GeographyIQ.comGeographyIQ.com
  Home
  Rankings


A B C D E F
G H I J K L
M N O P Q R
S T U V W Y
Z          


Currency Converter

 


World > Africa > Nigeria > Economy (Notes)

Nigeria - Economy (Notes)


ECONOMY

Trade
Nigeria is the largest U.S. trading partner in sub-Saharan Africa, based mainly on the high level of petroleum imports from Nigeria. Total two-way trade was valued at $30.8 billion in 2006, a 19% increase over 2005. Leading U.S exports to Nigeria were machinery, wheat, and motor vehicles. Leading U.S. imports from Nigeria were oil and rubber products. Nigerian exports to the United State under the African Growth and Opportunity Act (AGOA), including its Generalized System of Preferences (GSP) provisions, were valued at $25.8 billion during 2006, a 15% increase over 2005, due to an increase in oil exports. Non-oil AGOA trade (leather products, species, cassava, yams, beans, and wood products) totaled $1.4 million in 2006, almost double the amount in 2005. The United States was the largest foreign investor in Nigeria.

In June 2006, the United States met with Nigeria under the existing Trade and Investment Framework Agreement (TIFA) to cooperate on investment issues and to develop a strategy for Nigeria to diversify its export base, especially in manufactured goods. Under the TIFA, the United States and Nigeria pledged to work together on critical issues such as World Trade Organization (WTO) Doha Development, intellectual property rights, and trade capacity building.

The U.S. goods trade deficit with Nigeria was $25.7 billion in 2006, an increase of $3 billion from $22.6 billion in 2005. U.S. goods exports to Nigeria in 2006 were $2.2 billion, up 38% from the previous year. U.S. imports from Nigeria were $27.9 billion in 2006, up from 15% from 2005. Nigeria is currently the 50th-largest export market for U.S. goods.

The stock of U.S. foreign direct investment (FDI) in Nigeria in 2005 was $874 million, down from $2.0 billion in 2004. U.S. FDI in Nigeria is concentrated largely in the mining and wholesale trade sectors.

Dominated by Oil
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. In 2002 oil and gas exports accounted for more than 98% of export earnings and about 83% of federal government revenue. New oil wealth, the concurrent decline of other economic sectors, and a lurch toward a statist economic model 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 in 2006 its crude oil production averaged around two million barrels per day. Poor corporate relations with indigenous communities, vandalism of oil infrastructure, severe ecological damage, and personal security problems throughout the Niger Delta oil-producing region continue to plague Nigeria's oil sector. Efforts are underway to reverse these troubles. In the absence of coherent government programs, the major multinational oil companies have launched their own community development programs. The Niger Delta Development Commission (NDDC) was created to help catalyze economic and social development in the region, but it is widely perceived to be ineffective and opaque. The United States remains Nigeria's largest customer for crude oil, accounting for 40% of the country's total oil exports. Nigeria provides about 11% of overall U.S. oil imports and ranks as the fifth-largest source for U.S. imported oil.

The United States is Nigeria's largest trading partner after the United Kingdom. Although the trade balance overwhelmingly favors Nigeria, thanks to oil exports, a large portion of U.S. exports to Nigeria is believed to enter the country outside of the Nigerian Government's official statistics, due to importers seeking to avoid Nigeria's excessive tariffs. To counter smuggling and under-invoicing by importers, in May 2001 the Nigerian Government instituted a 100% inspection regime for all imports, and enforcement has been sustained. On the whole, Nigerian high tariffs and non-tariff barriers are gradually being reduced, but much progress remains to be made. The government also has been encouraging the expansion of foreign investment, although the country's investment climate remains daunting to all but the most determined. The stock of U.S. investment is nearly $7 billion, mostly in the energy sector. Exxon-Mobil and Chevron are the two largest U.S. corporate players in offshore oil and gas production. Significant exports of liquefied natural gas started in late 1999 and are slated to expand as Nigeria seeks to eliminate gas flaring by 2008.

Agriculture has suffered from years of mismanagement, inconsistent and poorly conceived government policies, and the lack of basic infrastructure. Still, the sector accounts for over 41% of GDP and two-thirds of employment. Agriculture provides a big chunk of non-oil growth, which in 2006 reached 9%. Nigeria is no longer a major exporter of cocoa, groundnuts (peanuts), rubber, or palm oil. Cocoa production, mostly from obsolete varieties and overage trees, is stagnant at around 180,000 tons annually; 25 years ago it was 300,000 tons. An even more dramatic decline in groundnut and palm oil production also has taken place. Once the biggest poultry producer in Africa, corporate poultry output has been slashed from 40 million birds annually to about 18 million. Import constraints limit the availability of many agricultural and food processing inputs for poultry and other sectors. Fisheries 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.

Oil dependency, and the allure it generated of great wealth through government contracts, spawned other economic distortions. The country's high propensity to import means roughly 80% of government expenditures is recycled into foreign exchange. Cheap consumer imports, resulting from a chronically overvalued Naira, coupled with excessively high domestic production costs due in part to erratic electricity and fuel supply, have pushed down industrial capacity utilization to less than 30%. Many more Nigerian factories would have closed except for relatively low labor costs (10%-15%). Domestic manufacturers, especially pharmaceuticals and textiles, have lost their ability to compete in traditional regional markets; however, there are signs that some manufacturers have begun to address their competitiveness.

Arguably the government'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. On December 17, 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 has 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 saves Nigeria about $34 million over a simple prepayment of the notes. Nigeria owes some bilateral loans and multilateral institutions over $101 million in oil warrant instrumental debts, which soon might be redeemed via a cash tender offer. Consequently, Nigeria faces intense pressure to accept multibillion dollar loans for railroads, power plants, roads, and other infrastructure.

In the light of highly expansionary public sector fiscal policies during 2001, the government has sought ways to head off higher inflation, leading to the implementation of stronger monetary policies by the Central Bank of Nigeria (CBN) and underspending of budgeted amounts. As a result of the CBN's efforts, the official exchange rate for the Naira has stabilized at about 127 Naira to the dollar. The combination of CBN's efforts to prop up the value of the Naira and excess liquidity resulting from government spending led the currency to be discounted by around 20% on the parallel (nonofficial) market. A key achievement of the Policy Support Instrument has been closure of the gap between the official and parallel market exchange rates. The Inter-Bank Foreign Exchange Market (IFEM) is closely tied to the official rate. Under IFEM, banks, oil companies, and the CBN can buy or sell their foreign exchange at government influenced rates. Much of the informal economy, however, can only access foreign exchange through the parallel market. Companies can hold domiciliary accounts in private banks, and account holders have unfettered use of the funds.

Expanded government spending also has led to upward pressure on consumer prices. Inflation, which had fallen to 0% in April 2000, reached 14% by the end of 2003. Inflation was estimated at 8% in early 2007. High world oil prices have resulted in the government now holding $45 billion in foreign exchange reserves. State and local governmental bodies demand access to this 'windfall' revenue, creating a tug-of-war between the federal government--which seeks to control spending--and state governments desirous of augmented budgets, preventing the government from making provision for periods of lower oil prices.

One of Nigeria's greatest success stories has been the completion in early 2006 of a major overhaul of its banking system, although some have criticized the pace of consolidation and aggressive CBN supervision. Reforms have reduced the number of banks from 89 to 25, 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. Rural communities remain largely unbanked, 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.

Nigeria's publicly owned transportation infrastructure is a major constraint to economic development. Principal ports are at Lagos (Apapa and Tin Can Island), Port Harcourt, and Calabar. Docking fees for freighters are among the highest in the world. Of the 80,500 kilometers (50,000 mi.) of roads, more than 15,000 kilometers (10,000 mi.) are officially paved, but many remain in poor shape. Extensive road repairs and new construction activities are gradually being implemented as state governments, in particular, spend their portions of enhanced government revenue allocations. The government implementation of 100% destination inspection of all goods entering Nigeria has resulted in long delays in clearing goods for importers and created new sources of corruption, since the ports lack adequate facilities to carry out the inspection. Four of Nigeria's airports--Lagos, Kano, Port Harcourt and Abuja--currently receive international flights. There are several domestic private Nigerian carriers, and air service among Nigeria's cities is generally dependable. The maintenance culture of Nigeria's domestic airlines is not up to international standards.

Gradual Reform
Nigeria made progress toward establishing a market-based economy in 2006. It privatized Nigeria Telecommunications and its mobile subsidiary as well as the only government-owned petrochemical company. The government also sold its interest in eight oil service companies. Nigeria continued implementation of the Economic Community of West African States (ECOWAS) Common External Tariff. Nigeria's implementation of non-tariff barriers has been arbitrary and uneven and continues to violate WTO prohibitions against trade bans. However, the government removed some textile items from its list of prohibited imports in 2006. Enforcement of criminal penalties against intellectual property rights (IPR) violations is weak, and firms that are successfully countering IPR piracy have generally done so through civil court cases. The government has recently created an intellectual property commission.

A co-member of the International Advisory Group of the Extractive Industries Transparency Initiative (EITI) initiated by the G8, Nigeria's federal government is playing an important role in having volunteered to pilot the new disclosure and validation methodologies. It has completed a comprehensive audit of oil sector payments and government revenues from 1999-2004. However, it is perceived that government contracting remains rife with corruption and kickbacks, and that many state and local officials continue to steal public monies outright.

Nigeria's economic team has enjoyed an excellent reputation in the international community. The team produced an encouraging body of work, notably budgets described as 'prudent and responsible' by the IMF and a detailed economic reform blueprint, the National Economic Empowerment and Development Strategy (NEEDS). Other positive developments have included: (1) government efforts to deregulate fuel prices; (2) Nigeria's participation in the EITI and commitment to the G8 Anticorruption/Transparency Initiative; (3) creation of an effective Economic and Financial Crimes Commission (EFCC), which has earned 150 convictions and recovered over $5 billion in mishandled funds; and (4) development of several governmental offices to better monitor official revenues and expenditures.

Nigeria is not on track to meet its Millennium Development Goals because of a lack of policy coordination between the federal, state, and local governments, a lack of funding commitments at the state and local levels; and a lack of available staff to implement and monitor projects on health, poverty, and education.

Investment
Although Nigeria must grapple with its decaying infrastructure and a poor regulatory environment, the country possesses many positive attributes for carefully targeted investment and will expand as both a regional and international market player. Profitable niche markets outside the energy sector, such as specialized telecommunication providers, have developed under the government's reform program. There is a growing Nigerian consensus that foreign investment is essential to realizing Nigeria's vast potential. Companies interested in long-term investment and joint ventures, especially those that use locally available raw materials, will find opportunities in the large national market. However, to improve prospects for success, potential investors must educate themselves extensively on local conditions and business practices, establish a local presence, and choose their partners carefully. The Nigerian Government is keenly aware that sustaining democratic principles, enhancing security for life and property, and rebuilding and maintaining infrastructure are necessary for the country to attract foreign investment.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Climate
Current Time
Ranking Positions


Notes and Commentary
People
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





   Privacy & Disclaimer

   Portions of this site are based on public domain works from the U.S. Dept. of State and the CIA World Fact Book
   All original material copyright © 2002 - GeographyIQ.com. All Rights Reserved.
   For comments and feedback, write to us at [email protected].