With 140 million people, Nigeria is the most populous African country - one in four Africans is a Nigerian. It is also Africa’s biggest oil exporter, yet half of its population lives below the poverty line, it receives only $6 of aid per capita a year and barely has any infrastructure to speak of. A committed team of reformers has set the country on the path of economic recovery since 2003. Whether new President Yar’Adua will be able to lock-in the achievements of the past few years and keep up the reform momentum will be crucial to give Nigeria a chance to meet the Millennium Development Goals (MDGs).

Before the Reforms

Between 1992 and 2002, annual GDP growth averaged 2.2 percent, while population grew by 2.8 percent per annum, causing a deterioration in living standards  - over 70 percent of the population dropped below the poverty line. This was the result of years of economic mismanagement and the “oil curse”. After independence in 1960, Nigeria’s economy switched from its traditional cash crop, palm oil, to the extraction of crude oil. The country started suffering from the “Dutch Disease”, witnessing a strong exchange rate appreciation and the disintegration of its non-oil economy. External terms of trade shocks and the over-reliance on oil export earnings soon made Nigeria’s economy amongst the most volatile in the world .

Governments adopted reckless pro-cyclical expenditure patterns, effectively transferring fluctuations in oil earnings directly into the domestic economy. Weak fiscal discipline translated into low growth and rising debt, as a fragmented banking sector discouraged long-term productive investment in favour of short-term arbitrage opportunities.

Widespread corruption and excessive government intervention produced a bloated and underperforming public sector; costly and inefficient state-owned enterprises; and many public projects that turned into white elephants. It is estimated that over $300 billion in government oil revenues has been stolen since independence.

The Reform Process

Since the return to democracy in 1999, Nigeria has embarked on a bold reform programme. The second Obasanjo administration (2003-2007) produced a home-grown development strategy,  the National Economic Empowerment and Development Strategy (NEEDS), based on the four goals of employment generation, poverty reduction, wealth creation and value reorientation. These were to be achieved by carrying out deep macroeconomic, structural and institutional reforms. Drawing also from the large pool of skilled Nigerians in the diaspora, Obasanjo assembled a group of reformers, among whom was former World Bank Vice-President, Dr Ngozi Okonjo-Iweala, who was appointed Minister of Finance in 2003. 

A pillar of the new reform agenda was the stabilisation of the Nigerian economy through the improvement of public financial management and the creation of an enabling environment for strong economic growth. An “Oil-based Fiscal Rule” was introduced to de-link public expenditure from oil revenues, by budgeting expenditure on an oil price benchmark that was lower than the forecasted market price. Any revenues accumulated above the reference price were saved in an “Excess Crude Account”. In this way, the transmission of external shocks into the domestic economy was limited, while significant public savings and the accumulation of foreign exchange reserves for consumption-smoothing were also possible.

The Central Bank of Nigeria (CBN) managed to reduce inflation to single digits and achieve the near convergence of the parallel market exchange markets through a Wholesale Dutch Auction System. The CBN also launched a bank consolidation exercise to strengthen the sector and increase domestic credit to the private sector. In less than two years, the number of  banks in Nigeria fell from 89 to 25 and credit to the private sector rose, propping up growth rates (averaging over 7 percent), particularly in the non-oil sector.

Another landmark achievement was the largest Debt Relief Deal obtained by any African nation from the Paris Club. By early 2007, Nigeria had exited both Paris and London Club debt obligations and its external debt stock had fallen from $36 billion to $3 billion. 

The budget process improved with the introduction of Medium Term Expenditure Frameworks (MTEF), Medium Term Sector Strategies (MTSS) and new Due Process regulations. The $1 billion of annual debt servicing savings, made through debt relief, were channelled into MDG-related expenditures.

The fight against corruption was strengthened through the introduction of the Nigeria Extractive Industries Transparency Initiative (N-EITI), the Economic and Financial Crimes Commission (EFCC) and the Independent Corrupt Practices and other Related Offences Commission (ICPC), which put behind bars several prominent figures.

The privatization of several state-owned enterprises and the civil service reform improved efficiency and transparency, e.g. eliminating 8,000 “ghost workers” .

Representing a step forward in the democratization process, the April 2007 polls were the first transfer of power from a democratically-elected leader to another in the history of Nigeria. However, this process was tarnished, as the newly elected President Yar’Adua was hand-picked by his predecessor and the elections were rigged.

The Challenges Ahead

The focus of the NEEDS programme, inspired by World Bank/IMF programmes, was primarily on macroeconomic stabilisation. Despite the enormous success in stabilising the macro economy – essential for a solid development strategy in the long-run – the plan clung onto the hope for a “trickle-down effect” that did not materialise, thus failing to generate wealth and employment for the people. The next phase, NEEDS II, aims at moving down to the microeconomy, to strengthen public support for the reforms. To avoid loosing momentum, NEEDS II will have to identify some “quick wins” and place more emphasis on non-oil, pro-poor growth, focusing on the development of a manufacturing sector. The latest government figures indicate that the percentage of government revenues coming from oil increased from 95% to 99% in 2007  – a worrying trend.

However, this will require improvements in the domestic business climate and infrastructure. The former will require better access to finance, technology, inputs and skills; curbing corruption;  reforming the judicial system; etc. The latter will constitute a major challenge, after decades of underinvestment. Bad roads, lack of electricity, inefficient ports, etc. all combine to create a very difficult environment for businesses to operate in. The focus is on establishing cost-effective Public-Private-Partnerships (PPPs) but progress has been slow. When sworn in, Yar’Adua announced he would declare the State of Emergency in the Power Sector. Eleven months on, only one thing has been done – a Committee was launched in February 2008. The latter will now start discussions on how to increase power production and where to get the funds. Meanwhile, the Niger Delta Development Commission (NDDC) and the government at large will have to intensify their efforts to ensure the end of militants’ activities in the Delta region, so as to restore oil extraction to Nigeria’s OPEC quota and take full advantage of sky-high world crude prices. This could help boost resources available to expand extractive capacity, build refineries (at the moment Nigeria must import refined oil) and power plants.

Another essential step will be to extend reforms to the sub-national level. Nigeria is a federation of thirty-six States plus the Federal Capital Territory, which enjoy ample autonomy in financial and legal matters. Despite adopting the States Economic Empowerment and Development Strategies (SEEDS), most States have not followed through with the reforms already carried out at the federal level. However, they (and Local Governments) make up half of the consolidated government expenditure. Corruption and low capacity have slowed efforts to embark on the reforms but the results achieved at the federal level could fade out if States and Local Governments were not to follow suit soon.

Lastly, the reforms carried out so far must be fully embedded in the legal code of the country in order to strengthen domestic institutions and provide the necessary platform for long-term sustainable growth.

Since becoming President, Yar’Adua has been busy shaking off the image of being Obasanjo’s puppet. For the good of Nigeria, he better be who he says he is – a committed President with a strong vision!

* Giulia Pellegrini (UWCAd 00-02) worked as an Overseas Development Institute (ODI) Fellow at the Debt Management Office of the Federal Republic of Nigeria. She holds an MSc in Economics for Development from St Anthony's College, University of Oxford.