NIGERIA: SMALL RETURN ON OIL WEALTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000500010002-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 25
• Document Creation Date: December 12, 2016
• Document Release Date: April 8, 2002
• Sequence Number: 2
• Publication Date: September 1, 1978
• Content Type: IS

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Ueflcr
Nigeria: Smell- Re turn
On Oil Wealth
An Intelligence Assessment
Approved For Release 2002/051
_ m....... . to th ' 1978
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Nigeria: Small Return on Oil Wealth
Central Intelligence Agency
National Foreign Assessment Center
Key Judgments
Despite the tremendous growth in oil revenues since 1973/74, Lagos is
far from establishing a multiproduct economy before the mid-1980s when
Nigerian oil output is expected to decline. From the economic development
angle, the past four years have been marked by incredible waste of foreign
exchange. Agriculture-the traditional backbone of Nigeria's economy and
livelihood for most of the population-has been neglected, while small-scale
entrepreneurial skills have not been nurtured to satisfy a booming local
market. At the same time, the oil sector has not performed up to government
expectations because of the international economic slump and official pricing
policies that have made Nigerian crude among the most expensive in OPEC.
Lagos now faces a revenue crunch that limits its ability to channel investment
into areas of greatest need.
The government's 1976-80 development plan aims to beef up the
manufacturing sector and diversify production. While more than $30 billion
(including $6 billion in private investment) has been spent, we estimate that
less than one-fourth of the plan has been carried out, and many of the projects
completed-such as several super highways-will only marginally help future
development. Contract negotiations and work under way were stalled by the
overthrow of General Yakubu Gowon in July 1975 and the installation of the
present military regime. Inexperienced and inefficient bureaucracies, togeth-
er with inadequate skilled manpower, have caused further delays. The time
lost has proven expensive, given an annual Nigerian inflation rate of 34
percent in 1975-77 and a 10-percent average annual rise in prices of Western
machinery.
The government's greatest achievements so far have come in infrastruc-
ture development. Port facilities have been expanded, road networks in and
around Lagos have been improved, and domestic air service, telecommunica-
tions, and electrification all are being upgraded. Advancements in essential
social services such as education, health care, housing, and public sanitation
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CONFIDENTIAL
have been less spectacular, although some progress has been made in
expanding primary and higher education.
Little headway has been made on major government industrial projects.
Only one new plant, the Kaduna superphosphate plant that was a carryover
from the previous development plan, has come on stream. Lack of funds,
difficulty in obtaining raw materials, and bureaucratic bickering have slowed
work on cement, wood pulp and paper projects, two oil refineries, an LNG
(liquefied natural gas) plant, and an iron and steel complex. Project cost
overruns and heavy recurrent expenditures have resulted in postponement or
cancellation of two other petroleum refineries, a petrochemical complex, a
nitrogenous fertilizer plant, and three direct-reduction steel plants. Light
industry, financed mostly by private domestic investors or local subsidiaries of
multinational corporations, has fared better; production of beer, textiles,
canned food, and other light industrial goods rose 15 percent a year in 1976-
Reflecting the government's neglect, agriculture has stagnated in recent
years. Nigeria has lost its self-sufficiency in food production, and agricultural
exports of peanuts, cocoa, palm oil, and rubber have declined. Many farmers
have left the land in search of higher paying jobs in the cities, while disease
and drought have taken their toll.
The development drive has cut deeply into Nigeria's once healthy foreign
exchange reserves, which now total less than $2 billion. As imports of goods
and services have mounted, oil revenues have lagged, reflecting stiff competi-
tion from North Sea and Alaskan oil as well as rigid government oil pricing
policies. The current account balance slipped from a $5 billion surplus in
1974 to almost a $1 billion deficit last year. This year Lagos faces a $3.5
billion to $4.0 billion deficit. Capital inflows have fallen off in response to
government steps to increase Nigerian participation in the economy, forcing
Lagos to borrow heavily in the Eurodollar market in 1978.
Lagos will not be able to generate the revenues to complete the
development plan on time and will be lucky if it can come up with $30 billion
in total revenues over the next two years. Over the longer haul, the
government's ability to cover development costs will depend on how successful
it is in moderating foreign exchange expenditures on nonessentials and in
stimulating additional investment by the oil companies.
Although the Obasanjo government has recently adopted a more prag-
matic petroleum policy to get oil investment on the move again and has
offered price incentives to boost oil sales, oil output by 1980 is not expected to
be above 2.3 million to 2.4 million barrels per day (b/d), only slightly more
than the 1975-77 average. Crude exports will slip back to about the 1976 rate
of 2 million b/d as an increasing share of output is diverted to meet the rise of
25 percent a year expected in domestic fuel demand. Under current
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investment plans, output and exports almost certainly would fall off some-
what from these levels by the late 1980s.
Preoccupation with the transition to civilian rule scheduled for October
1979 also will interfere with the government's ability to carry out critical
economic policy decisions. In light of past experience, development priorities
are likely to be reshuffled by the new government, causing further delays in
the program.
Given financial, political, and other constraints, completion of industrial
projects seems sure to be slow. Real growth in the next several years is likely
to be concentrated in services, light industry, and construction, although
housing construction will not increase fast enough to alleviate overcrowding in
the cities. Nigeria will not regain agricultural self-sufficiency until the
government is willing to commit substantially more funds and to provide
adequate incentives for private investors.
Indeed, Lagos will probably do well to maintain the preoil boom annual
real growth average of 6 percent over the next several years. By the mid-
1980s Nigeria will have more ports, roads, airports, and schools, but the bulk
of the population will still be in subsistence agriculture. Although consumer
industries will have expanded somewhat, the country will remain far short of
having established a broad industrial base.
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Nigeria: Composition of GDP
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Nigeria: Small Return on Oil Wealth
From Agriculture to Oil
Oil has transformed the face of the Nigerian
economy since the Royal Dutch Shell/British
Petroleum (Shell-BP) consortium made its first
strike of commercial proportions in 1956. Pro-
duction, which began two years later, rose gradu-
ally to 400,000 b/d on the eve of the 1967-70
civil war. Although sabotage against the industry
caused oil output to plummet during the war, the
end of hostilities ushered in a period of spectacu-
lar growth. Oil production increased fourfold
during 1970-73, pulling GDP growth up to 9
percent annually during the period-by far the
highest rate in sub-Saharan Africa. By 1973 oil
dominated the Nigerian economy, accounting for
39 percent of GDP (figure 1) and for the vast
bulk of government revenues and export receipts.
Before the onset of commercial oil production,
Nigeria had an agricultural economy that was
relatively prosperous by African standards. Al-
though suffering in common with most African
countries from a per capita income of well under
$100 and a high illiteracy rate, Lagos was practi-
cally self-sufficient in food production and a
leading world exporter of diverse agricultural
products such as peanuts, cocoa, palm oil, and
rubber. Devastated by the war, agriculture's
strong recovery in the early 1970s was choked off
by governmental neglect, disease, and drought.
The sector's share of national output was down to
29 percent in 1973, compared with more than
one-half in the late 1950s.
Up to the civil war, manufacturing was a fast-
growing-if small-part of the economy. Devel-
opment of simple manufactures was aided by
Nigeria's British colonial heritage, that is, an
impressive economic infrastructure relative to
most African countries, well-developed adminis-
trative skills among the bureaucracy, and a
substantial pool of business and financial skills.
The war destroyed scores of local factories and
forced others to close because of damage to
electric power facilities and the transportation
network. Expansion during the early 1970s was
held back by increased competition from im-
ports, stagnating agricultural output, and uncer-
tainties associated with a 1972 law nationalizing
various industries. Manufacturing's share of na-
tional output (including construction), which had
inched up to 8 percent on the eve of the war,
barely increased during the postwar recon-
struction.
The Oil Price Bonanza
The quadrupling in oil prices in 1973/1974
gave Nigeria in common with other OPEC coun-
tries the opportunity to accelerate economic
growth. The 200-percent jump in oil export
revenues in 1974 to $9.0 billion greatly enhanced
Lagos' ability to finance the imports needed to
develop its manufacturing sector and diversify its
production. The oil riches also revived official
hopes-first expressed soon after independence
and again after the civil war-that Nigeria could
become a developed black African nation provid-
ing the cornerstone for economic progress in its
poorer neighboring countries.
By April 1975 the government had issued an
ambitious new development plan calling for $48
billion (table 1) in investments by 1980. The
government intended to finance two-thirds of the
plan and hoped the private sector would contri-
bute the remainder. The plan stressed infrastruc-
ture development and- industry:
? One-fourth of the investments was slated for
improvements in transport and communica-
tion facilities-the main obstacle to economic
development-and in electric power genera-
tion.
? One-fifth was slotted for the manufacturing
sector, with most of the public funds allo-
cated to heavy industry.
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Nigeria: Planned Public and Private Investment by Sector
FY 1976-80 '
Public Private Total
Million Million Million
FY 1975 FY 1975 FY 1975
US $ Percent US $ Percent US $ Percent
Planned investment ............ ............ ....... ....... 32,000 100.0 16,000 100.0 48,000 100.0
Agriculture ........... ....... .......... .................. .....___ 2,080 6.5 1,920 12.0 4,000 8.3
Mining..__ ......... ......................... ...... ......... ..... ..... 2,240 7.0 1,760 11.0 4,000 8.3
Manufacturing ..... ................................................ 6,080 19.0 3,200 20.0 9,280 19.3
Power ......... .......... _....... ........................... .... ...... 1,600 5.0 0 0 1,600 3.3
Building and construction ................................ 0 0 4,320 27.0 4,320 9.0
Trade .............................. ............. _...... .............. 160 0.5 2,240 14.0 2,400 5.0
Transportation and communication .... ......... ._. 8,800 27.5 800 5.0 9,600 20.0
Government administration and defense .......... 4,800 15.0 0 0 4,800 10.0
Education _ .............................. .......... .......... ..... 2,400 7.5 0 0 2,400 5.0
Health and other services ................................. 3,840 12.0 1,760 11.0 5,600 11.7
? Almost one-fifth of planned investment also
was scheduled for social services such as
housing, water and sewage, health, and
education.
Although the stress on infrastructure was real-
istic in terms of Nigeria's development needs, the
main weaknesses of the plan were the low prior-
ity accorded to agriculture and the overemphasis
on heavy industry. Allocating a mere 6.5 percent
of public investment funds to agriculture, the
government also made the mistake of grossly
overestimating potential private investment in
the sector. With Nigeria's rich soil and success-
ful past experience with cash cropping, increased
investment in agriculture could have spread in-
come gains across a broad segment of Nigerian
society. Moreover, the private sector was given
primary responsibility for beefing up the coun-
try's light industry, which would also expand the
job-creating potential of development expendi-
tures.
Less attention was paid to details than to
overall plan strategy. Project completion dates
were uniformly optimistic, often based on opti-
mum construction schedules in the United States
and Western Europe. Government officials fre-
quently selected project locations on the basis of
politics, overlooking such factors as terrain and
access to transport facilities. Moreover, the
plan's assumption that Nigerians would fill most
technical positions ignored the fact that local
higher educational facilities could provide less
than one-half the projected yearly requirement
for skilled manpower.
Problems in Implementing the Plan
In Nigeria, political factors disrupted carry-
through of the development effort, compounding
mistakes made in common with most OPEC
countries by inexperienced and inefficient bu-
reaucracies. The wholesale removal of seasoned
civil servants following the overthrow of General
Yakubu Gowon in July 1975 by the Supreme
Military Council (SMC) stalled contract negoti-
ations and work on projects under way. Even
after the initial settling-in period, the SMC
remained a hindrance to plan implementation.
As part of an overall development review exer-
cise, it insisted on approving all contracts for new
projects. The result was a flood of technical
presentations largely outside the new govern-
ment's expertise and further delays in project
approvals.
Following the 1975 coup, the government em-
barked on periodic drives to eliminate endemic
bureaucratic corruption through personnel trans-
fers and firings. Many senior positions were filled
with unqualified people, often unable or unwill-
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ing to make crucial decisions. A major corrup-
tion scandal last year involving illegal currency
transactions paralyzed foreign currency oper-
ations for six months. The scandal, which in-
volved Nigerian and foreign businessmen along
with their accomplices in the central bank, the
port authority, customs, and probably the Minis-
try of Finance, produced more than 200 arrests
and triggered a wave of government resignations.
Import orders stacked up because central bank
employees preferred to do nothing rather than
risk implication in the scandal.
With Nigerian inflation running at 34 percent
annually in 1975-77 and prices of Western ma-
chinery rising on the order of 10 percent a year,
the delays in plan implementation on top of
changes in project specifications created by gov-
ernmental change and inefficiency added sub-
stantially to development costs. Officials of the
Ministry of Economic Development estimate
that costs have risen 250 percent since the plan
was drawn up three years ago. Although this is
undoubtedly an exaggeration, costs have risen
dramatically. Price tags on 16 major develop-
ment projects, for instance, have jumped from
$4.5 billion in Fiscal Year 1975 to $11 billion in
FY 1977 (table 2).
The Oil Bubble Bursts
The development drive has cut deeply into
Nigeria's once-healthy foreign exchange bank
balance. As imports of goods and services have
mounted, oil revenues have lagged, reflecting
stiff competition from new oil sources in recent
years. The current account slipped from a $5
billion surplus in 1974 to almost a $1 billion
deficit last year (table 3). Official assets have
declined by $3.5 billion in the past two and a half
years, to $1.9 billion in August 1978, and Lagos
has decided to borrow on the Eurodollar market
to shore up its foreign exchange position. It
negotiated a $1 billion Eurodollar loan earlier
this year and just completed renegotiation for an
additional $750 million loan.
Between 1973 and 1977, the value of imports
rose at an average annual rate of 50 percent, led
by purchases of machinery and equipment, which
accounted for more than two-fifths of total im-
Nigeria: Projected Costs of Selected Projects'
Million US
Original
Cost
(FY 1975)
Revised
Cost
(FY 1977)
Warri Petroleum Refinery ............
256
765
Jebba Hydroelectric Power Plant ..
47
157
Expansion of transmission lines ....
267
428
Rural electrification scheme ..........
144
238
Road projects:
Lagos Inner Ring Road ............
508
929
Port Harcourt - Enugu Highway
80
411
Lagos - Abeokuta Highway ......
7
54
Okene - Kaduna Highway ........
102
214
Kaduna - Kano Highway ..........
15
47
Ikom - Katsina Ala Highway ...
50
122
Ibadan - Oluku Highway ..........
34
129
Airport construction ........................
666
1,055
Telecommunications projects ........
1,680
4,443
Teaching hospitals ..........................
320
608
Military barracks ............................
152
797
Warships and other naval craft ....
160
608
' Based on official projections or reported values of contracts
already awarded. The fiscal year begins on 1 April.
ports in the period (figure 2). Imports of other
manufactured goods also rose sharply since the
construction boom and increased government
wages sparked a consumer spending binge.
Specifically:
? Purchases of machinery rose 50 percent an-
nually in 1974-77, led by a 700-percent in-
crease in imports of electric generating equip-
ment and a 500?-percent boost in orders for
industrial machinery.
? Deliveries of transport equipment sky-
rocketed, fueled by record demand for pri-
vate cars and trucks; commercial aircraft
sales also picked up as the government-owned
airline moved to expand both domestic anal
international operations.
? Manufactured imports of all kinds showed
marked increases, rising 41 percent annually
in the period; construction materials-steel
and cement-more than tripled, and consum-
er goods-often nonessential items such as
television sets and stereos-soared until the
SMC imposed import controls on an array of
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Billion US $
1973
1974
1975
1976
1977
Trade balance ............... ..... _........ ._ ................
1.9
7.3
2.7
3.8
3.2
Exports, f.o.b . ............ ............ .... ........ ......
3.6
9.7
7.9
10.2
11.9
Oil .... .... .... ............. ......_.... _.........._....
3.1
9.0
7.4
9.5
10.7
Nonoil ...................................... _ ..... _ _ ....
0.6
0.7
0.5
0.7
1.2
Imports, f.o.b.... ........ ..............................
1.7
2.4
5.2
6.4
8.7
Services and private transfers, net ...............
-1.9
-2.4
-2.7
-4.0
-4.2
Freight and insurance ...................... ..._...
-0.2
-0.2
-0.8
-1.3
-1.7
Other transportation ........... .....................
0
0
-0.1
-0.4
-0.1
Travel ....__._ ...............................................
0
-0.1
-0.2
-0.3
-0.3
Investment income ......................................
-1.0
-0.6
0.1
-0.3
0
Other government services .__........__.._
0
-0.4
-0.5
-0.5
-0.5
Other private services ........... .................
-0.7
-0.8
-1.2
-1.0
-1.4
Private transfers ......... .......... ...... ...... ......
-0.1
-0.1
-0.1
-0.1
-0.2
Current account balance ....... ........ ......... ....
Negl
5.0
Negl
-0.3
-0.9
Capital account balance ...............................
0.3
-0.1
0.2
0
0.1
Direct investment .....................................
0.4
0.3
0.5
0.4
0.2
Other government .... ._._ ...........................
-0.1
0
-0.4
-0.4
0
0
-0.1
5.1
0.2
-0.3
-0.8
Total foreign assets, yearend ........................
0.6
5.7
5.8
5.5
4.6
Because of rounding, components may not add to the totals shown.
Represents shipments, including goods in transit and continued backlogs in ports.
Including estimated lags in oil company payments to federal government.
foreign luxuries in 1977 and again this
spring.
? Food imports also rose dramatically; the de-
velopment drive pulled many farmers off the
land, while rising urban incomes stimulated
food demand, particularly for nontraditional
items such as rice and processed foods.
At the same time, the growth in export rev-
enues lagged. Although average oil prices rose
between 1974 and 1977, production slipped to
1.8 million b/d in 1975 and stayed at about 2.1
million b/d in the next two years. Demand for
Nigerian crude, which accounts for 90 percent of
export receipts, was particularly affected by the
increased availability of North Sea and Alaskan
oil, which are of similar quality. Because the
transportation costs are lower on these competing
oils and the supplies appear more secure, many
West European and US consumers switched
sources. Government oil pricing policies, more-
over, placed Nigeria at a disadvantage relative to
traditional competitors such as Libya and Alge-
ria. Meanwhile, oil demand in the developed
countries in these years was low due to the
sluggish pace of economic activity.
The deficit on services and transfers more than
doubled in 1974-77. Most of the increase re-
flected rising freight and insurance payments on
imports. Payments for government and private
services also rose steadily as the development
drive progressed. As in other OPEC countries,
charges for private consulting services often were
considerably inflated.
As the current account deficit worsened, capi-
tal inflows fell off, largely reflecting the Oba-
sanjo government's steps to increase Nigerian
participation in the economy. All businesses in
Nigeria were required to have at least 40 percent
local ownership by 1979. Various other legisla-
tion affected profit repatriation and tax allow-
ances. The indigenization program plus the day-
to-day frustrations of doing business with the
SMC prodded many foreign businessmen to
scale back or postpone their capital programs.
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Nigeria: Import Trends (customs data)
Import Shares
(percent)
Machinery and
Equipment
Instead of the large net capital inflows the
government planners had optimistically envi-
sioned, direct investment has fallen steadily since
1975, and the capital account has been just about
in balance.
Accomplishments To Date
So far Lagos has relatively little to show for its
oil price dividend. More than $30 billion (includ-
ing $6 billion in private investment) has been
spent on the development drive, but we estimate
that less than one-fourth of the plan has been
carried out. Although GNP has risen about 7.5
percent a year since 1973, somewhat above the
rates achieved in the early 1970s when oil pro-
duction escalated rapidly, the development effort
has barely reduced Nigerian dependence on oil.
It has involved only a small portion of the
country's population. For most Nigerians, life
has not changed.
Progress has been most substantial in the areas
of economic and social infrastructure, although
even here gains have been spotty. Light industry
has benefited from expanding consumer demand
in recent years, facilitating a little import substi-
tution. Despite government emphasis on heavy
industry, almost nothing has been done; numer-
ous projects have been canceled or postponed
indefinitely. Farm output has registered only
small increases and agriculture's share of na-
tional output continues its long-term decline.
Economic Infrastructure: Major Strides
Acknowledging Nigeria's vast size and the
gross inefficiencies in transporting people and
2 goods, the government has moved quickly to beef
up the country's transport and communications
facilities. Emphasis has been placed on expand-
ing port facilities and completing ongoing con-
1 - struction of a network of expressways in and
Food around Lagos to ease an unprecedented backlog
of ships and the city's infamous traffic jams (see
other Manufactures table 4). Substantial improvements are also pro-
gressing in domestic air service, telecommunica-
1961 63 65 67 69 71 73 75 77 tions, and electrification. Nevertheless, Nigeria
in the early 1980s will still have an inadequate
road network outside the Lagos area; the vast
bulk of the countryside will lack telephones and
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electric power; and a shortage of skilled person-
nel to run and maintain the power, transport, and
communications network will remain a major
stumbling block to rapid economic progress.
Nigeria: Status of
Infrastructure
Port expansion
Lagos Phase I
Lagos Phase II
Other port expansion
Port Harcourt, Warri,
Calabar
2,700-kilometer petroleum
pipeline
Roads
Lagos Inner Ring Road
Lagos-Ibadan Expressway
Lagos-Benin City Ex-
pressway
Onitsha-Enugu Express-
way
Jos-Makurdi Road
Conversion of railroad to
standard guage
Power plants
Shiroro hydroelectric ...
Jebba hydroelectric
Sapele thermal ..
Airport construction
Lagos . .
Kano
Ilorin
Port Harcourt ...... _......
Maiduguri
Industry
LNG plants (two) .....
Planned Major Facilities
Estimated Share of
Project Complete
Current Status 1977 (Percent)
Under construction
Design stage
Under construction
Under construction
Under construction
Design stage
Design stage
Contract awarded
Design stage
Under construction
Under construction
Under construction
Under construction
Under construction
Under construction
Design stage; plants
merged into one
Refineries
Ward _.___........._...... ._
Kaduna ....._. ._......
Port Harcourt (expansion)
Two other .._..__ ...__._
Petrochemical complex ...
Nitrogenous fertilizer plant
Aiaokuta steel plant ....._.
Direct reduction steel plants
(five Planned)
Cement plants (seven
planned) .. ....... .
Integrated sugar projects
(two planned) ..... _..- .
Pulp and paper mills (two
planned; expansion of one
existing mill)
Under construction
Under construction
No contract
No contract-one in-
definitely postponed
No contract
No contract
Design stage
Contract awarded (1)
three canceled
Three under construc-
tion
Under construction
Nigeria has made good progress in expanding
its ports. At Lagos, the country's largest port and
site of the worst conditions of any OPEC country
in 1975, capacity has been increased with the
opening this pastfall of a new port facility at Tin
Can Island ca able of handling 1 million metric
tons a year Additional berthing space
at the existing Lagos port complex also is near
completion, and work has begun on replacing the
Lagos customs wharves that were torn down in
late 1975 to make way for a major expressway.
Expansion efforts are also well under way at Port
Harcourt and other smaller ports. By 1980,
Nigeria should have 39 berths and some of the
most modern facilities in the world.
Substantial funds also have been allocated to
modernize Nigeria's civil air establishment.
With the absence of reliable telecommunications
and land transport systems, air travel has become
increasingly important as a means of carrying
out business and government activities expedi-
tiously. An airport construction program is well
along that will permit the use of the most
advanced types of commercial aircraft and con-
nect Lagos with each of the 19 state capitals.
The number of international airports is being
raised from two to seven, with at least one
located in each of the principal geographic re-
gions, which eventually should make it easier to
do business in Nigeria. Aircraft purchases have
been stepped up to bolster both domestic and
overseas service, but ground operations remain
hampered by shortages of skilled personnel and
maintenance equipment.
Road improvements are attracting the most
money. In addition to the $1 billion Lagos Inner
Ring Road project, expressways are almost fin-
ished that will link the capital with other major
urban areas in southern and western Nigeria.
Progress elsewhere is spotty:
? Only one bridge is under construction to
supplement four others across the 1,600-
kilometer Niger-Benue River system that
cuts through the country.
? Feeder roads linking agricultural areas with
principal highways have been largely ignored.
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? Traffic jams are still the rule in all urban
areas, and moving goods through eastern
Nigeria is particularly slow.
? High-speed highways in northern and eastern
Nigeria are in very early stages of construc-
tion, precluding the prospect of rapid cross-
country travel for several years.
A major effort also has been under way to
improve the availability of electric power
throughout the country. Since the civil war,
consumption of power has nearly tripled, over-
loading existing facilities and causing frequent
and lengthy power cuts that disrupt industrial
production. Two large power plants are under
construction along with an expansion of Nige-
ria's largest facility at Kainji; all will eventually
hook up with the existing national grid. Three
more hydroelectric plants also are on the boards
but are not slated to start up until the mid-1980s.
When completed, these projects should provide
adequate installed capacity for planned indus-
trial and residential needs in the cities through
the next 15 to 20 years. Some work is being
carried forward on the ambitious rural electrifi-
cation program, but the bulk of the countryside
will continue to rely on traditional fuel sources
for the foreseeable future.
Economic efficiency has also been hampered
by an inadequate telecommunications network.
Telephone service in the cities is largely nonexis-
tent, and routine business must be carried out in
person. Elsewhere, many parts of Nigeria are
without any means of rapid communication.
Lucrative contracts have been awarded to several
expatriate firms to increase the number of tele-
phone exchanges by almost tenfold, to expand
external communications capability, and to set
up microwave systems in more isolated areas.
Only a fraction of the countryside will have
access to a microwave radio; moreover, most of
these contracts are on a turnkey basis, with little
attention being paid to training Nigerians to
operate and keep up the equipment.
ments in both the quality and availability of
essential social services. An intensive education
program to reduce illiteracy and enlarge the pool
of local skilled labor has headed the list. Some
progress has been made in expanding the number
of hospital beds, but hopes of bringing basic
medical care to the countryside and smaller
towns have been disappointed by the continuing
lack of trained personnel. Token allocations have
kept public sanitation projects pretty much at a
standstill along with any pretense at carrying out
urban planning and developing leisure activities.
After a rather auspicious beginning, the gov-
ernment education program has progressed
slowly. A universal primary education scheme-
probably the most ambitious single project in the
entire development drive-started on schedule
but quickly bogged down as a result of a shortage
of qualified teachers, classroom space, and equip-
ment. Higher education has been given a major
push through a substantial building program
and-until recently-subsidized tuition. Instruc-
tion, however, remains concentrated on liberal
arts, while technical and vocational training are
still limited.
While the building industry has profited enor-
mously since the 1973/74 oil price hikes, the vast
majority of Nigerians continue to lack decent
housing. One population survey reveals an aver-
age of seven people per room in Lagos, and
conditions in the countryside remain primitive.
Substantial public funds are tied up in office and
luxury housing construction, including a federal
complex in Lagos that will eventually contain
most federal ministries, new quarters and offices
for civil servants and other professionals in each
of the 19 states, and a project to build new
facilities for Nigeria's 200,000-man Army. Pri-
vate money is centered on commercial office
space and luxury housing in Lagos and other
principal cities. Even with these efforts, the
government's original goal of 200,000 public and
private housing units by 1980 will not likely be
attained.
Social Infrastructure: Limited Headway
A second principal objective of the 1976-80
development program has been major advance-
Industry: Disappointing Results
A number of objectives have guided industrial
policy under the 1976-80 plan:
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? Establishment of a viable industrial base
before oil output starts to decline in the mid-
1980s.
? Development of a substantial heavy manu-
facturing sector to reduce Nigerian depend-
ence on imports of machinery and semi-
manufactures.
? Expansion of domestic light industry to sup-
ply the bulk of consumer goods.
? An increase in Nigerian participation in all
phases of industrial production.
In terms of implementation, little has been
done except for the indigenization decree an-
nounced early last year.
Before severe port congestion disrupted deliv-
eries of essential machinery and spare parts, the
private sector responded to the jump in demand
for all types of consumer goods by boosting light
industrial output-particularly of textiles-by
almost 25 percent in 1975. Growth during the
past two years has slowed to about 15 percent a
year, because of electric power shortages, import
restrictions, and frequent job transfers by skilled
workers trying to circumvent a government wage
freeze imposed in 1976 in a vain attempt to
control inflation (figure 4). Even with this
healthy expansion, the share of light industry in
GDP increased only marginally by yearend 1977,
to an estimated 5 to 6 percent.
Several new projects have been started that
will expand domestic production of beer, cars,
and canned food, but substantial imports, par-
ticularly vehicles and processed foods, are likely
for the foreseeable future. These projects have
been financed largely by private domestic inves-
tors, or local subsidiaries of multinational
corporations; Lagos has limited its involvement
primarily to heavy industry.
Little movement has been observed on major
heavy industrial projects, and heavy manufactur-
ing still accounts for only a few percentage points
of national output. The only new plant to come
on stream is the Kaduna superphosphate plant, a
carryover from the previous development plan.
Work is continuing on boosting production of
cement as well as wood pulp and paper, but
Nigeria: Industrial Production Trends
Light Manufacturing _
I i I i I i I i
1971 1972 1973 1974 1975 1976 1977
present plans still will not cover domestic needs.
Growth in this sector was set back by a decline in
output in 1974 due to difficulties in obtaining
raw materials abroad and in distributing them at
home. Expanded output of construction materi-
als now is leading growth in the sector, which last
year registered output 10 percent higher than in
1973.
Although work is well along on oil refineries at
Warri and Kaduna., Lagos must still import
substantial amounts of gasoline and other fuels.
In addition, bureaucratic bickering and lack of
funds have held up negotiations on several other
refineries and on such facilities as an LNG plant,
a petrochemical complex, and a nitrogenous fer-
tilizer plant (figure 5). Progress on the high-
priority, 1.5-million-t :on iron and steel complex to
be built by the USSR has been frustrated by the
lack of agreement on such basic issues as sources
of raw materials, ultimate size of the facility, and
the number of Soviets to be involved in construc-
tion. As an alternative, the government recently
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Nigeria: Economic Activity
f-e
Lakaja
aakuta
tlka'
a?amu
EXISTING
Thermal powerplant
Petroleum refinery
rr Cement plant
Hydroelectric powerplant
Motor vehicle assembly plant
gft -$ Textile plant
fl
Hydroelectric powerplant
Thermal powerplant
Petroleum refinery
Cement plant
Liquid natural gas plant
Steel mill
Petrochemical complex
(nitrogenous fertlizer)
? Petroleum Peanuts Sesame seed
r~. Tin ore and columbrte Oil palm [Cotton
Coal Cocoa Rubber
Iron ore
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awarded contracts to a West German firm for a
500,000-ton direct reduction steel complex that
would use Nigerian natural gas as a fuel source.
Production of both LNG and simple rolled steel
could begin as early as 1983, some two to three
years behind schedule. While LNG exports
would provide a partial offset to declining oil
earnings, steel output will supply only a fraction
of total internal consumption.
Prospects for additional heavy industrial proj-
ects getting under way anytime soon are dim.
Project cost overruns and unexpectedly heavy
recurrent expenditures have forced Lagos to
scale down its investment program substantially.
The result has been an indefinite postponement
or cancellation of several project proposals.
Among the victims are two petroleum refineries,
the petrochemical complex, the nitrogenous fer-
tilizer plant, and three direct reduction steel
plants. Government loan programs to facilitate
industrial development in the various states have
also suffered.
Agriculture: Suffering From Neglect
Accorded many fine words but relatively little
hard cash in the development program, agricul-
ture has received only a small share of public
attention. Although government-set producer
prices for major export crops were raised an
average of 30 percent in both 1975 and 1976,
farm incomes have barely kept pace with infla-
tion. Investment credit for farmers has been hard
to come by, and only a fraction of the planned
credit volume has been made available despite
government pressure on commercial banks to
increase agricultural loans. Distribution of fertil-
izers and other inputs has bogged down, initially
as a result of port congestion and later because of
internal distribution problems.
Some progress has been made in government-
sponsored irrigation projects, but other major
programs involving commercial crop and live-
stock development projects have been largely
ignored by the regime. More positively, Lagos
decided recently to allow farmers to sell cassava,
yams, and other staples for the first time to
federal commodity boards, thereby guaranteeing
them a ready market and a minimum income.
The boards are still waiting for government
guidelines, and it is uncertain whether prices will
be sufficiently attractive to boost production of
locally grown food crops.
Reflecting its low priority, agricultural output
has fallen short of the targeted annual growth
rate of 5 percent. Nigeria has lost its self-
sufficiency in food production, and agricultural
exports have declined (figure 6). Many farmers
have left the land in search of higher paying jobs
in the cities. Many who have remained have cut
back on commercial farming largely because of
transport and storage bottlenecks that prevent
crops from reaching the market place in good
shape.
Food shortages in urban areas are frequently
severe, and the government was forced to import
record amounts of foodstuffs in 1977. Cocoa
production is down as a result of a shortage of
labor and the absence of a long-term investment
program to replace aging trees. During the
height of the port backup in 1975 and 1976,
cocoa exports were negligible as ships were re-
quired to leave as soon as their cargo was
offloaded. Recent ;peanut harvests have been
devastated by disease and drought, and Ni-
geria-formerly the world's leading peanut ex-
porter-is now importing peanut oil. Output of
other key cash crops such as rubber and palm oil
has not recovered from the devastation of the
1967-70 civil war.
Oil: Set Back by Poor Policies
To conserve Nigeria's limited oil resources and
yet maintain a high level of vital revenues to
finance the ongoing development program, the
present regime has followed an aggressive oil
policy that has placed severe strains on govern-
ment relations with the producing oil companies.
Lagos has imposed production ceilings on most of
the oilfields. In many cases, these ceilings are so
low that wells are producing at uneconomic
levels; in others, the reduced flow rate is causing
wells to become clogged with sand, affecting
their productive capacity. Until recently, the
government focused its pricing efforts on maxi-
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Nigeria: Agricultural Production
Per Capita Food Production
Index: 1970=100 1 1970 1 1971 1 1972 1 1973 1 1974 1 1975 1 1976
80
Thousand Metric Tons (annual average)
Peanuts in Shell
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mizing per-barrel revenues through several uni-
lateral price increases that have made Nigerian
oil among the most expensive of OPEC crudes.
Company profits during much of the 1975-77
period hovered around 30 cents per barrel, which
officials claimed was inadequate.
Nigeria is feeling the impact. Sustainable pro-
duction capacity has declined from 2.5 million
b/d to 2.3 million b/d as a result of (1) the
absence of proper routine maintenance to prevent
wells from sanding up and (2) normal depletion
of developed reservoirs without bringing enough
new wells into operation. Nigeria's high-priced
crudes have also been hit hard by the increased
availability of lower-priced oil during the current
world market slump. Output slipped from an
average of 2.1 million b/d last year to 1.5 million
b/d in March 1978, the lowest in more than six
years, although it is recovering a little now that
Saudi Arabia has reduced its output of light
crude.
Since last summer, the government has indi-
cated that it is finally coming around to a more
pragmatic petroleum policy. Lagos first at-
tempted to get oil investment on the move again
by providing a package of increased tax writeoffs
and other financial incentives to expand oil com-
pany operations and to speed up development of
high-cost offshore areas:
? For companies not yet producing oil, the
profit tax rate will be reduced from 85
percent to 65.75 percent until all preproduc-
tion costs are recovered.
? Exploration and drilling costs and costs of the
first two appraisal wells may be written off
during the year these expenses occur. Pre-
viously, only the costs of dry wells could be
expensed.
? Royalty payments will be reduced for off-
shore production.
? Investment tax credits will be granted, rang-
ing from 5 percent for equipment used on
land to 20 percent for assets used in deep sea
exploration.
? Companies will be permitted to amortize all
but 1 percent annual investment expenditures
within five years, compared with the previous
timespan of seven to eight years.
The effects of the new measures vary widely
among fields and companies. Potential profit
margins now range from 25 cents for current
producers operating onshore fields to $1.27 for
companies not now operating in Nigeria who
decide to produce offshore in depths greater than
100 meters (table 5).
More recently, Nigeria has adopted a more
flexible oil pricing policy designed to boost sales
and stabilize company profits. Lagos has cut
prices twice this year and is offering an addi-
tional discount to both third-party customers
who sign long-term contracts and producing
companies who raise their liftings beyond the
average for the January-March 1978 period. At
the same time, the government still requires the
foreign companies to sell up to 27,000 b/d to
Nigeria's one refinery at an administrative price
of $3 per barrel, compared with tax and royalty
costs of more than $12.
Slow, Unsteady Progress Ahead
The petroleum industry remains the dominant
force in Nigeria's economy, and continued eco-
nomic development will hinge on the govern-
ment's ability to generate and use fruitfully oil
revenues. Just to carry out the rest of the planned
development program, the government would
need more than $50 billion in addition to private
investment on the order of $30 billion. Available
funds will fall well short of these requirements,
however, forcing both government officials and
private entrepreneurs to be more selective in
undertaking particular projects. Numerous pro-
grams will have to be stretched out, while others
will be postponed indefinitely or canceled. In any
event, a shaky political outlook augurs ill for
major strides in the development effort through
the mid-1980s.
The Revenue Pinch
Lagos simply will not be able to generate the
revenues needed to pay for the 1976-80 develop-
ment plan on time, even assuming that comple-
tion was technically feasible. The government
will be lucky if it can come up with $30 billion in
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Nigeria: New Royalty and Tax Rates
US $ Per Barrel
Onshore (Bonny Light) Offshore (Qua Iboe)
Water Shallower Water Deeper
than 100 Meters than 100 Meters
Old New Old New Old New
Producer Producer Producer Producer Producer Producer
1. Posted price ....... ...._ 14.94 14.94 14.94 14.94 14.94 14.94
2. Royalty 2.99 2.99 2.76 2.76 2.49 2.49
(Percent of 1 above) .._.......... ........_._.. (20) (20) (18.5) (18.5) (16.67) (16.67)
3. Production cost % ................................... 1.00 1.00 1.00 1.00 1.00 1.00
4. Profits for tax purposes (1-(2+3)) ...... 10.95 10.95 11.18 11.18 11.45 11.45
5. Tax 9.31 7.20 9.50 7.35 9.73 7.53
(Percent of 4 above) ...................._ ...... (85) (65.75) (85) (65.75) (85) (65.75)
6. Harbor dues 0.02 0.02 0.02 0.02 0.02 0.02
7. Government revenues (2+5+6)...._...... 12.32 10.21 12.28 10.13 12.24 10.04
8. Cost of equity oil (3+7) ........... ......._.... 13.32 11.21 13.28 11.13 13.24 11.04
(45 percent of production)
9. Cost of government participation
oil 3 (55 percent of production) 13.87 13.87 13.87 13.87 13.87 13.87
10. Average weighted cost 13.62 12.67 13.60 12.64 13.59 12.60
11. Average government revenue (10-3) ... 12.62 11.67 12.60 11.64 12.59 11.60
12. Company margin (9-10) ......................... 0.25 1.20 0.27 1.23 0.28 1.27
As of April 1978.
Deduction permitted by government.
Including $0.25 rebate for purchases of participation oil beyond first quarter 1978 liftings.
total revenues in the next two years (table 6).
Oil, which provides the bulk of the receipts and
foreign exchange to pay for the imports, is not
likely to show much growth. Any assistance from
LNG production depends on solving basic prob-
lems such as pricing and customers. Other rev-
enues-largely taxes on international trade-will
be constrained by government import restrictions
as part of a comprehensive program to improve
Nigeria's balance of payments.
crude exports will slip
back to about the 19 /(5 rate of 2 million b/d, as
an increasing share of output is diverted to meet
the rise of 25 percent a year in domestic fuel
demand. At these rates, government oil earnings
in 1979-80 will total only around $20 billion even
assuming a 5-percent oil price increase in 1979
and a 6-percent rise in 1980.
Beyond the next few years, oil revenue pros-
pects will depend on developments in world oil
prices. Production declines are likely after the
mid-1980s unless the government is able to bring
new wells on ram from still unexploited deep-
water areas.
Other financing possibilities are limited. For-
eign assets are down to less than $2 billion, and
Lagos already has built up an equivalent foreign
debt. Additional recourse to the Eurodollar mar-
ket may be colored by the country's unhealthy
political outlook and the lack of substantial new
export revenues. Moreover, the continued inabil-
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Estimated
FY 1977 FY 1978 FY 1979 FY 1980
Revenue .................. 9.6 11.5
Federal ...................... 9.1 10.8
Oil S ...................... 7.1 9.2
Government .... 4.0 5.2
Company .......... 3.1 4.0
Nonoil .................. 2.0 1.6
State . ........................ 0.6 0.8
12.5 13.5 15.4
11.5 12.1 13.5
9.1 9.5 10.3
5.2 5.5 5.8
3.9 4.0 4.4
2.4 2.7 3.3
1.1 1.4 1.9
' Because of rounding, components may not add to the totals shown. The fiscal year
begins on 1 April.
Excluding federal grants and loans.
At current oil prices for 1976-78; assumes a 5-percent oil price rise in 1979 and a
6-percent rise in 1980.
ity of the local economy to supply more than a
fraction of domestic needs suggests that a grow-
ing share of overseas borrowing will probably be
for consumer imports rather than for develop-
ment projects unless Lagos becomes more suc-
cessful than it has been in moderating inflows of
consumer goods.
In addition to these problems, the govern-
ment's ability to make critical economic policy
decisions could suffer during the last and most
difficult year in Nigeria's transition to civilian
rule scheduled for October 1979. The regime will
be heavily engaged in overseeing the revival of
civilian political activity and the holding of elec-
tions. Political campaigning could exacerbate
Nigeria's regional and ethnic tensions and lead
to sporadic civil disorders.
Lagos must keep the development program
going; discontent over the lack of economic ad-
vances under General Gowon was instrumental
in the widespread support for the July 1975 coup.
In addition, the government's new austerity pro-
gram caused serious student violence and civil
unrest earlier this year. However, the current
crop of civilian politicians includes few, if any,
leaders or groups capable of transcending for
long the deep-seated ethnic and tribal antago-
nisms in Nigeria. The turnover at minimum will
produce an intense jockeying for position in the
new government, during which the economic
program will take a back seat. A period of
uncertainty and possible instability, involving
serious setbacks to economic progress, is not out
of the question.
Development priorities may also be affected by
the anticipated change in political leadership
next year. The ongoing consensus is that the
civilian regime will be dominated by northern
Hausa-Fulani elements in coalition with eastern
Ibos. The new leadership may well decide to
boost the share of investment funds going to
these areas; most contract awards thus far are
for the projects in southern urban areas. Al-
though such a move would focus more attention
on the important agricultural and light industrial
sectors, government officials will have to be
careful not to jeopardize further Nigeria's much-
delayed heavy industrialization program.
Even under the best of circumstances, a num-
ber of factors will moderate the pace of develop-
ment. Nigeria will continue to lack adequate
skilled manpower. Of the estimated 500,000
additional skilled workers needed by 1980, no
more than 300,000 Nigerian higher education
graduates will be entering the job market, most
with liberal arts degrees. Filling the gap with
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imported labor is likely to be hampered by the
cumbersome expatriate quota system, the limited
availability of housing and other amenities, and
the government's desire to minimize dependency
on foreign managerial and technical talent
(figure 7).
Development will also suffer from the govern-
ment's inability to attract increased private in-
vestment. Foreign capital will be slow to come as
long as the ongoing indigenization program is in
effect, and meaningful changes are not expected
any time soon, given the nationalistic attitude of
most Nigerians with regard to overseas business.
Domestic investment will be held back by high
startup costs and the recent government anti-
inflation move to restrict new bank credit to the
private sector.
Conclusions
The bottom line of the 1976-80 development
drive is not terribly impressive. Government ex-
penditures have been marked by incredible waste
in terms of a contribution to future economic
expansion. A substantial share of Nigeria's oil
money has gone to finance consumer goods and a
massive office building program. Although Ni-
geria has more ports, roads, airports, and schools,
establishment of an industrial base is not much
further along than in 1975. Services for the most
part are even more chaotic, and agriculture
continues to falter.
Prospects for major strides in the development
effort in the next several years are clouded by a
growing financial crunch as a result of stagnat-
ing oil production and by an uncertain political
future that may well see increased ethnic and
regional tensions that were generally muted dur-
ing the long years of military rule. Indeed, real
growth during the next several years will prob-
ably do well to maintain the preoil boom annual
average of 6 percent. With more industrial proj-
ects likely to be stretched out or canceled, most
of the expected real growth will be concentrated
in services, light industry, and construction.
Even so, housing construction will not increase
fast enough to alleviate the severe overcrowding
in urban areas. Progress in broadening the manu-
facturing base will lag far behind demand for a
wide range of items, especially consumer dura-
bles, leading to a continued heavy need for
imports. Finally, the investment required to re-
turn Nigeria to agricultural self-sufficiency is
likely to remain substantially beyond what the
government will be willing to commit.
25X1A
This report was prepared by the Office of Eco-
nomic Research. Queries and co nments are
welcome and should be directed to
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