Document of

The World Bank

FOR OMCIAL USE ONLY

Report No. P-4359-UIII

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$452 MILLION

TO THE

FEDERAL REPUBLIC OF NIGERIA

FOR A

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

September 19, 1986

This document his a restrided distnbution ad nmy be used by recipients only in the perfonnace oftheir ocial duties. Its contens mny eot odrwise be disclosed without Wodd Dank authorization.

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CURRENCY EQUIVALENTS

Calendar 1984 Calendar 1985 Sept. 1986

Currency Unit = Naira (N) N NUS$1 = NO.76 N 0.89 N 1.33Ni = US$1.31 US$1.12 US$0.75

ABBREVIATIONS AND ACRONYMS

CBN - Central Bank of NigeriaFMGN - Federal Military Government of NigeriaFfF - Federal Ministry of FinanceFMT - Federal Ministry of TradeNEPC - Nigerian Export Promotion CouncilSAP - Structural Adjustment ProgramSFEM - Second-Tier Foreign Exchange Market

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLYNIGERIA

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

TABLE OF CONTENTS

Page

Loan Summary .................................................. i

Part I - The Economy .......................................... i

A. Structural Legacy of the Oil Boom (1973-80) .... ........... 1B. Economic Crisis (1981-85) ................................. 3C. Policy Initiatives ........................................ 5

Part II - The Adjustment Program .............................. 5

A. Exchange Rate and Trade Policies .......................... 6B. Monetary Policy ................................. 6C. Fiscal Policy ................................. 6D. Federal Capital Expenditures ............................. . 7E. Reform of Public Enterprises ............................. . 8F. Sectoral Policies ................................ 9

Part III - The Proposed Loan .................................. 9

A. Loan History and Objectives .............................. . 9B. Trade and Export Policy Adjustment Program .............. .. 10C. Loan Features and Operation ............. .. ................ 13D. Monitoring ....................... ......................... 14E. Role of the Bank and the IMF .............................. 15

Part IV - Program Effects and Implications .................... 15

A. Economic Effects . ........................ ................. 15B. Social Impact .. ................. ........................... 18C. Financing ................................................. 20D. Risks . ..................................................... 21

Part V - Bank Group Operations in Nigeria ..................... 21

Part VI - Recommendation ........................ 23

Annexes

I. Social Indicator Data SheetsII. Debt, Federal Budget, Macroeconomic Indicators,

Balance of Payments, and Status of Bank Group OperationsIII. Supplementary Loan Data SheetIV. Government's Letter of Trade Policy

V. Non-Oil Export Prospects and Development ProgramVI. Documents in the Project File

map

This document has a restricted distribu;ion and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

NIGERIA

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

LOAN SUMMARY

Borrower: Federal Republic of Nigeria

Executing Agency: Central Bank of Nigeria, Federal Ministries of Financeand Trade

Amount: US$452 million equivalent

Terms: 20 years, including five years of grace. Standardvariable interest rate.

Description: The proposed loan would support the Government'sefforts to reform trade and export policies with theobjective of increasing domestic output andrestructuring the productive base of the economy inorder to reduce its dependence on the oil sector and onimports. Specific policy reforms being supported bythe loan are: (i) introduction of a market-determinedexchange rate system; (ii) elimination of traderestrictions and price controls; and (iii) imple-mentation of a package of export incentives. The loanwould provide US$450 million equivalent to financegeneral imports of goods and US$2 million equivalent tofinance technical assistance and training for exportdevelopment and subsector investment studies. Thesereforms are being undertaken in the context of astructural adjustment program recently appr3ved by theGovernment.

Benefits and Risks: The immediate benefits of the trade policy reformswould be to eliminate long-standing distortions in theincentives system and to improve significantly theallocation of resources in the economy. The reformswould improve the profitability of tradeable goodssectors, particularly of exports, and would generateover time a sustainable structure of production. Therisks of the program emanate from the far-reachingnature of the reforms which may generate domesticpressures against such reforms. A renewal of thedecline in oil prices and the ensuing worsening of thebalance of payments situation may also create pressureson the Government to revert to controls and abandon itsefforts to free up markets. These risks are expectedto be reduced by: (i) a national consensus that drasticeconomic reforms are needed to overcome the economiccrisis; (ii) the Bank and IMF monitoring of theadjustment program and trade policy reforms in thecontext of this loan and a standby arrangement;

- ii -

and (iii) by debt rescheduling and increased financialflows from the commercial banks and official creditorsin support of the adjustment program.

EstimatedDisbursements: IBRD Fiscal 1987 1988

--- US$ millions --

Annual 440 12Cumulative 440 452

The loan, except the technical assistance component,will be disbursed in two tranches. The first trancheof US$250 million would be available for disbursementat the time of loan effectiveness; the second trancheof US$200 million is expected to be released two tothree months later, on the ba3is of (i) a favorableassessment of funding made available by the Governmentto support operations of the second-tier exchangemarket; and (ii) satisfactory progress on theimplementation of the agreed trade and export policyreforms.

Economic Rateof Return: Not applicable.

Appraisal Report: None

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTTO THE EXECUTIVE DIRECTORS ON A PROPOSEDTRADE POLICY AND EXPORT DEVELOPMENT LOAN

TO THE FEDERAL REPUBLIC OF NIGERIA

1. I submit the following report and recommendations on a proposedTrade Policy and Export Development Loan of US$452 million to the FederalRepublic of Nigeria. The loan would be amortized over 20 years, including5 years of grace. Interest on the loan would be at the standard variablerate.

PART I - THE ECONOMY

2. The following assessment of the Nigerian economic situation isbased on the findings of an economic mission that visited Nigeria inMarch-April 1985, continued economic reporting of the Resident Mission inLagos, a review of the 1986 budget and a mission in April-May 1986 thatassisted the Government in drawing up its proposed structural adjustmentprogram. Annex I presents selected social and economic indicators forNigeria.

A. Structural Legacy of the Oil Boom (1973-80)

3. Export revenues grew rapidly (Chart 1) during 1973-80 as thebuoyant oil market radically altered Nigeria's resource position. Therevenue increases largely accrued to the Government and were used tofinance commensurate increases in public spending. The magnitude andcomposition of the increase in domestic resources preempted by the publicsector over this period entailed major changes in the underlying structureof the economy. Coupled with a package of complementary exchange rate,import, and pricing policies, these changes increased the economy'sdependence on oil revenues and made it highly vulnerable to a downturn inthat market.

tHAR1 f

NIGERIA FOREIGN TRADECOILLIONS OF U S DOLLARS)

22.6606

20nwe A^|". , ,~~~~~~~~~, \

12. ee -

4.ee0

2. 69 :76 _6 1- 'S

spa 19 e7 1 Q9e 1 97 1 1 B73 197 1s 2 77 l1g79 ?Gt e 1 983 l oss

- 2 -

4. Designed partly to heal the wounds of the civil war that hadended in 1969, the increases in public spending supported an ambitiouspublic investment program intended to translate rising oil revenues intoinfrastructure and productive capacity that would serve as the basis fordiversified growth and development. Significant gains were scored over theperiod in both economic and social infrastructure. Transportinfrastructure, particularly roads and ports, expanded considerably, andeducational opportunities spread rapidly; witness the doubling of theprimary school enrollment ratio, which had been about 35 percent at thebeginning of the 1970s. These successes notwithstanding, many publicinvestment projects had been undertaken without sufficient attention,either to their economic viability or to the capacity of governmentagencies and public enterprises to implement them. By 1980, publicinvestment, representing over half of total investment, absorbed some 15percent of GDP and covered a wide range of activities.

5. The rapid growth of the public sector - and the constructionboom that accompanied the massive public investment program - altered theprevailing pattern of relative prices and wages and set in train changes inthe underlying structure of the economy. High rates of wage and priceinflation in the non-traded goods sectors, while securing the resourcesneeded by these sectors to accommodate the expansion in demand, depressedthe non-oil traded goods sector. Labor costs vere boosted by the need tomatch wage offers in the construction and service sectors, but exportprices were effectively capped by an exchange rate policy which allowed thenaira to appreciate with rising oil revenues. The combination of risingdomestic costs and the appreciation of the naira meant a sharpdeterioration in international competitiveness (Chart 2). The impact ofthese policies on the agricultural sector - the major source of GDP andexport revenues before the oil boom -- vas particularly severe: by 1980its share in non-oil GDP had fallen to 30 percent, from around 50 percentin the early 1970s (Chart 3). While non-oil exports stagnated, aprotective import regime, based on a system of licenses and quantitativecontrols, was used to insulate domestic industries from foreigncompetition. This encouraged the growth of import-based consumer goodsindustries which contributed little to domestic value added.

LHART 3UIART 2 tHR CHART 2 ~~~~~~~NIGERIA STRUCTURE OF NON-OIL GDP

NIGERIA EXCHANGE RATE INDICES ePEPCENTAG SIRES itN COMENT 'R=S7

170*

l1" 70-

130~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-30 OO

140~~~~~~~~~~~~~~~~~~~~0

'28

7s /7.C Jt s _ -

se- 99 *.;7 I§^9 *g79 *gn Is7s se7 Is7e le Bee3 Ig15 9 ^: 7 IPl5Q Q?X gn 97. 1177,7 s9le IQ'8s 2sel08 2l~7 195g 1971 1973 1975S 1077 1070 lOut 1053 I05mh O7 ,5 l' 93 '7 07 09 18 93 18

-3-

B. Economic Crisis (1981-85)

6. Throughout the 1970s budgetary expenditures had more than keptpace with the rapidly rising revenues from oil (Chart 4). Indeed, a smalldeficit persisted even in 1980, despite the spectacular rise in oilearnings that year. Accordingly, as oil revenues fell away in thefollowing years - to one half their 1980 level in 1983 -- the budgetaryposition became increasingly unsustainable. Partly because the downturnwas expected to be short-lived, the Federal and State Governments reactedslowly to the drop in oil revenues. And by 1983, sizeable external andfiscal imbalances had emerged - wvth thLe current account deficit reaching6 percent of GDP and the fiscal deficit fully twice that -- financed bypublic sector borrowing, a rundown of international reserves, and alarge-scale accumulation of arrears on external trade payments. At thesame time, the Government continued to follow an exchange rate policygeared to appreciation in order to damp domestic inflationary pressures.Notwithstanding the 27 percent depreciation vis a vis the US dollar betweenDecember 1980 and December 1983, the naira posted a 12 percent appreciationin nominal effective terms over the same period. In real terms theappreciation approached 50 percent.

tLKART 4

NIGERIA GOVERNMENT FINANCEScrcPcrrTAcF .'l-v ARES OF GOP3

1-S

\/

rISEAL YEARS 0[GpQW AP RL row 1R`*- 979

7. The authorities began to implement measures to redress thesedeficits in 1984. Budgetary expenditures were slashed and administrative#controls over imports were tightened. Fiscal austerity was characterizedby across-the-board cuts, in many cases without taking account of therelative priorities of different types of expenditure or the stage ofcompletion of projects. Outlays on supplies, spare parts, and routinemaintenance were also generally cut back, even as significant sums were setaside to support operating deficits of inefficient parastatals and toprovide heavy subsidies, particularly on fertilizers. While steps weretaken to improve the system of trade taxes, controls on factory gate pricesand other market interventions continued to distort the structure of

- 4 -

relative prices. Moreover, the exchange rate was only belatedly allowed todepreciate beginning in 1985.

8. Although the austerity measures were successful in bringing abouta rapid decrease in the fiscal and external deficits, their bluntnessexacted a considerable economic toll (Chart 5). Production and employmentin most sectors fell sharply. Even after allowing for the slight recoveryin 1985 resulting from increased oil production and improved harvests, realGDP in 1985 was some 15 percent lower than at the beginning of the 1980s.Construction and other service sectors were particularly hard hit by thecutbacks in public expenditures, and declined at an even faster rate thanGDP. The much reduced supplies of raw materials and spare parts to theimport-dependent industrial sector led to widespread plant closures, asubstantial drop in capacity utilization (at present about 35 to 40percent) and extensive layoffs of the work-force. Severe shortages ofimported goods gave a sharp boost to prices -- with the inflation ratereaching 40 percent in 1984 - with scarcity rents of up to 400 percent formany essential goods accruing to traders who, unlike manufacturers, werenot subject to price controls.

CHART S

-"'N OIL GDP TMPORTS AND CONSUMER PRrCES'ANWJAI4 rEPCENTAGE RATES OF C"'ANGE

- - - -

-4e~~~~~~ -~

Q*c 10b- *¢2 1 .f 1i. 4 1Wmr

9. Domestic savings halved in real terms due to the decline in bothGDP and the terms of trade, with the savings ratio falling to 16 percent in1985. The reduction in investment expenditures was also substantial;investment fell to 12 percent of GDP in 1985, under half the peak level of1981. The across-the-board public expenditure cutbacks meant furtherdelays in completing viable projects, thus escalating their costs anddepriving the economy of their benefits. Private investment shrank evenfaster than public investment and by 1985 constituted only a quarter of thetotal. Between 1980 and 1985, real income per head fell by about35 percent, bringing it down to the level prevailing just before the oilboom.

10. External debt service requirements (including payments on privatedebt and rescheduled arrears) increased to 34 percent of exports of goodsand non-factor services in 1985, a tripling since 1982. External medium-and long-term public debt outstanding and disbursed at the end of 1985 ofUS$12.8 billion included a total of US$1.3 billion in promissory notesissued in respect to pre-1984 uninsured trade arrears and US$0.4 billion inrescheduled letters of credit (see Annex iI, Table 1). In addition,insured trade arrears of US$2.3 billion were also outstanding, along withan estimated US$1.8 billion (including accumulated interest) in uninsuredtrade arrears not yet recognized by the Government. Current letters ofcredit outstanding were estimated at US$1.0 billion.

C. Policy Initiatives

11. In the face of a weak oil market and mounting debt serviceburden, the new military Government that came to power in August 1985recognized that demand management policies alone would be insufficient torestore internal and external balance. It accordingly declared its intentto move from "austerity alone to austerity with structural adjustment" andto seek support from the international financial community to ease theburden imposed by the unfavorable debt maturity profile. A major policybreakthrough came with the announcement of the new Government's 1986budget. Key reforms included the removal of the financial subsidy onenergy products (which increased the prices of petro' about 100 percent,diesel 170 percent and fuel oil 250 percent) and a commitment to phase outthe fertilizer subsidy. In addition, a temporary import surcharge of 30percent across-the-board was introduced to serve as an implicit devaluationon the import side, and the foreign exchange retention allowance fornon-oil exports was raised to 25 percent. Other announcements in the earlymonths of the new Government included the intention to establish a limitedsecond-tier market for foreign exchange, to improve export incentives, tocut substantially transfers of public funds to parastatals, to privatizecommercially-oriented public enterprises, and to dismantle the agriculturalcommodity marketing boards. These actions and resolutions affirmed theGovernment's intention to address the fundamental structural weaknesses inthe economy.

PART II - THE ADJUSTMENT PROGRAM

12. The sharp fall in oil prices in the first quarter of 1986increased the urgency of reform. Recognizing this, the Governmentformulated a structural adjustment program covering the period fromJuly 1986 to June 1988. The program, building on the Government's earlierinitiatives, is broadly based, combining exchange rate and trade policyreforms with overall macroeconomic restraint. It also lays considerablestress on shrinking the size of the public sector and improving itsefficiency. The program was prepared with Bank and IMF staff assistanceand was approved by the Government in June. Implementation is alreadyunderway. The Government is now seeking the financial support of itsofficial and commercial creditors, as well as the Bank. The main features

- 6 -

of the macroeconomic program are summarized below. Projections ofmacroeconomic indicators, the federal government budget, and the ba3ance ofpayments are presented in Annex II.

A. Exchange Rate and Trade Policies

13. The core of the program is the move towards a market-determinedexchange rate and the associated dismantling of import controls. To thisend, the Government has undertaken to set up a viable and substantialsecond-tier foreign exchange market (SFEM). This is to be accompanied byprogressive downward adjustments of the official (i.e., first tier) rate,with the aim of reaching a single market-determined exchange rate free ofadministrative controls. In conjunction with the opening of SFEM, due totake place before the end of October, the Dresent systems of importlicensing and ex-factory price controls are to be abolished. TheGovernment is also to implement changes in the system of protection and apackage of export incentive measures. Details of the exchange and tradepolicy measures being supported by the loan are contained in Part III.

B. Monetary Policy

14. Monetary policy plays a dual role in the adjustment program. Fordemand management purposes, monetary policy is to remain tight over theprogram period in order to minimize inflationary pressures that couldotherwise fuel excessive demand for foreign exchange on the second tiermarket. To this end, domestic -redit policy is to be restrained, with netdomestic credit of the banking system projected to grow by only 7.5 percentin 1986 and 4.5 percent in 1987. But monetary policy is also to be anintegral part of the program's supply side, involving movements toward amore market oriented financial system designed to facilitate themobilization of financial savings and to encourage the more efficientallocation of financial resources. In addition, in view of the importanceof liberalizing interest rate policy in conjunction with the establishmentof the second-tier market, interest rates are to be progressivelydecontrolled.

C. Fiscal Policy

15. Fiscal policy combines a restrictive stance with measures toimprove efficiency. Fer the former, the adjustment program aims at keepingthe federal budget deficit below 4 percent of GDP (Annex II, Table 2). Butin pursuing this target, certain general principles designed to enhance theeffectiveness of public spending are to guide the Federal and StateGovernments in their budgetary and planning decisions. First, restraint onthe growth of the federal wage bill is to be maintained, with nominal wageincreases held to 10 percent in 1987 and federal government employmentreduced by 5 percent through a combination of attrition and an extension ofthe freeze on hiring. Second, material supplies are to be increased toensure adequate maintenance of infrastructure. Third, as announced in the1986 budget, non-statutory transfers to all economic and quasi-economicparastatals are to be limited to no more than half their 1985 levels, withtransfers to fully commercially-oriented parastatals to be eliminated by

- 7 -

the end of the program period. Fourth, projects with established economicviability and proportionately low completion costs are to be finishedexpeditiously. Finally, new projects are to be undertaken on anexceptional basis and only if they are deemed to be essential for theeconomic recovery process and their funding is fully assured.

D. Federal Capital Expenditures

16. Nigeria cannot afford many of the ambitious and costly projectsbegun during the period of peak oil revenues. Indeed, under the program,the ceiling on capital expenditures in 1986 is only N3.3 billion, abouttwo-thirds the originally budgeted amount, which had been predicated on amuch more favorable oil price assumption. Within the total, the Governmentis according priority to the rehabilitation and maintenance of existingassets and the timely completion of economically viable projects, withincreased attention to cost recovery. The rationale for the allocation offederal public capital expenditure across sectors is to derive principallyfrom the relative importance of the different sectors in the Government'sdevelopment strategy. The revised sectoral allocations (Annex II, Table 3)have taken account of the Bank's sector and macroeconomic work and itsrecent reviews of the Government's expenditure programs. Compared with the1981-85 period, the new sectoral allocations show a considerably reducedemphasis on industry and increased emphasis on social and physicalinfrastructure. The ceiling on public investment is forecast to remainunchanged in nominal terms in 1987, implying a substantial decline in realterms. But at this stage, both the totals and the sectoral allocations for1987 are indicative; the final shares are to be established in the contextof the 1987 budget exercise to be conducted later this year.

17. Within the capital expenditure program, the critical areas ofconcern are infrastructure, agriculture, petrochemicals, and steel.Capital expenditures on infrastructure and in the social sectors are to beprimarily for the rehabilitation of existing assets. The Bank supportedprogram of Agricultural Development Projects is to be given priority,allowing for increased investment in viable small-scale and low-costirrigation schemes and adaptive research. Gas infrastructure developmentis also to be encouraged to enable power stations and selected industrialusers to substitute gas for more expensive fuel oil, while funding for thenew capital, Abuja, is to be reduced sharply from earlier plans. Inpetrochemicals, priority is to be given to the completion of the Phase Iprojects but with the necessary restructuring to link them to realisticmarket prospects. Preparation and implementation of the proposedexport-oriented Liquified Natural Gas (LNG) project is to proceed only ifpurchase contracts can be guaranteed and the project is confirmed tc beeconomically viable. Other projects in the oil and gas sectors are to bereviewed and a strategy mapped out for the further development of the oiland gas related industries in light of the recent deterioration ininternational oil and petrochemical diarkets. Such a review will highlightpossible ways to restructure Phase II of the petrochemical projects inorder to ensure their viability, in addition to exploring furtheropportunities for private-sector participation. The constrained fiscalsituation will require scaling down and restructuring of the steel

-8-

development program. The present plan for the completion of Ajaokuta is ofparticular concern, given the limited market for its products and its highcosts. In this context, the Government, in collaboration with the Bank, isundertaking a review of the steel subsector and its major projects.Pending the completion of this and the petrochemicals review, relatedpublic expenditures are not to exceed the modest 1986 revised budgetlevels. The Government is considering all possible options, includingprivate sector participation, to restructure other ongoing,capital-intensive industrial projects.

E. Reform of Public Enterprises

18. The public sector in Nigeria has become seriously overextended,with more than 100 commercially oriented enterprises at the federal levelalone. The Nigerian Government plans to rationalize and commercialize thissector as far as possible and to transfer a number of enterprises to theprivate sector. This will be a complicated and sensitive process and willtake several years to implement fully; however, the Government intends toissue guidelines on the modalities of implementation by June 1987. Thegovernment has requested Bank assistance in developing an implementationprogram. On present official thinking, enterprises which function in afully commercial manner are to be fully privatized. But even forenterprises that will be only partially privatized, the government will nolonger provide operating subventions, and their future financial needs willhave to be met by the private capital market. Another set of enterpriseswill be either partially or fully commercialized: these will continue to befully owned by government. Those fully commercialized will be expected tooperate without government operating subventions and support for futurecapital development. Enterprises which can generate a fair proportion ofthe financial resources needed for operations but will continue to needsome goverL ent support towards operating costs or future capitalinvestment will be partially commercialized. The final category consistsof purely public institutions. These will continue to be largely fundedfrom treasury resources butt will, even then, be expected to impose usercharges as appropriate.

19. The operations of all government enterprises are to be closelymonitored and steps are to be taken to ensure their public accountabilityat all times. To this end, the government intends to establish clear termsand conditions for all future loans to public enterprises and willformulate a plan for the settlement of outstanding arrears, including thosedue to the Federal Government. Guidelines and performance tests forefficient operation of the parastatals are also to be established.Measures are to be introduced, designed both to reduce governmentintervention in the operations of public enterprises and to prevent theirexploitation of monopoly positions to impose noncompetitive prices onconsumers.

-9-

F. Sectoral Policies

20. Agriculture. The major objectives of the government'sagricultural sector policies are to increase production of food, rawmaterials, and exportable cash crops; to raise rural employment andincome; and to achieve an optimal regional crop production mix, reflectingthe different comparative advantages of the various agro-ecological zones.In pursuing these goals, the Government intends to rely on privateinitiative and the profit motive as the main catalysts. In order tostrengthen the incentive system, it has terminated the activities of theCommodity Boards and is in the process of transferring the distribution offertilizer and other inputs to private sector channels. Along with theestablishment of a market-determined exchange rate, these actions shouldencourage the production of export and import competing crops. Crop priceswill be determined largely by market forces, and the subsidy on fertilizerhas been reduced to less than 30 percent and is now to be fully eliminatedby the end of 1988.

21. Industry. Distorted incentives have long encouraged excessiveimport dependence in the induscrial sector, which has suffered badly fromthe cutbacks in imported raw materials and spare parts over the past fewyears. Indeed, for production to recover significantly in the short-term,a rather sharp injection of imports would be needed. However, in themedium term, the government's industrial strategy is to reduce importdependence by accelerating the development and utilization of localtechnology, raw materials, and intermediate inputs. The key policymeasures for achieving this objective are the adoption of a realistic andflexible exchange rate policy that reflects the scarcity of foreignexchange and ensures its efficient allocation; trade liberalization, toensure access to imports where they are really needed; the removal ofex-factory price controls; and an appropriate tariff structure to promotean efficient industrial structure. Procedures for establishing enterprisesand for foreign investment approvals are also being liberalized andstreamlined. Under a Bank assisted Industry Technical Assistance Project,a Policy Analysis Department has been set up in the Ministry of Industriesin collaboration with the Ministry of Planning to implement and keep underconstant review industrial, trade, and export policies.

PART III - THE PROPOSED LOAN

A. Loan History and Objectives

22. The proposed loan arose out of discussions between senior offi-cials of the Government and the Bank during April 1986 on the policymeasures required to stabilize the economy and to return it to a path ofgrowth. The loan specifically focuses on the second tier foreign exchangemarket and on related trade policy reform, including non-oil exportdevelopment measures. Additional areas of the adjustment program, such aspublic enterprise reforms and public investment programs. will be addressedthrough the continued dialogue and other ongoing and proposed operations.

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The loan was appraised in May 1986. Negotiations were held in WashingtonD.C. from August 25-28, 1986. The Nigerian delegation included theMinister of Finance, the Governor of the Central Bank of Nigeria; theDirector of Budget and the Assistant Director of External Finance from theMinistry of Finance; and representatives of the Ministries of Trade andJustice and the Central Bank of Nigeria. Presentation of this loan to theBoard is being made before the full external financing package has beenassembled for Nigeria because of the catalytic role of the proposed loanand to ensure that the proposed second-tier foreign exchange market isadequately supported in its initial, crucial period. However, the loanwill not become effective until the Bank receives satisfactory assurancesthat Nigeria's external financing needs for 1986 and 1987 will be met.Supplementary data on the proposed loan are presented in Annex III.

B. Trade and Export Policy Adjustment Program

23. The program of trade and export policy reforms supported by theloan is presented in the Government's Letter of Trade Policy (Annex IV).Two major policy changes under the program that would substantiallyincrease the reliance on market mechanisms for allocating resources are theintroduction of a market-determined exchange rate and the elimination ofthe present system of import licensing. The main features of the tradepolicy reforms being supported by this proposed loan are presented below.

Exchange Rate Realignment

24. The establishment and maintenance of an appropriate exchange rateis at the heart of Nigeria's structural adjustment program. The exchangerate realignment is to be accomplished through the establishment of asecond-tier foreign exchange market (para 13), which the proposed loan willsupport. The sources of supply of foreign exchange to the second-tiermarket are expected to comprise oil export receipts (except the amountsneeded for debt service and official reserves), non-oil export receipts,new lending by the Bank and overseas commercial banks, remittances, tourismand capital transfers. Demand in the second-tier market would comprise allprivate and public sector payments for imports, remittances and capitalaccount transactions. Taking into account the latest balance of paymentprojections and the expected needs for debt service, it is estimated thatthe initial size of the second-tier market could be about US$6 billionannually.

25. The exchange rate for transactions in the second-tier market isto be determined by the supply and demand for foreign exchange. Theforeign exchange would be supplied to the second-tier market by directsales of foreign exchange by its earners and holders to authorized foreignexchange dealers and by sale of oil-export earnings through the CentralBank of Nigeria to the commercial banks and other dealers. The exchangerate would be set by direct negotiation between buyers and sellers atmutually agreed exchange rates that are free to vary from hour to hour andday to lay. The commercial banks would be free to buy and sell foreignexchange from each other in an inter-bank market. All requirements for the

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surrender of foreign exchange will be abolished except for oil exportreceipts. Buying and selling rates would be posted daily for publicinformation. The decree establishing the second-tier market has beensigned into law and the operational guidelines elaborated; the market isexpected to start in October 1986. The establishment of a second-tierforeign exchange market with operational features satisfactory to the Bankis a condition of effectiveness of the proposed loan.

Trade Policy Reforms

26. Removal of Import Controls. At present all imports and exportsare subject to prior licensing or prohibitions. With the launching of thesecond-tier foreign exchange market, the import licensing system will beabolished and the import prohibition list reduced from 74 to 17 items(mainly food and textiles). It has been agreed that the items remaining onthe import prohibition list will be reviewed in the context of acomprehensive tariff study which is to be carried out under the loan, asdiscussed below.

27. Restructuring of Tariffs. With the assistance of the Bank, thecustoms tariff and excise duty schedules were simpl'fied and rationalizedin 1984 to reduce significantly the dispersion of effective rates ofprotection among products, encourage the use of local raw materials andincrease excise revenues. The current import duty rates cluster between15 and 60 percent. In addition a 30 percent across-the-board importsurcharge was introduced in January 1986, applicable to all imports.Excise duty rates are mainly 10 percent with some at 5 or 15 to 20 percentand a few higher. The introduction of a market-determined exchange ratewould remove the need for the across-the-board surcharge and would enable areduction in level of trade taxes. The Government has therefore agreed to:(a) abolish the 30 percent import surcharge on goods (except selectedluxury goods) passing through the second-tier market prior to effectivenessof the proposed loan; (b) implement, in conjunction with the launching ofthe second-tier market, interim revisions in import duty and exciseschedules which will reduce the average level and dispersion of rates;(c) carry out, no later than June 30, 1987, a comprehensive tariff studyand formulate proposals for revised customs and excise duty schedulesconsistent with the flexible exchange rate policy; and (d) implement arevised customs and excise duty structure based on the findings of thestudy, and taking into account the Bank's comments, by August 31, 1987.

28. Removal of Price "ontrols. At present, justification ofex-factory prices is required in principle for all manufactured goods and,in practice, ex-factory prices of twenty products are tightly controlled.Such price controls are ineffective in protecting consumers from retailprice increases; they shift profits from producers to traders and reducegovernment revenues by lowering the tax base. The Government recognizesthat the elimination of ex-factory price controls is necessary to enableproducers to operate profitably at the second-tier import prices, and hasagreed to abolish them in conjunction with the second-tier market.

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Export Incentive Measures

29. Since January 1986 the Government has announced a series ofmeasures for export development (Annex V). These include: (a) reductionin the list of prohibited exports; (b) simplification of export licensingprocedures; (c) abolition of the six agricultural commodity boards andtheir monopoly export powers; (d) Export Incentives and MiscellaneousProvisions Decree which will provide a set of incentives for exporters,including most notably a duty drawback scheme and a redlscounting facilityfor short-term export loans; (e) introduction of an export credit guaranteeand insurance scheme (including a revolving fund to provide foreigncurrency loans to exporters); (f) plans for the reorganization of theNigerian Export Promotion Council (NEPC) into an autonomous body withstrong private sector participation and strengthened promotioncapabilities; and (g) streamlining and simplification of procedures anddocumentation for exports. Measures (a) through (c) have already beenimplemented. Two Government committees have formulated proposals on (f)and (g).

30. By far the most powerful incentive to exporters would beunrestricted access to the second-tier market for realizing their exportearnings and meeting their import requirements. Under the arrangementsproposed for the second-tier market (para 25), non-oil exporters would ineffect have 100 percent retention rights since there would be no require-ment to surrender their earnings. To further encourage the non-oil exportsthe Government will abolish the remaining export prohibitions andsignificantly reduce export licensing requirements in conjunction with thelaunching of the second-tier market. Export licensing will be used only inexceptional circumstances e.g. health, national security, natureconservancy, and national cultural heritage. Under the proposed loan,guidelines for operation of the duty drawback scheme will be issued by endDecember 1986, and proposed measures for streamlining and simplification ofexport procedures and documentation will be adopted by end September 1986.Also, guidelines for operation of the scheme for CBN rediscounting ofshort-term bills for exporters will be issued by end December 1986. Thereorganized NEPC will formally be established and an organizationalstrategy for it finalized by end December 1986.

31. The Government is considering additional export incentivemeasures as well as institutional strengthening for export development.The proposals under consideration, as well as prospects for non-oil exportdevelopment, are discussed in Annex V. The proposed loan would support theformulation of a longer term strategy and action program for exportpromotion and incentives by the NEPC, in consultation with other agencies.For this purpose, the proposed loan would provide US$1 million to financetechnical assistance and training for selected agencies and staff to enablethem to provide export incentives and promotion services, includingstrengthening of the NEPC, implementation of the duty drawback scheme, anddesign of export credit schemes (Annex V).

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C. Loan Features and Operation

32. Loan Amount and Complementary Funds. A US$452 million Bank loanis proposed to support the establishment and operations of the second-tierforeign exchange market and the trade policy reforms and export incentivemeasures described above. The proceeds of the loan would supplement theGovernment's own resources and other external funding to be channelledthrough the second-tier market. The Government will provide the bulk ofits oil-export earnings to the second-tier market and is seeking thesupport of its commercial creditors to close the projected financing gap inthe balance of payments (para 53). Satisfactory assurances that theGovernment's external financing needs for the remainder of 1986 and 1987will be met is a condition of effectiveness. The proposed Bank loan wouldfinance about 8 percent of the expected total volume of funds (US$6billion) expected to be channelled through the second-tier market duringthe first 12 months of the market's operations (para 24).

33. Loan Channelling. The Government of Nigeria would be theborrower of the proposed loan, the proceeds of which will be made availableby the Government to the Central Bank of Nigeria. The Central Bank willadminister and disburse the funds, and a project agreement would beconcluded between the Bank and the Central Bank of Nigeria. The CentralBank will (a) maintain separate accounts to record and monitordisbursements and repayments; and (b) arrange for an audit of such accountsby auditors acceptable to the Bank and submit certified copies of therelevant audited accounts to the Bank within six months of the loan'seffectiveness and then on an annual basis. The auditor's report wouldinclude an opinion on whether satisfactory procedures are in operation atthe Central Bank of Nigeria regarding the use of Statements of Expenditure(para 36).

34. Procurement. The proceeds of the loan will be sold through acompetitive bidding process by the Central Bank of Nigeria to a largenumber of banks and other authorized foreign exchange dealers who in turnwould sell it to a large number of beneficiaries. The procurement will beundertaken by the respective beneficiaries. Since there will be no ex-antelicensing requirements and no means to identify prospective importers, itwill not be possible to determine intended purchases which may be suitablefor international competitive bidding according to Bank guidelines.International suppliers are well represented in Nigeria; this, togetherwith the proposed exchange rate and trade liberalization, should ensure aninternationally competitive market in which the importers can be relied onto procure their materials and services from the most efficient sources andto minimize costs. In view of the above, the beneficiaries of the loanwill follow their normal commercial practices for procurement of goods andservices from countries and territories referred to in the Bank'sprocurement guidelines. In case of procurement for the public sector(excluding commercial parastatals), international competitive biddingaccording to the Bank's procurement guidelines will be required forcontracts estimated to cost US$5 million or more.

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35, Disbursement of the proposed loan, except the US$2 millionearmarked for technical assistance and sub-sector investment studies, willbe in two tranches. The first tranche of US$250 million will be availableimmediately upon effectiveness of the loan while the second tranche ofUS$200 million will be released on: (a) release of adequate funds by thegovernment for the efficient operation of the second-tier market; and(b) satisfactory progress with respect to implementation of the agreedtrade and export policy reforms, listed in Attachments I and II of theGovernment's Letter of Trade Policy (Annex IV).

36. The proposed loan is expected to be disbursed within a period of12 months. The loan would provide US$450 million equivalent to finance100 percent of foreign expenditures for import of eligible goods. The listof goods ineligible for financing under the proposed loan would comprisethe standard items, i.e. imported crude oil, luxury goods, goods formilitary and para-military uses, and uranium. The remaining US$2 millionof the loan proceeds would be made available by the Government to(a) selected export promotion agencies to finance technical assistance andtraining (para 31), and (b) carry out subsector studies to help rationalizethe Government's public investment program. Contracts for less thanUS$100,000 in value (except for technical assistance and studies) would notbe eligible for reimbursement. All disbursements will be fully documentedwith the exception of reimbursement applications related to contracts ofless than US$2 million, which would be disbursed on the basis of statementsof expenditure and for -which the supporting documentation would be retainedby the Central Bank of Nigeria. To facilitate rapid execution of theproject, the Bank would, upon loan effectiveness, make an initial depositof US$100 million in a Special Account which would cover estimateddisbursements over a two to three month period. Retroactive financing ofup to US$45 million equivalent would be provided to cover eligibleexpenditures made prior to the sign'ng of the proposed loan but afterSeptember 1, 1986.

D. Monitoring

37. The Government has undertaken to monitor closely the policies andmeasures enunciated in the adjustment program. Periodic targets andspecific tasks have been assigned to various Ministries and Agencies toensure that performance keeps pace with program expectations. In addition,a Monitoring Unit, comprised of staff of the Cabinet Office and the Financeand National Planning Ministries, will be established to oversee theimplementation of the program. The Unit will prepare and submit to theBank on a quarterly basis data on key indicators of progress made on(a) the trade and export policy measures being supported by the loan;(b) the public investment operations, and (c) the operations of thesecond-tier foreign exchange market. The first such report covering theperiod to the end of 1986 would be submitted in January 1987. In addition,the Bank will monitor the progress through regular supervision and exchangeof views with the Government and the Central Bank of Nigeria and throughconsideration of subsequent policy-based loans.

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E. Role of the Bank and the IMF

38. In 1983, the Government began discussions with the IMF on apossible drawing under the Extended Fund Facility (Nigeria had not s0 farmade use of IMF resources in the credit tranches). In April of the sameyear, the Bank began discussions with the Government regarding elements ofa possible medium-term adjustment program that could be supported bystructural adjustment loans. The policy measures recommended by the Bankand the IMF were complementary. Indeed, many of the structural elements ofthe proposed Fund program were drawn from the numerous sector studiesalready carried out by the Bank. During 1983-85, discussions between theIMF and the Government made little progress, although Bank involvementcontinued, particularly vis a vis the rationalization of the public sectorinvestment program. The Government has recently reached agreement withFund management on a program for 1986 and 1987.

39. Bank and IMF staff wili continue to work together in providingthe Government technical assistance in managing the adjustment. effort. Inthis regard, the IMF's concentration will be an the operation andmodalities of the second-tier exchange market, and in monitoring fiscal andmonetary policies. The Bank will assist the Government in designing andmonitoring of the accompanying trade liberalization measures, including thetariff and incentive policies, the public investment program, and sectoralpolicies. The staffs of the two organizations will continue to shareinformation and coordinate actions and recommendations throughout theperiod of the loan.

PART IV - PROGRAM EFFECTS AND IMPLICATIONS

40. The austerity package pursued by the previous Govern ent in 1984and 1985 surfaced quite dramatically the basic source of imbalance in theeconomy, viz., the simultaneous excess supply of labor and excess demandfor foreign exchange. While it will clearly be important to continue tostrengthen programs designed to reduce population growth -- currentlyestimated at 3.3 percent per anvut -- the essential challenge for theGovernment will be to maintain an overall economic policyenvironment in which job creation proceeds apoce with labor force growth,in a manner consistent with the external financial constraints. The keywill be the maintenance of an exchange rate policy that will permit exportsto grow sufficiently fast to finance an adequate rate of growth of importscombined with the efficient channeling of limited domestic and foreignsavings into productive investments. The policy reforms envisaged in theadjustment program, and supported by the proposed loan, represent majorsteps toward these objectives. If successfully implemented, they promiseto deliver considerable benefits, both for the short to medium-runadjustment process and for the longer-run development process.

A. Economic Effects

41. The adjustment program is likely to have wide ranging effects.At the microeconomic level, the new policies will correct the distortions

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in relative prices caused by the overvalued naira and reduce the frequencyof ad hoc government interventions in the market place; relativeprofitability should more closely mirror underlying comparative advantages,causing a convergence of private and social perceptions of opportunitycosts and an associated improvement in efficiency. On the macroeconomiclevel, an exchange rate considerably below the official rate is expected toemerge. With the pass-through into prices and wages generally expected tobe much less than the nominal depreciation, a very substantial depreciationin the real exchange rate should remain. Much of the effect of thedepreciation has already been embodied in prices, as scarcities derivingfrom import restrictions Lave taken their toll -- witness the steep jump inprices in 1984. In addition, excessive price pressure is unlikely to findmonetary accommodation in the program. An inflation rate of 20 percent isforecast for 1987 (Annex II, Table 4).

42. Real non-oil GDP is forecast to grow by 3 percent in 1987, thusrecovering the ground lost in 1986. While a rather stronger recovery isforecast for imports, it is the expectation that a large part if these willbe needed to replenish depleted stocks. For the rest of the 1980s and theearly 1990s, growth in non-oil GDP approaching 4 percent per annum appearsbroadly consistent with import levels growing by 3 percent per annum inreal terms. Such a profile allows for very modest increases in per capitaGDP and per capita consumption. Measured in current prices, investmentthroughout the rest of the 1980s is expected to average around 14 percentof GDP, with a higher ratio of private to public investment resulting fromthe improved incentive system and more favorable investment climate.Despite the lower rate of investment compared with previous years, GDPgrowth is expected to resume based on the considerable scope for increasingoutput through better utilization of existing productive capacity; thegreater selectivity with respect to public investments; and theimprovements in the productivity of private and public investment that arelikely to follow the policy reforms outlined earlier. The domestic savingsrate would average around 13 percent of GDP; public savings over the restof the 1980s are slightly less than public investment but are expected toexceed them in the early 1990s. The freeing up of interest rates will beimportant in the encouragement of private sector savings. Improved revenuemobilization, control over public expenditures, and reform of theparastatals should improve public sector savings performance.

43. The success of the adjustment program will rest on the ability ofthe economy to expand the production of exports and import substitutes soas to increase the foreign exchange available for the purchase of keyimports essential for growth. Consistent with this, the program foreseesimportant changes in the agricultural and industrial sectors, with theformer growing at an annual rate of over 3.5 percent (compared with under2 percent over the 1980-85 period) and the latter at over 8 percentcompared with a negative growth over the 1980-85 period (Annex II, Table4). In the near term, the increase in non-oil exports will primarily comefrom the channellirg of all non-oil exports through the second-tier market,a fairly significant portion of which are currently exported illegally. Inview of this, rapid growth of agricultural and industrial exports --

- 17 -

averaging some 20 percent per annum -- is anticipated, albeit from a verysmall base (Annex V).

Agriculture

44. The proposed exchange rate and trade policy reforms arefundamental to the continued recovery of the agricultural sector and itssustained contribution to the adjustment effort. Indeed, over the mediumterm the net effect of the exchange rate depreciation, combined with thereduction in bans and tariffs, will be to encourage a more efficientallocation of resources and a shift away from the production ofnon-tradeable crops to that of tradeable crops. A rather more immediateeffect should be a boost in the incentive to export. In turn, this shouldspark increased production of cocoa and cocoa products, which alreadyaccount for two thirds of Nigeria's non-oil exports, and possibly ofrubber, as considerable excess capacicy exists. However, after the initialrevival, there is likely to be a substantial hiatus before growth picks upagain, because both cocoa and rubber have aging tree populations and itwill take time to re-establish an inventory of high-producing trees. Interms of other products, exports of maize and sorghum to neighboringcountries are possible over the near term, and vegetables and fresh fruitscould develop into foreign exchange earners in the longer term.

45. With respect to import substitutes, the picture is morecomplicated. Many farmers have been enjoying excessivc protection inrecent years because their output prices have been held up by scarcitiesarising from import restrictions, while the prices of their imported inputshave been kept down via the overvalued naira. Indeed, for a wide range offood crops, the move to a freer trade regime may mean an initialdeterioration in profits. This will be the case where the removal ofquantitative restrictions invites an increase in competitive imports, suchthat the higher input prices on fertilizer, pesticides, and machinery arenot matched by increases in output prices. Nevertheless, over the mediumterm there is likely to be a shift away from import-intensive techniquesand mechanized forms of production towards more labor-intensive techniques.In addition, a relative shift -- albeit at the margin -- towards morelabor-intensive activities, such as tree crops, cotton, and livestock, islikely to occur. Imported wheat and sugar are unlikely to be replacedfully by local production, because Nigeria cannot produce these cropseconomically.

Industry

46. Manufacturing growth in the near term is dependent to a largeextent on the availability of raw material imports; however, over thelonger term, Nigeria's comparative advantage in industry is likely to bemore broadly based. Indeed, its endowment of supply factors (a diversifiedagricultural and mineral resource base), demand factors (the large domesticmarket and, by African standards, relatively high income levels), andcatalytic factors (a sizeable and dynamic cadre of indigenousentrepreneurs) is favorable. And with the restoration of an appropriateexchange rate, Nigeria should be well placed to capitalize on its potential

- 18 -

for industrial development. On the expo-t side, consumer items should beprofitable -- with agro-based industries providing the upstream inputs.Diversification into LNG and LPG should serve to strengthen the industrialbase and broaden exports during the 1990s. On the import substitutionside, more realistic pricing of imports of capital equipment and spareparts should encourage a range of intermediate and engineering/repairindustries. There are also a number of consumer products for whichdomestic installed capacity is substantially less than domestic demand.The potential for an efficient supply response in manufacturing would alsodepend crucially upon the rationalization and restructuring of majorprojects in the public sector. In some instances, timely completion couldresult in a significant contribution to manufacturing output. In others,such as steel and petrochemicals, restructuring will be essential to avoidhigh-cost production adversely affecting downstream industries.

B. Socia]. Impact

47. The social impact of the adjustment program needs to be evaluatedin terms of the evolution of policy from "austerity alone to austerity withstructural adjustment." Under austerity alone, the foreign exchangeconstraint was met through a tightening of aggregate demand coupled withimport controls to prevent any spillover into the balance of payments. Theattendant decline in economic activity reduced per capita real income in1985 to the levels broadly prevailing before the oil boom; without theadjustment program, the decline was projected to continue and even worsen,given developments in oil prices in 1986. A key aspect of the contractionwas the rise in unemployment and underemployment, but labor was furtherinjured by a steep erosion of purchasing power, as the import controls wereunable to prevent increases in consumer prices for imported goods. Withfairly flat nominal wage developments over the period, real wages fell;however, these real wage decreases did not induce increases in labordemand, because of the effects of the austerity measures and the overvaluedexchange rate.

48. Under "austerity with structural adjustment", a rise in real percapita income and consumption over the period 1987-1995 is likely. Whiledemand restraint will perforce need to continue, a major impact of theexchange rate aspects of the adjustment program is expected to be on thelevel of employment. Jith the exchange rate depreciation, exportprofitability will improve; as such, the demand for labor should increase,although the pace at which labor can be taken up depends on a variety offactors. Activity levels are low at present, but spare capacity is mostavailable in activities heavily dependent on imports and in non-tradedgoods sectors. The former are unlikely to revive significantly under theprogram, and the latter will depend on the course of income generated inother sectors. A basic question thus concerns the speed of adjustment atwhich agriculture and other non-oil export production can expand and absorbworkers. In agriculture, this means reversing the previous out-migrationfrom riral areas. While this process has been underway since the inceptionof the austerity program, it should now receive a boost as profitability inthe sector rises, permitting increases in remunerations and therebyenhancing the attractiveness of rural employment. In manufacturing,

- 1.9 -

considerable rationalization and retooling of existing capacity may beneeded in view of the large change in the relative prices of labor andforeign exchange.

49. The speed at which new capacity and jobs can be created is thusaffected by the magnitude of resources for investment channelled to theexpanding sectors. In turn, this is determined by the overall level offoreign savings available to the economy; the degree to which domesticsavings can be transformed into imports for investment purposes; and theefficiency with which financial and capital markets can ensure theeffective intermpdiation of the resulting financial flows to entrepreneursresponding to the new price and profitability signals. However, each ofthese is improved under the program compared with austerity alone. Theausterity alternative implied little new money from foreign creditors; theflow of imports was lower, hence potential investment was lower. Moreover,the transformation of domestic savings into foreign exchange was lesseffiritent, since the overvalued exchange rate discouraged non-oil exports.Finally, with regard to financial intermediation, the program includes somefirst steps toward enhanced effectiveness, but a close watch will have tobe kept on this critical link in the adjustment process to see what furtherchanges are needed.

50. Although on balance the effect of the program is expected to bestrongly positive, some individuals and sectors will suffer. Within theurban sector, for example, employment and incomes of those dependent on thepublic sector are likely to decline in real terms, although incomes derivedfrom the private manufacturing sector are likely to increase. Within theprivate sector, there is likely to be a shift away from trading activitiestowards manufacturing activities, where growth prospects are brighter. Ashift is also expected away from import-dependent activities towardssmall-scale, labor-intensive industries. In rural areas, the mostimportant impact of the adjustment program is likely to derive from theimproved incentives for export crops, with the cocoa and rubber producersin the south of Nigeria benefitting significantly. Other sectors couldsuffer an initial deterioration as rising prices for imported inputs maynot be matched by equivalent increases in output prices. However, over themedium run, the effect should be positive, as higher overall income growthboosts domestic demand.

51. The relaxation and simplification of exchange and trade controlsshould also have important social effects. Clearly, administrative andenforcement costs will be reduced, thus freeing resources for moreproductive uses. But perhaps a more important factor is that complex,highly controlled exchange systems tend to introduce costly arbitrarinessand uncertainty into the allocation of foreign exchange. Resources areexpended to influence and to predict administrative decisions and users offoreign exchange are forced to deal in parallel markets. The willingnessof different economic agents to participate in such activities affects theultimate allocation of foreign exchange, which in turn reduces theefficiency of domestic resource allocation. With relaxation andsimplification of exchange restrictions, therefore, the economy can beexpected to operate with greater economic efficiency. Nonetheless, the

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benefits and impact of the associated improvement in potential welfare willnot be distributed equally, with the economic agents who had benefited fromthe exchange controls suffering large losses under the program.

C. Financing

52. The financing needs of the adjustment program are substantial.Bank and Fund staff have worked closely with Government to determine thefinancing gap and to put together a feasible financing plan. Thepreliminary balance of payments projections and assessment of the financinggap (Annex II, Table 5) discussed in this report are based on threeassumptions:

(a) the world oil market is unlikely to recover quickly and in anycase will remain subject to considerable uncertainty;

(b) Government wishes to ensure the repayment of genuine andauthenticated outstanding debts in an orderly manner; and

Cc) access to international capital markets will be constrained forsome time to come.

All of these assumptions call for restraint in planning import levels. In1986, imports of goods are likely to be down to a level of at mostUS$5.4 billion, representing a drop of over 35 percent in real terms fromthe already compressed level of 1985. Imports of US$6.0 billion areenvisaged for 1987.

53. For 1986 and 1987 taken together, the projected current accountdeficits, scheduled maturities, and the requirement to make settlements onoutstanding arrears lead to an estimated balance of payments financing gapof US$10.9 billion. In turn, this will require reschedulings of Paris andLondon Club debts, bilateral credits, and trade arrears. New loancommitments will also be needed. The assumptions used here implyreschedulings of US$9.1 billion -- including capitalized interest due toofficially insured suppliers and Letters of Credit and US$1.5 billion inarrears incurred in 1986 on uninsured Letters of Credit. New commercialand official or officially guaranteed credits are projected to reachUS$1.2 billion, while disbursements from the Bank on adjustment policyloans are forecast at $0.7 billion.

54. There will be a need for further reschedulings and new moneybeyond 1987. Under conservative oil price assumptions -- rising fromUS$13 per barrel in 1987 to US$16 per barrel in 1990 and US$22 perbarrel in 1995 -- and an assumed real import growth of somewhat over3 percent, external debt would continue to grow until 1991, whenconditions would begin to ease. On these assumptions, Nigezia could beginto pay down its debt and to rebuild reserves starting in 1992. The debtservice ratio would be about 30 percent in 1995. In making these centralcase projections, it is assumed that, in the event of a limited andtemporary shortfall in foreign exchange earnings, reserves would be drawndown and/or external borrowing could be marginally increased. If, on theother hand, the decline in earnings were not expected to be short-lived,

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the Government would need to take further adjustment measures. Additionalearnings beyond the projected levels could be used to finance higher importgrowth and pay down debt. Indeed, under more favorable oil priceassumptions - with t,ie price for Nigerian crude reaching US$19 per barrelin 1990 and US$26 per barrel in 1995 -- an average rate of real importgrowth of 6 percent over the period would be consistent with a drop in thedebt service ratio to about 15 percent in 1995.

D. Risks

55. The principal risks associated with the proposed loan and theadjustment program it supports emanate from its far-reaching nature. Thereis thus the consequent need to develop a broad-based constituency for thereforms that will be able to withstand the many points of resistance thatare likely to arise. The introduction of a market-determined exchange rateis expected to result in a sudden and rapid depreciation of the naira,generating possibly strong pressures on the Government to interfere withthe market. In turn, the depreciation will raise some production costs andmay intensify pressures for wage and price increases in some sectors. Thesubstantial trade liberalization being proposed is also likely to meetconsiderable opposition from those currently benefitting from excessprotection or from quota rents on scarce goods and those engaged inImplementing administrative controls. Since it will clearly take longerthan two years to complete the structural adjustment process, a key to thesustained execution of the adjustment process will lie in the continuedpolitical momentum of the Government to implement the proposed andfollow-up reforms. In this respect, the level of imports and theassociated rates of growth of GDP and consumption and employment willclearly be critical factors. Support from the international financialcommunity will thus be an essential ingredient in the success of theprogram.

PART V - BANK GROUP OPERATIONS IN NIGERIA

56. Bank and IDA lending to Nigeria as of March 31, 1986 amounted toUS$2,760.2 million (net of cancellations). The amount of loans and creditsdisbursed as of March 31, 1986 was US$1,710.4 million, leaving an undis-bursed balance of US$1,049.8 million. Agriculture accounts for about43 percent of total commitments; transport, power, and water supplytogether for about 35 percent; and education, industry, urban, health, andthe post-war rehabilitation loan for the remaining 22 percent. There havebeen only two IDA credits to Nigeria, totalling US$35.3 million; both arefully disbursed. IFC has made six loans to borrowers totalling US$25.0million, and six equity investments totalling US$4.5 million. Of theseamounts, US$6.3 million have been repaid, terminated, cancelled, or sold.Annex II contains a summary statement of Bank loans, IDA credits, and IFCinvestments.

57. As a result of the abrupt decline in earnings from oil and thecorresponding decline in public revenues, many of the ongoing projects haverun into serious problems of counterpart funding. The Bank, the Federal

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Government, and the relevant state governments are making concerted effortsto alleviate the situation. To speed up disbursements, the Bank reallo-cated the proceeds of several loans and increased disbursement percentages.Working within very severe and continuiing resource constraints, the Federaland the State Governments are instilling a greater degree of discipline intheir budgeting process and cutting back on new capital expenditure inorder to fund existing obligations.

58. A number of important policy changes are to be introduced underthe adjustment program (Part II). To support these far reaching changes,the Bank's lending program would be increased to include about one-half ofthe lending in the form of quick disbursing policy based loans. Thesewould include a second trade policy loan followed by further adjustmentloans. At the same time, the Bank will continue to support efforts toraise the productivity of the lowest income groups and thereby diminish theincidence of absolute poverty in Nigeria. As in recent years, the Bankwill continue to provide support for agriculture and rural development withan emphasis on institution-building and transfer of technology, in order toraise the standard of living of its population, particularly the ruralpoor. The Bank will similarly support a well-balanced and integrateddevelopment of Nigeria's industrial sector focusing on import-substitutionand in the medium-term, on non-oil exports. This approach will entail acombination of intensive sector work and policy dialogue with theGoverrment, as well as Bank assistalnce in the industrial and financialsectors.

59. Projects in the agriculture, water supply and urban sectorstogetl1 r should account for a large share of Bank lending in the coming twoto three years. Effective support for the commodity producing sectors willalso require strategic investment in production-related infrastructure.There are opportunities for the Bank to make a significant contribution inenergy development and highway maintenance particularly once the Governmentannounced its decision in January 1986 to substantially increase petroleumproduct prices. Similarly, there is a strong case for continued lending toeducation. In this context, vocational, technical, and teacher trainingwould be given special emphasis. Finally, the Bank would support theFederal and State Governments' efforts to spread the benefits of growth tothe social sectors. It is envisaged that some of the pressing problems ofrapid urbanization will continue to be addressed through urban developmentlending focussed on the needs of the urban poor and resource mobilizationfor urban areas. The Bank is also assisting the Government in tackling thecountry's health problems with a project aimed at both Federal and state(Sokoto) levels, and is continuing a dialogue with the Government onpopulation issues, perhaps leading to lending in this area.

60. Although annual disbursements have increased from US$52 millionin FY78 to nearly US$284 million in FY86, Nigeria's disbursement perfor-mance has lagged behind that cf other countries in the region. The undis-buzsed balance now stands at 38 percent of some US$2.8 billion in loans andcredits approved. One of the reasons for this development is the rapidexpansion of the Bank's loan portfolio since 1979 as well as the fact thatthe closing dates for a number of large loans, with relatively large,

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planned disbursements during the early years, were extended during thisperiod, mainly for agricultural projects. In many cases, however, dis-bursements have been slowed by long delays in loan effectiveness andinstitutional and management problems. Recently, the inadequate counter-part funding of projects by the Federal and State Governments, resultingfrom lower oil revenues, has further slowed disbursements. The FederalGovernment, with the assistance of the Bank's Resident Mission, is nowcarefully monitoring loan disbursements with a view to identifying problemsearly and taking corrective action. Also, the Bank has taken a series ofmeasures aimed at accelerating disbursements under both ongoing and newprojects (para. 66) which are showing results.

PART VI - RECOMMENDATION

61. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank and recommend that the Executive Direc-tors approve the proposed loan.

Barber B. ConablePresident

AttachmentsSeptember 19, 1986Washington, D.C.

ANNEX I-24- Page 1 of 6

1986 SOCIAL INDICATOR DATA SHEET

NIGERIAReference Groups (MRE)

MoltRecent Mid-income Mid-income

1965 1973 Estimate S-S Africa NA & ME

AREATotal land area (thou sq km) 923.8 923.8 923.8Agricultural (% of total) 52.3 54.8 55.6

GNP PER CAPITA (USs) 730.0 1025.3 1136.1

POPULATION AND VITAL STATISTICSTotal population (thou) 58490.0 71274.t 96485.1Urban pop. (% of total) 14.7 17.5 23.0 33.t 49.3Population growth rate(%):

Total 2.5 2.8 2.9 2.8Urban 4.7 5.2 4.8 4.1

Life expect. at birth (yrs) 41.5 44.7 *49.6 51.0 59.9Population projections:

Pop. In 2000 (mill) 163.5Stationary pop. (mill) 528.1

Population density per sq kmof agricultural land 121.2 140.8 187.8 45.6 105.2Pop. age structure (%):

0-14 yrs 46.4 47.3 48.1 46.2 43.915-64 yrs 51.3 50.3 49.4 51.0 52.765 and above 2.3 2.4 2.5 2.8 3.4

Crude birth rate (per thou) 51.4 50.5 49.6 46.3 39.5Crude death rate (per thou) 22.8 20.0 16.4 15.6 10.4Total fertility rate 6.9 6.9 6.9 6.4 5.6Infant mort. rate (per thou) 178.5 145.6 110.4 103.2 94.0Child death rate (per thou) 33.0 28.6 21.4 17.6 12.1Fa1ily planning:

Acceptors, annual (thou) 24.6Users (X of married women) 5.0 7.1 27.2

FOOD. HEALTH AD MJTRITIONIndex of food production percapita (1974-76 a 100) 119.4 97.8 94.3 88.3 89.1Per capita supply of:

Calories (M of requirmnts) 95.6 90.8 85.7 94.2 117.5Proteins (grams per day) 51.8 48.1 41.8 50.6 76.2

Pop, per physician (thou) 45.0 30.4 12.0 a 11.3 4.6Pop. per nurse (thou) 4.1 5.1 3.0 a 2.6 1.3Pop. per hospital bed (thou) 2.4 1.7 1.6 b 1.4 0.7Access to safe water

(% of population): Total 45.8 71.3Urban 70.5 94.9Rural 35.0 53.6

-25 - ANNEX IPage 2 of 6

1986 SOCIAL INDICATOR DATA SHEET

NIGERIAReference Groups (MRE)

MostRecent Mid-income Mid-income

1965 1973 Estimate S-S Afrfca NA & ME

LABOR FORCETotal Labor Force (thou) 23645.2 27160.7 33986.4

Female (X) 41.3 40.7 40.0 37.5 11.4Agriculture %) 721 70.2 68.2 a 59.4 39.2Industry (%) 10.2 10.8 11.6 a 14.8 25.7

Participation rate tX)rotal 40.4 38.1 35.2 36.2 25.8Male 48.1 45.8 42.8 45.8 45.3Female 32.9 30.7 27.8 26.7 5.9

Age dependency ratio 1.0 1.0 1.0 1.0 0.9

HOUSINGAverage size of household:

TotalUrban 4.7Rural

Percentage of dwellings withelectricity:

TotalUrban 81.3 42.4Rural

EDUCATIONEnrollment rates:

Primary: Total 32.0 37.0 98.5 93.5Male 39.0 47.0 107.8 107.1Femle 24.0 27.0 90.7 79.7

Secondary: Total 5.0 4.0 21.0 44.7Male 7.0 6.0 28.5 52.9Female 3.0 3.0 16.9 35.5

Pupil-Teacher ratio:Primary 33.4 38.8 42.5 29.4Secondary 17.8 27.8 27.7 19.5

Pupils reaching grade 6 (%) 80.8 75.9

INCOME. CONSUMPTION. 4AN POVERTYEnergy consurpt ion per cap.(kg of ol equivalent) 34.5 52.9 129.2 530.7 719.9Percentage of private tncomereceived by:

Highest 10% of householdsHighest 20%Lowest 20%7Lowest 40%

Est. absolute poverty incomel-vel (USS per capita):Urban 696.0 689.6Rural 341.0 338.1

Est. pop. below absolutepoverty Income level (%)

Urban .. ..

RuralPassenger cars/thou pop. 1.0 2.1 ,, 36.0 10.2Newspaper circulation(per thousand population) 6.7 3.0 5.3 7.4 35.3

EPD Jul y 1986

Not availableb1Note: Group av@ea are popubilon weighted. Countiry coverage depends on dmls avaIlabilitv end is not uniteor. Unsen UoiMerw

oted. 1965 reign to any year between 1962 and 196 1973 between 1970 and 197&k and molt recent estimael beiween 192 snd laga. 19M. b. i979.

-26- ANNEX IPage 3 of 6

Definitions of Social Indicators

The definition of a particular social indicator may Infant (age 0-1) mortality rate - Number of infantsvary among countries or within one country over per thousand live births who die before reaching onetime. For instance, different countries define 'urban year of age, in a given ycar.arca" or "safe water" in different ways. Child (age 1-4) mortality rate - Number of deaths

or children, age 1-4, per thousand children in theAREA (thousand square kilometers) same age group in a given year. For most developingTotal - Total surface area comprising land area and countries these data are derived from models usinginland waters. information on infant mortality rates.Agricuitural (percentage of total) - Estimate of agri- Family planning - acceptors, (thousands) - Annualcultural area used for crops, pastures, market and number of acceptors of birth-control measures re-kitchen gardens or to lie fallow. as percentage of ceived under the auspices of a national family plan-total. ning program.

Family planning - users (percentage of married wom-GNP PER CAPITA (USS) - GNP per capita esti- en) - Percentage of married women of child-bearingmates at current market prices, calculated by the age who are practising, or whose husbands areconversion method used for the World Bank Atlas. practising, any form of contraception. Women of1986. child-bearing age are generally women aged 15-49,

although for some countries contraceptive usage isPOPULATION AND VITAL STATISTICS measured for another age group.Total population - r:id-year (millions)Urban population (percentage of total) - Different FOOD, HEALTH AND NUTRITIONcountries follow different definitions of urban popu- Index cffoodproduction per capita (J974 - 76=100)lation. Such differences may affect comparability of - Index of per capita annual production of all fooddata among countries. commnodities. Production excludes animal feod andPopulation growth rate (percent) - rotal and urban - seed for agriculture. Food commodities include pri-Annual growth rates of total and of urban popula- mary commodities (for example, sugarcane insteadlions. of sugar) which are edible and which contain nu-Life expectancy at birth (years) - Number of years a trients (for example, tea and coffee are excluded).newbom infant would live if prevailing patterns of Commodities include nuts, fruits, pulses, cereals,mortality for all people at the time of its birth were vegetables, oil seeds, sugarcane and sugar beets,to stay the same throughout its iife. livestock, and livestock products. Aggregate produc-Population projections tion of each country is based on national average

Population in 2000 - The projection of population producer price weights.given total population by age and sex, fertility and Per capita supply of calories (percentage of require-the demographic parameters of mortality rates, and ments) - Computed from energy equivalent of netmigration in the base year 1980, until the population food supplies available in country per capita per day.rcaches a stationary state. Available supplies comprise domestic production,

Stationary population - The projected population imports less exports, and changes in stock. Netlevel when zero population growth is achieved: i.e.. supplies exclude animal feed, seeds for use in agri-the birth rate is constant and equal to the death rate, culture. quantities used in food processing, and loss-the age structure is stable, and the growth rate is es in distribution. Requirements were cstimated forzero. 1977 by the Food and Agriculture OrganizationPopulation densizry agricultural land - Population per (FAO) based on physiological needs for normalsquare kilometer (100 hectarcs) of agricultural area, activity and health considering body weights. envi-Populaiion age structure (percent) - Children 0-14 ronmcntal temperature, age and sex distribution ofyears, working age 15-64 years, and people of 65 population.years and over as percentages of population. Per capita supply of protein (grams per day) - ProteinCrude birth rate - Annual live births per thousand content of per capita net supply of food per day. Netpopulation. supply of food is defined as above. Requirements forCrude dearh ratie - Annual deaths per thousand all countries established by United States Depart-population. ment of Agriculture provide for minimum allow-Tt,j.l let,ilitr rate - The average number of children ances of 60 grams of total protein per day and 20that vu'ulu be born alive to a woman during her grams of animal and pulse protein. These standardslifetime il uuring her childbearing years she werc to are lower than those of 75 grams of toLal protein andbear children at each age in accordance with prevail- 23 grams of animal protein as an average for theing age-specific fertility rates. world, as proposed by FAO.

-27- ANNEX IPage 4 of 6

Population per physician - Population divided by group of individuals who share living quarters andnumber of practising physicians qualified from a main meals. A boarder or lodger may or may not bemedical school at university level. included in the household for statistical purposes.Population per nursing person - Population divided Percentage of dwellings with electricity - total, urban,by number of practising graduate nurses, assistant and rural - Conventional dwellings with electricity innurses, practical nurses and nursing auxiliaries. living quarters as percentage of all dwellings.Pbpudation per hospital bed - Population divided bynumber of hospital beds available in public and pri- EDUCATIONvate, general and specialized hospitals, and reha- Enrollment Ratesbilitation centers. Hospitals are establishments Primary School Enrollment - total, male andfemalepermanently staffed by at least one physician. Es- - Gross enrollment of all ages at primary level as atablishments principally providing custodial care am percentage of primary school-age children. Whilenot included. many countries consider primary school age to beAccess to safe water (percentage ofpopulation) - total. 6-11 years, others have wider age groups. Differ-urban, and rural- People (total, urban, and rural) with ences in country practices in the ages and durationreasonable access to safe water supply (includes treat- of school are reflected in the ratios given. For someed surface waters or untreated but uncontarninated countries with universal education, gross enrollmentwater such as that from springs, sanitary wells, and may exceed 100 percent since some pupils are youn-protected boreholes). In an urban area a public foun- ger or older than the country's standard primary-tain or standpost located not more than 200 meters school age.from a house may be considered within reasonable Secondary School Enrollment - total, male andaccess of that house. In rural areas reasonable access female -Computed in a similar manner, but includeswould imply that members of the household do not pupils enrolled in vocational, or teacher traininghave to spend a disproportionate part of the day secondary schools, for pupils usually of 12 to 17fetching water. Absent and incomplete responses, and years of age.large variations between countries, may affect the Pupil-teacher ratio - primary, and secondary - Totalvalidity of the overall results of the country and students enrolled in school divided by the totalregional comparisons. In addition, certain definitions number of teachers.and classifications such as urban and rural, reason- Percentage pupils reaching grade six - The percen-able access to safe water in rural areas, safe water tage of a cohort of 1,000 pupils starting primarysourcs (when they are not subject to laboratory school that persist into grade six.control) vary considerably from country to countryand thus affect comparability of the data. INCOME, CONSUMPnION, AND POVERTY

LABOR FORCE Ener consumptionper capita (kzlogroms of oil equi-Total labor force (millions) - EconomicaEly active valint) - Annual consumption of commercial pri-persons, including armed forces and unemployed but mary energy (coal and lignite, petroleum, naturalexduding housewives and students. Definitions in gas, and hydro, nuclear and geothermal electricity).various countries ar not comparable. Private incomn distribution - Income (both in cashreniaoe (percent) - Female labor force as a percen- and kind) accnring to perentile groups of house-

tage of total labor force. holds ranked by total household inuome.Agriculture (percent) - Labor force in farmiing. Passenger cars (per thousandpopulation) - Includesforestry, hunting and fishing as a percentage of total motor cars seating fewer than eight persons; ex-labor force. cdudes ambulances, hearses and military vehicles.Industry (percent) - Labor force in mining, construc- Newspaper circulation (per thousand population) -tion, manufacturing and electricity, water and gas as Average circulation of 'daily general interest news-a percentage of total labor force. paper," defined as a periodical publication devotedParticipation rate (percent) - total, male, andfemak primarily to recording general news. It is considered- Participation rates are computed as the percentage to be "daily" if it appears at least four times a week.of population of all ages in the labor force. These are Estimated absolute poverty income level (USS perbased on International Labour Office (ILO) data on capita) - urban and rural - Absolute poverty incomethe age-ex structure of the population. level is that below which a minimal nutritionallyAge dependency ratio - Ratio of population under 15, adequate diet plus essential nonfood requirementsand 65 and over, to the working age population (age are not affordable. These estimates are very approx-1564). imate measures of poverty levels, and should be

inLerpreted with considerable caution.HOUSING v Estimnated population below absolute poverly incomeAverage size of household (persons per household) - level (percent) - Percentages of urban and ruraltotal, urban, and rural - A household consists of a populations who live in 'absolute poverty."

-28 - ANNEX IPage 5 of 6

ECONONIC INDICATORS

6ROSS NATIONAL PRODUCT 1/. ANNUAL RATE OF lONTHII, Constant Pricgsl1983 19U4

US1 Din I USI Din 2 1975-90 1992 1983 1994

IMP at Market Prices 75.9 100.0 71.7 94.4 3.5 0.4 -B.9 -6.6GrOs houstic lnvntmot 13.4 17.6 9.6 12.6 6.2 -22.4 -24.5 -27.76ross Nmtional Saving 9.9 12.9 6.7 8.9 1.2 -29.6 -23.9 -32.7Current Account Ulance -4.8 -6.3 -0.7 -0.9 - - - -Exports of G00ds & ifs 10.7 14.1 12.3 16.2 5.5 -29.5 1.5 20.3lmports of Bauds & nfs 13.9 18.2 10.7 14.2 6.3 -23.1 -22.4 -22.7

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1993 /b/

Value Added Labor Force Value Added per Urker

US$ Bln I Nl n US

Agriculture 16.9 25.6 20.3 59.3 027Industry & Mining 23.1 35.3 6.9 19.8 3350Services 25.7 39.1 7.6 21.9 3361

Total/Average 65.7 100.0 34.9 100.0 1861

GOVERNMENT FINANCE Ja/Federal Government

NBi9n As of 6DP

1995 1985

Current Receipts 8.6 11.6Current Expenditure 7.5 10.1

Current Surplus 1.1 1.5Capital Expenditure and Net Lending 3.4 4.6

Deficit -2.3 -3.1

NONEY, CREDIT AND PRICES1979 1900 1981 1982 1983 1984 1905

(Percentages)Annual Percentage Changes in:Consumer Price Index 11.8 10.0 20.8 7.7 23.2 39.6 5.5Bank Credit to Public Sector 3.0 4.4 84.1 59.3 50.3 15.0 4.3Bank Credit to Private Sector 14.7 32.9 34.3 17.8 8.6 4.0 5.9Honey L Ouasi Honey 28.1 46.1 9.0 8.7 14.7 11.5 10.3Honey & Quasi Honey as I GDP 24.0 29.8 31.9 33.0 35.2 39.5 37.2

Note: All conversions to US dollars are at the average exchange rate prevailing during the periodcovered.

lal Based on the 6overnment Budget estimates, IMF data, and IhRD Staff estimates.Jb/ Derived from planning documen;s and refers to the number of gainfully employed.

21-Sep-86

- 29 - ANNEX IPage 6 of 6

TRADE PAYIENTS Al CAPITAL FLOINS

MLAICE DF PAYIENTS lal hERCHIANDISE EXPORTS (Average 1983-85)

1982 1993 1984 1995 USS Bln X

(Billions US S I Crude Oil 11.2 95.9Cocoa Products 0.37 3.2

Exports of Goods, nfs 12.6 10.7 12.3 12.9 Palo Products 0.01 0.1Imports of Goads, nfs 18.4 13.9 10.7 9.9 Rubber 0.02 0.2

Others 0.07 0.6

Interest Paymnts (net) -0.5 -0.9 -1.6 -1.6 Total 11.7 100.0

Other factor Payunts (net) -0.5 -0.4 -0.3 -0.3

Net Transfers -0.4 -0.4 -0.3 -0.3 EXTERNAL DEBT, DECEMBER 31, 1995 Jb/

Bklance on Current account -7.2 -4.9 -0.7 0.8 USS Bln

Direct Foreign Investmnt 0.4 0.4 0.2 0.4 Total Debt IncludingUndisbursed 21.85

Net Official Borrowing 3.0 1.3 0.6 -0.2Di sursment 3.6 2.3 1.8 1.6 Total Outstanding andAdortization -0.6 -0.9 -1.3 -1.7 Disbursed 18.45

of which Non-GuaranteedOther Capital (net) 0.4 -0.2 -0.1 0.4 Private Debt 0.42

Errors and Omissions -1.1 -1.9 O.E -0.3DEBT SERVICE RATIO FOR 1985

Overall Balance -4.5 -5.3 0.7 1.01

Reerve lovements(Incr.-) 2.4 0.6 -0.5 -0.3Total tLT 32.5

Fuel and Related Material Non-Guaranteed PrivateImports Debt 1.8of which: Mineral Fuels 0.3 0.2 0.1 0.2

Exports Total Outstanding and -of which: Petroleum 11.9 9.9 11.6 12.2 Disbursed 34.3

EXCHANGE RATE IBRD/IDA LENDING AS OF DECEMBER 31, 19B5

1978 N1.00 = US$1.57 1IRD IDA1979 :NI.00 S USS.66 1990 If1.00 s USS1.B3 Outstanding L Disbursed 1.27 0.031991 1N1.00 = US$1.63 Undisbursed 1.011982: IN1.00 US$I.491983 111.00 = US$1.39 Outstanding Includinq ---1994: N11.00 = US$1.31 Undisbursed 2.28 0.031995 : 1.00 = USS1.12

/a/ 1IRD and IMF Staff estimates./b/ Including short-ter loans; assumed Central Bank liability of private sector arrears;

and current letters of credit.

-30 - ANNEX IIPage 1 of 6

Table 1: NIGERIA - External Public Debt 1/(Millions of US$)

1982 1983 1984 1985

London Club (Commercial Banks) 5977 6463 5745 4560

Medium-and Long-Term 4278 4328 3809 3123Rescheduled Letters of CreditArrears & Rescheduled 1449 1935 1186 437

Letters of Credit -- Current 250 200 750 1000

Paris Club (Official andOfficially Insured) 3246 4858 5260 7277

Medium- and Long-term 2896 3166 3360 4986Arrears 350 1692 1900 2291

Multilateral: 742 884 1097 1317

IBRD 674 824 1044 1267IDA 37 36 36 35European Invest. Bank 29 22 16 15African Dev. Bank 3 2 1 -

Uninsured Suppliers' Arrears 350 2762 3070 3100

Unrescheduled 350 2762 2813 1800Rescheduled - - 257 1300

Short Term 120 395 225 110

SAMA - 400 400

Other 1160 1479 1477 1664

TOTAL 11595 17241 17274 18028

1/ Including assumed liability on private sector arrears, and currentletters of credit to the private sector.

- 31 - ANNEX IIPage 2 of 6

Table 2: Nigeria - Federal Budget 1/ 2/(Billions of Naira)

1985 1986 1987Outturn Forecast Forecast

Federal Budget:

Revenues 8.4 9.5 12.8

Petroleum Revenues 5.0 4.7 8.8Other 1.9 1.9 3.0Own Feder- Revenue 1.5 2.9 1.0

Expenditures 10.3 12.2 15.8

Wages and Salaries 1.5 1.6 1.7Goods and Supplies 1.8 2.6 3.7Domestic Interest Payments 2.1 2.8 4.2Foreign Interest Payments 0.8 1.2 2.3Capital Expenditures (includingNet Lending to Parastatals) 3.4 3.3 3.3Net Lending to States -0.3 0.3 -

Other 1.0 0.4 0.6

Deficit -2.0 -2.7 -3.1

Memorandum Items:

Deficit as a Percent of GDP 3.1 3.9 3.1Oil Price (US$ per barrel) 27.50 14.10 13.00Exchange rate (US$ per Naira)Official (end-year) 1.00 0.63 0.25SFEM (average over period) ... 0.25 0.25

1/ Totals may not add up because of rounding.2/ Excludes revenues and expenditures earmarked for investment under

the Nigerian National Petroleum Corporation joint venture account.

- 32 - ANNEX IIPage 3 of 6

Msble 3: NIIA - Public; Invesbmt hLlocatigxuoercmta shilres)

1981-83 1984 1985 1986 1987Revised

Budget EgeCt Bbdget Budget Forecast

Agriculture & Water Resources 15.0 19.0 22.0 19.2 18.7

Oil & Gas 7.0 4.0 3.0 10.3 10.5

Transport 19.0 10.0 10.0 11.2 15.4

Irxlustries 21.0 21.0 26.0 16.0 14.3Of Whiich:

Ajcaoita (5.1)

Power 3.0 5.0 6.0 3.2 3.7

HamIng & UIban 8.0 7.0 9.0 5.8 5.7Of ali&d:Abuja (4.5)

Te leam-n wlsicadnog n.a. 4 6 2.6 2.9

AExatian 1/ 6.0 2.0 4.0 9.6 6.8

Health 1/ 2.0 1.0 1.0 2.2 2.9

c e.nmme & 5mhancizg ...21 ... -1 ... 3.2 2.2

M.irng & Quarrying ... 2/ ... 2/ ... 2 1.9 2.6

Otber & Unallocated 18.0 25.0 13.0 14.7 14.3

Total 100.0 100.0 100.0 100.0 100.0

Note: 1/ Health, Fductim (& Water Supply & Satation) inulve prinlipaly State public exlrwhidi are llOt 1inced in this table.

2/ Tnclixli in other & unallocated.

-33- . ANNEX IIPage 4 of 6

Table 4. Nigeriai Kly Ibcro-Ecmuic Indicators.

| : I : P R 0 JEE C T E 0D: :U _ _ _ . _ _ _ _ _ _ _

A C T U A L I ESTINATED A D J U 9 1N E I T P O L I C Y 9 C E I A R I 0:: 4 - -------- 4- -- _--- __________---- …___

:1910 19B1 1982 1983 1984 1195 1M6 1987 1990 1If9 1990 M V E R A8 E 1995 : : : 1 1987-90 1991-9 :* _ _ _ __ _ _ _ I _ _ _ _ _ _ _ _ I _ _ __ _I_ _ _ _ _ _ _ _ _ _ _ _ _ _ _

l(Rtios beloo arm custant/constaat) I : :1kn-Oil UDP/IIR (1 1 75.9 82.5 34.6 93.6 80.6 79.7 79.4 79.3 80.2 7?.9 79.9 79.8 90.1 90.3

: riculturvlDP (Z} : 25.7 25.6 29.0 30.1 31.4 31.7 33.41 33.3 33.5 33.3 33.2 33.3 32.6 32.2: -Idustry/IP 12) 17.4 20.1 20.7 20.2 17.5 16.4 13.6 14.0 14.9 15.3 15.9 15.0 17.3 18.31

-Servicms/IDP Z) 132.7 36.9 34.9 33.3 31.7 31.6 32.4 32.0 31.1 31.3 30.9 31.5 30.2 29.8:Petrolemel/BP (Z : 24.2 17.5 15.4 16.4 19.4: 20.3 20.6 20.7 19.9 20.1 20.1 20.2 19.9 19.7

I I~~~~~~ ..

1km-Oil 6P growth ate : 7.6 3.4 2.6 -9.3 -9.2 1.3 -3.0 3.0 3.8 3.7 3.9 3.6 4.2 4.3: -riculture Orauth : 6.4 -5.3 13.5 -4.0 -0.9 3.5 2.5: 2.9 3.3 3.5 3.5 3.3 3.5 3.5

-Industry Gowmth 7.3 9.4 3.2 -10.5 -17.4 -5.0 -21.0 12.0 8.0 8.0 8.0 9.0 9.0 8.0WPtroleum Broth :-11.6 -31.5 -11.7 -2.5 12.9 7.0 -1.3 4.1 -2.0 5.3 4.4 3.0 3.6 2.9t:61P Broth Rate 2.2 -5.0 0.1 -9.2 -4.81 2.4 -2.7 3.2 2.6 4.1 .0 3.5 4.1 4.0:liii? 6rurth Rate : 14.1 0.2 2.8 -6.1 -1.3: 0.7 -11.1: 2.5 3.6 4.1 4.3 3.6 4.4 4.3IHYICapita Growth Rate :10.9 -3.1 -0.5 -9.4 -4.6 1 -2.6 -14.4: -0.8 0.3 0.8 1.0 0.3 1.1 1.01Consomption/Capita Growth Rate 1 5.9 -1.6 4.2 -11.3 -10.6 -3.0 -8.1 I 1.3 -1.0 -0.2 -0.2 -0.0 0.3 0.41

*~~~~~~~~~~~ . .MIRltios below are cwurent/currentl0ross Domestic Investment/9DP (ZR : 23.0 29.7 22.4 17.4 12.9 12.0 10.4 112.7 14.3 14.4 14.5 14.0 15.0 15.4 1

IDomestic Savi.gsID0P (1) : 27.8 18.3 14.8 14.1 15.3 :16.1 12.3 11.9 13.6 15.4 17.4 14.6 21.9 24.9.latiuomu Savings/6DP (Zr) 24.9 15.7 12.0 11.3 13.3 :14.1 11.0 : 10.7 12.2 14.0 15.8 13.2 20.4 23.4Ifargital Rational Savings Rate () : -36.9 -23.9 -5.6 19.0 1 5.8 -22.0 1 -2.7 14.0 14.8 12.9 9.7 12.2 14.7IPhblic InvestamntlfiP (Zl : 14.4 15.6 14.7 10.9 9.9 9.0 7.9 : 9.3 10.5 10.2 10.0 10.0 9.7 9.4Public Savings/9DP (2) 113.7 6.0 6.0 0.0 0.01 2.5 3.9 : 5.7 7.3 8.0 9.9 7.7 12.5 14.5 :Private InvestmentIlUP (S) 8.6 13.1 7.7 6.6 3.0 : 3.0 2.5 : 3.4 3.8 4.2 4.5 4.0 5.3 6.0 :

:Private Savins/GDP (2Z :14.1 12.3 8.9 14.1 15.: :13.6 8.4 : 6.2 6.3 7.4 7.5 6.8 9.4 10.4 :Private/Public Investment (U : S9.5 84.3 52.1 51.4 30.1: 33.3 31.6 3 6.6 36.2 41.2 45.0 39.8 54.6 63.8

:Ezportsk6DP (Z : 29.3 22.2 15.4 14.3 16.6 :17.5 14.3 27.6 27.7 29.2 30.6 29.8 33.3 35.1:[ports/6lP (ZR 23.5 29.4 22.2 18.2 14.2 :13.8 12.3 28.4 28.4 19.1 27.8 29.2 26.5 25.6 :

flCER Non-Oil SDP-at 97 prices J . 6.0 4.4 4.8 4.6 5.0 5.0 5.0

Mon-Oil Export Growth (ZR 15.4 -31.1 -35.4 63.6 -44.2 : -1.1 13.6 1 24.8 39.2 7.4 10.9 20.3 4.6 4.9: -Cocoa w :-12.0 13.6 :12.0 21.4 11.8 5.3 12.6 4.3 4.2Export Irorth Rate I) : -9.5 -32.3 -27.3 1.0 19.9 11.8 0.2 1 5.5 -1.3 6.4 5.6 4.1 4.0 3.1 :Heport 6rowth Rate (Z) :27.2 19.6 -19.4 -22.1 -22.7 : -8.9 -40.1 : 8.3 3.0 3.0 3.0 6.0 3.0 3.0ITerms of Trade Index 101.3 113.3 113.0 100.3 100.0 189.8 48.0 41.5 43.4 44.5 45.8 43.8 50.7 54.0Period Average Exchange Rate 1.83 1.63 1.49 1.38 1.31 :1.12 0.7S 1 0.25 0.22 0.20 0.18 0.21 0.14 0.12

IPeriod Average Domestic Inflation 9.9 19.4 9.9 23.2 39.6: 5.5 20.0 1 20.0 16.0 14.0 12.0 15.5 10.0 10.0* ~~~ ~~~. . .

| _ _ _ _ _ _ _ I _ ____ ____________----- -- _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-----

Note GDP46ross Domestic Product; GNY4Bross Rational Income.

19-Sqp-86h, DAINI

- 34 ANNME IIPage 5 of 6

Tabl 5S. NlIERIA - SAI OF PAUTS AND nTNAL DEDT AN' DEIRT SERVICE PROJECTrlOs 1I

1935 1966 1967 1966 1969 1990 9 m992 1993 I99 1995

(Sllitons of UB$9

mlaun.e of PqtMentes

Oil Ixports 12.2 G.4 6.2 6.7 7.5 8.2 9.1 10.1 11.2 12.0 12.5llon Oil ELorct 0.4 0.4 0.5 0.7 0.5 1.1 1.1 1.2 1.3 1.4 1.6limorts 8.3 5.4 6.0 6.3 6.7 7.1 7.5 e.0 5.5 9.0 9.5

Current Account 0.6 -1.5 -2.1 -2.0 -1.6 -1.3 -0.5 -0.3 0.4 0.S .2

Camital Account 0.3 -2.4 -1.0 -1.1 -0.9 -0.3 -0.1 - 0.1 0.5 0.

Overall Balane 1.0 -3.9 -3.1 -3.1 -2.5 -1.6 -0.9 -0.1 0.5 1.3 2.0

Reserve lncrease (- -0.3 0.4 -0.3 - - - - -0.2 -0.1 -0.6 -0.7Not Transactions on

Pre-1936 Arreare 0.4 -3.2 -0.3 -0.3 -0.3 -0.2 - - - - -

Gsap -6.7 -4.2 -3.9 -3.3 -1.6 -0.9 -0.5 .4 0.7 1.3

Wet Impact of 198-7echadli-ugs and Viau loguzof Ibtdaiia CaD 2 a - 6.0 3.1 0.1 -0.7 -1.1 -1.5 -1.1 -1.2 -1.3 -2.4

Rmmidual Cap - -0.7 -1.2 -3.7 -*.0 -2 .9 -2.* -1.6 -0.7 -1.1 -1.1

Deblt: Debt Outine_______d 31 6.0 19.9 22.0 23.7 24.9 25.9 26.3 26.3 25.5 24.9 23.9Of Which:-

IU8D 1.3 1.7 2.2 2.8 3.3 3.3 4.2 6.5 6.A 4.3 4.8

crwtn DiD _r* 21.4 30.5 29.4 '27.2 17.9 IS.2 10.5 *.. 4.5 4.3 -IUSbShiiareIn Total De b e7 1U W 1MY 3 1 T7 1T11 1" ii: i13 2 0

Ration to Ezonrtr ofGods and P-PEr Sices (Ratio)

Debt 1.4 2.6 3.2 3.1 2.9 2.7 2.5 2.2 2.0 1.3 1.6Debt Servie

Pre-echeodliag Al 34.3 107.0 74.3 65.4 34.6 37.3 29.7 26.2 23.5 16.7 IS.1Voet-Raehedullug 6/ 34.3 20.7 30.0 63.9 63.3 49.0 44.3 36.7 33.5 32.2 30.1

DRD 1.0 3.1 4.2 4.9 5.0 5.1 5.6 5.5 5.6 5.9 5.9

IBRD Debt Sevice toTotal Debt Service 0.3 . 15.0 13.3 7.7 7.9 10.4 12.6 15.0 16.7 18.3 19.6

Memorandum Item:

oil Price (USS per barrel) 27.5 14.1 13.0 13.9 14.6 15.6 16.9 18.0 19.2 20.5 21.3Oil Exports (MBD) 1.2 !.2 1.3 1.3 1.4 1. 1.5 1.5 1.6 1.6 1.6

11 Totals may not add because of rounding.2/ includes mortization of recheduliuga and financing of residual gap.3/ Includes current l.ttere of credit and assed labiity on prlvate sector arrears.Z/ includes debt service on on-Pasrante*d private sector debt.

ANNEX I:I35 - Page 6 of 6

ThE STATES o07 GXUOtGUP OPEUT:on

A. STATEMENT1 07 S CROUP ;EftAlmg g"IINGERIA i

loan or rL1 MillionCredit =ut (IRS Ca

Number leer Sowror Furio Da ii-re

Twenty might loan. and two credits fully dieburaed 743.7 35.3 1b

I3"! 1976 UNgeria L C State Oil Pisl 19.0 3.'1591 1978 iepria Rue. et. Smaliholder Oil 30.0 0.0 el1597 3978 NIDS Industrial Developmnt 51.9 3.31567 3979 Nigeria A4ric. DeN. - lda 23.0 1.71668 1979 Nigerie Agric. Dev. - llarls 27.0 5.73679 1979 Nigerie forentry 31.0 1.41731 1979 Klgerie WMtor Supply - Kaduns 92.0 52.21119 1979 Nigeria AgTIC. & Rutrl #Dlt. Iust. 9.0 3I62766 3Pn S(EPA power lOFe. 4.. 33767 1980 Nigeria Urban Developnt - eahi 17.8 7IS38 1980 Nigeria Aerie Dev. - Oyo-North 28.01854 1980 Nigerie Asric. Dev. - Ekiti-Aoko 32.5 1e.21883 1908e Nigeria lead 78.0 21I.39S2 1981 Nigeria Agric. nev. - Buchi 132.0 28.81982 198l Nigeria Agric. Dev. - lana 142.0 64.62029 1981 Nigeria Tech. Aslastance - Agri. 47.0 21.52036 1982 Nitgria UMter Supply - Anambrg 67.0 42.8UOS5 1982 NUA Favor - Distribution 100.0 33.32185 1982 Nigeria Agrlc. Dev. - Sokoto 147.0 el.12299 3983 KIDS Industrial Development 120.0 107.72145 1984 Nigeria Fertilizer Import 250.0 50.0237b 1984 11CI Stall 6 Medium Scle Industry 41.0 40.6

*2390 1984 NNPC Tech. Last. - Ca. Entineering 23.0 25.02436 1984 Nigeria Agflc. Dlw. - KadunA 122.0 121.72480 3985 Nigeria Tech. Assietence 13.0 12.22503 1985 Nigeria lIalth - Sokoto 34.0 36.02528 3985 Nigeria dater Supply - Dorno 72.0 72.02007 1985 Nigeria Urban - lao 53.0 53.0

*-2618 1985 Nigeria Industry - Tech. Anst. 5.0 5.0260 1985 Nisgria Urban - Lago Solid wMee 72.0 72.0

Total 2 724 9 35 3 13059.8Of which has bean repaid .3599 538Total outstmnding 2.b5 29.5

mount sold 16.8Of which bha bean reaid T1 0.0

Total now hold by Dank ,6 IDA 2.365.0 29.S

Total undisburmed 10.49.8

D. STATD=YT OF ITC INYESTKDITS(Al of March 3I, llasi

Flical Ty of AMout in US MillionYear BuStnges Loan - fl Total

396. 1937. ArMew Textilee Ltd. Textile NLg. 1.0 0.6 1.61970

3964 Nigeria Industrial Dew, Fin. Co. 1.4 1.4Developmet Bank Ltd.

1973 Funtua Cottonased Vea. Oil 1.6 I1bCnaebing Ltd. Crushng

1973. 1974 NIgeria Aluminum Aluminm 1.0 0.3 1.3Extruaon Ltd. Processing

1975 La fagl Sugar Suger 0.1 0.1Estate

19B0 ilt textiles 6.2 0.7 6.9

1981. 1935 Ikaja lHotel Tourico 10.3 1. H.;

190S slger Battery Drt-l I.. 4Q - 6.G

Tatel groes cmmitwents 25.0 *.5 29.5

Less canceillaione uereina-clans. repemment an d sale. 4.7 3.t 6.3

Total comiten now held by IFC 20.3 ?.s 23.2

nditsbursed .0 r.: I.2

* 't yet tlettlive.

h* Not yet signde.

is The seatus of the projects listed In Part A Is descri' ed In a separatereport ca all Dank/bA finaned projects in execution. whlch isupoated twice yearly ant circulated to the Executlve Directors onAprll 31 and October 31.

lb Prior to exchanpe rate adjtustnts.

Ic Balance too small to be reflected in this table.

- 36 - ANNEx III

NIGERIA

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

SUPPLEMENTARY LOAN DATA SHEET

Section 1: Timetable for Key Events

(a) Time taken to prepare project: 1 month(b) Departure of Appraisal Mission: May 5, 1986(c) Completion of Negotiations: August 1986(d) Planned Date of Effectiveness: October 1986

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

(1) Condition of Loan Effectiveness

(a) the Government shall have received satisfactory assurances thatits esternal financing needs for the remainder of 1986 and 1987will be met (para 32);

(b) the Government shall have issued an enabling decree and theguidelines for operations of the second-tier foreign exchangemarket, satisfactory to the Bank (para 25);

(c) the Government shall have taken the necessary steps to(i) eliminate import licensing requirements to permit free acce~sto the second-tier market (para 26); (ii) eliminate ex-factoryprice controls and lift a substantial number of import prohibi-tions (paras 26 and 28); (iii) remove 30Z import surcharge,export duties, export prohibitions and export licensingrequirements (para 27) as specified in the Government' s Letter ofTrade Policy; and (iv) establish the Monitoring Unit (para 37).

(2) Conditions of Release of Second Tranche (para 35)

(a) release of adequate funds by the Government to the second-tiermarket; and

(b) satisfactory progress with respect to implementation of agreedactions for trade and export policy reforms.

-37- ANNEX IVPage 1 of 9

PIA XvAZ-' 4vo

.LTw' crsg*7

September 3, 1986

Mr Barber ConablePresidentThe World Bank1818 H Street, N. W.Washington, D.C. 20433U.S.A.

Dear Mr President

Trade and Exonrt Policies of the Federal Military Government ofNiceria

1. The Federal Military Government of Nigeria wishes to requestfor a World Bank loan in support of a trade policy and exportdevelopment programme. In this connection, this letter isintended to expatiate on the trade policy and export developmentactions which the Government has alreaey taken or proposes totake. The ultimate, goal of these policy reforms is to put inpl2ce an appropriate incentives framework which wouldrestructure and revitalize productive sectors of the economy toconcentrate on those activities that can produce goods atcompetitive prices for both Nigerian consumers and exportmarkets and, thus, are sustainable over time. To this end thetrade policy adjustment programme, discussed in this letter,will aim at realignment of the exchange rate, elimination ofimport and price controls, rationalization of the customs tariffand excise schedules, and implementation of the first phase ofmeasures for the development of non-oil exports.

2. May I refer to other interrelated matters beforeconcentrating on the specific actions through which the tradepolicy adjustment programme will be implemented. These are theoverall adjustment programme of the Government which providesthe macroeconomic framework for the trade policy adjustmentprogramme; the ongoing adjustment efforts of the Government; andthe arrangements being made to secure financing for theadjustment programme.

- 38 - ANNEX IVPage 2 of 9

The Structural Adiustment Programme (JulY- 1986-June 1988)

3. As you are aware, the Government approved a StructuralAdjustment Programme in June 1986 which aims to: correctdistortions in the incentives system; address other long-termstructural problems facing the economy; and return the economyto a path of growth of GDP; projected at 4 percent per annumjduring the 1986-88 period. A copy of the Adjustment Programmehas been provided to you separately. I am pleased to inform youthat the implementation of the Adjustment Programme has begunand the monitoring system described in the programme has beenput into operation.

4. The main features of the Structural Adjustment Programmeinvolve actions to: (a) correct the overvaluation of the Nairathrough the setting up of a viable Second-Tier Foreign ExchangeMarket (SFEM), in which the exchange rate for the Naira isdetermined freely by market forces, as further described below;(b) restructure and diversify the productive base of the economyin order to reduce dependence on the oil sector and onimports; (c) make substantial progress towards fiscal andbalance of payments viability over the period; (d) lay the basisfor sustainable non-inflationary growth; (e) lessen thedominance of unproductive investments in the public sector,improve the sector's efficiency and intensify the contributionof the =private sector to economic growth. The budget deficitwill be contained within 4 percent of the GDP and a tightmonetary policy will be pursued during the Adjustment Programmeperiod. In view of the limited amount of resources that areexpected to be available to the Nigerian Government, prioritieshave been set for: (a) providing the private sector with therequisite infrastructure and supporting services: (b)improvement of roads and rural infrastructure and modernizationof the transport system, including the railways; (c) completiononly af viable existing projects, rather than initiation of newones; (d) maintenance and rehabilitation of existing assets,with increased focus on cost-recovery; (e) rural development andemployment creation; and (f) agricultural production. Thesepriorities are reflected in the Fifth National Development Planwhich will be launched in. 1987. As noted in the StructuralAdjustment Programme, in line with the above priorities, theGovernment will carry out sectoral studies to furtherrationalize the public investment programme.

Onqoina Adjustment Efforts

5. Our President's Budget speech of December 1965 announced thelaunching of a broad effort at structural adjustment, on whichthe further reforms contained in the Adjustment Programme aresubstantially based. A brief recapitulation of the progressmade at economic reforms since 1984 - when the austeritymeasures were initiated - and more particularly during 1986might be useful as background for the current phase of theAdjustment Programme and as an indication of the seriousness andcommitment with which the present Administration is pursuing thenecessary struc ural adjustments.

-39 ANNEX IVPage 3 of 9

6. The tight fiscal policy pursued since 1984 has enabled theoverall public sector deficit to be reduced from 11.6 percent ofthe GDP in 1983 to 2.7 percent in 19B5. This has been madepossible by cutting overall public expenditures by 28 percent innominal terms (40 percent in real terms) in 1984 and a further36 percent reduction in recurrent expenditures in 1985.Simultaneously, federally-collected revenues grew by 9 percentin 1984 and 34 percent in 1985 as a result of c-mncerted revenuemobilization measures. A key reform announced in the 1986Budget was the elimination of the hitherto substantial subsidyon petroleum products. In addition to these austere fiscalmeasures, monetary and wage policies were substantiallytightened. Net domestic financial assets grew at an annualaverage rate of only 10 percent during 1984-85, compared with a47 percent increase in 1980 and an average of 13 percent in1981-83. As regards wages, no general salary increase has beengranted to public sector employees since 1982. The wage policyguidelines for the last three years have put a freeze on privatesector wages and salaries as well as fringe benefits. Thesemeasures, coupled with good harvests of food crops in 1985,resulted in a slow-down of the inflation rate from 40 percent in1984 to 5.5 percent in 1985.

7. The austerity measures introduced in 1984 and 1985 are beingcontinued in 1986. The pace of these policy reforms is beingsubstantially enhanced in the Adjustment Programme. Specialattention is being paid to the balance of payments situation.The current account deficits of 9.8 percent of GDF in 1982 and6.5 percent in 1963 were transformed into a modest surplus of 2percent of GDP in 1985. New external borrowing has beenseverely limited and, despite the difficult external paymentssituation, Nigeria has remained current in its servicing ofmedium- and long-term debt. However, in view of the currentweakness and uncertainty in the world oil market, the mountingdebt service burden, and the need to finance the AdjustmentProgramme, the Government has decided to actively seek arestructuring of its external debt and inflows of new money fromexternal sources.

Financing the Adjustment Programme

6. Accomplishment of the Adjubtr..ent Programme's growthobjectives will require an annual investment averaging around 16percent of GDP during the 1986-88 period and imports of US$6.0billion in 1987 (compared to about US$5.4 billion in 1986) withonly 3 percent annual growth in real terms in subsequent years.The Government's policy is to meet t;he financing requirementsprimarily from domestic resources. The gap for which balance ofpayments financing will be required over 1986 and 1987 isestimated at approximately US$10.8 billion per annum. Theproblem is made worse by a bunching of repayments in 1986-88,and huge claims under trade arrears. In order to make thesepayments without any debt relief, the debt service to exportratio would exceed 100 percent in 1986 and 70 percent in 1987.

- 40 - ANNEX IVPage 4 of 9

9. Faced with the difficult payments prospects, the Governmentis seeking a firm level of capital inflow from the internationalfinancial community to ease the debt-service burden and to closethe financing gap required to support the conservative projectedlevels of imports designed to ensure success of the adjustmentprocess. This will involve the official rescheduling of Parisand London Club's debts and of trade arrears, as well as newloan commitments. The latter is particularly important toensure that (i) the proposed Second-Tier Foreign Exchange Market(SFEM) is adequately funded on a continuous basis; (ii) reservesare stabilized; and (iii) trade financing and other short-termrevolving credit lines will be increased from the currentcurtailed levels. The Government is therefore negotiating afinancing package with the export credit agencies and thecommercial banks for the 1986-88 period and beyond.

The Trade Policy Adjustment Programme10. I wish now to turn to the specifics of the trade policyadjustment programme which the proposed loan will support. Thetrade policy reforms relate to three major categories: {i)exchange rate realignment; (ii) elimination of crade and pricecontrols; and (iii) non-oil export development. The timetablefor various trade policy reform actions is presented inAttachment I to this letter.

11. One of the main elements of the Adjustment Programme is theadoption of a realistic exchange rate policy to correct theserious overvaluation of the Naira. This will be accomplishedby establishing a viable and substantial Second-Tier ForeignExchange Market (SFEM) in which the exchange rate is determinedby market forces rather than by administrative means. The SFEMcovers all Nigeria's external payments, including those of theGovernment, except payments for debt service and transfers tointernational organizations and to Nigerian embassies. Inaddition to the private sources of foreign exchange supply tothe SFEM, the Government will itself release foreign exchange tosupport the market. Subject to resource availability, theGovernment intends to support the SFEM with US$1.2 billionduring the fourth quarter of 1986, and US$1.3 billion during thefirst quarter of 1987. The Government will also channel to theSFEM the proceeds of the proposed World Bank loan as well as anynew commercial bank money which may be forthcoming as a resultof the financing package being negotiated (para 9). Thedetailed modalities of the SFEM's operation are now completedand have been embodied in a decree to be promulgated by endAugust 1986. The SFEM will be launched before end-October1986. Accompanying the introduction of the SFEM, exchange,trade and price contr-ols have been and are being greatlyliberalized, as discussed below. In order to minimize the riskof distortions and to improve Government revenues, the policy ofdepreciation of the official rate will be continued until theconvergence of the two rates, and this is to be achieved within9 months of the launching of the market.

- 41 ANNEX IVPage 5 of 9

12. The Government is aware that a system of bureaucraticcontrols applied to trade flows is not only cumbersome but alsoleads to unintended distortions in resource allocation. TheGovernment is also aware that the current import licensingsystem will become unnecessary once the SFEM becomes operationalsince the rationing of available foreign exchange would takeplace by price and not by administrative means. Indeed,elimination of trade controls would be necessary to allow theSFEM to function effectively under market conditions. TheGovernment has therefore decided to eliminate the existingadministrative controls on trade and prices. Thus, at theinception of the SFEM all import licensing requirements and allex-factory price controls will be abolished. Export licensingrequirements, as a matter of principle, will be removed exceptin the case of exception.l circumstances (e.g. health, nationalsecurity, nature conservancy, national cultural heritage,etc.). The import prohibition list has been substantiallyreduced from 72 to 17 items; those bans that are retained areapplied for reasons of national security or of public health,safety or morality. However, the remaining bans will bereviewed as part of the comprehensive tariff study.Consequently, the thrust of the protection policy has shiftedfrom quantitative restrictions to tariffs.

13. The tariff and excise schedule was simplified andrationalized in 1984 to reduce the variations in effectiveprotection to local industries. At that time the Government haddeclared that the revised schedule would not be changed untilJune 1987. The Government is aware that a furtherrationalization of the tariff schedule would be necessary tomake it consistent witri the market-eetermined exchange ratepolicy and to reduce the high levels of effective protectionwhich the current schedule would provide if left unaltered whenthe SFEM is launched. The Government has therefore decided tointroduce in conjunction with the SFEM, revised tariff andexcise schedules which would further reduce tariff dispersion,encourage efficient domestic production and increase taxation ofluxury consumption. These revised schedules will be interim innature for a period of about 12 months. The Government hasdecided that a comprehensive review of the customs and exciseduty schedules will begin before the end of the year with aiarget completion date of June 30, 1987 and a revised structurewill be implemented by end-August 1987. The Go.ernment has alsodecided that the 30 percent import levy and the remaining exportduties will be abolished at the inception of the SFEM since theexchange rate adjustment implicit in the SFEM will render suchtaxes Unnecessary.

14. It is noteworthy that a key element of the Government'sstrategy under the Adjustment Programme = the introduction ofexport incentives and promotion measures, aimed at exportdiversification by substantially increasing the share of non-oilexports by the early 1990s. The major objectives of thesereforms are to overcome the strong bias against exports that hasexisted in the trade and exchange rate regime, enabling non-oil

- 42 - ANNEX IVPage 6 of 9

exporters to operate competitively on international markets andto remove other constraints on exports. The broad aim will beto promote the growth of efficient and competitive exportactivities in agriculture, agro-processing and manufacturing.

15. Since January 1986 the Government has announced a broadpackage of export incentives and promotion measures, several ofwhich have already been implemented. These include: a reductionin the list of prohibited exports; simplification of export1 censing procedures; a foreign exchange retention scheme 4orexporters; abolition of the six agricultural commodity boardsand their monopoly export marketing powers; an Export IncentivesDecree (August 1986) including a range of fiscal and creditincentives to exports (duty-drawback, export subsidy scheme, ashort-term bill rediscounting facility for exporters and otherfiscal incentives); an export credit guarantee and insurancescheme; reorganization and strengthening of the Nigerian ExportPromotion Council (NEPC); and streamlining and simplification ofexport documentation and procedures.

16. Given the broad scope of the incentives package, the fullintroduction of all the proposed measures will clearly taketime. Besides, with the establishment of the SFEM, certainproposed incentives will need to be modified or eliminated. Atthe same time, high expectations have been created among actualand potential non-oil exporters. The Government strategy wouldtherefore be to give priority to effectively putting in placequickly certain key incentives, while leaving others requiringfurther preparation to be implemented later. A phased programmewill therefore be adopted for implementation of key exportincentives over the Adjustment Programme period. The specifictimetable for measures to be implemented in the first phase inpresented in Attachment II to this letter. In this phase,priority will be given to simplification of export proceduresand documentation; removal of export licensing with someexceptions, abolition of export prohibitions and removal of theremaining export duties; reactivation of the customsduty-drawback scheme; and provision of credit to exportersthrough rediscounting of short-term bills. Other measuresproposed will be reviewed and the necessary preparatory workundertaken in subsequent phases.

17. The Government recognizes the need to strengthen exportpromotion and support services to non-oil exporters. In thiscontext, the Nigerian Export Promotion Council (NEPC) will bereorganized with enhanced private sector participation, itspromotion functions more sharply defined, and its capabilitiesand staffing strengthened. A report by an interministerialcommittee recommending the upgrading of the NEFC is currentlyunder review by the Government, and a new NEPC decree will bepromulrated by December 31, 1986. The NEPC will have a key"focal point" role to play in the non-oil export promotiondrive. To this end, its activities will be directedparticularly towards assisting the private sector andintegrating its wjrk more closely with the organized private

- 43 - ANNEX IVPage 7 of 9

sector. Given overall budget constraints and the need torecruit and train on-the-job qualified professional staff, NEPCwill need prog-essively to build up and extend its capabilitiesover several years. A clear multi-year organizational strategywill be developed (in Phase I) focusing NEPC's efforts in theinitial years upon selected key promotion and outreach functionsto assist private exporters. While it would need to have afacilitating and referral function on behalf of exporters, aswell as a policy advisory role vis-a-vis the Government, NEPCwill avoid involvement in the day-to-day administration ofincentives, which would be left largely to existing concernedagencies.

18. In support of the measures being taken, the Government wouldappreciate a favourable consideration of the request for a TradePolicy and Export Development Loan. We look forward tocontinuing exchange of ideas with the Bank and to the successfulimplementation of the Adjustment Programme.

Thank you.

Yoours truly

Chu S P OkongwuMinister of Finance

44- ANNEX IVPage 8 of 9

Attachment IPage 1 of I

TRADE POLICY ACTIONS: IMPLEMENTATION PROGRAMME

Action To be taken by

1. Issue enabling decree and ........ 1986launch second-tier foreignexchange market

2. Discontinue import and September 19e6export licensing

3. Discontinue ex-factory September 1986price controls

4. Discontinue import surcharges September 1986except on luxury goods

5. Remove import prohibitions September 1986for protective reasons

6. Eliminate 30 percent levy September 1986on imports and the export tax

7. Implement interim September 1986tariff revision

8. Obtain an indication of likely October 1986funding from commercial credi-tors through debt reschedulingand new loans

9. Complete review of tariff June 1987and excise scheduleand formulate proposals

10. Implement revised tariff and August 1987excise schedules

11. Unify foreign exchange rates 1987

45 ANNEX IVPage 9 of 9

Attachment 2Page 1 of I

EXPORT INCENTIVES AND PROMOTION: IMPLEMENTATION PROGRAMME

TIMETABLE OF ACTIONS

Actions To be taken by Responsible Agency

1. Prepare and issue September 30, 1986 Federal Ministry oforders revising Finance,export licensing, Federal Ministry ofabolishing export Trade.prohibitions and NEPC.removing remainingexport duties.

2. Implement measures September 30, 1986 Federal Ministry ofsimplify Export Trade, CBN,Procedures and Department ofDocumentation. Customs & Excise.

3. Prepare and issue December 31, 1986 Federal Ministry ofguidelines for Trade,operations of Duty Federal Ministry ofDraw-back/Suspen- Finance,sion Scheme. Department of

Customs & Excise

4. Prepare and issue December 31, 1986 CBN.guidelines foroperation of (CBN)rediscounting ofshort-term billsfor exporters.

5. Prepare and issue December 31, 1986 Federal Ministries ofDecree establish- Trade and ofing Reorganized Justice.NEPC with enhancedprivate sectorparticipation.

6. Prepare and December 31, 1986 NEPC,finalize initial Federal Ministry ofmulti-year organi- Trade.rational strategyfor NEPC.

- 46 -ANNEX VPage 1 of 7

NIGERIA

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

THE NON-OIL EXPORT PROSPECTS AND DEVELOPMENT PROGRAM

A. Introduction

1. A key element of the Government's strategy under the Medium-TermAdjustment Program (MTAP) is the introduction of a package of exportincentives and promotion measures aimed at export diversification bysubstantially increasing the share of non-oil exports by the early 1990s.Major objectives of the measures announced in the 1986 Budget and therecently approved Export Incentives Decree (May 1936) are to overcome thestrong bias against exports that has existed in the trade and exchange rateregimes, enabling non-oil exporters to operate effectively on a free tradebasis and to remove other constraints to exports. The broad aim will be topromote the growth of efficient and competitive export activities inagriculture, agro-processing and manufacturing. Key components of thisstrategy will be the shift towards a realistic exchange rate (initiallythrough creation of the Second-Tier Foreign Exchange Market), as well asintroduction of related trade liberalization measures, appropriate fiscalincentives, export credit schemes, streamlining of export documentation andprocedures, and strengthened export promotion efforts.

B. Past Export Policies and Performance

2. Up until the early 1970s Nigeria had a diversified and balancedexport base, including cocoa, groundnuts, palm oil, palm kernels, rubber,cotton, tin, hides and skins as well as other products apart from oil. Theoil boom of 1973/74 (and again in 1979/80) was accompanied by a dramaticshift in export structure. With the rise of the oil sector, the share ofnon-oil exports declined very sharply (from about 42% in 1970 to an averageof 4% over 1980-85), meanwhile agro-processed exports virtually disap-peared. The total value of non-oil merchandise exports has averaged aboutUS$400 million per annum over 1980-85. The export base also narrowedsubstantially to a smaller range of goods, with cocoa accounting for anaverage of 75% of- the total. In addition, there have been reportedlysubstantial "unofficial" exports (possibly as much as US$500 million perannum) to neighboring countries of manufactured goods (e.g., soaps, tex-tiles, cement etc.) and smuggling of agricultural commodities (e.g., cocoa)as part of the parallel market in goods and currencies.

3. The decline in non-oil export performance has in large part beendue to the past economic policies pursued during the rise of the oilsector. Following the 1973/74 oil boom, the appreciation of the nairacoupled with accelerated inflation and increased real wages eroded thecompetitiveness of Nigerian agriculture and industry. The grossly over-valued currency and the escalated customs tariff structure providing higherlevels of protection to finished goods, together with extensive quantita-tive controls on imports since 1982, resulted in a strong anti-export biasin the incentives regime. Meanwhile, the duty drawback scheme has beenineffective in practice and non-operational since the 1970s; other export

-47 - ANNEX VPage 2 of 7

incentives schemes (the export development fund and the export creditguarantee and insurance scheme) were not put into operation; and theNigerian Export Promotion Council (NEPC), established in 1978, remainedunder-funded, inadequately staffed, and relatively ineffective. Exportlicensing (applied to all exports) and export documentation procedures havebeen cumbersome and time consuming, and export prohibitions and exportduties applied to a number of (principally agricultural) commodities.

C. Non-Oil Export Piospects

4. The Government it now attaching high priority to the diversifica-tion of the export base through the promotion of non-oil exports. Itrecognizes the need for a strong and sustained commitment over the longerterm to an appropriate policy and incentives framework to enable Nigerianproducers to compete effectively on international markets. With appropri-ate exchange rate and export incentives policies, the Government considersthat it should be possible to substantially increase non-oil exports in themedium-term. The Adjustment Program has set a target of US$1 billion perannum in non-oil export earnings by 1990, or over double the level of thepast five years, implying a growth rate of 20% per annum over 1986-90.This goal appears ambitious. However, the initial increase in exports isexpected to come from a shift into official trade channels of presentlyunrecorded, unofficial exports to neighboring countries. Such a shift willbe important from the balance of payments point of view. In view of theabove the projected increase of 20 percent per annum in the next few yearsmay be achievable.

5. Two assessments of the non-oil export prospects over the mediumand long term have recently been completed. The first was carried out byconsultants for the Nigerian Export Promotion Council who evaluated theprospects of and requirements for manufactured exports from Nigeria. Theconsultants' report entitled "Long Range Strategic Planning for the Devel-opment and Promotion of Manufactured Exports from Nigeria" is available inthe Project File (Annex VI). The second assessment was carried out as partof appraisal of this proposed loan by Bank staff drawing upon: (a) theabove consultants' report; (b) interviews with exporters and othersinvolved with exports (banks, agriculture experts, NEPC, Ministry of Trade,customs officials, etc.); and (c) the Bank's previous secto- work inagriculture, industry and a 1982 Bank study of non-oil export prospects.

6. The main conclusions of these assessments can be summarized asfollows:

(a) Nigeria's main competitive advantage is its diversified naturalresource base together with ample supplies of natural gas andcultivable land and different climatic zones suitable for a rangeof agricultural products. These resources should enable Nigeriato substantially increase exports of agricultural and/or agro-based products over the medium-term and provide a basis forexports of a diversified range of manufactured exports in along-term perspective;

- 48 - ANNEX VPage 3 of 7

(b) Nigeria's large domestic market which provides a potential fordiversified production, many competing producers, as well aseconomies of scale, provides a good basis for Nigeria to producemanufactured goods on a competitive basis and penetrate exportmarkets, particularly in ECOWAS countries;

(c) the main agricultural products with good export prospects (andmany of which were exported in significant amounts in the past)are cocoa, rubber, palm oil, fruits (including pineapples, citrusfruits and mangos), and maize;

(d) agro-based products with export prospects include canned fruitjuices, frozen shrimps, cocoa intermediates, spices, cocoa-basedbeverages;

(e) wood and timber products such as sawn timber, plywood, veneer,particle board, furniture components, pulp and newsprint havegood export prospects to EEC and ECOWAS;

(f) manufactured products where Nigeria could potentially competi-tively export include soaps and detergents, plastic products,enamelware, aluminum kitchenware, nail and wire products, glassbottles, African print texti'les and plastic footwear; and

(g) Nigeria could potentially export LNG and LPG products in themedium- to long-term, provided that a long-term supply contractcould be secured and dry gas (LPG) also marketable.

7. The analyses also point out certain constraints and comparativedisadvantages which will make it difficult for Nigeria to substantiallyincrease its non-oil exports in a short period of time and making a medium-to long-term export supply response more likely. Principal constraintsinclude: inadequate replanting in some traditional agricultural exportcrops (rubber, cocoa, oil palm) may cause a decline in production over thenext few years before a long-term expansion materializes; lack of exportmarketing capabilities; and lack of adequate transportation facilities.

8. In short, good potential exists for an increase in non-oilexports, but the extent and timing of increase is hard to predict given thesupply rigidities and the highly distorted policy and incentives framework(and strong anti-export bias) since the mid-1970s. With thq policy reformsunder the adjustment program, the vastly improved profitability of exports,combined with a sizeable and dynamic pool of private entrepreneurs includ-ing well established larger trading companies with external market links,may well generate an immediate export response exceeding the expectationsand targets.

D. Export Incentives Program

9. The objectives of the Government's Export Incentives Program willbe: (a) to ensure equal (price) incentives in naira terms are provided to

- 49 - ANNEX VPage 4 of 7

export sales as for domestic market production; (b) to remove existingprocedural and administrative bottlenecks to exports; (c) to ensure auto-matic, speedy and equal access to export incentives for direct, indirectand occasional exporters; and (d) to facilitate appropriate (especiallypre-shipment) financing for exporters.

10. Since January 1986, the Government has announced a comprehensivepackage of export incentives and promotion measures, several of which havealready been implemented. These include: reduction in the list of prohib-ited exports; simplification of export licensing procedures; a foreignexchange retention scheme for exporters; abolition of the six agriculturalcommodity boards and their monopoly export marketing powers; an ExportIncentives Decree including a range of fiscal and credit incentives toexports (duty-drawback, export subsidy scheme, redisco'inting facility forexport financing and other fiscal incentives); an export credit guaranteeand insurance scheme; reorganization and strengthening of the NigerianExport Promotion Council (NEPC); and streamlining and simplification ofexport documentation and procedures.

11. Given the ambitious scope of the incentives package and theGovetament's limited implementation capabilities, full introduction of allthe proposed measures will take time. Meanwhile, with the establishment ofthe Second-Tier Foreign Exchange Market, certain proposed incentives wouldneed to be modified or eliminated. At the same time, high expectationshave been created among actual and potential non-oil exporters. Thestrategy would therefore be to give priority to put in place quicklycertain key incentives, while leaving others requiring further preparationto be implemented later. A phased implementation program has been adoptedby th_. Government for the export incentives package. Three implementationphases are proposed: Phase I (Ju±y - December, 1986), Phase II (January -August, 1987), and Phase III (September, 1987 - May, 1988). The incentivesmeasures to be implemented in the first phase are sumnmarized inAttachment II to the Government's Letter on Trade and Export Policy (AnnexIV).

12. Trade and Exchange Rate Policies. By far the most powerful andnecessary incentive to exporters would be the establishment of a realisticexchange rate. The non-oil exporters will have unrestricted access to theSecond-Tier Foreign Exchange Market for payment of their export receiptsand purchase of imports. All foreign exchange surrender requirements willbe abolished. However exporters are expected to open foreign currencyaccounts domiciled with banks in Nigeria to which export proceeds are to befully crelited. Effectively this will permit non-oil exporters to retain100Z of their foreign exchange earnings.

13. Under the proposed loan the following measures will be imple-mented to place non-oil exporters effectively on a free-trade regime:

(a) The Customs Duty Drawback will be reactivated and its operationsstreamlined. In Phase I, guidelines and procedures will be putin place for a duty drawback/suspension to offset customs tariffs

50- ANNEX V

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and excise duties on exporters' tradeable inputs. In order toensure automaticity, a system of "fixed" drawback rates (as apercentage of f.o.b. export sales) will be established--as wellas giving exporters the option of individual rates. Initially,the "fixed" rates will be established for a limited list ofcurrently exported goods and others with export potential. InPhases II and III, the drawback/suspension scheme will bereviewed, in light of experience with its operation; and "fixed"rates developed for a wider range of goods. Under the proposedloan, funding is included for technical assistance and trainingto facilitate implementation of the duty drawback scheme.

(b) The remaining export duties will be abolished, since they arelargely redundant given Nigeria's small share of world marketsfor the goods on which they are levied.

(c) Removal of Export Restrictions. Currently all exports aresubject to prior export licensing, and a number of goods arestill subject to export prohibition (e.g., rice, maize, vegetableoils, stockfish, timber). The export licensing system is largelyredundant even for statistical purposes; ard, while its adminis-tration has been streamlined recently, its price checking systemis necessarily arbitrary and can constrain exporters. TheGovernment has agreed to substantially remove export restric-tions. Thus (i) export licensing requirements would be abolishedexcept for goods whose exportation is controlled for health,national security or nature conservancy reasons, and exportersregistration with the Nigerian Export Promotion Council (NEPC)made voluntary rather than a requirement; and (ii) remainingexport prohibitions will be abolished.

(d) Streamlining Export Procedures and Documentation. A Governmentinterministerial committee (which included private sector repre-sentatives and had technical support from UNCTAD/ITC) has pre-pared recommendations which are currently under review.Meanwhile, both the Customs Department and the Federal Ministryof Trade have already- started to streamline their procedures forexports, including notably customs clearance procedures at theports. The streamlining measures will be completed in Phase I.Thereafter, in Phases II and III, export documentation andprocedures will be kept under review by the Customs Departmentand the NEPC to obtain feedback, and to determine furthersimplification measures.

(e) Rediscounting of short term bills for exporters. Once the SFEMis established, this will be important to ensure adequate access,especially for first-time exporters to (pre-shipment) workingcapital financing. The Central Bank of Nigeria will prepare andissue guidelines for operations of a rediscounting scheme byDecember 31, 1986.

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14. Export Financing. Several different schemes are also underpreparation by the Central Bank of Nigeria (CBN) to provide appropriatefinancing for exporters, formulation of which is to be carried out underthe proposed loan:

(a) An Export Credit Guarantee and Insurance Scheme is to beestablished under the CBN and will have several separatecomponents: (i) Of these, the (pre-shipment) credit guaranteefund will be particularly important to assist (particularlyfirst-time) exporters with less well-established corporatecredentials in obtaining working capital financing. (ii) Of lessimmediate importance given the likely profile of Nigerian non-oilexporters is the credit insurance scheme, which would thereforebe deferred to later.

(b) Importantly, further devel.'pment of the export finance systemwill also be needed to give access to other export incentives(e.g., duty drawback) to indirect exporters, and to foster thedevelopment of export trading companies. This is becauseNigerian agricultural, agro-processed and manufactured exportsare likely in many instances to be produced by small- andmedium-scale producers, but exported by trading companies withbetter knowledge of external markets. A simplified system ofexport financing, possibly based upon issuance of domestic L/Csto local producers (back-to-back with export L/Cs), could helpachieve this objective. Under the proposed loan, funding isincluded for studies to prepare the design of export financingschemes along the above lines.

E. Institutional Support for Export Development

15. The Government has recognized the need to strengthen exportpromotion services and support services to non-oil exporters. In thiscontext, the Nigerian Export Promotion Council (NEPC) will be re-organizedinto a semi-autonomous statutory body with strong private sectorparticipation, its promotion functions more sharply defined, and itscapabilities and staffing strengthened. As noted earlier, since itsinception, the NEPC has been a relatively weak and ineffectiveorganization, beset with budget and staffing problems, largely because ofthe past lack of firm government commitment to export promotion. A reportby an interministerial committee recommending the upgrading of the NEPC (iscurrently under review by Government). A suitable decree to enable suchreorganization will be promulgated by December 31, 1986. The NEPC willhave a key "focal point" role to play in the non-oil export promotiondrive. To this end, its activities will be directed particularly towardsassisting the private sector and integrating its work more closely with theorganized private sector. Given overall budget constraints and the need torecruit and train on-the-job qualified professional staff, NEPC will needprogressively to build and extend its capabilities over several years. Aclear multi-year organizational strategy will be developed (in Phase I)focussing NEPC's efforts in the initial years upon selected key promotion

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and outreach functions to assist private exporters. These would includenotably: trade and market information services, export marketing andpromotion assistance (incl. trade fairs); organizing training for privatesector oersonnel in export marketing and market development; and review offreight services and packaging issues. While it will need to have afacilitating and referral function on behalf of exporters, as well as apolicy advisory role vis-±-vis government, NEPC will need to avoidinvolvement in day-to- day administration of incentives, which would beleft largely to existing concerned agencies. Under the proposed loan,funding is included for technical assistance and staff training to supportthe strengthening of the reorganized NEPC.

- 53 -ANNEX VI

NIGERIA

TRADE POLICY AND EXPORT DEVELOPMENT LOAN

DOCUMENTS IN THE PROJECT FILE

No. Document Title

1. Federal Military Government of Nigeria: Structural Adjustment Program(July 1986 - June 1988).

2. "Long Range Strategic Planning for the Development and Promotion ofManufactured Exports from Nigeria". Enterprise Consulting Group,Ltd., Lagos, on behalf of the Nigerian Export Promotion Council.

3. "Prospects for Non-Oil Exports". Sector report dated June 23, 1986.

Working Papers (WP)

4. WP No. 1 Trade Policy Issues Related to the Second-Tier ForeignExchange Market.

5. WP No. 2 Note on Export Incentives and Promotion Measures, May 21,1986.

6. WP No. 3 Note on Proposed Technical Assistance and Training forNon-oil Export Development.

7. WP No. 4 Strategy for Reorganizing Nigerian Export Promotion Council.

8. WP No. 5 Proposed Interim Revision of Customs and Excise Schedules.

9. WP No. 6 Note on Duty Drawback Scheme for Exporters.

10. WP No. 7 Terms of Reference for Steel Sector Study.

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