Nigeria came about in 1914 after the British merged the Muslim north and Christian south to form the modern state of Nigeria, formal independence from the United Kingdom occurred in 1960. Today, it is home to Africa’s largest population of 138 million scattered amongst 250 ethnic groups with approximately 50 percent Muslims and 40 percent Christian. Nigeria as a third world country is well known for its corruption and abuse of oil wealth as years of military rule have long been accused of skimming billions of US-dollars from foreign exchange reserves and leaving the nation with widespread poverty and an inadequate infrastructure. Presently, Lagos a city of 8 million is projected to be one of the world’s largest by 2020 as it is in need of infrastructure upgrades in areas coupled with challenges with diseases and violent conflict. These conditions paint a picture for most of Nigeria. Nigerian demographics reflect a young nation with 45 percent of the population under age 14 and life expectancy is cut short at 48 years due to the impending AIDS crisis in Nigeria where 5 percent of the adult population are infected.
POLITICS: struggling democracy. After April 2007 election, Nigeria experienced a peaceful civilian transfer of power to President Umaru Musa Yar’adua. Year 1999 saw a return to democracy with the election of Mr. Olusegun Obasanjo as President, Nigeria’s first civilian President in 15 years. Next presidential election is scheduled for April 2011. For a complete detailed history and political analysis of Nigeria, please contact us at BankINTRO.com for further details.
. ECONOMY: performing well. Ten years ago in 1998 at a time of record low oil prices, Nigeria was in severe financial difficulties encumbered in record sovereign debt at 35 billion USD. Today, Nigeria has had a stunning economic turnaround attributed to high world crude oil prices. Nigeria rich in petroleum resources as Nigeria is a net energy exporter. The oil and natural gas industry is basically Nigeria’s only source of income. Oil industry represents 20 percent of GDP, 80 percent of government revenues and 95 percent of foreign exchange earnings. Privatization policies are in place along with diversification of the economy into textiles, mining, chemicals & banking. Subsistence agricultural forms a large component of the economy.
The large national oil wealth has yet to trickle down to the citizens of Nigeria as 55 percent of the population lives in poverty. Nigeria’s infrastructure is in immediate need of investments (schools, hospitals, etc.). Nigeria’s industrial infrastructure is limited.
Now flush with cash, Nigeria can now invest in the nation’s infrastructure which is key to future long term economic growth. Remittances play a large part of the economy positively helping the balance of payments position as remittances are worth a huge 4 to 5 percent of GDP per year. The United States is Nigeria’s largest export market as 50 percent of Nigeria’s oil exports are directed to the US.
Oil & Natural Gas Industry
Africa’s largest oil producer, world’s number 8 oil exporter. Nigeria is presently an OPEC member with an oil production quota of 2.2 million bpd (2008), potential capacity of 3 million bpd. Due to the large capital investments of the oil industry where 95 percent of the producing wells are joint ventures between the Nigerian government and foreign owned major oil companies. Reforms are necessary for the oil industry. Oil exports for Nigeria were valued at 52.5 billion USD in 2006. Surprisingly, Nigeria currently uses very little oil itself
Nigeria by 2010 will have oil production projected at 2.6 million bpd. Nigeria’s current proven oil reserves total 36 billion barrels and growing while natural gas reserves are estimated to be 5.2 trillion cu m (2006). Within the Gulf of Guinea, more reserves yet to be outlined plus oil producing agreements with nearby Sao Tome and Principe where massive oil reserves are newly discovered. Greater natural gas potential, industry must realize efficiencies.
Of significant concern to Nigeria’s oil production are armed militant attacks against oil installations, kidnapping – ransom, and extortion. Conflicts in the Niger Delta have set back Nigeria’s oil production and reduced oil exports by 20 percent during 2006-07.
May 2008, the Nigerian government is placing demands for upwards of 2 billion USD in back taxes on foreign oil companies such as Shell, ExxonMobil after a review of contracts covering large offshore oilfields.
Economic Statistics
As measured by purchasing power parity, total GDP stands at 295 billion USD (2007) with corresponding GDP/Capita at 2200 USD. As measured by market prices, total GDP amounts to 127 billion USD (2007). GDP growth rates have 2007 at 6.3 percent, year 2008 at 9 percent, 2009 estimated at 8.3 percent. Inflation for 1999-2000 was running at 10 to 15 percent, 2001 inflation at 19 percent while year 2002 inflation came in at 14 percent. Recent inflation quotes have it now in single digits with year 2008 projected at 8.6 percent, 2009 at 8.5 percent. Fiscal budget is now in surplus at 6.2 percent of GDP for 2008 well up from year 2007 at 0.4 percent. The current account has improved significantly since 2002 now showing a surplus of 4.7 percent of GDP, 2009 projected at 2.4 percent. The trade component is in surplus at 31.5 billion USD. Foreign external debt has declined dramatically from historical high levels 10 years ago now down to a low level of 3.3 billion USD (2007). debt is at 15 percent of GDP. Large agricultural sector as it employs 70 percent of the labor force although Nigeria is not self sufficient as it is a net importer of food. Both cocoa and rubber account for the majority of the other 5 percent in exports. Official unemployment stands at 5.8 percent. Largest export market is the United States at 49 percent.
POSITIVES: low to moderate inflation, non-oil economy showing good GDP growth, great mineral wealth potential, 32.3 million cellular phones, and sovereign debt deal in 2005 drastically lowered Nigeria’s external debt. CONCERN: Niger-Delta conflict, high population growth, fair literacy levels, domestic electrical shortages at times, corruption is prevalent at all levels, very high infant mortality rate, importer of food, AIDS/HIV.
BANKING SYSTEM: being modernized from a troubled past. p until 1995 when inflation peaked at 73 percent, the central bank was monetizing the fiscal deficits which led to very high inflation levels. A terrific rebound in international reserves from 7.2 billion USD in 2002 to 54 billion USD (January 2008). Nigeria’s financial sector is growing positively, development of capital market activities. Inter-Bank call interest rates for Nigeria as of late May 2008 stood at 6.25 to 10.25 percent. Please contact BankINTRO.com for further details.
REGIONAL: ECOWAS
The Economic Community of West African States ‘ECOWAS’ which consist of 15 regional countries in West Africa are planning to introduce a common. Please contact us for further background details regarding ECOWAS.
KNOWLEDGE: contact BankINTRO.com for further information.
CURRENCY: ISO symbol ‘NGN’, Nigerian naira. At time of review on June 23, 2008, the Nigerian naira had an exchange value of 117.77 NGN to the US-dollar (USD) and/or 182.43 NGN to the Euroland Euro (EUR). Year 2004, unification of the official and parallel market exchange rates of the Nigerian naira was formalized. During September 2007, the authorities announced plans to drop two zeros from the denomination in a currency revaluation but those intentions are on hold. The currency regime follows that of a managed float, during September 2007 the authorities allowed the NGN to float more freely against the USD.
CURRENCY HISTORY: the naira came into inception in 1973 when it replaced the former pound at a rate of 2 NGN to 1 pound. During the time of military rule, the naira was tremendously overvalued particularly in light of low world oil prices in 1998. Nigerian insiders with the help of currency controls were able to buy at the cheap official exchange rate and sold at the black market rate. In effect, currency controls were an incentive for cheating and profits for those dishonest insiders. Before the transition to civilian rule in 1999, the naira crashed in value from its peg of 21.8 to the USD to the 90 NGN to the USD range.
Historical official exchange valuations for the naira include: year 1973 at 0.658 NGN to 1 USD, 1975 at 0.616, 1979 at 0.596, 1980 at 0.55, 1983 at 0.724, 1985 at 0.89, 1986 2.02, 1987 at 4.02, 1989 at 7.39, 1992 at 17.3, years 1994-98 at 21.89 (USD peg), 1999 at 85.98 (devaluation – record low oil prices), 2000 at 103, year 2001 at 111, January 2002 at 115, February 24, 2003 at 128.7, year 2004 at 132.9, 2005 at 132.6, 2006 at 127.3, 2007 at 127.4. Some historical black market exchange quotes for the naira include: year 1980 at 0.9 NGN to 1 USD, 1990 at 9.3, year 1993 at 56.8, 1994-98 at around 80, years 2000-03 at upwards of 10 to 20 percent higher than the official rate.
Historical currency crisis dates include June 1986, January 1989, July 1991 and 1998-99.
CURRENCY FORECAST: steady modest appreciation. Nigeria has to incur large foreign investment to finance capital investments in the petroleum industry that has resulted in large borrowings abroad. With current high world oil prices and plentiful capacity, Nigeria has recently benefited from its oil and natural gas resources with windfall revenues allowing more monies towards debt repayments. Improving political management with less corruption, an increase in social spending & infrastructure development will see living standards improve. .
BankINTRO.com’s 12 month currency outlook is positive with the naira projected to 110 NGN to the USD. With its large and growing international reserves with high import coverage ratios, huge oil windfalls will have to be smartly redirected by the Nigerian authorities into infrastructure, health & education, etc. The naira is now underpinned by a solid reserve position, basically no external debt, lower inflation and strong GDP growth bodes well for future currency stability. Overall, Nigeria has the potential with its large population size to be a significantly larger economy, huge possibilities lie ahead.
However, risks remain. Civil disruptions between the Muslim north and Christian south provide for an increased level of domestic risk into the economy. , Nigeria has produced over 300 billion USD equivalent in oil wealth. Corruption and inadequate income redistribution squandered much of this wealth. Fortunately, the country now finally seems to be on a more sounder political framework with much improved policies. Much yet has to be done in order to quell the rebel attacks as it is the inability to spread this wealth amongst the citizens that is the root cause of these oil attacks. The political will has seemed to have changed to the positive for social redistribution of oil wealth. Nigeria must consider avoiding directly linking high levels of national spending from oil revenues in order to escape the nasty historical boom bust domestic economic cycles. Perhaps set up a national oil fund such as Norway and spend excess monies during slow economic times, evenly spread the wealth in order to sustain steady GDP growth in order to reduce poverty.
To Nigeria’s credit, the authorities have used excess oil savings over the last few years to pay down external debt in a more balanced approach rather than the temptation for large immediate spending plans to even the economy. The net result has been much improved macro-economic variables and a more stable Nigerian naira currency. Our research conveys a relatively optimistic future for Nigeria and its currency.
UPDATED: June 23, 2008
