Productivity, 1960-1999:

4

Infrastructural decay…Poor state of Infrastructure (Power Supply, Roads, and Telecommunications).In 1999, no new power stations for a decade. No major overhaul of power plants for 10-15 years. Only 19 of 79 generating units operational.Infrastructure deficiency constitutes major barrier to doing business today.

The State of Infrastructure – A Comparison Nigeria South

Africa SSA LIC HIC

Electric power consumption kw per capita (2001)

82 3,793 456 317 8,421

Electricity Generationb(mw) 2003

4,500 45,000

Road to Population Ratio 1000km per million people (1995-2001)

1.1 8.5 2.6 -- --

Paved primary roads – percent of roads (1995-2001)

30.9 20.3 13.5 16 92.9

Telephone – Mainlines per 1000 people (2002)

6 107 15 28 585

Access to sanitation – percent of population (2000)

54 87 54 43 --

Access to safewater - % of population (2000)

62 86 58 76 --

Sources: World Bank: World Development Indicators, African Development Indicators (various).

7

10

11

12

19

24

0 5 10 15 20 25 30

Crime & Theft

Gov. Bureaucracy

Policy Instability

Financing

Corruption

Infrastructure

5

High Poverty levels and poor socio-economic indicators…

High poverty levels and poor socio-economic indicators in comparison with other Low Income Countries.Nigeria ranked 142nd in the UNDP Human Development Index, lower than most Low Income Countries.

SELECTED POVERTY AND SOCIAL (MDG) INDICATORS

Nigeria Low Income Countries

GNI per capita (Atlas method US$) 320 450 Life Expectancy at birth (years) 47 58 Infant mortality (per 1000 live births) 87 82 Under-5 mortality rate (per 1000 live births) 184 121 Access to improved water source (% of population) 57 75 Illiteracy (% of population age 15+) 32 39 Gross primary enrolment (% of school-age population)

82 92

Sources: World Bank – Nigeria at a glance tables, 2004; and Nigeria, Official sources.

Serious crisis in the health and education sector due to neglect and poor funding. Per capita health expenditure in

2001 was $15 compared with $29 for SSA, $222 for South Africa and $2,841 for High Income Countries.

19 physicians per 100,000 people between 1990-99 compared with about 65 for South Africa.

Looming HIV-Aids pandemic - prevalence rate at 5% in 2001.

Immunization rates less than 50%.

Public education expenditure 0.7% of GNP in 1995-97 compared with 3.4% for SSA in 2001.

Over 33% primary school drop-out rate and only 50% progression to secondary school.

Sources: World Bank - African Development Indicators and World Development Indicators.

6

Public sector/Economic management weaknesses…

Weak Public Sector Institutions and poor governance structures Lack of Transparency

and Accountability and high levels of Corruption.

Poor Economic Management: Accommodating fiscal

and monetary policy; fiscal indiscipline, distorted expenditure patterns; weak revenue effort;

Poor management of oil revenues Pro-cyclical

expenditure patterns resulting in boom-bust growth cycles and associated consequences.

0

10

20

30

40

50

60

70

80

90

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

EastWestNorth

CHART 3: TRENDS IN % CHANGES IN OIL REVENUE AND TOTAL EXPENDITURE: 1971-2001

-50

0

50

100

150

200

250

300

1971 1976 1981 1986 1991 1996 2001

YEARS

% C

HAN

GE

IN R

EV

& EX

POil revenue

Total Expenditure

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Large external debt burden…Large External Debt Burden as measured by traditional indicators.

Over 80% owed to Paris Club creditors.

Paris Club

Multilaterals

Commercial Creditors

Growth in debt stock associated with accumulation of penalties and arrears. Rescheduled amount in December

2000 comprised 24% late interest; 21% interest; 48% principal arrears, and only 7% principal balance.

Worsening position. Since December 2000, arrears have accumulated to the tune of about $5 Billion.

Cross-currency exchange risks have added over $5 billion to the debt stock in dollar terms since 2001, due to dollar depreciation. Dollar accounts for less than 25% of debt.

Nigeria - Debt Indicators, 1970-2002

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1970-811982-85 1986-1992

1993-1998

1999 2000 2001 2002

Deb

t Rat

ios

(%)

0.0

5000.0

10000.0

15000.0

20000.0

25000.0

30000.0

35000.0

Deb

t st

ock(

$mil)

Debt/GDP Debt/Export Debt stock($m)

8

Large domestic debt burden…External debt burden exacerbated by Rising Public Sector Domestic Debt Securitized public debt now at $10 billion equivalent.

Mostly short term T-Bills, which exposes government to serious financial risks.

Huge unsecured arrears arising from past mismanagement. Arrears to Local Contractors (including large foreign

companies) amounting to $4.2 billion equivalent, some dating back 10-15 yrs.

Unpaid pension liabilities, including Military pensions, now over $8 billion equivalent.

Arrears have also been accumulated on allowances due to teachers, doctors and health workers, and liabilities of Foreign Missions, amounting to over $200million.

Total securitized and non-securitized public debt now well over $56 billion or 83.6% of GDP 2004.

9

Low aid flows and negative transfers…

Nigeria is the lowest aid recipient in Sub-Saharan Africa. Per capita annual aid flow is about $2 compared

with $28.2 average for Sub-Saharan Africa (2002).

Presently experiencing net negative transfers of approximately $1.6bn, or $11.9 Per capita per annum in 2002 (GDF and DAC figures).

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Addressing the development challenges - NEEDS

National Economic Empowerment and Development Strategy (NEEDS) is Nigeria’s home-grown Medium Term Economic Development and Poverty Reduction Strategy for:

Poverty reduction Wealth creation Employment generation Value Reorientation

States have also commenced preparation of SEEDS to complement efforts.

Key Pillars of NEEDS include:

Redefining the role of government in the economy.

Creating an enabling environment for private sector growth.

Improving social services delivery.

Creating a new value system.

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Main Focus of the Reform…Economic management

Fostering macroeconomic stability – fiscal discipline Public Expenditure Management Public Revenue reforms; Tax reforms and customs

restructuring; Improving public resource management/utilization

Governance and accountability Procurement reforms - due process mechanism. Oil Sector Transparency. Rule of Law/Security

Public service restructuring Focus on efficiency, responsiveness, service delivery.

Accelerated privatization and liberalizationFinancial Sector ReformsRebuilding physical and social infrastructure

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Addressing the development challenges - SEEDS

State Economic Empowerment and Development Strategy (SEEDS) complement efforts of Federal Government.

Each SEEDS has core measures on improving Public Expenditure Management.

Procurement Reforms: Several States have adopted Due Process Mechanism and are setting up Units.

Emphasis also placed on creating enabling environment for Private Sector Development.

Some limited progress in redefining role of government.

12 States ahead of the Pack: Bauchi, Cross Rivers, Ebonyi, Enugu, Federal

Capital Territory, Kaduna, Katsina, Kwara, Nassarawa, Ogun, Sokoto and Osun.

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Rationale for a home-grown program…

Bitter historical experience with previous IMF adjustment programs.True ownership of reforms.Depth of adjustment - large and significant – hence need for true ownership.Nature of Program – endorsed by the IMF

Judged by the IMF to be at least as tough as or tougher than the standard fund programme.

Well-laid out and transparent structural matrix of reforms, with well-defined performance benchmarks.

Quarterly monitoring by the IMF.

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Progress to date…Progress in consolidating democratic institutions, structures and processes, which constitutes bedrock for economic reform. Successful democratic transition effected. Establishment of workable relationship

with the legislature. Search for unity, peace and harmony. Vigorous civil society. Virile, (free?) press.

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Progress to date…

Macroeconomic Stability

Measure Present Status

Fiscal Deficit

2004 Deficit no more than 2.1% of GDP with budget at $25 a barrel.

On target. Ended with projected deficit of N147 billion instead of N181 billion. Surplus recorded if higher oil price is considered.

Inflation Low Double Digits 10 – 11%

Monthly moving average inflation rate at 15% . 12-month inflation moderated June to June 14.1% ; July to July 10.9% , Aug-Aug 13.0% , Dec-Dec 10 % .

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Progress to date…Macroeconomic Stability

Measure Present Status

Exchange Rate

Stability Exchange Rate has been relatively stable in the past 6 months at about N132 to $1. Parallel mkt. Premium stable at 5% .

Foreign Reserves

Upto 6 months of Imports

Reserves at about $20 billion including $5.9 billion excess crude revenue

Growth Rate

Targeted 5% real GDP Growth

On target – growth rate in 2004 is 6% .

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Progress to date…Anti-corruption drive, Transparency and Accountability

Procurement Reforms: Due Process Mechanism. EITI - Audits to be launched shortly. G8 Transparency Compact. Economic and Financial Crimes Commission –

progress with tackling advance fee fraud, cybercrime, oil-bunkering, and high-level political crimes.

Independent Corrupt Practices Commission - 55 cases under investigation.

Police Reform – Increase in size, equipment and training. But true reform yet to begin.

Legal and Judicial Reform under preparation.

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Progress to date…Improved public expenditure management

MTEF Medium Term framework to give strategic focus and expenditure prioritization.

MDG-directed expenditures in 2004 and 2005 Budgets. Fiscal Discipline – Commodity-Price Based Fiscal Rule. Public expenditure reforms also on-going at state level to

varying degrees.Commodity-price based fiscal rule adopted in 2004:

savings of $5.9 billion equivalent for the entire nation, as a result of oil price rise. Amount kept in reserves.

50% of amount saved for volatility cushioning fund against oil price volatility. 50% to be shared between Federal and State/Local Governments.

FG’s share applied to 2005 Budget – education, power, roads, pension and structural reforms, as well as security.

Fiscal Responsibility Bill in progress to lock in changes.

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Progress to date…

Enhanced budget monitoring with key performance indicators.Improved budget transparency

Publication of mid and end-year budget performance review.

Monthly publication of revenues to tiers of government.

Publication of revenue allocation over past 5 years.

Improved revenue management. Tax reform bill under preparation. Customs Reforms involving major clean-up of top

tier.Trade and Tariff Reforms underway to harmonize tariffs to ECOWAS Four Tariff Bands.

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Progress to date…Civil service reforms

5 pilot Ministries: Restructuring focused on re-professionalization;

improving efficiency and service delivery as well as reducing waste.

Payroll audits in a pilot Ministry has weeded out 5000 ghost workers.

Monetization of in-kind benefits for civil servants to curb waste.

Privatization and deregulation Deregulation of Downstream Petroleum sector.

Progressive phase out of subsidies on petroleum products has clawed back $1 billion into the budget over the last few years.

Sale of 29 Enterprises to date, although not as rapid progress this year.

Deregulation of Telecoms Industry Planned deregulation of power sector.

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Progress to date…Financial sector reforms. Bank recapitalization from $15 million to $188.3

million. Proposed Insurance Sector Reforms.

Pension Reforms Pension Reform Bill passed. New contributory pension scheme under

implementation. Large transition cost.

22

Progress to date…Improved Debt Management New Debt Office created to improve debt

management -More professional/technical approach to debt management.

Progress in External Debt Management. Improved Relations with creditors – restoration of

dialogue. Working with PC to address burden-sharing. Timely payment of agreed amounts.

Progress in domestic debt management: Curtailment in domestic borrowing due to tight

fiscal policy. Limited domestic borrowing now on a limited

basis to deepen capital markets ad restructure short term debt.

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Next Big Push…Legislations to lock in Reforms

Procurement Bill, EITI Bill, Fiscal Responsibility Bill, Local Government Bill, Power Sector Bill (passed).

State-level Reforms. Carrot and Stick approach – matching grants,

performance-based allocation of donor funds, legislation.

Improving human/physical infrastructure and promoting real sector growth.Improving service delivery.Big push on privatization.Political Reforms – National Political Conference commenced

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Key challenges…Managing the political economy of reform

Contending with vested interestsNeed to deliver visible “wins” to the population quickly to broaden political support.Balancing political and economic reformsManaging complex Federal-State relations.Managing costly trade-offs while ensuring reform stays on track.Dealing with Reputational overhang – burden of past history.

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Key challenges…Building national consensus on debt strategy.

Keeping dialogue going on the debt issue remains difficult. Debt repayment seen as too large a portion of national

resources. Combined external and domestic debt service exceeds Federal

Capital Budget. Even $1 billion paid to PC represents 70% of total (recurrent and

capital) education budget and 110% of health budget (both States and Federal).

More than $3 billion needed annually to service external debts in next 5 years.

Concerns about origins and escalation of the debts. Fraudulent loans. Devastating effect of accumulating arrears. Exchange rate effects.

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Key challenges…Financing the MDGs.

Oil revenues insufficient to meet financing needs. Even with higher prices, oil earnings in 2004, oil revenues

amounted to only about $28.5 billion. $3.2 billion reinvested in oil industry as Nigeria’s share of

production costs, with a net of $25.3 billion, of which $5.9 billion is excess crude.

With population of over 130 million, oil earnings translate to about 53 cents per capita per day.

Huge financing needs for achieving MDG targets. Work underway by various organizations - Preliminary estimates

indicate average annual spending requirements in 2005-2009 as $7.65 billion, compared with $4 billion NEEDS estimate:

Power, Transport and Water - $5.2 billion Education - $1.7 billion; Health - $720 million

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How can you assist?Realistic appraisal of Nigeria’s situation and the facts on ground.Recognition of Nigeria’s size and role in improving MDGs for SSA.Recognition of Nigeria’s role in peace-keeping and regional stability.Acknowledgement of strong efforts to address key challenges and support for Reform effort.Recognition of “window of opportunity” for dialogue.Strong partnership approach.

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What do we owe you?

Strong implementation of structural reforms in open, transparent and monitorable manner.Strong anti-corruption drive.Strong commitment to channelling savings from debt relief towards poverty reduction.Strong acknowledgement of our debt obligation to you.Implementation of agreement in a fair manner to all creditors.