Economy and Trade
Nigeria is the most populous country in Africa, with an ethnically and religiously diverse population of 140 million. Nigeria has the second-highest GDP in Africa (US$166.78 billion in 2007), reflecting the country’s substantial oil reserves. However, oil has proved a mixed blessing for the country. Much of the oil revenues has been squandered through corruption, while Nigeria neglected its strong agricultural and light manufacturing bases during the 1970s oil-price boom. Few Nigerians, including those in oil-producing areas, have benefited from the oil wealth. Nigeria is keen to attract foreign investment but it is hindered in this quest by security concerns, as well as by a shaky infrastructure troubled by power cuts. The United States is Nigeria’s largest trading partner after the United Kingdom. Nigeria supplies around 11% of US oil imports. Crude oil and liquefied natural gas (LNG) account for around 98% of exports and around 80% of government revenues.
Economic Policy over 12 Months
The government’s finances benefited from the boom in oil prices that began in 2003 and only ended in the second half of 2008, helped by a program of reforms introduced during President Olusegun Obasanjo’s second term (2003–2007). These included an oil-price-based fiscal rule under which government expenditure is based on a conservative oil-price benchmark. Any revenues that accumulate above the reference prices are saved in a special excess crude account.
Thus, the 2008 budget was based on crude-oil prices of US$53 a barrel. However, the average price of crude oil during 2008 was significantly higher, reaching a peak of US$147. As a result of this fiscal rule, the government has recorded healthy budget surpluses in recent years—the budget surplus is estimated to have reached 4% of GDP in 2008, down from 5.6% in 2007.
However, the collapse in the price of oil in the final quarter of 2008 is taking a toll on the government’s fiscal position. The government based its 2009 budget, passed by Parliament in December 2008, on crude selling at no less than US$45 per barrel. However, in February 2009, the government said it may scale back spending plans in 2009 as revenue from oil exports declines. The government said it may also borrow more money, or increase tax revenue from non-oil sources.
The tumbling price of oil has also undermined the Nigerian currency, the naira. In February 2009, the central bank reimposed currency controls not seen since the mid-1990s in an effort to stabilise the naira, which lost more than 20% of its value against the US dollar from mid-December 2008 to mid-February 2009.
The banking sector has not been immune to the excesses seen in other countries. Bank lending grew rapidly during the oil-price boom, much of it to finance share purchases on the stock exchange. The slump in oil prices in the latter months of 2008 caused the stock market in general and banking stocks in particular to fall sharply. The Nigerian Stock Exchange All-Share Index declined by 45.8% during the course of the year.
The central bank reacted to falling share prices and the problems in the banking sector by seeking to boost liquidity. In September 2008, it cut its key interest rate from 10.25% to 9.75%, having increased interest rates from 9.5% during the earlier part of the year. It also cut the banks’ cash reserve requirement from 4% to 2% and reduced the liquidity ratio from 40% to 30%.
Economic Performance over 12 Months
The economy grew by 6.4% in 2008, according to official statistics, up from 6.2% in the previous year, but well below the official target of 9.8%. The slump in oil prices that occurred in the second half of 2008 has had a devastating impact on the economy. Attempts by militants in the Niger Delta to sabotage the oil business have also hit the economy. Attacks on oil infrastructure and kidnappings of oil workers have cut exports by more than 20% since 2006.
In November 2008, the government projected that the economy would grow by 8.9% in 2009. However, in February 2009, the central bank admitted that growth would slow sharply (due to falling oil prices), although the economy would avoid recession. In February 2009, JP Morgan was reported to have estimated that, at an oil price of US$43 per barrel, the Nigerian economy would grow by 4.4% in 2009 and would record a current-account surplus of 9.4%, down from an estimated 13% in 2008, and 16.4% in 2007. Other analysts, such as Dun and Bradstreet, believe that economic growth could be as low as 2.5% in 2009.
The fall in the price of oil and the consequent slump of the naira have also created powerful inflationary pressures. Year-on-year headline inflation jumped to 15.1% in December 2008, from 14.8% in November. Inflation had fallen to an annual average of 5.4% in 2007. High inflation is preventing the central bank from cutting interest rates sharply to boost the economy.
Nigeria’s foreign-exchange reserves, while still healthy, are also coming under pressure. They fell to US$52.7 billion at the end of December 2008—their lowest level in 12 months—down from US$57.8billion in late November. Earnings from crude-oil exports fell on the back of the falling price of oil. Capital inflows also declined due to a drop in foreign direct investment (FDI), reflecting the economic difficulties experienced by major investment partners such as the United States, the European Union, and China. Furthermore, the central bank intervened to support the currency, selling foreign exchange.
Support for Inward Investment and Imports
The Nigerian Investment Promotion Commission (NIPC) is a one-stop federal government agency that aims to encourage, promote and coordinate investments in Nigeria. The agency provides a number of services, including business entry permits and licenses, as well as general information on the investment environment.
Tax Exemptions
Certain types of income are exempt from income tax. These include:
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the profits of any company engaged in ecclesiastical, charitable, or educational activities of a public character, in so far as such profits are not derived from a trade or business carried on by such company;
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the profits of any company formed for the purpose of promoting sporting activities, where such profits are wholly expendable for such purpose.
Statistics
GDP growth: 6.4% (2008, government figures)
GDP per capita: US$2,200 (2008 est.)
CPI: 51.1% (December 2008, government figures)
Key interest rate: 9.75% (February 2009, Central Bank)
Exchange rate versus dollar: Pakistani rupees (PKR) per US dollar—70.64 (2008 est.)
Unemployment: N/A
FDI: US$35.75 billion (2008 est.)
Current account deficit/surplus US$7.722 billion (2008 est.)
Population: 146,255,312
Source: CIA World Factbook except where stated
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