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Nigeria: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
August 2005
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II. Reforms for Private Sector–Led Growth29

A. Introduction

52. The federal government of Nigeria has embarked on an ambitious and broad-based medium-term economic reform strategy (NEEDS) designed to unleash the country’s enormous growth potential and significantly lower poverty.30 NEEDS aims to break away from the misguided policies and failures of the past that created an environment hostile to private sector growth. It recognizes that fundamental changes and bold reforms are necessary to address the deep-rooted structural and economic problems facing the economy and that, without them, the country will remain stuck in a trap of low savings, low investment, and low productivity.

53. This section reviews key aspects of the government’s reform strategy to promote private sector growth. It also reviews briefly the country’s growth performance and main growth constraints and discusses the government’s efforts to improve the business environment. It concludes by drawing some policy implications.

54. This section draws heavily on the NEEDS document, the World Bank’s Investment Climate Survey, which was completed for Nigeria in 2002, and Doing Business31 and the Global Competitiveness Report, published by the World Economic Forum. The last three documents are largely survey-based sources but, given the dearth of information available on Nigeria, they provide invaluable insight into factors affecting business costs and productivity in Nigeria and also allow for some cross-country comparisons.32

B. Background

55. Nigeria’s economic growth performance since independence in 1960 has been disappointing, with no significant improvement in living standards. Real economic growth averaged about 3½ percent between 1960 and 2002, barely exceeding average population growth. The country has also lagged behind countries at a comparable level of economic development in 1960. Most indicators of social and economic progress, including real per capita income, real per capita consumption, literacy, access to clean water, and income distribution, indicate that poverty has worsened since 1960.33 Despite its human and natural resource wealth, Nigeria has become one of the poorest countries in the world. Per capita income in real terms was lower in 2002 than in 1975.

56. The economy has also become highly dependent on oil. Nigeria was largely an agrarian economy in the 1960s, with agricultural output accounting for two-thirds of GDP and the bulk of export earnings and employment. It was among the world’s largest exporter of key cash crops. Forty years later, it is a net importer of food, and the contribution of agriculture to the economy has declined significantly.34 With its manufacturing comprising only 5 percent of GDP, Nigeria is also one of the least industrialized countries in sub-Saharan Africa (SSA). The decline of agricultural exports reflects a host of factors, including the impact of Dutch disease, protective trade policies, weak infrastructure, and misguided sectoral policies.

57. Nigeria’s economy has also been highly volatile and unstable. Most macroeconomic indicators—terms of trade, real exchange rate, government investment per capita, real per capita GDP growth—display higher volatility than the average for SSA or other developing countries. The volatility stems from the country’s: (a) heavy dependence on oil as a source of government revenue and export earnings; (b) highly uncertain policy environment and weak economic management, including procyclical fiscal policies, fiscal dominance, accommodating monetary policy, and frequent ad hoc changes to policies, including trade policy, the exchange rate regime, and business regulations; (c) social and political conflicts; and (d) ineffective financial system. Studies have shown that macroeconomic volatility has an adverse impact on growth.35

Nigeria: Macroeconomic Volatility, 1961-2000
Sample Size 1/Nigeria’s Rank 2/
Terms of trade903
Real Exchange rate844
Monetary growth12532
Consumer prices11421
Government revenue per capita713
Real GDP per capita879
Source: World Bank (2003)

Number of countries with more than 15 observations in the period

Higher ranking indicates among top country’s in volatility

Source: World Bank (2003)

Number of countries with more than 15 observations in the period

Higher ranking indicates among top country’s in volatility

58. Despite some privatization and liberalization efforts since the early 1990s, the public sector’s role in the formal economy remains substantial and has undermined the development of the private sector. Public consumption averaged 16 percent between 1990 and 2002, compared with 7 percent for Indonesia.36 There are still an estimated 1,500 public enterprises, of which state and local governments own 900 and the federal government owns the rest. In total, they account for two-thirds of formal sector employment and over half of investment. Public sector enterprise inefficiencies have significantly raised input costs and have lowered productivity in the economy.

59. The Nigerian economy, which is also relatively closed and highly regulated, has been out of step with liberalization trends taking place elsewhere in the world. The simple average tariff increased to 30 percent at end-2004 and is now one of the highest in the world. Nontariff barriers have increased in recent years with the imposition of bans not sanctioned by the World Trade Organization (WTO). Overall, foreign direct investment and the participation of foreign companies in economic activity outside the oil and gas sectors have been low.37 Studies show that Nigerian manufacturing firms are more reluctant than other firms in sub-Saharan Africa to compete outside their domestic market.38

60. Nigeria’s non-oil private sector has also experienced a significant loss in productivity and turned in a poor investment performance. Total factor productivity contributed negatively to economic growth between 1960 and 2000.39 The negative trend growth in productivity reflects economic losses from the civil war, macroeconomic volatility, nonproductive public investment, and other institutional and policy constraints limiting efficiency gains and more productive private investment. Most of the capital contribution to economic growth came from the surge in public investment during the oil boom years and oil- and gas-related investments.40 Non-oil private investment averaged less than 7 percent of GDP between 1960 and 2000, failing to keep pace with capital replacement costs and contributing negatively to non-oil GDP growth.41 This level is also well below the average of 20 percent of the world’s fastest-growing economies.

Table 1.Nigeria: Sources of Growth, 1960-2000
1960-19691970-19791980-19891990-20001960-2000
Real GDP growth1.47.50.43.93.6
Factor growth rates (in percent)
Capital7.111.65.72.56.7
Labor3.13.33.73.83.5
TFP-3.30.9-4.10.6-1.2
Factor conbribution to gowth (percentage points)
Capital 1/2.84.72.31.02.7
Labor 1/1.92.02.22.32.1
TFP-3.30.9-4.10.6-1.2
Sources: Staff estimates, World Bank

Assuming a Cobb Douglas production function with labor and capital shares of 0.6 and 0.4 percent, respectively.

Sources: Staff estimates, World Bank

Assuming a Cobb Douglas production function with labor and capital shares of 0.6 and 0.4 percent, respectively.

Figure 1.Nigeria: Sources of Economic Growth, 1960-2000

Source: Authorities, World Bank, and staff estimates.

61. Learning from past policy failures, the authorities’ main policy objectives, as described in NEEDS, are to create an environment conducive to private sector-led growth. The aim is to boost productivity growth and external competitiveness, diversify the economy away from oil, reduce the role of the public sector in economic activity, and free the business sector from government regulations, controls, and inefficiencies. One key objective is to restore the status of agriculture as the leading sector in the economy and to enhance its contribution to export earnings and employment creation. Strong growth is also expected in manufacturing and solid minerals.

62. The government aims to raise growth in the non-oil economy to 7 percent a year over the next decade. The high growth rate, necessary to halve poverty by 2015, is very ambitious. To achieve it, real investment would have to increase by about 15 percent in real terms, requiring that national savings also increase. Total factor productivity growth would need to average about 2 percent a year over the next 10 years.42

63. The government’s key strategies to achieve these goals include

  • creating a stable and predictable macroeconomic framework
  • privatizing state-owned enterprises
  • strengthening institutions and governance standards
  • improving and developing infrastructure
  • liberalizing the trade regime
  • reforming the judicial system and enforcing the rule of law
  • creating competitive business regulations
  • strengthening the financial sector

Public sector governance

64. The government considers strengthening governance and improving the quality of public institutions as the country’s central reform challenge and critical to achieve higher sustainable growth and to reduce poverty. It is of the view that weak public sector institutions and poor governance principles, including a lack of transparency and accountability, are a root cause of Nigeria’s weak growth record, ineffective public policies, and marginally productive public spending.

65. International surveys confirm the poor quality of Nigeria’s public institutions. As measured by the perceived degree of corruption, the rule of law, and enforcement of contracts, they ranked 98 out of the 102 countries assessed in the 2004 Global Competitiveness Report. On key issues that matter to a sound investment climate—such as transparency and predictability of policies, enforcement of property rights, judicial independence, even-handed treatment of the private sector, low level of corruption and crime, quality of infrastructure and efficient bureaucracy—Nigeria ranked in the bottom 5 of the 102 countries assessed.43 While Nigeria’s public school system was considered among the best in Africa in the late 1960s, 30 years later businesses ranked it as one of the worst in sub-Saharan Africa. Similarly, Transparency International’s 2004 report places Nigeria next to last on its Corruption Perception Index—which assesses the degree of corruption among public officials and politicians. The World Bank’s worldwide governance indicators rank Nigeria lower than most developing countries on property rights, rules-based governance, and quality of public administration and regulations.

Table 1.Competitiveness Indicators--Nigeria compared to other Sub-Saharan African (SSA) Countries
Growth Competitiveness Indicator 1/Public Institutions Index 2/
SSA RankGlobal RankSSA RankGlobal Rank
Botswana136Botswana126
South Africa242Malawi238
Mauritius346Gambia339
Namibia452South Africa443
Gambia555Mauritius544
Tanzania669Namibia648
Ghana771Tanzania759
Malawi876Ghana865
Senegal979Zambia969
Uganda1080Ethiopia1073
Kenya1183Senegal1175
Nigeria1287Mozambique1282
Zambia1388Mali1383
Cameroon1491Uganda1484
Ethiopia1592Zimbabwe1590
Mozambique1693Angola1691
Madagascar1796Kenya1792
Zimbabwe1897Cameroon1895
Mali1999Madagascar1996
Angola20100Nigeria2098
Chad21101Chad21101
Source: The Africa Competitiveness Report, World Economic Forum

The Growth Competitiveness Index (GCI) uses hard data and survey data and consists of the macroeconomic environment index, public institutions index and technology index.

The public institutions index is a composite of the contracts and laws sub index and corruption sub index. It uses survey data and reviews the extent of paybacks and brides that are required in dealing with the public sector as well as quality of the legal system, enforcement of contracts, as well as the cost of organized crime on business.

Source: The Africa Competitiveness Report, World Economic Forum

The Growth Competitiveness Index (GCI) uses hard data and survey data and consists of the macroeconomic environment index, public institutions index and technology index.

The public institutions index is a composite of the contracts and laws sub index and corruption sub index. It uses survey data and reviews the extent of paybacks and brides that are required in dealing with the public sector as well as quality of the legal system, enforcement of contracts, as well as the cost of organized crime on business.

Figure 2.Nigeria: Competitiveness Indicators

(Score) 1/

Source: The Africa Competitiveness Report, World Economic Forum

1/ The numbers in paranthesis reflect the country’s score out of the total 102 countries surveyed and ranked. Data reflect responses to the 2003 Executive Opinion Survey.

Figure 3.Nigeria: Competitiveness Indicators

(Score, unless otherwise indicated) 1/

Source: The Africa Competitiveness Report, World Economic Forum

1/ The numbers in paranthesis reflect the country’s score out of the total 102 countries surveyed and ranked. Data reflect responses to the 2003 Executive Opinion Survey.

66. Firms surveyed in the World Bank’s RPED cited corruption, irregular application of laws and regulations, and favoritism as major cost drivers and deterrents to investment. Rent-seeking activities were highest with establishing public utility connections, followed by license and permit processing, procurement of government contracts, customs clearance, and tax collection. With regard to the last-named item, firms indicated that they did not view the level of corporate taxation (at 30 percent) a burden but rather the harassment by tax officials. This may also explain the large presence of smaller firms in the informal sector, with estimates suggesting the informal sector accounts for as much as 40-50 percent of GDP as well as for low tax compliance.

67. A related governance issue is the problem of crime and security. According to the World Economic Forum’s Executive Survey Opinion, businesses listed security and crime concerns, including theft of equipment and inventory by employees, as their sixth biggest cost driver. Firms in the World Bank’s RPED survey noted that security issues were a serious concern in Lagos. Because of the frequent threat of robberies along main transportation routes, crime and security issues restrict commerce and domestic market integration. Companies also complain that security problems make it more difficult to attract highly skilled expatriates.44

68. In formulating NEEDS, the authorities have made fighting corruption, improving governance and quality of public institutions, and strengthening security its number one reform priority. The following actions have brought them closer to their goal:

  • Nigeria has signed on to the Extractive Industries Transparency Initiative (EITI) to enhance the transparency of oil revenue management. A formal audit of the oil accounts is under way, and all results will be published. The passage of the EITI law would formally require that oil companies publish all oil- and gas-related information.
  • The Economic Financial Crimes Commission (EFCC) has been established to fight corruption in the public sector and financial system. The passage of the anti-money laundering act in 2004 allows the EFCC to investigate and prosecute crimes committed thereunder.
  • The government has begun publishing, on a monthly basis, revenue distributed to the three tiers of government, auditing fiscal accounts, and making audited results available on a timely basis.
  • Main line ministries are subject to performance evaluation and reporting requirements.
  • Procurement and due process reforms, the ongoing civil service reforms, and overall efforts to streamline the government are critical to eliminating corruption, enhancing the quality of public institutions, and ensuring value for money.
  • The police force is being strengthened and the judicial system (see discussion below) is being reformed to ensure rule of law.

Physical infrastructure

69. Nigeria’s infrastructure, in terms of quality and quantity, is inferior to that in much of the rest of the world, which significantly raises the cost of doing business.45 Out of 102 countries assessed in the Global Competitiveness Report (2004), business executives ranked Nigeria’s overall quality of infrastructure third to last. This outcome is consistent with the results of the World Bank’s RPED survey, with manufacturing firms ranking infrastructure as their most severe business constraint. This holds true for all firms, independent of size, sector, location, or ownership (foreign or domestic).

70. Unreliable electricity is Nigeria’s single largest business problem. Frequent blackouts have sharply inflated operational costs through production stoppages, output losses, and missed delivery dates. About 97 percent of the firms surveyed operated their own power generator, well above the average of 22 percent of the 55 countries surveyed in the World Bank’s Investment Climate Survey. Purchasing private power generators accounted for 22 percent of firms’ investment budget. Firms estimated that frequent outages caused them to lose about 85-90 working days a year, equivalent to 15 percent of their annual sales.46

71. Nigeria also fares poorly in other areas of infrastructure provision vital to economic development:

  • Telephone coverage is among the lowest in the world, with 0.6 lines per capita, compared with 10.2 for South Africa and 27 for Mauritius.47 The country scores low in terms of number of telephone lines and internet users and internet access in schools. Interregional variability is large, with rural areas having weaker access.
  • The port system is inefficient and costly. Lagos port is considered one of the most expensive ports in the region, with transaction costs roughly three times higher than those of any other West African port.48 It requires an average of 28 days to clear shipments, as opposed to the international norm of less than 2 days. Aside from port inefficiencies and outdated equipment and technology, key causes for the delay are the punitive trade regime, theft, and corruption in customs, which further raise the cost of importing cargo through the ports.49 The highly protective trade regime has resulted in widespread smuggling and duty evasion. In response, the authorities have instituted a 100 percent inspection requirement, which, in turn, has increased port congestion.
  • Poor road network. The country’s road density is among the lowest in Africa: 31 percent of roads are paved compared with 52 percent in middle-income countries, and only 40 percent are in good condition. Only about half of the unpaved roads are accessible in the dry season, and 40 percent of the rural communities are shut off from market-access roads. The lack of all-weather roads condemns rural areas to subsistence production and limits access to education and primary health care. A major problem has been insufficient investment, with government budgets not providing sufficient funding to complete and maintain roads. As a result, much of the investment that has taken place has lost value.
  • Weak water infrastructure. About 60-70 percent of rural dwellers and 50 percent of urban dwellers lack access to adequate water supplies (including potable water) and proper sanitation facilities. A further lack of water irrigation systems in rural areas makes agriculture production more vulnerable to climatic conditions, limits opportunities to invest in higher value added crops, and overall agricultural productivity. Universal access to adequate water and sanitation services is recognized as essential to public health, individual well-being, and productive activities.

72. The weak state of Nigeria’s infrastructure reflects a host of factors, including neglect, misguided policies, lack of competition and private sector involvement, weak capacity for selecting and administrating projects, and political interference and corruption. Licensing and other government entry restrictions prevented private firms from competing with state monopolies in the provision of infrastructure. The government’s pricing policies were also set with little regard to commercial objectives, including cost recovery and ability to operate, maintain, and rehabilitate facilities. Corruption, weak procurement practices, and a lack of public accountability resulted in a mismanagement of funds and inefficient infrastructure investments.

73. Tackling infrastructure inefficiencies is a core part of Nigeria’s strategy to provide an environment conducive to private sector development and poverty reduction. Active private sector partnerships will be sought in the provision of infrastructure services, key public sector enterprises are to be privatized, and the legal and regulatory framework will be reformed to encourage competition and protect consumer welfare. Where necessary, the government will scale up funding for rehabilitation and expansion of services, particularly with regard to water and roads (see Box 1). Privatization and deregulation would help create a level playing field that would encourage market entry and competition.

Business regulations

74. Firms in Nigeria grapple with costly administrative procedures and regulations, excessive red tape and rent-seeking activities by public officials wanting to establish and operate businesses in Nigeria. According to Doing Business (World Bank, 2005), to start a business, a firm in Nigeria is expected to go through at least 10 bureaucratic procedures and wait an average of 44 days; in contrast, a firm in one of members of the Organization for Economic Cooperation and Development (OECD) faces an average of 6 procedures and a 27-day waiting period.50 A firm must also deposit capital equivalent to at least 60 percent of per capita income in Nigeria to establish a limited liability company, as required under the Company Law (the Companies and Allied Mattes Act). Many countries, seeking to spur small business start-ups, have scrapped this requirement.

75. Routine business applications in Nigeria are slow and costly, and firms complain that poor government services add considerably to the cost of doing business.51 The administrative process is further complicated by the federal system with its overlapping jurisdictions and procedures. Companies are frequently required to pay new, arbitrary local taxes and fees, clarify plans, and submit additional documents to local government officials. All these hurdles and extra payments raise production costs and lower profitability, discourage market entry, and weaken competition. The heavy-handed business procedures also imply opportunities for officials to extract bribes and tend to disadvantage small and medium-sized enterprises.52

Box 1.NEEDS--Infrastructure Reforms

  • A major reform of the power sector is under way. A new power bill signed into law in March 2005 will facilitate the unbundling of the national power company into 18 transmission, generation, and distribution companies and encourage private participation and investment. The Nigerian Electricity Regulatory Commission (NERC) will be established to ensure a level playing field and consumer protection. Independent power producers will be allowed to generate and sell electricity. The government will focus on improving transmission lines and encourage the utilization of gas through price and other incentives. The introduction of a new collection method has already helped improve collection rates to 75 percent compared with 20 percent a few years ago. New power plants are also being built and should increase generation to 10,000 megawatts by end-2007 from 2,500 megawatts currently. Finally, the national rural electrification program aims to connect the remaining 96 local governments to the national grid by end-2005.
  • The transportation sector is being reformed. The passage of a draft transportation bill will establish new regulations and allow private participation in the management of ports, railways, and airports. A major port reform is under way with the aim of increasing the role of Nigeria’s seaports in the shipping sector within the region. Private companies will be granted long-term concessions in all government-owned ports. This, along with the customs administration reform and trade liberalization, should help expedite the movement of cargo.
  • The federal government has increased budgetary resources considerably for the completion of unfinished road projects and for road maintenance. The ongoing construction of 3,000 kilometers of roads will be completed before the government embarks on new projects. The federal government is also coordinating with subnational governments about the order of priority of road projects. A federal road maintenance agency has been established to oversee road maintenance and involve private sector participation. In general, improved access to paved roads would allow farmers to move their goods to bigger markets more cheaply, making land and farming more productive and profitable. Paved roads would also improve primary school enrollment and health care access.
  • The national telecommunication company is slated for privatization in 2005/06. The sector’s performance has already improved dramatically with the introduction of cellular telephony and opening of this segment to private sector competition, including foreign operators in 2001. At end-2004, there were over 9 million cellular phone subscribers.
  • The government has launched the National Water Supply and Sanitation Policy, which aims to make safe drinking water available to at least 60 percent of the population. Budgetary resources at all levels of government have been increased, and a national system to ensure the quality of water is being developed, consistent with the standards of the World Health Organization.

76. Companies also pay high costs to obtain foreign exchange. The current regulatory regime governing foreign currency transactions is cumbersome: applications for foreign exchange have to be approved by the Central Bank of Nigeria in accordance with foreign exchange control regulations. Nigeria is, furthermore, among a handful of economies remaining that still maintain multiple foreign exchange markets.

77. The government aims to streamline the business registration process by simplifying forms; cutting the number of procedures; transforming the NIPC into promoter and facilitator rather than regulator; eliminating the FDI registration process through the NIPC; streamlining tax forms, requirements and incentives; and doing away with site visits. The authorities also plan to streamline foreign exchange documentation requirements and unify the official foreign exchange market. The government is currently overhauling both tax and customs administrations to streamline tax procedures, improve the quality of service provision, expedite trade facilitation, and broaden the tax base. These reforms, however, call for strong coordination with subnational governments to avoid overlapping functions and costs.

Business legal environment

78. Although, on paper, Nigerian laws are largely adequate, they are not adequately enforced and the courts are considered debtor-friendly and inefficient.53 Creditors usually find themselves in costly and lengthy litigation because debtors can easily obtain court injunctions to avoid repaying their debts. Cross-country comparisons show that Nigeria’s court procedures are among the slowest and that commercial cases take a long time to resolve. It takes, on average, over 2 years, 23 procedures, and one-third of the debt amount to enforce a debt contract in Nigeria. Creditors and firms are consequently reluctant to consider the courts a meaningful option for loan recovery or dispute resolution. They tend to seek out-of-court options, even frivolous ones, because of their lack of faith in the efficacy of the judicial system.

79. Foreclosure procedures are also cumbersome in Nigeria. Asset recovery and liquidation come at considerable cost. The rate of recovery, for example, is about 33 percent. The cause of court delays and low recovery rates are manifold: weak court procedures, such as making it easy for debtors to appeal; a lack of specialized commercial courts or small claims court, backlogs, frequent power failures resulting in court adjournments; a low level of technology; and too few judges who can prosecute corruption.

80. The NEEDS document takes into account shortcomings in the judicial system and the fact that after 30 years of military rule the system no longer offers a reliable basis for dispute resolution, protection of property rights, and enforcement of contractual rights. Judicial reforms will include training judges, improving court facilities, developing an alternative dispute resolution mechanism, and creating commercial courts.

81. Lagos State, which accounts for the bulk of the country’s commercial and financial activity, has been at the forefront of judicial reform. Since the return of civilian rule in 1999, the state has appointed over 25 young professional judges and has established a specialized commercial court to resolve commercial disputes expeditiously. The salaries of judges have been increased to attract qualified candidates and remove incentives for corruption. Furthermore, court infrastructure is being strengthened through the acquisition of computer facilities, the construction of law libraries, and the hiring of legal assistants. With donor assistance, efforts are also under way to update court procedures, such as through the introduction of modern case management techniques and simplified pretrial procedures. Similar reforms will be needed in other state jurisdictions to enhance the efficacy of the courts.

Registering and transfering property

82. According to Doing Business, Nigeria’s regulations for registering and transferring property, which are among the most cumbersome in the world, comprise 21 procedures, 27 percent of the property value in official fees, and a registration period of 274 days. These procedures reflect the institutional arrangements governing land ownership and transactions in Nigeria. According to the Land Use Act of 1978, all land in a state is vested solely in the governor of that state, who must consent to requests to sell, lease or mortgage the land.54 Although in practice, consent is readily given, the process is slow, costly, and associated with heavy rent-seeking activities. In Lagos State, the fees associated with obtaining governor consent amount to 30 percent of the market value of the land. In addition to these costs, there are registration fees, taxes, and legal fees. Permission to lease land and use it as collateral must be approved separately. Registering collateral can take from six months to two years.

83. The property registration system is also poorly managed, and few records are kept of plot allocations and transfers. This problem is further exacerbated by large, unrecorded informal property transactions that take place to avoid the formal system. As such, land titles do not provide full security of ownership and can be contested in the courts or by state governors.

84. Land reform, an important component of the NEEDS, is viewed as central to wealth creation. It is also seen as increasing investment; improving credit access; spurring innovation in financial products, such as mortgages and term lending; and developing a private real estate market. The reforms aim to reduce documentation requirements and fees for individuals purchasing and registering property, establish transparent site visit protocols and processing deadlines, develop a registry system of plot allocation and transactions, provide easier access to information in the registry, and create a data bank of property registries. The policy governing stamp duty will also be reviewed.

85. The Federal Capital Territory (FCT) has taken the lead in reforming its land registry system and privatizing state-owned land. So far, it has computerized all land records and, in the process, has uncovered significant forgeries of certificates of title and multiple ownerships. It is now validating more than 50,000 plots allocated over the past two decades. Once completed, the FCT will begin selling off public houses and land with the aim of spurring the development of a private real estate market. Comprehensive land reform will require a review of the 1978 Land Use Act and the full cooperation and participation of all state governors.

Financial infrastructure

86. Overall, the Nigerian financial system has not fostered stability or supported investment and economic development. The financial system is underdeveloped, and the level of financial intermediation, as reflected in a narrow M2/GDP ratio, low private sector credit/GDP ratio, and large share of cash transactions, is low. The use of credit cards and leasing arrangements is limited. A large segment of the banking system does not have access to bank credit, and most lending is short term in the form of collateralized overdrafts. Movables such as equipment, inventory, or receivables cannot be pledged as security. Long-term bank lending is not available, and the corporate bond market is inactive. Some larger, more established firms have access to equity financing through the Lagos Stock Exchange. The underdeveloped financial system and cash-driven economy reflect a host of factors:

  • The banking system is unsound. Banks continue to be plagued by unsound balance sheets and weak governance practices. The quality of their balance sheets continues to be undermined by a high level of nonperforming loans and operational inefficiencies. The 2002 Financial Sector Assessment Program (FSAP) report noted that misreporting, systemic underprovisioning, widespread insider lending, and illegal transactions are common. Balance sheet weaknesses have also contributed to the large spread between deposit and lending rates, averaging about 20-25 percent. Weaknesses in the legal system and corporate governance further explain the high spread (see Box 2).
  • The environment is a high-risk one. Banks’ reluctance to supply loans to the real economy reflects the unstable macroeconomic environment, inefficiencies in the judicial system, and shortcomings in corporate governance practices (see Box 2). Governance problems explain in part the high volume of cash transactions and the limited use of credit cards, leasing arrangements, and supplier’s credits.
  • The central bank lacks autonomy and accountability. Except in 2004, monetary objectives have not been met owing to insufficient operational autonomy of the central bank and fiscal dominance.
  • Shortcomings in the conduct of monetary policy have also undermined the development of the financial system. The extensive reliance on reserve requirements and the high liquid asset ratio (at 40 percent) serves as a tax on financial intermediation and has hampered money market development.

Figure 4.Nigeria: Financial Depth Broad Money (In percent of GDP), 2000-2004

Source: IFS, and staff estimates.

87. The 2002 FSAP also found shortcomings in the prudential and supervisory framework governing the banking system, in particular with regard to enforcement of regulations, consolidated banking supervision, and the supervision of the nonbanking system. In a number of areas, prudential regulations governing insider lending, including to shareholders, large exposure limits, loan classification, and provisioning were found to be inconsistent with international best practices.

88. The authorities, recognizing the importance of a sound and well-developed financial system for achieving the growth and poverty goals of the NEEDS, have launched a major reform to strengthen the banking system (see Box 3). More, however, will need to be done to spur financial intermediation. To encourage financial intermediation in a high-risk environment, several countries have reformed their collateral registry system to allow other pledges, such as receivables, firms’ equipment or shares, and other movable property, to be used as collateral and have established public credit registries and a private credit bureau.55 Furthermore, corporate governance standards need to be strengthened in Nigeria. The national accounting, auditing, and reporting standards need to be brought in line with international best practices. Steeper penalties should be applied for misreporting and noncompliance. Standards governing small- and medium-sized enterprises (SMEs) should be strengthened and state-owned enterprises should comply with international accounting standards.

Box 2.Nigeria: Corporate Governance Practices

Sound corporate governance practices are essential building blocks for fostering a good investment climate. They help creditors and investors make informed decisions, help build confidence in the company, and reduce capital costs.

Corporate governance practices have been weak in Nigeria. Nigeria’s company law, Companies and Allied Matters Act, Bank and Other Financial Institutions Act, and the Securities and Exchange Commission’s listing requirements incorporate many sound corporate governance features. However, past banking and corporate failures point to major weaknesses in corporate governance. Key problems are inadequate enforcement of statutory standards and a lack of sanctions for wrongdoing.

The 2002 FSAP and the World Bank’s 2004 Report on the Observance of Standards and Codes (ROSC) on accounting and auditing also found serious shortcomings in regulations, compliance, and enforcement of current national standards and rules. Their main findings were as follows:

  • The SASs are not in line with current International Accounting Standards (IAS). The ROSC indicates that are 14 international standards where there are no equivalent local standards. For instance, SAS does not provide standards for financial statement preparation and presentation, impaired assets, related party disclosure, consolidating group accounting, and companies in agriculture.
  • Special financial reporting requirements for small companies are weaker than SASs and insufficient. In many cases, financial statements of nonlisted companies and private companies are not available.
  • Although the Nigerian Accounting Standards Board (NASB), the standards-issuing body, has the mandate to monitor and enforce compliance with SAS, it lacks the financial and human resources and the capacity to do so, and SAS updates have been infrequent.
  • A national auditing standard does not exist. Auditors are advised to follow International Standards on Auditing), but generally deviate significantly from best practices.
  • There are significant compliance gaps with standards, including manipulation of accounts, misreporting, and failure to disclose relationships with related parties, including local and overseas suppliers.
  • Pecuniary sanctions for violation of filing requirements either have not been imposed or have been minimal. As a result, they have not served as an effective deterrent for wrongdoing. This in part reflects the weak judicial system which has discouraged regulators and other stakeholders from action taking against companies in violation of statutory standards.
  • Ethical codes governing the auditing body are not in line with international best practices. Auditors have limited skills and capacity to do in-depth reviews and often knowingly sign inaccurate reports. While audit committees exist, committee members typically do not perform their function.
  • The 2001 on-site safeguard assessment also found notable shortcomings in audit and accounting practices within the CBN, such as the retention of one audit firm for over 25 years, no oversight of the external audit process, and noncompliance with SAS.

Box 3.Nigeria: Authorities’ Financial Sector Reform Strategy

  • Increase the minimum capital base requirement to N25 billion at end-2005;
  • Provide tax and other incentives to encourage banking consolidation; introduce a risk-focused and rules-based regulatory system;
  • Improve banks’ regulatory compliance and strengthen their corporate governance practices through adoption of a zero-tolerance policy;
  • Develop an exit strategy for unsound banks;
  • Strengthen supervision of the non-banking financial institutions, including insurances and community banks;
  • Strengthen central bank autonomy and accountability;
  • Improve corporate governance of banks and strengthen reporting requirements;
  • Increase reliance on indirect instruments of monetary policy, thereby contributing to the development of the financial market;
  • Remove the central bank as purchaser of government securities in the primary market and allow interest rates to clear the market;
  • Unify the foreign exchange markets and lower burdensome foreign exchange regulations on banks.

C. Conclusion

89. The central challenge Nigeria faces is to create the broad-based conditions for rapid and sustained productivity growth in the private sector. Developments over the past 18 months and the development of NEEDS are evidence that Nigeria has turned the corner. NEEDS is appropriately focused on policies and reforms that will improve the investment climate and correct for past policy mistakes.

90. Far-reaching reforms are needed for Nigeria to achieve higher sustainable growth and attract foreign investment and technology. The growth experiences of China and India over the past decade or two can serve as an example for Nigeria. Their experiences show that higher per capita growth is attainable and that significant progress can be made in lowering poverty with appropriate policies and the right attitude. Both countries have liberalized their economies, opened them up to trade and foreign direct investment, and freed them from excessive government controls. They now rely primarily on private sector initiative to drive growth and innovation. The main challenge facing policymakers in Nigeria is to implement its reform agenda consistently over the medium term.

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29

Prepared by Jeanne Gobat.

30

The NEEDS document can be found at http://www.nigerianeconomy.com.

31

Firm-level survey data were collected from about 232 manufacturing firms of all sizes, spread across nine sectors in Nigeria. This survey forms part of the World Bank’s Regional Program on Enterprise Development Survey (RPED).

32

Unfortunately, significant data limitations make it very difficult to analyze factors affecting productivity in Nigeria. For example, investment is not broken down by private and public sector, or by non-oil versus oil, and few wage and employment data are available.

33

In 1960, Nigeria’s per capita income was just 11 percent below Indonesia’s and exceeded India’s and China’s by 24 and 57 percent, respectively. In forty years, Indonesia has achieved per capita income growth four times higher than Nigeria, and China and India have also surpassed Nigeria.

34

Nigeria was, in the 1960s, one of the largest exporters of cocoa, cotton, groundnuts, palm oil, and rubber and a net exporter of foodstuff. By the end of the 1990s, Nigeria had lost considerable export market share; imports of food products now account for about 10 percent of imports, and non-oil exports for about 5 percent of total exports.

35

Bleaney and Greenway (2002).

36

The public sector’s share of economic activity is probably much higher if one includes spending by state-owned enterprises.

37

Nigeria had restrictive foreign direct investment regulations until 1995. The passage of the 1995 decree by the Nigerian Investment Promotion Commission eliminated discriminatory screening processes for foreign investment and allowed 100 percent foreign ownership of any business except those in the oil and gas sectors and in sectors deemed sensitive to national security.

38

Soederbom and Teal (2002).

39

It would be more accurate to calculate the TFP without the oil sector. Unfortunately, data for investment do not allow for such an analysis.

40

According to government reports, many of the capital projects were never completed. In addition, public investment may be overstated as some of the reported capital spending could be capital flight or private consumption.

41

This is a derived figure. Nigeria’s Federal Office of Statistics provides overall investment.

42

standard growth accounting framework was used to derive these figures. The labor force will grow at 2.8 percent a year, and, typical for a standard Cobb-Douglas production function, labor’s share was assumed to be 0.6 percent. Improvements in educational attainment are captured as part of total factor productivity growth. The depreciation rate of the capital stock was set at 6 percent. See Tahari and others (2004).

43

Although required by law, fiscal accounts, including those of state-owned enterprises, have not been audited and made publicly available on a timely basis, impairing the ability of parliament and the general public to monitor fiscal operations and hold public officials accountable.

44

World Bank (2002).

45

Adequate and high-quality physical infrastructure is central to economic development. Studies have found that firms that have access to good infrastructure invest more and are more productive. See Weiss (1999).

46

Only 10 percent of rural households and 40 percent of the country’s population have access to electricity. Poor power service also has serious implications for the attainment of the country’s health and education goals. Unreliable power has made it difficult to refrigerate vaccines and operate hospitals and also prevents children from studying at night.

47

Mobile phones have started to make up for this shortcoming.

48

World Bank (2002).

49

World Bank (2002).

50

Foreign companies have to go through additional steps, including registering with the Nigerian Investment Promotion Commission (NIPC), which they must do every year in the state in which they will operate; provide background information on company officers, and proof of share capital deposited with a local bank; and provide information on training programs for local personnel. They also face a quota restriction in hiring expatriates.

51

World Bank (2002).

52

Morrisset and Neso (2002) and Djankov and others (2005).

53

Nigeria’s bankruptcy laws (Bankruptcy Act of 1979) are based on U.K. laws. Corporate bankruptcies and the use of receiverships or administrators to manage businesses during reorganization or liquidation are not uncommon in Nigeria. Less common are personal bankruptcies.

54

When land is allocated, the recipient receives a certificate of occupancy for a period of up to 99 years. The certificate entitles the person, with the consent of the state governor, to sell, lease, or mortgage the land.

55

Credit registries are information-sharing institutions that make credit information on borrowers available to lenders. Studies find that in low-income countries public credit registries play a constructive role, and, where they have been introduced, credit to SMEs and households has expanded. See Djankov, McLeish, and Shleifer (2005).

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