- Friday, 24 January 2014
The oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases in favor of an unhealthy dependence on crude oil. Oil and gas exports account for more than 95% of export earnings and over 80% of federal government revenue. New oil wealth and the concurrent decline of other economic sectors fueled massive migration to the cities and led to increasingly widespread poverty, especially in rural areas. A collapse of basic infrastructure and social services since the early 1980s accompanied this trend. By 2002 Nigeria's per capita income had plunged to about one-quarter of its mid-1970s high, below the level at independence. Along with the endemic malaise of Nigeria's non-oil sectors, the economy continues to witness massive growth of "informal sector" economic activities, estimated by some to be as high as 75% of the total economy.
Nigeria's proven oil reserves are estimated to be 36 billion barrels; natural gas reserves are well over 100 trillion cubic feet. Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC), and its current crude oil production averages around 1.6 million barrels per day.
Agriculture has suffered from years of mismanagement, inconsistent and poorly conceived government policies, and the lack of basic infrastructure. Still, the sector accounts for about 40% of GDP and two-thirds of employment. Agriculture provides a significant fraction (approximately 10%) of non-oil growth. Poultry and cocoa are just two areas where production is not keeping pace with domestic or international demand. Fisheries also have great potential, but are poorly managed. Most critical for the country's future, Nigeria's land tenure system does not encourage long-term investment in technology or modern production methods and does not inspire the availability of rural credit.
Arguably Nigeria's biggest macroeconomic achievement has been the sharp reduction in its external debt, which declined from 36% of GDP in 2004 to less than 4% of GDP in 2007. In October 2005, the International Monetary Fund (IMF) approved its first-ever Policy Support Instrument for Nigeria. In December 2005, the United States and seven other Paris Club nations signed debt reduction agreements with Nigeria for $18 billion in debt reduction, with the proviso that Nigeria pay back its remaining $12 billion in debt by March 2006. The United States was one of the smaller creditors, and received about $356 million from Nigeria in return for over $600 million of debt reduction. Merrill Lynch won the right to take on $509 million of Nigeria's promissory debt (accrued since 1984) to the "London Club" of private creditors. This arrangement saved Nigeria about $34 million over a simple prepayment of the notes. Nigeria faces intense pressure to accept multibillion dollar loans for railroads, power plants, roads, and other infrastructure. Expanded government spending also has led to upward pressure on consumer prices. However, a drop in world oil prices and the global financial crisis prompted the federal government to tap its foreign exchange reserves, which consequently decreased from $60 billion to $48 billion, in order to meet pressing budget demands from cash-strapped state and local governmental bodies.
In 2009, Nigeria took significant steps to strengthen the banking sector. After completing financial audits of all 24 national banks, the Central Bank found 10 of the banks to be undercapitalized or suffering from illiquidity. The Central Bank replaced many of the failing banks' management teams and pumped nearly $6 billion into the sector. In addition, the Central Bank published the names of significant loan defaulters, which included many prominent political and business figures. These reforms came on top of a major banking overhaul in 2006 that reduced the number of banks from 89 to 24, increased a bank's minimal capital requirement to $190 million, and required banks to hold 40% of their deposits in liquid assets. Retail, corporate, and Internet banking are seen as intensively competitive, and the home loan market is considered moderately competitive. Less than 10% of lending is believed to be made to individuals. About 65% of the economically active population is serviced by the informal financial sector, e.g., microfinance institutions, moneylenders, friends, relatives, and credit unions. Since 1999, the Nigerian Stock Exchange has enjoyed strong performance, although equity as a means to foster corporate growth remains underutilized by Nigeria's private sector. Credit is largely inaccessible to rural communities, the real estate sector and small businesses receive a low level of lending, and the credit card market remains at an early stage of development.