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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00589R000300300003-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: January 12, 2017
• Document Release Date: March 4, 2011
• Sequence Number: 3
• Publication Date: June 1, 1985
• Content Type: REPORT

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Directorate of -S*CM4-
Intelligence
Economic Decline
Nigeria: Implications of
ALA 85-10067
June 1985
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Directorate of Secret
Intelligence
Nigeria: Implications of
Economic Decline
Office of African and Latin American Analysis.
It was coordinated with the Directorate of
Operations. Comments and queries are welcome
and may be directed to the Chief, Africa Division,
This paper was prepared by
ALAS
Secret
ALA 85-10067
June 1985
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Nigeria: Implications of
Economic Decline 25X1
Key Judgments Nigeria has emerged from 10 years of high oil earnings cash poor, heavily
Information available in debt, import dependent, and sociopolitically deeply divided. Over the
as of 21 June 1985 course of the 1974-84 period, Lagos squandered much of its $145 billion in
was used in this report.
export earnings as five successive governments have mismanaged the oil
income, diverted substantial sums to create personal fortunes, and missed
the opportunity to develop an economic base that could provide growth for
the future. In our judgment, and that of most other knowledgeable
observers, Nigeria is in worse economic condition today than when the oil
boom began in 1974.
The Buhari military regime seized power at the end of 1983 promising
economic revitalization, jobs, and lower prices. Instead, economic data
show that Nigeria experienced its fourth consecutive year of economic
contraction in 1984, higher unemployment, and rising prices. Although the
government has succeeded in getting Nigerians to live more within their
means and has brought some order to the country's foreign accounts, we
believe that it has concentrated on short-term solutions while failing to
address the country's basic economic problems. Lagos's dependence on oil
income is growing-97 percent of export earnings came from oil in 1984
compared with a 93-percent average for the 1980-83 period. Per capita
food production is less than it was in 1970, and the manufacturing sector is
dependent on imports for almost three-fourths of its material inputs.
Evidence of the economic decline is not limited to the aggregate statistics.
On a human scale, it has sharpened the historical divisions between
mutually hostile ethnic and regional groups, according to Embassy report-
ing and open sources. For example, competition is escalating among
various regions for a share of the diminished oil earnings. In our view, such
centrifugal tendencies probably will grow and violent clashes between
regions could occur that eventually might lead to the type of conflict that
occurred in 1966-69.
Nigeria's fundamental economic problems have had an especially adverse
affect on its external accounts. Lagos is not earning sufficient foreign
exchange to pay its debts, purchase food, supply inputs for production, and
maintain the billions of dollars worth of existing investment. Food imports
iii Secret
ALA 85-10067
June 1985
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and debt service alone will consume about two-thirds of hard currency
earnings in 1985, according to US Embassy estimates. An abrupt drop in
oil income could cause trade arrears to accumulate again-Lagos still has
about $9 billion in trade debt outstanding from 1982-83 when the former
Shagari government failed to contract the flow of imports in the face of de-
clining oil earnings.
We estimate that, even if oil earnings remain relatively stable at current
levels, Lagos's debt service will increase to at least 60 percent of export
earnings in 1987 and will remain high for the decade. In our judgment, La-
gos can meet its payments on its estimated $23 billion debt during 1985 if
it maintains planned restrictions on imports and if the oil price does not
soften considerably. However, we believe that rising unemployment and
inflation, severely restricted credit, and the need to limit imports will
finally produce economic pressures sufficiently severe to compel the
Nigerian Government to agree to an IMF program as a prelude to debt re-
scheduling sometime next year or in 1987.
Despite its message of austerity, the Federal Military Government is
continuing the development policy of the oil boom years. Spending is
heavily influenced by the need to satisfy regional and ethnic jealousies,
pacify the military, and maintain the support of business and bureaucratic
elites. Funds continue to be squandered because of corruption. Although
personal enrichment at public expense reached its peak during the high-
income years of the former civilian government-and the present military
government came to power promising to end it
these leaders are continuing the practice.
Based on reports of dissatisfaction with Buhari's leadership, we would
expect some reshuffling of top officers and the likely replacement of
Buhari, possibly by force, by another senior officer such as Chief of Army
Staff Ibrahim Babangida. Although such a government would be more
likely to accept an IMF program because of economic circumstances, we
would not expect other abrupt policy changes. Despite US Embassy reports
of unrest throughout the military, we believe it most likely that officers
representing conservative, northern-based interests will be able to retain
power with or without Buhari. Based on assessments from the Embassy
we do not judge that potential rivals from other
regions can coalesce enough support within the military to mount a
successful coup.
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We believe an alternative scenario within the next two to three years is a
coup by midlevel officers who would replace the present northern-based
power elite. A regime formed by midlevel officers, probably representing
Nigeria's southern and Middle Belt regions as well as reformist elements in
the north, could be expected to depart from the policies of previous regimes
by taking a more nonaligned posture and instituting nationalistic economic
policies including the probable refusal of an IMF program. In our
judgment, this scenario becomes more probable if intense ethnic and
regional rivalries are not eased soon. However, conservative northerners are
likely to resist forcefully such attempts by nonnorthern groups almost
certainly leading to factional fighting within the military.
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Key Judgments
Foreign Exchange Crisis 2
Political Constraints on Policy Implementation 5
Regional, Religious, and Ethnic Conflict 6
Corruption 8
Power of the Military 8
Flashpoints To Watch 11
Implications for the United States 13
Key Sectors of the Nigerian Economy 15
vii Secret
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Figure 1
Nigeria: Economic Indicators, 1980-85
Real GDP Growth
Percent
Current Account Balance
Billion US $
Foreign Exchange Reserves
Billion US $
Imports, 1983
Percent
Consumer Price Inflation
Percent
Composition of Real GDP, 1982
Percent
a Estimated.
b Projection.
Trade and
services
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Nigeria: Implications of
Economic Decline
The Nigerian economy reached its peak during 1981
but has declined continually since then, according to
International Monetary Fund (IMF) data. By 1984,
real GDP had dropped to the level of a decade earlier,
while the population had increased by 25 million to
more than 90 million. Over the same 1974-84 period,
the official consumer price index, which usually un-
derstates inflation, rose by over 500 percent and
Lagos's foreign debt increased from $2 billion to
about $23 billion. Nigeria's debt service also rose
from 2 percent of export earnings in 1974 to 36
percent in 1984, according to estimates by the US
Embassy. At the same time, oil revenues, which
provide over 95 percent of export earnings, peaked in
1980 at $25 billion but then declined to less than half
that amount by 1984.
By the end of 1984, political stability in Nigeria
seemed as elusive as economic development. The cycle
of rapid regime changes, brought on in part by
popular dissatisfaction with the failure of successive
governments to manage the economy, seemed likely to
continue. The current Federal Military Government
(FMG), which seized power 31 December 1983, has
had no more success than its civilian predecessor in
reversing the economic decline.
The Buhari regime has concentrated on short-term
containment of a foreign exchange crisis rather than
on solving Nigeria's fundamental economic problems,
in our judgment. According to Nigerian press ac-
counts, most Nigerians had welcomed the military
coup of December 1983 as deliverance from the
official fraud and economic mismanagement of the
politicians.' Reporting at the time of the coup indi-
cates, however, that the military leaders had badly
underestimated the severity of the country's problems.
Rather than achieving an easy economic revitalization
as promised, the Buhari regime instituted even tough-
er austerity measures that led to the fourth consecu-
tive year of economic contraction in 1984 (see
figure 1).
Economic Indicators
The standard economic indicators based on official
data and Embassy reporting paint a dismal picture of
Nigeria's economy:
? Output. After falling by 1 percent in 1984, GDP has
continued to decline in 1985 because of stagnant oil
earnings, only marginal improvements in agricul-
ture, and further deterioration in industrial produc-
tion stemming from import and foreign exchange
controls.'
? Inflation. Although the official consumer price in-
dex showed an increase of 40 percent in 1984, the
US Embassy estimates that prices actually climbed
by as much as 200 percent. We believe that the
shortages stemming from the planned 57-percent
reduction in imports will cause inflation to escalate
further in 1985.
? The Budget. Lagos has made deep budget cuts for
the second consecutive year, and the 1985 federal
budget of $14.6 billion is below even the reductions
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-5,897
-7,691
-4,738
-500
100
-1,177
4,913
11,106
-911
-3,993
-1,691
1,700
3,500
Exports (f.o.b.)
10,508
16,774
25,741
17,961
12,877
10,456
11,200
10,500
Oil
9,457
15,665
24,699
16,713
11,782
9,423
10,900
10,200
Nonoil
1,051
1,109
1,042
1,248
1,095
1,033
300
300
Imports (f.o.b.)
11,685
11,862
14,636
18,872
16,871
-12,147
-9,500
-7,000
Net services and transfers
-2,608
-3,249
-6,002
-4,986
-3,698
-3,047
-1,200
-3,400
Foreign reserves at yearend
1,323
5,017
9,593
3,098
1,568
963
800
1,000
External debt at yearend c
3,326
5,196
6,831
8,494
12,748
15,009
23,000
21,000
Debt service
175
555
987
1,571
2,167
2,880a
3,992
4,200
a Estimate.
b Projections.
c Medium and long term except 1984, which includes short term.
recommended by the IMF and World Bank, accord-
ing to the US Embassy. Debt repayments make up
the single largest portion of the entire budget.
? Unemployment. Unemployment probably will con-
tinue to rise this year because of budget cuts and the
lower level of industrial activity. Although the new
military government had promised to create jobs, as
many as 230,000 workers were laid off between
January and June 1984, according to Nigerian
private economic studies.
Foreign Exchange Crisis
According to financial and trade data, Lagos does not
have sufficient foreign exchange to pay its debts,
purchase food, supply inputs for production, and
finance the upkeep of billions of dollars of existing
investment. Food imports and debt service alone will
consume about two-thirds of hard currency earnings
during 1985, according to US Embassy estimates (see
table 1).
Trade Balances. Nigeria's export earnings depend
almost totally on the international oil market (see
figure 2). According to government statements, Lagos
is planning on export earnings of $10.5 billion this
year of which only $300 million will come from nonoil
sales. Downward pressure on oil prices probably will
continue through 1985, according to CIA analysis.' If
the expected price reduction is moderate, we believe
that Nigeria probably will export sufficient oil to
approximate the income target by adjusting its prices
unofficially as needed.
Severe restrictions on imports and greater control over
foreign exchange allocation, which have allowed La-
gos to reduce sharply its current account deficit, will
continue through 1985. The military government has
planned imports of only $4.1 billion in 1985. This
level represents the lowest since 1974 and less than
one-fourth of the amount spent on imports in the peak
year of 1981. We doubt, however, that Nigeria will be
able to sustain this import level of only $342 million
per month-an amount slightly less than $4.00 per
Nigerian per month-because of political pressure
coming from both consumers and manufacturers as
shortages increase.
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Figure 2
Nigeria: Oil Statistics, 1978-84
Export Revenues
Billion US $
Production
Million b/d
Price: Nigerian Light
US $/barrel
Export Volume by Destination, 1983
Percent
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Lagos believes that it already has imposed sufficient
austerity on Nigerians and should receive IMF assis-
tance. Negotiations with the Fund have stalled, how-
ever, over Nigeria's refusal to accept three pivotal
IMF conditions: devaluation of the naira by up to 60
percent, an end to petroleum subsidies-Lagos sells
crude oil to itself for $11.30 per barrel-and liberal-
ization of trade regulations. The military government
has publicly accused the IMF of wanting to destabi-
lize the country, claiming that devaluation in particu-
lar would result in political chaos.
The military regime argues that a devaluation makes
no sense for Nigeria. Lagos reasons that, since oil is
denominated in US dollars, a devaluation would do
nothing to increase the competitiveness of exports.
Manufacturing is small and agriculture is affected by
weak markets. Imports already have been reduced to
minimum levels. Devaluation would increase the cost
of domestically produced goods in Nigeria, cause
higher inflation, and precipitate economic chaos, ac-
cording to the Nigerian argument. It would also
cause a surge in food prices, particularly in urban
areas where imports are an essential part of the
supply. Ultimately, Lagos believes devaluation could
lead to social unrest.
Lagos's resistance to IMF requirements probably will
prevent the conclusion of an agreement with the Fund
during 1985, but, as debt service increases, we believe
the regime will be forced either to concede or to cease
making payments on external debts. A moratorium
on payments probably would result in a cutoff of
trade credits, which might lower oil income because
Lagos would have difficulty purchasing oil equipment
and supplies. On the other hand, an IMF agreement,
while not solving the basic structural problems of the
economy, would allow a respite from the foreign
exchange struggle by:
? Providing $2.5-3 billion in IMF loans.
? Allowing disbursement of a $300 million Structur-
al Adjustment Loan from the World Bank.
? Permitting the conversion of approximately $3 bil-
lion in officially guaranteed trade debt to medium-
term debt; Paris Club governments are refusing to
restructure this short-term debt until Lagos has an
agreement with the IMF.
? Facilitating the rescheduling of medium- and long-
term debt when payments become unmanageable,E
commer-
Nevertheless, we believe Nigeria's overvalued curren-
cy is a major factor in its immediate economic crisis.
In addition to encouraging consumption of imports
and retarding the development of agriculture and of
resource-based industries-because imports are
cheap-the overvalued naira continues to be the basis
for widespread illegal activity including bribery,
smuggling, and currency speculation. It lessens gov-
ernment control over the economy by encouraging the
growth of a wide array of activities in the informal
economy. Traders in Nigeria and in neighboring
countries ignore the official exchange rate, operating
at the free market rate of up to 4 or 5 naira to the US
dollar versus the official rate of 0.794 (January
1985). Cross-border trade and currency transactions
are based on free market rates between the naira and
the African Financial Community (CFA) franc, a
convertible currency used in Benin, Togo, Niger,
Chad, and Cameroon. This encourages Nigerians to
sell their produce in neighboring countries where they
can receive up to four or five times the amount they
would realize on the same sale in Nigeria.
cial creditors generally have also hesitated to re-
schedule LDC debt unless there is an IMF role.
? Encouraging short-term lines of credit to remain
open so that Lagos can purchase essential goods.
We believe that the Buhari regime probably will
continue to hold out against devaluation and the IMF
until there is a shift in the top leadership. General
Buhari and Chief of Staff Tunde Idiagbon have been
the most outspoken in their opposition and we believe
that they have deprived the regime of the latitude to
maneuver by making the refusal to devalue a point of
Nigerian sovereignty. Having convinced Nigerians
that disastrous consequences would ensue from a
devaluation, it will now be difficult for this govern-
ment to survive the political repercussions of a big
devaluation.
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finance such a deficit, it probably will delay some
payments in order to avoid a current account deficit.
Lagos has been accumulating substantial payments
arrears for nonmerchandise trade and debt service,
estimated by Nigeria at $4.2 billion in 1985 and by
the US Embassy at $6.5 billion, which will consume
most of the trade surplus. Because there has been
pressure to make ontime interest payments, Lagos
could begin to build trade arrears again by late in the
Lagos has been attempting to diversify its sources of
imports partly through increased use of countertrade
agreements. A $1 billion exchange with Brazil-by
which Nigeria will supply crude oil in return for
Brazilian goods, including automobile parts needed
for Nigeria's assembly plants-could make Brazil
Nigeria's largest trading partner in 1985. Brazilian
imports from Nigeria for the first nine months of
1984 amounted to $470 million compared to $195
million for all of 1983, according to press accounts.
Countertrade agreements with France and Austria
have also been completed and others with Yugosla-
via, Italy, Canada, West Germany, and several US
firms may follow soon,
Although countertrade allows Lagos to avoid some
hard currency expenditures, it may be detrimental in
the longer term because it reduces the foreign ex-
change realized from oil sales.
US sales to Nigeria may decline again in 1985 as a
result of the drop in Lagos's overall imports and the
low availability of credit from official sources. Im-
ports from the United States dropped by about one-
third in 1984 to only $575 million, while Nigerian
exports to the United States-virtually all oil-
dropped from $3.9 billion in 1983 to $2.6 billion in
1984, according to IMF data. US agricultural ex-
ports-mostly wheat-increased slightly, however, to
$338 million in 1984. Lagos is expected to import 2
million metric tons of wheat in 1985, according to the
US Embassy, and, while most should come from the
United States, purchases from Canada-because of
credit-and Argentina-because of price-are being
considered. Credit from the US Commodity Credit
Corporation (CCCJ is not available to Nigeria pend-
ing an IMF agreement. Lagos has shifted most of its
rice purchases to cheaper sources, in particular Thai-
land.
The Current Account. Although the government is
forecasting a current account surplus of $300 million
in 1985, we believe a deficit of at least $1 billion
would be more likely if all obligations were paid.
However, because Nigeria does not have access to
sufficient new borrowing and other capital inflows to
year.
We concur with the US Embassy estimate that Lagos
plans to spend only $4.2 billion for debt service in
1985 regardless of the amount actually owed. This
would cover obligations on medium- and long-term
debt and result in a debt service ratio of about 40
percent of foreign exchange earnings. If Lagos were to 25X1
pay all the interest owed on short-term debt, which
includes almost $1 billion in interest arrears from
1984, the debt service ratio would rise to 62 percent.
Nigeria's endemic political instability and ingrained
system of patronage and corruption have prevented
successive regimes from instituting structural eco-
nomic reforms that could reduce dependence on oil
and lead to future growth. Groups perceived by
leaders as potential threats to the regime have op-
posed such measures as privatization of government-
owned firms, realistic exchange rate policies, trade
liberalization, and cutbacks in the bureaucracy. Gov-
ernments in Lagos, in our view, have usually given
short-shrift to longer term considerations because of
immediate concerns of self-preservation, the struggle
to avoid ethnic conflict, the vested interest of the
bureaucracy, Nigeria's tradition of taking advantage
of time in office for personal enrichment, and de-
mands for special treatment by the armed forces.
The bureaucracy also plays an important role in
impeding reform. A permanent civil service runs the
daily affairs of the government and has provided
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Nigeria, a member of OPEC since 1971, is widely
considered by oil industry analysts to be the cartel's
weak link. Lagos's large population, low level of
development relative to other members, and its des-
perate need for cash have led to increasingly indepen-
dent actions on both pricing and production levels.
Although Nigeria is unlikely to leave OPEC unilater-
ally, we believe Lagos will increasingly set its own
course while giving tacit support to OPEC quotas and
price structures, essentially its current stance. Saudi
Arabia in the past has made loans to Lagos, and
Nigeria probably hopes that the Saudis can be ap-
proached in the future. Current market conditions
permit Lagos to pursue its own oil policy, letting both
price and production adjust to whatever the market
can bear, without tangible discipline from the OPEC
organization. However, Nigeria's independence is
tempered in part by its realization that any real
challenge to Saudi Arabia could be met by Saudi
moves to absorb Nigerian markets through price and
political pressures.
At present, we believe that Nigeria has nothing to lose
by remaining in OPEC. Some OPEC members will
continue to express annoyance at Nigeria's behavior,
but the cartel must increasingly respond to a soften-
ing oil market and not just to Nigerian intransigence.
Other OPEC countries under pressure to produce
beyond their quota have joined Nigeria in breaking
ranks with the cartel. OPEC is unlikely to single out
Nigeria for discipline, in our view, in large part
because of fear that such a move could break up the
cartel. A recent CIA analysis concludes that the
financial bind that the soft oil market has imposed on
most OPEC states is increasingly threatening the
cohesiveness of the organization
administrative continuity through several regime
changes. The growth in government control over the
economy has enhanced the position of this administra-
tive class, which guards policies that protect its urban
standard of living and opposes serious efforts to
eliminate mismanagement and corruption, according
to academic studies.
Regional, Religious, and Ethnic Conflict
The deep divisions and mutual suspicions between the
ethnic and geographic components of Nigeria often
shape and constrain government policies, usually to
the detriment of long-term national economic growth.
According to academic studies, governments since
1970 generally have been conscious of the fragile
nature of the federation and have sought to contain
the type of rivalries that led to the secession of the
former Eastern Region (self-proclaimed Biafra) in
1967, and a 30-month civil war (see figure 3).
Both the civilian government of former President
Shagari and the present military regime have at-
tempted to create a veneer of ethnic and regional
balance. Nonetheless, nonnortherners, led by the
country's two largest ethnic groups-Yoruba and
Ibo-charge publicly that the current government
represents the same northern Hausa-Fulani elite that
backed Shagari-an allegation that we and the US
Embassy believe is largely valid. Yoruba and Ibo
efforts to contain Hausa-Fulani favoritism in the
current government are only an extension of the
north-south conflict, in our view. Members of all three
of these major ethnic groups, as well as those of the
over 200 minority tribes, have a fundamental and
mutual distrust for all who are identified with a group
other than their own, according to Embassy reporting.
The Buhari regime's reluctance to take bold steps
toward economic reform is in part a reflection of its
fears about the potential reactions of nonnortherners
to the adverse effects of such reform, in our judgment.
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Figure 3
Tribal Groups and States in Nigeria
Niger
Sokoto
Benin
Kainji.(~
Res. {,
J
Kaduna A~
J---,~ L A ._ Ba~chi
N i g e r uaa~^a '~. `. I'
1`.
(Federal!
Capital
Territory)
'J? v
Y or .. Ondo
Ogun f r-~xt
PORTG- LAGOS
NOVO
IBIH
EFI
iVGongala
Cameroon
PRINCIPAL TRIBES
Hausa and Fulani (intermingled)
MINOR TRIBES
Kanuri - Tiv
Ibibio-Efik = Edo
Q Other
Gabon Congo
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Many rumors of coup plots center around cabals of
southern officers, or Middle Belt officers composed of
minority tribal groups from central Nigeria. We
believe that the northern elite is determined to retain
power, however, and any serious move by nonnorth-
erners would probably result in factional violence
within the armed forces.
Ethnic and regional considerations have led to a
number of questionable economic decisions that are
still supported by the Buhari government, according
to business and academic sources:
? The costly oil exploration undertaken by the Nigeri-
an National Petroleum Corporation in the Lake
Chad area has been driven by a desire for a
nonsouthern source of oil despite discouraging geo-
logical reports on the area. The current oil minister
has announced that all the river basins of the
country will be explored for oil in an effort to
achieve ethnic and regional equity in resource
wealth (see figure 4).
? The sites of steel facilities have been chosen with
regional balance in mind irrespective of economic
rationale, with the
result that Nigeria cannot reliably produce steel;
economists estimate that the price of Nigerian
steel-even if all projects were completed-would
be at least double the world price. The government
has retained the construction plan despite a recom-
mendation by its own advisory panel that it be
scrapped, according to Embassy reporting.
? Despite its original intention to sell off some govern-
ment companies, the Buhari regime has not done so,
largely, we believe, because of the opposition of
southerners who dominate the Nigerian civil service
and hence the management of most government-
owned corporations. Southerners suspect that plans
to privatize government-owned industries conceal a
northern plot to gain control of the economy, ac-
cording to US Embassy reporting.
Corruption
Endemic corruption also inhibits the government's
ability to implement economic policy adjustments.
Nigerians traditionally have viewed public office as
an opportunity for personal enrichment, according to
academic studies. Obligations to family and tribe
have led many in the government and government-
owned corporations to pad the payroll with relatives,
to refuse to discipline their relatives and tribal allies,
and often to divert official funds for personal and
family use.
That is not to say that the Buhari government has
ignored the impact of corruption on the country. The
military government has brought a number of officials
of the former regime to trial on charges of misappro-
priation of public funds, currency offenses, and relat-
ed crimes. During 1984, 13 state governors were
found guilty on charges ranging from foreign ex-
change trafficking to embezzlement of millions of
dollars. many
southerners believe justifiably, in our view-that the
government has been partial in these prosecutions,
citing especially the early release of prominent mem-
bers of former President Shagari's northern-based
National Party of Nigeria and the conviction of
several opposition governors. Southern political lead-
ers also suspect that senior military officers arranged
the escape of some prominent officials in the Shagari
government at the time of the 1983 coup,
We believe the system of using public office for
personal gain persists. The economic downturn even
may have resulted in a more intense scramble for a
widespread bribing of
customs inspectors by smugglers and kickbacks for
contracts and sales of import licenses. While urging
Nigerians to live by the principles of its "War against
Indiscipline" (WAI), virtually the entire Supreme
Military Council, as well as some civilian ministers,
have used their positions for personal enrichment,
Power of the Military
In addition to the limits that regional and ethnic
rivalries and corruption put on effective economic
policy reform, Buhari-or any Nigerian govern-
ment-has to assess the impact of economic policies
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Figure 4
Petroleum in Nigeria
Bight of Biafra
O Oilfield
Oil pipeline
^- Tanker terminal
50 Kilometers
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on the military. In our view, Nigeria's history of coups
and countercoups will prompt any Nigerian govern-
ment to make military spending a priority, regardless
of other political or economic goals. Persistent rumors
of coup plotting by various factions of officers have
kept the Buhari regime from applying the same
austerity to defense spending that it has to other
areas. Although the present regime has said publicly
it would cut the size of the military force by about 20
percent, the 1985 budget allows for a 15-percent
increase in defense spending-which consumes 12
percent of the budget-despite an overall budget cut
of about 10 percent. Moreover, defense expenditures
apparently have been quietly exempted from the
severe import restrictions, and Lagos has taken deliv-
ery of new MIG-21 fighter aircraft, several British
helicopters, and other equipment purchases thus far in
1985.
Nigeria's near-term economic prospects-under any
government-appear poor. The severity of Nigeria's
economic decline reflects, in our view, both past
mismanagement and such structural weaknesses as
overreliance on oil for foreign exchange and revenue,
stagnant agricultural production, and import-
dependent industry. Furthermore, the longer term
outlook is also unfavorable because we believe that in
the short term any regime would operate under the
same political constraints as the present government
and, therefore, we expect progress toward restructur-
ing the Nigerian economy to be negligible.
Nigeria's foreign exchange predicament, in our judg-
ment, is not a short-term problem. Additional reduc-
tions in imports will be necessary during 1986 and
1987 because debt service payments are scheduled to
increase, while we expect income to be stagnant at
best. Although debt service will peak in 1987, debt
obligations will be high throughout the decade, ac-
cording to analyses by major international banks.
Given the severe social and political constraints on
needed economic adjustments, we do not see much
prospect for a quick or sustained turnaround in the
Nigerian economy. Buhari's record shows that he has
tried to control the damage accruing from Nigeria's
desperate financial condition but has continued many
of the policies of past governments that we believe
have contributed to the overall decline. For example,
budget documents show that investment is still being
channeled into politically sensitive areas to satisfy
potential opponents or to salve regional and ethnic
rivalries. Steel projects, for example, singled out by
Buhari's own panel of experts as being uneconomic,
constitute the largest line item in the 1985 budget.
According to the 1985 budget, agriculture has been
granted top priority, but the amount of spending on
this sector is less than that committed under the
civilian government. While the scale of corruption is
less than under the civilians-in part because of
reduced income-we see no evidence that the waste
and fraud that characterized past governments have
been substantially reduced by this regime.
Effective economic management in Nigeria would be
difficult for the Buhari government even without the
political constraints because the ministries have a
shortage of managerial and technical personnel,
Generally chaotic condi-
tions prevail in the central statistics office that, in
addition to a shortage of skilled staff, lacks a working
computer. Thus, the government's knowledge of
trends in such key areas as international trade, debt,
and national accounts is vague at best,
With the inability of Buhari to make any constructive
improvements to the economy beyond trying to limit
import outlays, we believe Nigeria probably will
experience continued economic decline during the
1986-87 period, even if oil revenues remain steady.
We expect Lagos to do little more than attempt to
contain the economic crisis given its severe foreign
exchange crunch and inherent political instability.
We believe that rising unemployment and inflation,
severely restricted credit, and the need to increase
imports will finally produce economic pressures severe
enough to compel the Nigerian Government to agree
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to an IMF program sometime next year or in 1987.
During 1986 and 1987, amortization and interest
payments on the rescheduled trade arrears will fall
due and debt service will exceed 60 percent of export
earnings. We believe that Lagos will have to resched-
ule its debt by the end of next year and that the
preconditions set by creditors will compel Lagos to
strike a deal with the IMF. Some technocrats in the
government reportedly have urged acceptance of IMF
terms to ease the foreign exchange crisis and to
permit a broad rescheduling of debt, according to
Embassy reporting. Because the Buhari government
has limited its own options by making its anti-IMF
stance a matter of national policy, however, the
agreement might be more palatable to Nigerians if it
could be presented by a new and more popular head of
state. The urgent need to settle with the IMF could
provide strong motivation within the military govern-
ment to replace Buhari.
Nigeria's declining economic health, in our judgment,
is likely to increase the competition among various
regions for revenues with all of them most likely to be
dissatisfied with their diminished portion. The eco-
nomic decline has sharpened ethnic, regional, and
religious conflicts, in our view, and competition
among factions for power and for a favored share in
the country's diminishing wealth is escalating. Under
these circumstances, Nigeria's centrifugal tendencies
probably will grow, and regional secession or violent
clashes between regions may occur. The north is
particularly likely to look for outside help from other
Muslim states, including Libya. Libya, buoyed by
military successes in Chad, is redoubling its efforts to
use Islam as an entree to Nigeria. To date inroads
have been made where northern-based Muslims have
proved most receptive, according to a CIA study.'
Iran is also seeking greater influence in Nigeria,
according to the same study.
We believe that senior Army officers from the north
are likely to continue in control of the Nigerian
Government over the next 12 to 18 months. It is quite
possible that there will be a reshuffling of top person-
nel, however, including the probable removal-possi-
bly by force-of General Buhari. We do not expect
substantial changes in ideology or sudden policy shifts
to occur in this case, with this essentially pro-Western
group. The new government, which could include
Middle Belt officers, would be likely to institute a
pragmatic economic program that probably would
include an IMF agreement. A new head of state, such
as Chief of Army Staff Ibrahim Babangida, probably
would have some popular support and buy time for the
northern-based military regime. The longstanding
ethnic grievances would persist, however, and we
would not expect northern domination to go unchal-
lenged in the long term.
Continued economic decline could also encourage
ambitious senior military officers to seek power while
there are still spoils to be claimed, in our view. Such
pressures would contribute to the overall instability of
the present ruling group as rival leaders strive for top
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Buhari may be able to claim the support of other
officers and northern business interests and remain in
office. On balance, however, we believe Buhari proba-
bly will be jettisoned as a scapegoat for the regime's
failure to cope with the economy.
Flashpoints To Watch
We believe that there are a number of potential
sources of unrest that in the long run could lead to
either a change in government or to escalating
violence:
? Considerable discontent exists within the military
over the failure of the Buhari regime to revive the
economy and to deal with the corruption of ruling
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carefully planned coup by midlevel officers could
succeed, although we believe this is unlikely in the
near term.
? Nigeria's rapidly growing young population is un-
happy over the removal of subsidies for education
and the shrinking job market, according to US
Embassy reporting. Campus demonstrations proba-
bly will occur but, in our view, would be unlikely by
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themselves to bring down a government. Neverthe-
less, widespread student demonstrations-especially
if they lead to violent confrontation with the re-
gime-could provide the occasion for rival elements
in the military to stage a coup.
? If sectional disputes intensify, northern dissatisfac-
tion with its share of oil revenues or southern
resentment of northern domination could turn vio-
lent. Such conflict not only could remove a govern-
ment but also could set off a long period of instabil-
ity, even leading eventually to civil war.
? Ethnic conflict also shows signs of becoming more
acute, with the perception that ethnicity is the most
important factor in determining government policy
and a conviction among nonnortherners that the
regime acts in the interests of the north.
Government action that would have an immediately
adverse impact on living standards of Nigerians-a
devaluation, for example-also could lead to violent
unrest. CIA studies indicate that sudden shifts in
policy generally are more likely to generate a public
reaction than broad, negative economic develop-
ments.' A cut in subsidies on key consumer commod-
ities, for example, is a potential trigger point for
strong political backlash. In our judgment, a major
currency devaluation would have the same net effect
as removing subsidies because it would raise substan-
tially the prices of food staples for urban dwellers.
Similarly, the abolition of subsidies on petroleum
would cause a sudden increase in the cost of transport
and, therefore, also serve as a trigger point, in our
view.
Alternative Scenario
A likely alternative scenario to survival of rule by the
present conservative, northern-based elite within the
next two or three years is a countercoup by midlevel
or junior officers. Although we do not know which
specific officers might emerge to lead such a coup,
many
younger Nigerian military officers are more national-
istic than their seniors and share a common desire to
cleanse the armed forces and the government of
we believe that such a group could be expect-
ed to depart from the policies of the previous govern-
ments by taking a more nonaligned foreign policy and
by instituting highly visible changes domestically. A
new regime might, for example:
? Remove top members of the bureaucracy, despite
the resulting chaos in the administration of the
government's daily affairs.
? "Nigerianize" the oil sector by eliminating expatri-
ates, even though the loss of expertise probably
would hurt production.
? Declare a moratorium on payments-or possibly a
repudiation-of external debts, arguing that funds
should not go to Western banks at the expense of
the Nigerian people, or that Lagos should not repay
debts incurred as a result of corruption.
An attempted coup led by nonnortherners probably
would split the armed forces sectionally and ethnical-
ly. We believe that the northerners who dominate the
current regime would be certain to resist forcefully
such moves by other officers. However, this scenario
will become more probable if the escalating ethnic
and sectional divisions and corruption within the
present regime go unchecked.
We believe that the emergence of a younger, reform-
ist, populist faction composed principally of junior
officers and enlisted men is a much less likely threat
to the Buhari regime at this time because of the
practical difficulties of circumventing the command
structure and of unifying subordinate elements that
are widely separated geographically. The capacity of
younger officers to act could increase in the future,
however, if regimes headed by senior officers are
ineffective and the command structure becomes frag-
mented. The junior and midlevel officers could garner
substantial popular support if they are able to join
forces with civilians who also espouse solutions to
Nigeria's problems that are anti-Western, unortho-
dox, and highly nationalistic.
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Implications for the United States
Although Nigeria supplied only 6 percent of US oil
imports in 1984, Lagos remains an important source
of crude oil located outside the Persian Gulf and
relatively accessible to the United States and its
European allies. In the event of disruption in the
supply of oil from the Gulf, Nigeria almost immedi-
ately could increase production from the present
average of about 1.4 million barrels per day (b/d) to
1.9 million b/d and to 2.1 million b/d within three
months, according to the US Embassy.
US access to Nigerian oil seems assured, especially
under weak market conditions, although internal de-
velopments could interrupt the supply. For example,
oil production would be affected negatively by the
removal of expatriate personnel, or possibly by a
breakout of sectional violence. In our judgment, the
advent of an anti-Western government probably
would not affect oil sales to the United States,
Nigeria's largest single customer.
Lagos's deteriorating financial situation probably will
reduce the market for US agricultural exports, now
totaling about $350 million annually. Although Nige-
ria will continue to have more hard currency than
most Sub-Saharan African nations, Lagos is likely to
favor food producers who are cheaper and are willing
either to provide credit or to barter.
The endemic instability in Nigeria indicates, in our
judgment, that the United States will be faced with
frequent shifts in policy by Lagos and occasionally
difficult bilateral relations as new regimes and leaders
attempt to confront US policies in Africa to gain
support at home. Moreover, continuing political tur-
moil in Nigeria caused by-and also a cause of-
deteriorating economic conditions will provide grow-
ing opportunities for outside meddling, particularly by
Libya and Iran in the northern, Muslim areas of the
country.
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Appendix
Key Sectors of the
Nigerian Economy
Oil
Lagos has made several astute moves to protect its
markets, By obtaining
a temporary increase in its OPEC quota, and then in
October 1984 acting quickly outside of OPEC to
lower its prices in line with North Sea oil producers,
Lagos safeguarded virtually its only source of foreign
exchange. Furthermore, the government has indicated
that it will produce beyond its OPEC quota when
market conditions permit. Oil production in the first
three months of 1985 has exceeded its official OPEC
quota of 1.3 million b/d, sometimes by as much as
400,000 b/d, according to US Embassy reporting.
We believe that Lagos will continue to maximize
production regardless of OPEC quotas to the extent
that it can sell its oil and will rely on increased use of
such techniques as discounts, special trades, and spot
market sales by its foreign oil company partners to
market its oil.
Recent contracts with
several LDCs have included discounts or extended
credit, as did an agreement with the Soviet Union for
100,000 b/d for apparent resale to Cuba, according to
the Embassy The United States
is still Lagos's largest single customer although US
purchases have fallen from almost 1.1 million b/d in
1979 to 206,000 b/d in 1984. Nigeria as a supplier of
oil to the United States has gone from second to sixth
over the same period.
Nigeria's oil income is unlikely to grow significantly,
in our judgment, primarily because Lagos is totally
dependent on the export of crude oil and has not
diversified into "downstream" activities. Unlike many
oil-exporting countries, Nigeria has neither developed
a refining industry for export nor purchased refinery
operations abroad. Lagos currently imports about 20
Figure 5. Minister of Petro-
leum and Energy, Professor
Tam David-West. '1 have my
two legs in OPEC and my two
eyes on the North Sea. "F_
percent of domestically needed refined products, al-
though planned refinery expansion could provide self-
sufficiency by 1986.
Technological changes in the refining industry world-
wide have negative implications for Nigeria's future
earnings, The rapid rise
in the price of high-quality, light crude oil during
1974-81, which is the bulk of Nigerian production,
encouraged the development of new refining technol-
ogies that use less expensive medium and heavy
crudes. New refining processes have grown most
rapidly in the United States and have contributed to
the distinct decline in US purchases of Nigerian oil.
Nigerian National Petroleum Corporation (NNPC)
data indicate that in 1977 Nigeria exported 37 per-
cent of its production to the EC compared with 58
percent in 1983. During the same period, the US
share declined from 40 percent to 22 percent.
NNPC claims crude oil reserves of 16.8 billion barrels
or about 33 years of production at the 1984 rate of 1.4
million b/d. new exploit-
able wells exist in the Niger Delta area, but explora-
tion has been discouraged by the weak international
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oil market and by the high cost of projects in Nigeria.
Despite unfavorable geological surveys, the NNPC
has spent $37 million in thus far unsuccessful explora-
tion in the Chad Basin area.
Natural Gas
Lagos would like to develop its natural gas resources
as a means of diversifying sources of foreign exchange
earnings. However, high investment costs and weak
markets have discouraged foreign oil companies from
developing Nigeria's natural gas,
Oil companies continue, as they have for
the past 27 years, to burn off the natural gas associat-
ed with oil production, despite a government decree
that prohibited flaring after 1983. In 1983 over 90
percent of associated gas, or 13 billion cubic meters,
potentially worth $4.6 billion was flared, according to
a World Bank study. Companies still have not
brought in the equipment to reinject the gas into the
oil wells as a short-term solution.
Several ambitious gas development projects are
planned, although funding problems may eventually
scuttle them:
? The Bonny LNG project, the most ambitious of the
natural gas plans, even after being scaled down from
a projected cost of $14 billion to $6.5 billion,
assumes-unrealistically, we believe-the availabil-
ity of external financing and the existence of a
market in Europe in the 1990s. Nonetheless, fund-
ing for preliminary studies is in the 1985 budget.
? The government has decided to go ahead with the
construction of a petrochemicals complex near Port
Harcourt with a completion target of 1990, accord-
ing to public statements by Nigerian energy offi-
cials. Encompassing 9 square miles and including
construction of a new town for 30,000 people at a
currently projected cost of $2 billion, the project is
supposed to make Nigeria self-sufficient in a num-
ber of plastic products and to reduce Lagos's annual
$650 million bill for chemical imports. Again, oper-
ators will be expected to provide their own
financing.
? A fertilizer plant at Onne, in the planning stages for
years, is designed eventually to supply 60 percent of
the projected demand for fertilizer in Nigeria, using
natural gas that is now flared.
Until 1970, Nigeria was a predominantly agricultural
country self-sufficient in food and producing for
export such crops as cocoa, palm oil, and peanuts.
Although 70 percent of the labor force still works in
farming, agriculture contributed only about 22 per-
cent to total GNP in 1984 compared with about 70
percent at independence in 1960. Total food produc-
tion, however, has not kept pace with population
growth. The falling production of staple crops, now
below the 1975 level, is particularly acute with esti-
mated per capita production of staples in 1984 below
that of 1972, according to the Nigerian Central Bank.
Rapid urbanization is one of the fundamental factors
in the decline of Nigerian agriculture. The urban
population, which had been only 13 percent of the
total in 1960 but reached 21 percent by 1982, contin-
ues now to grow by about 5 percent per year, accord-
ing to the World Bank. By providing food imports at
prices with which domestic produce cannot compete,
Nigerian governments have favored the needs of city
dwellers over the longer term concerns of agricultural
development, in our judgment.
Export crop production also has dropped precipitous-
ly. Exports of cocoa, the only nonoil foreign exchange
earner of any significance, were down 88 percent in
1983 from their peak in 1965, according to IMF
statistics. Nigeria at one time accounted for 25
percent of the world supply of palm oil; it now
actually imports it. As late as 1965, fully 75 percent
of exports by value were agricultural products; now
they comprise under 3 percent of Nigeria's exports.
The negative trends in Nigeria's agricultural sector
probably cannot be reversed soon, or even slowed,
given Lagos's desperate financial situation. Although
the Buhari government has assigned top priority to
agriculture, the 1985 austerity budget gives even less
to agriculture than was allocated in 1982, according
to statistics published by the Nigerian Central Bank
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(see figure 4). Reduced government spending on agri-
culture and the country's sharply curtailed capacity to
purchase fertilizers and other imports, in our judg-
ment, ensure that per capita agricultural production
will continue its decline.
Policies
Lagos's agricultural policies have been targeted at
large-scale farms under government direction and
have failed to assist the small holders that account for
90 percent of domestic production,
Nigeria's policies, moreover,
have discouraged the production of crops for export,
marketing boards, with a monopoly on the sale of
commodities abroad, pay very low prices to producers.
Recent price increases still have not kept pace with
the increase in world prices, according to Embassy
because government
reporting.
Nigerian manufacturing depends on imports for about
70 percent of its raw materials because successive
governments have consistently supported import sub-
stitution rather than encouraging the development of
resource-based industry, according to economic stud-
ies. Consequently, the Buhari government's import
restrictions have forced many firms to operate at less
than 50 percent capacity during 1984, according to
US Embassy reporting, and the situation is likely to
worsen in the second half of 1985. Companies with
connections within the government have claimed most
and government projects vie with other private firms
for the remaining licenses:
of the import licenses,
? Volkswagen, one of five automobile assembly plants,
has been able to acquire less than 20 percent of its
components locally and has produced only 70 cars
per day in late 1984 compared with 130 cars per day
in 1981.
? The steel plant that supplies other steel mills in
Nigeria now operates less than two days per month,
since most of its raw materials are imported. Steel
production nationwide grinds to a halt whenever
foreign exchange becomes scarce.
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