Nigeria s Competitiveness In The Global Economy 2 No 2 April 2006.pdfNigeria s Competitiveness In...

ZENITH ECONOMIC QUARTERLY : : April, 2006 1

E D I T O R I A L T E A M

CHRIS 'E ONYEMENAMEditor-in-Chief

MARCEL OKEKEEditor

TONI KAN ONWORDIAssistant Editor

EUNICE SAMPSONAssistant Editor

MICHAEL MUSAProduction Assistant

UKUT SYLVESTERROTIMI AROWOBUSOYE

Layout/Design

E D I T O R I A L B O A R D O F A D V I S E RSUDOM EMMANUEL

GIDEON JARIKREPAT NWARACHEOCHUKO OKITI

UGO ANYANWU

ZENITH ECONOMIC QUARTERLYis published four times a year by Zenith Bank Plc.

The views and opinions expressed in this journaldo not necessarily reflect those of the Bank.

All correspondence to:The Editor,

Zenith Economic Quarterly,Research, Economic Intelligence &

Franchise Enhancement Group,Zenith Bank Plc

7th Floor, Zenith HeightsPlot 87, Ajose Adeogun Street,

Victoria Island, Lagos. Tel. Nos.: 2781046-49,2781064-65| Fax: 2703192.

E-mail: [email protected],[email protected]

ISSN: 0189-9732

C O N T E N T S

PERISCOPEKey indices and sectors of the economy areexamined together with the impacts of eco-nomic policies and programmes. Pg. 4 - 10

POLICYThe code of corporate governance for Banks,issued by the CBN is reproduced. Pg. 11 - 17

ISSUES (I)Nigeria’s competitiveness in the globaleconomy is examined. Pg. 19 - 30

ISSUES (II)The challenges of budgeting and budgetimplimentation are explored and discussed.Pg. 32 - 38

FOREIGN INSIGHTS (I)Takes an insight into the Chinese -Nigerian trade, and explores its implicationsfor the future. Pg. 41 - 44

FOREIGN INSIGHTS (II)Examines the evolving issues of corporategovernance in development financial insti-tutions. Pg. 46 - 49

FOREIGN INSIGHTS (III)Deals with the issue of effective communi-cation between the private and public sec-tors in driving the reform process. Pg. 51 - 54

GLOBAL WATCHThe varied impacts of the high and risingprices of crude oil on various economies arex-rayed. Pg. 56 - 61

FACTS & FIGURESExamines economic, financial and businessindicators. Pg. 63 - 68

ZENITH ECONOMIC QUARTERLY : : April, 20062

From The Editorial Suite

C‘Competitiveness’, that word typically used to describe the de-gree of superiority by which a firm or a nation produces goods,services and related functions when compared to peers, has beenwith man since prehistoric times – remember Darwinian and Malthu-sian theories of survival of the fittest and the ‘Man in a state ofnature’ postulation of Thomas Hobbes.

In modern times, the defining thrust is superior performancebased on certain perhaps identifiable advantages or competitiveedge. Nations world over can be differentiated by their capacityto compete, measured in universally accepted criteria. The WorldEconomic Forum (WEF) Annual Competitiveness studies havesuggested at least three indices namely, macroeconomic stability,quality of public institutions and technological progress.

That is correct. However the essence lies elsewhere: Con-viction! Global competitiveness is all about conviction. It’s aboutthe conviction of leadership. For example, there were times (es-pecially the 1970s) when goods imported intoNigeria from Japan were considered as inferior orsubstandard. Today Japanese products rankamongst the best world wide. So convinced andaccomplished are the Japanese that they coinedthe slogan translated as ‘good thinking, good prod-ucts’. Truly the ‘Japanese miracle’ and the Singaporetransformation tagged ‘from third world to first world’demonstrate the power of conviction in fosteringa competitive edge. Today we speak of the ‘AsianTigers’, the ‘Japanese miracle’ and the ‘Singaporetransformation’.

Through conviction you commit and developthe staying power that enables you to address those constrains tocompetitiveness and thus generate greater competitive advan-tage. And the Chinese have demonstrated the benefits of convic-tion- a GDP growth rate averaging 7% per annum for over adecade now. As Toni Kan Onwordi highlighted in his contribution“Sino-Nigerian Trade: Implications for the Future” NapoleonBonaparte, the great French Emperor had told the world over twohundred years ago: ‘let China sleep, for when she awakes, she willshake the world’. That prediction is coming true by the day princi-pally because China remained focused based on the convictionthat it had tremendous untapped competitive edge. The awesome-ness of her competitive edge has elicited trade policy adjustmentsin USA (on steel) and the European Union (on fabrics especiallyjeans wears, amongst others) in the recent times.

Conviction breeds resolve. A strong commitment to ‘turnthings around’, by doing something that would add value, in spiteof the seeming insurmountable constrains. That is where Nigeria’srecent experiment at pervasive sector reform belongs. Nigeriahas traversed the paths of competition in different modes – as anoutsider when it was under colonization, as a rookie, when itbecame a strong contender in the export of agricultural produce,as a fan and member of the supporters club, when it turned to its oilmoney to support the rise of modern economies through its west-ernized consumption patterns and expenditure profile.

Nigeria’s economy was not globally competitive, in spite ofits oil and gas sector. All parameters for evaluating global com-petitiveness demonstrated this. In particular, cost of doing busi-ness was very high and BYOI- ‘build your own infrastructure’ –was the order of the day. A holistic approach to adequately addressthis was what it needed and the NEEDS stand out as an importantand timely response. It is important that this document was widelyreviewed. The lessons are aptly captured by the contribution ofHugo Rivas

Truly, things are changing, (lets not talk about how we aremanaging the trade-offs.). First it seemed very inappropriate that aPresident with so much to do back at home would globe trot insearch of debt relief or cancellation. But it came. With a conditionthough. Thanks to the soaring prices of crude oil, paying a whop-ping $13bn was achieved. And like a flash in the pan, the Paris ClubDebt is gone, gone for good! Then the sector reforms and the

future promise it holds for a sustainable growth pathfor the economy- telecommunications sector, thePensions reform act, the Power sector reform Act,the various Tax Administration reforms, privatization,power, etc.

The ongoing Banking sector reforms have shownthat Nigeria has the capacity to ‘catch up’ with globalbest practices (thanks to Mercedes Suleik for his piece,we have also included the code of corporate gover-nance recently published by the Central Bank of Ni-geria.) and compete strongly –FDI inflows into thenon-oil sector have gone up, home remittances have

gone up, etc. It’s good news that Nigeria is becoming, once again,attractive to FDIs, and thus competitive.

The next assignment is very critical: at least we passed the firsttest in 1999, and the second in 2003; we must somehow get it rightagain come 2007. Only then would the gains of sector reforms andforbearance of today by the citizenry translate into sustainablegrowth and economic development. Not just the type that willcompare Nigeria favourably with other African countries. No, agrowth path that would place Nigeria truly, globally, as Africa’sChina, Asia’s Singapore and, may be, Europe’s Germany. And soDr. Oshikoya’s lead contribution, the central theme of this editionfocuses on this issue of competitiveness and indicates that althoughso much has been done, so much needs to be done to attain thatlevel of global competitiveness befitting of the status of Nigeria asAfrica’s giant.

Dr. Boniface Chizea’s contribution on the Federal Budget 2006highlights the sustained effort, through the budgetary process, atkeeping faith with the reform process, Mrs. Eunice Sampson’spiece highlights the impact of crude oil prices on global eco-nomic growth and as usual, the ZEQ Databank offers a brief reviewof the economic performance in the first quarter of 2006.

The ongoingBanking sectorreforms haveshown that

Nigeria has thecapacity to ‘catchup’ with globalbest practices.


T

PERISCOPE

* By Marcel Okeke

The first quarter 2006 was marked by signifi-cant developments regarding Nigeria’s exter-nal debt reduction, banking sector reform;progress in solid minerals sector, pensions,tax and port reforms; a leap in oil export pro-ceeds and its concomitant accretion in foreignreserves, among others. It was, in fact, duringthe period that several buds of the pervasivereforms sprouted, blossomed and actuallybloomed. All segments of the new pensionsscheme courtesy of the Pension Reform ActNo.2, 2004, took shape and became opera-tional; the process of liquidating the 14 un-re-capitalized banks under the first phase of theCentral Bank of Nigeria (CBN) consolidationprogramme commenced in earnest during thequarter, just as the nation received afavourable rating (BB-) from global credit rat-ing agencies—Fitch International and Stan-dard & Poors (S & P)—an auspicious and semi-nal reckoning for the country.


PERISCOPE

ECONOMIC INDICATORSAll core economic indicators either hit or surpassed theirtargets during the quarter under review. Inflation, ex-change and interest rates moved in desired directions:the year-on-year inflation came down and stood at about12 per cent in March. This is indicative that the target of asingle digit inflation rate could be realized and sustainedduring the course of the year.

Interest rates trended downwards in the period underreview as a sequel to the improved liquidity situation aris-ing from the bank recapitalization that was rounded up inDecember 2005. Average prime lending rate varied from13 per cent to 18 per cent during the quarter while average7-day NIBOR declined from about 12 per cent at the end of2005 to 10.0 per cent at the end of the first quarter 2006.

The foreign exchange market underwent a radical re-form during the quarter under review: a new method forthe sale of foreign exchange, Wholesale Dutch AuctionSystem (WDAS), was introduced in February by the Cen-tral Bank of Nigeria. This reform measure which has fur-ther liberalized the foreign exchange market, aims to movetowards exchange rates unification of the official and par-allel markets. Some key elements of the measure includereduction in documentation in the official market, accessof Bureaux de Change to the official foreign exchangemarket as well as a 100 per cent upward review of Per-sonal Travel Allowance (PTA) and Business Travel Allow-ance (BTA). It also implies the CBN dropping its two-yearold policy of maintaining a band of plus or minus three percent within which the domestic currency would be allowedto appreciate or depreciate. All these have improved theefficiency of the forex market, leading to the virtual con-vergence of the inter-bank and official exchange rates;the high premium in the parallel market rates comparedto the official rates, though dropping, is, however, yet tobe wiped out. Overall, the CBN has become a ‘marginal’

player in the market while the exchange rate re-mained generally stable throughout the quarter—at an average of N129 to the dollar in the officialmarket.

In the capital market, activities remained up-beat during the first quarter 2006, essentially drivenby the recapitalization efforts of insurance com-panies and the second phase of consolidation inthe banking sector, kick-started by Zenith Bank’sjumbo public offer. Specifically, Zenith Bank’s pub-lic offer of three billion shares at N16.90 per shareissued to raise about N50.7billion opened on Feb-ruary 6, and lasted till March 20. During the quar-

ter, a number of insurance firms made hybrid offers andovertures for mergers and acquisitions in pursuit of theirmandatory re-capitalization, with February 2007 as dead-line. JAIZ International Bank, a new bank that is anchoredon no-interest-charges-for-facilities also made an entryinto the market. For the insurance sector, quite a few merg-ers and acquisitions were being negotiated, just as a goodnumber of the operators resorted to public offers in thecapital market. The Securities and Exchange Commission(SEC) on March, 20, issued a directive, ordering the de-listing of acquired and merged banks from the offi-cial list of the Nigerian Stock Exchange—withApril 18, 2006, as deadline. SEC also directed‘surviving banks’ to immediately appointlead registrars for their merged entities.

Also, the monthly issuance of the3rd FGN bonds lasted throughoutthe quarter under review. TheFederal Government be-tween January and June2006 would, throughthe bonds, raise a to-tal of N155 billion.

SECTORIALOVERVIEW

PensionsDuring the first quarter 2005, some mile-stones were recorded in respect of the actu-alization of the new contributory pensionscheme envisaged by Pension Reform Act 2004.Specifically, Pension Fund Administrators (PFAs), Pen-sion Fund Custodians (PFCs) and a Closed Pension FundAdministrator (CPFA) that were issued Approval-in-Prin-ciple (AIP) by the National Pension Commission (PenCom),

In the quarter underreview, Nigeria’s

foreign debtand external reserves

began an inverserelationship trend,

such that as theformer was

decreasing, the laterwas recording

significant accretion,monthly.


PERISCOPE

were each presented with a license. On the occasion onFebruary 20, 2005, this first set of operators in the pensionindustry under the Act, comprising 12 PFAs, 4PFCs and aCPFA, received their licenses. The PFAs include: IBTC Pen-sion Managers Limited, Premium Pension Limited, PensurePFA Limited, Sigma Vaughn Sterling Pension Limited, Pen-sion Alliance Limited, ARM Pension Managers Limited andFirst Alliance Pension & Benefits Limited. Others are:Trustfund Pensions Plc, First Guarantee Pension Limited,Legacy Pension Managers Limited, NLPC Pension FundAdministrators Limited and Crusader Pensions Limited.

The PFCs include: Zenith Pension Custodian Limited,UBA Pension Custodian Limited, First Custodian NigeriaLimited and Diamond Pension Fund Custodian Limited.The Shell Nigeria Closed Pension Fund Administrator isthe only CPFA. The licensing of the pension industry op-erators is however ongoing, according to Mohammed K.Ahmad, the Director-General, PenCom, in his remarks atthe license presentation ceremony. To qualify for licens-ing, each of the PFAs was registered as a limited liabilitycompany with a minimum paid up capital of N150 million.Similarly, each of the PFCs was registered as a limited

liability company and licensed as a financial institution,with a minimum net-worth of N5billion and a balance sheetof not below N125 billion. By the close of the first quarter,most of the operators licensed had set up structures andcommenced operations in various parts of the country.

Some of the core objectives of the Pension Reform Act2004 are to:

1. Ensure that every person who has worked in eitherthe public or private sector receives his retirement ben-efits as and when due;

2. Assist improvident individuals by ensuring that theysave to cater for their livelihood during old age;

3. Establish a uniform set of rules and regulations forthe administration and payment of retirement benefits inboth the public and private sectors; and

4. Stem the growth of outstanding pension liabilities.

FOREIGN DEBT/FOREIGN RESERVEIn the quarter under review, Nigeria’s foreign debt and

external reserves began an inverse relationship trend,such that as the former was decreasing, the later was


PERISCOPE

recording significant accretion, monthly. Towardsthe consummation of the debt treatment agreedbetween Nigeria and members of the Paris Club(PC) of Creditors, the country worked hard on thePolicy Support Instrument (PSI) all through the firstquarter—a step that culminated into her debt exitplan being endorsed by all individual members ofthe (PC). Under the IMF-supported PSI, at thecompletion of the debt deal between Nigeria andthe PC, the country’s total external debt stock hasnow dropped to about $5billion.

The country’s gross external reserve main-tained its growth streak all through the quarterunder review, rising from $28.28billion at end-December2005 to $31.33billion in January 2006. It further rose to$43.32billion by end-February 2006, hitting $36billion by theend of the quarter. This sustained significant growth in thereserves is attributable to the phenomenal rise in the pricesof crude oil in the international market. By the close of thequarter, the price of Nigeria’s crude had climbed to over$65 per barrel, almost double the $35 per barrel bench-mark for the 2006 budget. Although the country experi-

enced drop in the volume of oil production due to mili-tant youths’ disturbances in the Niger Delta, the rise

in the price of oil made up the shortfall in thevolume of production.

BANKING SECTORThe first quarter 2006, for the bank-

ing sector, was studded withfallouts and upshots of the

first phase of the con-solidation in the in-

dustry whichclosed Decem-

ber 31, 2005. On Janu-ary 2, 2006, the Central

Bank of Nigeria announcedthe names of 25 banks that met

the N25 billion minimum capital.These 25 emerged from 75 out of the 89

banks that existed as at the take-off of theconsolidation on July 4, 2004; 14 could not re-

capitalize and have been put up for liquidation. How-ever, some of the emerging 25 banks have entered into

negotiations with the CBN with the view to “cherry pick-ing” or acquiring the assets and liabilities of a few of thosefacing liquidation. It was this trend that saw Diamond Banktake up African International Bank while ECOBANK Plcassumed responsibility for the assets and liabilities of All

States Trust Bank.These are however seen in some quarters as aspects

of market-induced second phase of consolidation in thebanking industry. Other aspects of the new trend includethe quest by a number of banks to meet the CBN’s re-quirements to join others in the management of Nigeria’sexternal reserves. Towards this end, Zenith Bank, duringthe quarter under review, consummated a memorandumof understanding (MoU) with JP Morgan Chase. Other lead-ing banks that are known to be pursuing similar deals withsome Nigerian banks include Goldman Sachs, UBS, HSBC,CitiBank, Merrill Lynch and Standard Bank of UK. On thewhole, about five Nigerian banks have already signed JointVenture Agreements with foreign fund managers/banks.All these alliances and alignments are aimed at qualifyingas global custodians for Nigeria’s foreign reserves and byso doing, propping a number of Nigerian banks to worldclass stature through mutually beneficial ‘mentoring’.

During the first quarter, the CBN released its Code ofCorporate Governance for banks, with a highlight thatgovernment’s direct and indirect equity holding in any bankshall not exceed 10 per cent by the end of 2007. It main-tains that any equity holding above the stipulated 10 percent by any investor shall be subject to the CBN’s priorapproval. Another highlight of the Code is the abolition ofthe head of the board also acting as head of management,and the combination of the post of chairman and chiefexecutive officer of any bank. The Code does not recog-nize the post of executive vice-chairman. Also, two mem-bers of the same extended family should not occupy theposition of executive directors of a bank at the same time.

SOVEREIGN RATINGThe sovereign credit rating by two reputable agencies,almost contemporaneously, early in the first quarter 2006,was both a heartening gauge and boost to the Nigerianeconomy. First, Fitch Ratings assigned Nigeria long-term

This sustainedsignificantgrowth in thereserves isattributable tothe phenomenalrise in the pricesof crude oil inthe internationalmarket.


PERISCOPE

foreign and local currency default ratings of BB- (BB mi-nus), both with stable outlook. It also assigned a ‘BB’ ratingto Nigeria’s Par Bond maturing in 2020 and a country ceil-ing of BB- (BB minus). Similarly, Standard & Poor’s (S & P)assigned long-term Nigerian debt in foreign currency arating of BB- (BB minus).

According to the two agencies, Nigeria’s ratings wereunderpinned by the current Government’s commitmentto economic reforms, including measures to improve gov-ernance, tackle corruption, accelerate privatization andrationalize the banking system. Both Fitch and S & P notedthat the establishment of an oil-based fiscal rule wherebyall oil proceeds above a reference price (of $35 per barrelfor 2006) are deposited into an Excess Revenue Accountat the Central Bank of Nigeria and the Fiscal Responsibil-ity Bill already submitted to the National Assembly, repre-sent an important strengthening of the macroeconomicpolicy framework. Both agencies further noted that thecurrent administration’s reform programme is also sup-ported by InternationalFinancial Institutions(IFIs), including the IMFunder a Policy Support In-strument (PSI) arrange-ment. This enabled theGovernment to reach anagreement on resolutionof outstanding debt obli-gations with the Paris Clubmembers in October 2005.Said Fitch: “the currentadministration’s ambi-tious reform programmeand regularization of rela-tions with the Paris Clubof Creditors mark an im-portant step in Nigeria’srehabilitation with the in-

ternational financial community”The ratings by Fitch and Standard & Poor’s, although

below ‘investment levels’ are a significant milestone inthe annals of the country’s economic development. In-terestingly, the country was rated at par in several re-spects with such emerging economies as Brazil, Ven-ezuela, Turkey, Ukraine and Vietnam—all otherwise per-ceived to be better than Nigeria. This implies a leap inNigeria’s business-worthiness; attracting more ForeignDirect and portfolio investments as well as better con-sideration by creditor and trading nations. All these alsopose high responsibility on Nigeria, namely the challenge

of sustaining or even surpassing the current rating.

AGRICULTUREThe high tempo of activities in the agricultural sector allthrough 2005 was sustained in the first quarter 2006 throughvarious initiatives. At both the Bankers’ Committee andStakeholders’ Meeting on Financing of Agriculture held inFebruary, it was agreed that interest rate on credit to theagricultural sector be reduced/subsidized. Sequel to this,a Presidential tax waiver was gotten for interest earningsfrom agricultural loans in 2006 fiscal year. In addition, theCBN would subsidize the 14 per cent approved interestrate for agricultural loans by six per cent and the benefi-ciaries would pay the balance of eight per cent. This isaimed at encouraging banks to redouble their efforts atlending to the agricultural sector to enable the FederalGovernment achieve the target growth rate of 10 per centfor the economy for 2006.

PERISCOPE

ZENITH ECONOMIC QUARTERLY : : January, 2006 10

On its part, the Nigerian Agricultural Co-operative andRural Development Bank is to disburse N7billion for agri-cultural development programmes this year, accordingto the chief executive officer, Alhaji Bubale Gurei. This is inline with Government’s initiatives to ensure food securityand produce extra for exports. Thus, the Presidential ini-tiatives on rice production, processing and export; cas-sava production and export; livestock development andcocoa development are being vigorously pursued. Thereare also the vegetable oil developmentprogramme, the root and tuber expansionprogramme as well as the fertilizer stabilizationprogramme, etc.

SOLID MINERALSThe implementation of the multi-facetedprogrammes of the Federal Ministry of Solid Min-erals Development aimed at restoring the sectorto a pride of place in Nigeria’s economic develop-ment, began during the first quarter 2006. The min-eral and mining policy that would drive the devel-opment of the sector was approved; the policymakes the private sector to take the centre-stageas operators and managers. Government remainsonly the regulator/administrator. Under the new policy,states and local governments should hands-off completelythe issuance of permits to miners and to establish ‘statesenvironmental committees’ to monitor and assist inves-tors. The new policy also places emphasis on ‘global bestpractices’ and high environmental standards.

The Ministry of Solid Minerals Development has alsocommenced the resuscitation the National Institute ofMining and Geology in Jos, for the training of more func-tional high caliber manpower. An inter-ministerial panel

has been set up for this pur-pose. The Institute, estab-lished in 1952 during the co-lonial era, was used for thein-house training of theMines Department of theSchool of Mines and latergot upgraded.Sequel to the revalidationexercise carried out by theMinistry late last year, theFederal Government earlythis year approved some1,450 mining licenses, leasesand permits out of a total of

about 4,000 approvals that had existed in the books of theMinistry. A breakdown of this total showed that entry per-mits were 236; prospecting rights 58; exclusive prospect-ing licenses 24; mining leases 116; quarrying leases 260;and quarrying licenses 843. A further breakdown showsthat about 10 per cent of the holders of mining titles are inthe real mining sector. Also, in its determination to remainan administrator-regulator, the Ministry in the quarterunder review, commenced the divestment of its stakes in

certain parastatals. It has therefore called for the “ex-pression of interest as investors” in bitumen blocks in Ondoand Ogun States. The Ministry has also in conjunction withthe Bureau of Public Enterprises, called for similar interestin its coal properties located in Enugu, Kogi, Benue andDelta states.(* Marcel Okeke is the Editor, Zenith Economic Quarterly.)


POLICY

PART I: NEED FOR A NEW CODE OF CORPORATEGOVERNANCE

1.0 Introduction1.1 Financial scandals around the world and the recentcollapse of major corporate institutions in the USA andEurope have brought to the fore, once again, the need forthe practice of good corporate governance, which is a sys-tem by which corporations are governed and controlledwith a view to increasing shareholder value and meetingthe expectations of the other stakeholders.1.2 For the financial industry, the retention of public con-fidence through the enthronement of good corporate gov-ernance remains of utmost importance given the role of

the industry in the mobilization of funds, the allocation ofcredit to the needy sectors of the economy, the paymentand settlement system and the implementation of mon-etary policy.1.3 In Nigeria, a survey, by the Securities and ExchangeCommission (SEC) reported in a publication in April 2003,showed that corporate governance was at a rudimentarystage, as only about 40% of quoted companies, includingbanks, had recognized codes of corporate governance inplace. Specifically for the financial sector, poor corporategovernance was identified as one of the major factors invirtually all known instances of a financial institution’s dis-tress in the country.1.4 Yet, the on-going industry consolidation is likely to

pose additional corporate governance challenges arisingfrom integration of processes, IT and culture. Researchhad shown that two-thirds of mergers, world-wide, fail dueto inability to integrate personnel and systems as well asdue to irreconcilable differences in corporate culture andmanagement, resulting in Board and Managementsquabbles. In addition, the emergence of mega banks inthe post consolidation era is bound to task the skills andcompetencies of Boards and Managements in improvingshareholder values and balance same against other stake-holder interests in a competitive environment. A well-de-fined code of corporate governance practices should helporganizations overcome such difficulties.1.5 Since 2003 when the Nigerian Securities and Exchange

Commission released a Code of Best Practices on Cor-porate Governance for public quoted companies, therelevant banks had been expected to comply with itsprovisions. This was in addition to a Code of CorporateGovernance for Banks and Other Financial Institutionsapproved earlier in the same year by the Bankers’ Com-mittee.1.6 The consolidation of the banking industry, how-ever, necessitated a review of the existing code for theNigerian Banks. This new code therefore was developedto compliment the earlier ones and enhance their effec-tiveness for the Nigeria n banking industry.1.7 Compliance with the provisions of this Code ismandatory.

2.0 Weaknesses in Corporate Governance of Banks in Ni-geria2.1 Disagreements between Board and Management giv-ing rise to Board squabbles.2.2 Ineffective Board oversight functions.2.3 Fraudulent and self-serving practices among mem-bers of the board, management and staff.2.4 Overbearing influence of chairman or MD/CEO, es-pecially in family-controlled banks.2.5 Weak internal controls.2.6 Non-compliance with laid-down internal controls andoperation procedures.2.7 Ignorance of and non-compliance with rules, laws and

If consolidation should fail to achievetransparency through diversificationin bank ownership, the pervasiveinfluence of family and related partyaffiliations may continue, resulting inhuge levels of insiderabuses andconnected lendings.


POLICY

regulations guiding banking business.2.8 Passive shareholders.2.9 Poor risk management practices resulting in largequantum of non-performing credits including insider-re-lated credits.2.10 Abuses in lending, including lending in excess of singleobligor limit.2.11 Sit-tight Directors – even where such directors fail tomake meaningful contributions to the growth and devel-opment of the bank.2.12 Succumbing to pressure from other stakeholders e.g.shareholder’s appetite for high dividend and depositorsquest for high interest on deposits.2.13 Technical incompetence, poor leadership and admin-istrative ability.2.14 Inability to plan and respond to changing businesscircumstances.2.15 Ineffective management information system.

3.0 Challenges of Corporate Governance for Banks PostConsolidation3.1 Technical Incompetence of Board and Management:In view of the greatly enhanced resources of the con-solidated entities, Board members may lack the requi-site skills and competencies to effectively redefine, re-strategize, restructure, expand and/or refocus the en-larged entities in the areas of change of corporate iden-tities, new business acquisitions, branch consolidation,expansion and product development.3.2 Relationships among Directors: Boardroomsquabbles could be an issue due to different businesscultures and high ownership concentration especially inbanks that were formerly family or “one-man” entities.The dominance of a “key man” could also emerge withthe attendant problems.3.3 Relationship between Management and Staff:Squabbles arising from knowledge gaps, harmonizationof roles and salary structure could also manifest amongstaff and management of consolidating banks with thepotential to create unhealthy competition and a counter-productive working environment.3.4 Increased Levels of Risks: Currently, very few bankshave a robust risk management system in place. With thehuge amount of funds that will be available to them andthe significantly increased legal lending limits, banks willbe financing more long-term mega projects in the realsectors of the economy as opposed to the existing work-ing capital/trade financing. Given the expected significantincrease in the level of operations, the banks will be facing

various kinds of risks which, if not well managed, will re-sult in significant losses. The management of risks in atransparent and ethical way will thus present some issuesbordering on corporate governance.3.5 Ineffective Integration of Entities: Banks that wouldhave completed the process of merging might continue tooperate independently rather than as a single entity. Forexample, an investment bank’s merger with a retail bankin which the MD of the investment bank continues to man-age his arm of the business and the MD of the retail bankdoes the same and the operating results of the two enti-ties are then consolidated for reporting purposes.3.6 Poor Integration and Development of InformationTechnology Systems, Accounting Systems and Records:Banks with different IT systems (banking application, da-tabase platform, operating systems, human resource ap-plications, hardware, server configuration, and networkand telecommunication infrastructure) as well as differ-ent accounting systems and records will have to fuse and

this could pose problems if not well managed. There willalso be increased use of technology to power the consoli-dated business and this too will have to be well managedto ensure efficient operations and quality service deliv-ery.3.7 Inadequate Management Capacity: Directors and Man-agers will be running a much larger organization and con-trolling a significantly higher level of resources. Adequatemanagement capacity is needed to efficiently and profit-ably run a larger organization.3.8 Resurgence of High Level Malpractices: To boost in-come as a result of intense competition and lack of enoughviable projects, malpractices may resurface post consoli-dation. Such sharp practices could include round-trippingof forex, excessive customer charges, falsification ofrecords etc., and adoption of unethical methods to poach

The huge amount of funds thatwould be available to banks postconsolidation would significantlyincrease their legal lending limitsand make them engage in financinglong term mega projects.


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customers.3.9 Insider-Related Lending: If consolidation should fail toachieve transparency through diversification in bank own-ership, the pervasive influence of family and related partyaffiliations may continue, resulting in huge levels ofinsiderabuses and connected lendings.3.10 Rendition of False Returns: Similarly, rendition of falsereturns to the regulatory authorities and concealment ofinformation from Examiners to prevent timely detectionof unhealthy situations in the banks may continue as aresult of lack of transparency and pressure to boost in-come.3.11 Continued Concealment: Continued concealment ofmaterial issues discovered by banks during their pre-merger duediligence will also compromise good corpo-rate governance.3.12 Ineffective Board/Statutory Audit Committee: The au-dit committee, which comprises both directors and share-holders who are not board directors, may be composed ofpeople who are not knowledgeable in accounting and fi-nancial matters thus rendering the committee less effec-tive.3.13 Inadequate Operationaland Financial Controls: Theremight be absence of such con-trols to cater for the increasedsize and complexity of opera-tions.3.14 Absence of a Robust RiskManagement System: The hugeamount of funds that would beavailable to banks post con-solidation would significantlyincrease their legal lending limits and make them engagein financing long term mega projects. The management ofthe attendant risks in a transparent and ethical mannerwould require, as part of sound practices, the institutional-ization of a robust risk management system.3.15 Disposal of Surplus Assets: After consolidation, somebranches of banks that are closely located may be sold toinsiders at below market price. Other surplus assets mayalso be similarly sold. Fixed assets may also be sold indis-criminately and the profit from the sale used to boost prof-its with the intention of covering operational losses andinefficiencies.3.16 Transparency and Adequate Disclosure of Information:These are key attributes of good corporate governancewhich the merged banks must cultivate with new zeal inorder to provide stakeholders with the necessary infor-

mation to judge whether their interests are being takencare of. Currently there are many deficiencies in the in-formation disclosed, particularly in the area of risk man-agement strategies, risk concentration, performance mea-sures etc. These shortcomings will need to be addressed.

PART II: CODE OF BEST PRACTICES ON CORPORATEGOVERNANCE4.0 Principles and Practices that Promote Good Corpo-rate Governance4.1 The establishment of strategic objectives and a set ofcorporate values, clear lines of responsibility and account-ability.4.2 Installation of a committed and focused Board of Di-rectors which will exercise its oversight functions with ahigh degree of independence from management and indi-vidual shareholders .4.3 A proactive and committed management team.4.4 There should be adequate procedures to reasonablymanage inevitable disagreements between the Board,Management and staff of the bank.

4.5 The Board should meet regularlyat a minimum of four (4) regular meet-ings in a financial year. There shouldalso be adequate advance notice forall Board meetings as specified in theMemorandum and Article of Asso-ciation.4.6 The Board should have full andeffective oversight on the bank andmonitor its executive management.4.7 There is a well-defined and ac-ceptable division of responsibilities

among various cadres within the structure of the organi-zation.4.8 There is balance of power and authority so that noindividual or coalition of individuals has unfettered pow-ers of decision making.4.9 The Articles of Association should clearly specifythose matters that are exclusively the rights of the Boardto approve apart from those for notification.4.10 The number of non-executive directors should exceedthat of executive directors.4.11 All Directors should be knowledgeable in business andfinancial matters and also possess the requisite experi-ence.4.12 There should be a definite management successionplan.4.13 Shareholders need to be responsive, responsible and

Institutions should beheaded by an effective

Board composed ofqualified individuals that

are conversant with itsoversight functions.


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enlightened.4.14 Culture of compliance with rules and regulations.4.15 Effective and efficient Audit Committee of the Board.4.16 External and internal auditors of high integrity, inde-pendence and competence.4.17 Internal monitoring and enforcement of a well articu-lated code of conduct/ethics for Directors, Managementand staff.4.18 Regular management reporting and monitoring sys-tem.

5.0 Code of Corporate Governance Practices for Banks PostConsolidation5.1 Equity Ownership5.1.1 Preamble: The current practice of free, non-re-strictive equity holding has led to serious abuses by indi-viduals and their family members as well as governmentsin the management of banks. However, to encourage aprivate sector-led economy, holdings by individuals andcorporate bodies in banks should be more than that ofgovernments. It is also recognized that individuals whoform part of management of banks in which they also haveequity ownership have a compelling business interest torun them well. Such arrangements should be encouraged.5.1.2 Government direct and indirect equity holding in anybank shall be limited to 10% by end of 2007.5.1.3 An equity holding of above 10% by any investor issubject to CBN’s prior approval.5.2 Organizational Structure5.2.0 Executive Duality5.2.1 The responsibilities of the head of the Board, that isthe Chairman, should be clearly separated from that ofthe head of Management, i.e. MD/CEO, such that no oneindividual/related party has unfettered powers of deci-sion making by occupying the two positions at the sametime.5.2.2 No one person should combine the post of Chair-man/Chief Executive Officer of any bank. For the avoid-ance of doubt, also no executive vice-chairman is recog-nized in the structure.5.2.3 No two members of the same extended family1should occupy the position of Chairman and that of ChiefExecutive Officer or Executive Director of a bank at thesame time.5.3 Quality of Board Membership5.3.1 Institutions should be headed by an effective Boardcomposed of qualified individuals that are conversant withits oversight functions.5.3.2 Existing CBN guidelines on appointment to the board

of financial institutions should continue to be observed.Only people of proven integrity and who are knowledge-able in business and financial matters should be on theBoard.5.3.3 Regular training and education of board members onissues pertaining to their oversight functions should beinstitutionalized and budgeted for annually by banks.The term ‘extended family’ here refers to the members ofa nuclear family comprising the husband, wife and theirsiblings plus (+) parents and brothers/sisters of both thehusband and the wife.5.3.4 The Board should have the latitude to hire indepen-dent consultants to advise it on certain issues and the costborne by the banks.5.3.5 The number of non-executive directors should bemore than that of executive directors subject to a maxi-mum board size of 20 directors.5.3.6 At least two (2) non-executive board members shouldbe independent directors ( who do not represent any par-ticular shareholder interest and hold no special businessinterest with the bank) appointed by the bank on merit .5.3.7 A committee of non-executive directors should de-termine the remuneration of executive directors.5.3.8 There should be strict adherence to the existing Codeof Conduct for bank directors, failing which the regulatoryauthorities would impose appropriate sanctions includingremoval of the erring director from the board.5.3.9 Non-executive directors’ remuneration should be lim-ited to sitting allowances, directors’ fees and reimburs-able travel and hotel expenses.5.3.10 In order to ensure both continuity and injection offresh ideas, non-executive directors should not remain onthe board of a bank continuously for more than 3 terms of4 years each, i.e. 12 years.5.3.11 Banks should have clear succession plans for theirtop executives.5.3.12 There should be, as a minimum, the following boardcommittees – Risk Management Committee, Audit Com-mittee, and the Credit Committee.5.3.13 The practice of the Board Chairman serving simul-taneously as chairman/member of any of the board com-mittees is against the concept of independence and soundcorporate governance practice, and should be discontin-ued.

5.4 Board Performance Appraisal5.4.1 Preamble: While adherence to corporate governanceprinciples is recognized as necessary for successful per-formance of Boards, it is often not a sufficient condition.


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Hence, the need for Board performance reviews or ap-praisals as a new concept to ensure successful or excep-tional performance.5.4.2 Each Board should identify and adopt, in the light ofthe company’s future strategy, its critical success factorsor key strategic objectives.5.4.3 Boards should determine the skills, knowledge andexperience that members require to achieve those objec-tives.5.4.4 A Board should work effectively as a team towardsthose strategic objectives.5.4.5 There should be annual Board and Directors’ review/appraisal covering all aspects of the Board’s structure andcomposition, responsibilities, processes and relationships,as well as individual members’ competencies and respec-tive roles in the Board’s performance.5.4.6 The review should be carried out by an outside con-sultant.5.4.7 The review report is to be presented at the AGM anda copy sent to the CBN.

5.5 Quality of Management5.5.1 Appointments to top management positions shouldbe based on merit rather than some other considerations.5.5.2 Existing guidelines on appointments to top manage-ment of banks should continue to be observed.5.5.3 Track record of appointees should be an additionaleligibility requirement. Such records should cover bothintegrity (‘fit and proper’ as re-vealed by the CBN ‘blackbook’,CRMS etc) and past performance(visible achievements in previousplace(s) of work).

5.6 Reporting Relationship5.6.1 Officers should be held ac-countable for duties and respon-sibilities attached to their respec-tive offices.5.6.2 The structure of any bankshould reflect clearly defined and acceptable lines of re-sponsibility and hierarchy.

6.0 Industry Transparency, Due Process, Data Integrity andDisclosure Requirements6.1.1 The above are core attributes of sound corporategovernance practices that are essential to installing stake-holder confidence.6.1.2 Where board directors and companies/entities/per-

sons related to them are engaged as service providers orsuppliers to the bank, full disclosure of such interestsshould be made to the CBN.6.1.3 Chief Executive Officers and Chief Finance Officersof banks should continue to certify in each statutory re-turn submitted to the CBN that they (the signing officers)have reviewed the reports, and that based on their knowl-edge:

• The report does not contain any untrue statementof a material fact.

• The financial statements and other financial information in the report, fairly represent, in all material respects the financial condition and resultsof operations of the bank as of, and for theperiods presented in the report.

6.1.4 False rendition to CBN shall attract very stiff sanctionof fine plus suspension of the CEO for six months in thefirst instance and removal and blacklisting in the second.In addition, the erring staff would be referred to the rel-evant professional body for disciplinary action.6.1.5 There should be due process in all the procedures ofbanks.6.1.6 All insider credit applications pertaining to directorsand top management staff (i.e. AGM and above) and par-ties related to them, irrespective of size, should be sentfor consideration/approval to the Board Credit Commit-tee.6.1.7 The Board Credit Committee should have neither the

Chairman of the Board nor the MDas its chairman.6.1.8 Any director whose facilityor that of his/her related interestsremains non-performing for morethan one year should cease to beon the board of the bank and couldbe blacklisted from sitting on theboard of any other bank.6.1.9 The Board Credit Committeeshould be composed of membersknowledgeable in credit analysis.

6.1.10 The practice/use of Anticipatory Approvals by BoardCommittees should be limited strictly to emergency casesonly and ratified within one month at the next committeemeeting.6.1.11 Banks’ Chief Compliance Officers (CCO) should, inaddition to monitoring compliance with money launderingrequirements, monitor the implementation of the corpo-rate governance code.6.1.12 Banks should also establish ‘whistle blowing’ proce-

There should be annual Boardand Directors’ review/appraisal

covering all aspects of the Board’sstructure and composition,

responsibilities, processes andrelationships, as well as

individual members’competencies and respective roles

in the Board’s performance.


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dures that encourage(including by assurance of confiden-tiality) all stakeholders (staff, customers, suppliers, appli-cants etc) to report any unethical activity/breach of thecorporate governance code using, among others, a spe-cial email or hotline to both the bank and the CBN.6.1.13 The CCO shall make monthly returns to the CBN onall whistle blowing reports and corporate governance re-lated breaches.6.1.14 The CCO together with the CEO of each bank shouldcertify each year to the CBN that they are not (apart from6.1.14) aware of any other violation of the Corporate Gov-ernance Code.6.1.15 The corporate governancecompliance status report should beincluded in the audited financialstatements.

7.0 Risk Management7.1.1 The Board/Board Risk Manage-ment Committee should establishpolicies on risk oversight and man-agement.7.1.2 Banks should put in place a riskmanagement framework including a risk management unitthat should be headed by a Senior Executive, in line withthe directive of the Board Risk Management Committee.7.1.3 The internal control system should be documentedand designed to achieve efficiency and effectiveness ofoperations; reliability of financial reporting, and compli-ance with applicable laws and regulations at all levels ofthe bank.7.1.4 External auditors should render reports to the CBNon banks’ risk management practices, internal controlsand level of compliance with regulatory directives.

8.0 Role of Auditors8.1.0 Internal Auditors8.1.1 Internal auditors should be largely independent,highly competent and people of integrity.8.1.2 The Head of Internal Audit should not be below therank of AGM and should be a member of a relevant pro-fessional body.8.1.3 He should report directly to the Board Audit Commit-tee but forward a copy of the report to the MD/CEO of thebank. Quarterly reports of audit must be made to the Au-dit Committee, and made available to examiners on fieldvisits.8.1.4 Members of the Board Audit Committee should benonexecutive directors and ordinary shareholders ap-

pointed at AGM and some of them should be knowledge-able in internal control processes. One of such appointedordinary shareholders should serve as the Chairman ofthe Committee.8.1.5 The Audit Committee will be responsible for the re-view of the integrity of the bank’s financial reporting andoversee the independence and objectivity of the externalauditors.8.1.6 The Committee should have access to external audi-tors to seek for explanations and additional informationwithout management presence.

8.1.7 Internal Audit Unit shouldbe adequately staffed.8.2.0 External Auditors8.2.1 External auditors shouldmaintain arms-length relation-ship with the banks they audit.8.2.2 Appointment of ExternalAuditors will continue to be ap-proved by the CBN.8.2.3 The tenure of the auditorsin a given bank shall be for amaximum period of ten years

after which the audit firm shall not be reappointed in thebank until after a period of another ten years.8.2.4. A bank’s external auditors should not provide thefollowing services to their clients:

1. Bookkeeping or other services related to the accounting records or financial statements of the audit cli-ent;

2. Appraisal or valuation services, fairness opinionor contribution-in-kind reports;

3. Actuarial services;4. Internal audit outsourcing services;5. Management or human resource functions includ

ing broker or dealer, investment banking services a n dlegal or expert services unrelated to theaudit contract.8.2.5 Quality assurance auditing should be engaged whenever the CBN suspects a cover-up by auditors, and whereproved, erring firms would be blacklisted from being audi-tors of banks and other financial institutions for a length oftime to be determined by the CBN.8.2.6 An audit firm would not provide audit services to abank if one of bank’s top officials (Directors, CFO, andCAO etc) was employed by the firm and worked on thebank’s audit during the previous year.

Each Board should identify andadopt, in the light of thecompany’s future strategy, itscritical success factors or keystrategic objectives.


1 Temitope W. Oshikoya

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IIntroductionInternational media attention has focused inrecent years on the globalization of the worldeconomy with the integration of nationaleconomies through product, capital, andlabour markets as well as the developmentand diffusion of information technology. Atthe same time, national media attention hasalso focused in recent months on the pace ofeconomic and financial sector reforms in Ni-geria and the emergence of mega banks andconglomerate such as Trans-Corp, which arepreparing to compete in the regional Africaneconomy and the global economy. This is sig-nificant as Nigeria has no single transnationalcompany in the UNCTAD database of emerg-ing markets transnational companies. On theother hand, companies from South Africa,Brazil, South Korea, India and China domi-nate the list of the largest 50 multinationalcompanies from the developing countries.

In the past five years, the pace of eco-nomic liberalization and financial sector re-forms in Nigeria has accelerated. While Ni-geria successfully concluded a debt forgive-ness agreement with the Paris Club, the coun-try has also been rated by leading credit rat-

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ing agencies. In 2005, the International Monetary Fund(IMF) also approved a two-year Policy Support Instrument(PSI) for Nigeria under the IMF’s newly created PSI frame-work, which is intended to support the nation’s economicreform efforts. The satisfactory review of the benchmarksfor the PSI has paved the way for the clearance of thedebt to the Paris Club in April 2006 (IMF, 2006).

This paper provides a perspective on Nigeria’s com-petitiveness in the global economy. While Nigeria is oftenreferred to as the giant of Africa, the country’s competi-tiveness can be benchmarked against three countries onthe continent—South Africa, Algeria and Egypt; and fourcountries outside Africa: Brazil, China, India, and Mexicothat are large emerging economies in their respectiveregions.

Recent Performance of the Nigerian EconomyIn the previous three decades, poor economic policies,corruption, and the high costs of doing business have com-bined to keep Nigeria’s competitive potential virtually un-tapped. In the 1990s, annual GDP growth rate averagedless than 3 percent, compared to more than 10 percentamong the fastest growing economies in Asia. With popu-lation growth rate of 2.8 percent, annual per capita GDPgrowth rate was stagnant in the 1990s. As a result, by 2000per capita income was 20 percent lower than in 1975 eventhough the country earned more than $300 billion from oilexports since the mid-1970s (National Planning Commis-sion, NPC, 2004).

Since Nigeria’s return to democracy in 1999, the Gov-ernment has undertaken a wide range of economic andstructural reforms, underpinned by the National EconomicEmpowerment and Development Strategy (NEEDS), whichhave started improving economic performance. In 2005,the real GDP growth is estimated at 6.9 percent, with non-

oil GDP growth at 8.2 percent (Table 1). During 2001-2005,real GDP growth rate averaged 5.6 percent per annumcompared to 2.7 percent in the previous five years (1997-2001). Higher economic growth benefited from the im-proved macroeconomic environment, higher oil exportreceipts and policy initiatives to spur agricultural produc-tion. Investment rate has averaged slightly more than afifth of GDP in the past three years, while savings rate isnow approaching a third of GDP. Fiscal deficits have beendeclining since 2003 reflecting prudent monetary and fis-cal stance and increased oil export revenue. The govern-ment has been implementing a conservative oil price-based fiscal rule, resulting in large overall budget sur-pluses projected at 18 percent of GDP, and a significantbuild-up in foreign reserves, projected to reach almost$50 billion or 14 months of imports by end-2006.

Nigeria’s economy reflects a dichotomy between theoil and non-oil producing sectors. Nigeria is the 8th oil pro-ducer and the 6th country with the largest reserve of natu-ral gas in the world. Due in part to rising prices of oil, thecountry’s dominant and major exports earnings, Nigeria’s

nominal GDP has more than doublefrom $45 billion in 2000 to $100 billionin 2005. Within the non-oil sector, ag-riculture remains the mainstay of theeconomy contributing the largestshare of non-oil GDP, serving as amajor source of employment, and oc-cupying a pivotal role in poverty alle-viation efforts.

The services sector in particularhas benefited from economic reformsand liberalization. The financial andtelecommunication services are twoof the rapidly growing sectors of the


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economy. In the past five years, Nigeria has been oneof the fastest growing cellular telecom sectors in theworld with 18 million subscriber base (13 percent of thepopulation) from less than 500,000 (about 0.4 percent ofthe population) in 2001. Nigeria’s financial sector has alsoundergone major restructuring in the past two yearswith the number of banks reduced from 89 to 25 andminimum capital requirements increased ten-fold.

Competitiveness of the Nigerian EconomyRelative Economic Position: Nigeria’s competitive posi-tion in the global economy can be viewed through acomparative analysis with other key developing coun-tries (peer group), which include 3 countries in Africa—Algeria, Egypt, and South Africa; 2 countries in Asia—Chinaand India; and 2 Countries in Latin America—Brazil andMexico.

Among sub-Saharan African countries, Nigeria andSouth Africa have strong potentials to become more com-petitive in harnessing the opportunities that the globaleconomy could provide. Both countries account for 55percent of the region’s GDP and a quarter of total popula-tion. Their dominance is even more pronounced at thesub-regional levels. South Africa accounts for 80 percentof the total output in Southern Africa (ADB, 2005). Withinits immediate sub-region, Nigeria is one of 15 countries inWest Africa that make up the Economic Community ofWest African States (ECOWAS). The ECOWAS is domi-nated by Nigeria, which accounts for half of its populationand 60 percent of its output. Nigeria is the second largest

economy in Sub-Saharan Africa after South Africa; andthe third largest in continental Africa after Algeria. In 2005,Nigeria’s economy surpassed that of Egypt, which is nowthe 4th largest in Africa.

In terms of population, Nigeria has a large pool of po-tential consumers and workers that is projected to increase

by almost two and a half fold in the next 4 decades (Chart1). Nigeria’s population estimated at 135 million people,which currently accounts for about 2 percent of the world’stotal population, is projected to more than double to 5 per-cent of the world’s total by 2050. Its population currentlyranks among the ten largest in the world at 9th place in2005. Among its peers, China, India, and Brazil rank first,second, and fifth in the world, while Egypt, South Africa,and Algeria rank 15th, 27th, and 37th. However, becauseNigeria’s population is relatively young and the fastestgrowing among its peers (2.4 percent as against an aver-age of 1.2 percent), it is projected to reach 356 million by2050, placing the country as the 4th largest in the worldbehind India, China, and the United States respectively(U.S. Census Bureau, 2006). By 2050, Nigeria’s populationwould be more than 10 times that of South Africa and wouldbe more than the combined population of Algeria, Egypt,

Mexico and South Africa. Today, Nigeria’s population isabout 45% of the population of the USA. By 2050, Nigeria’spopulation will be more than the current population of theUSA.

Nigeria’s large pool of potential consumers has notbeen fully tapped as per capita income remains low. In


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2005, Nigeria’s nominal per capita income stood at US$ 678more than double the level of $300 in 1999. In spite of adoubling of per capita income in the seven years, Nigeria’sper capita income is still five times less than the averagefor its peers. While Nigeria’s per capita income is nowclose to that of India at $715, on purchasing power parity(PPP) basis, India’s per capita income is three times that ofNigeria. Among its peers, South Africa has the highest percapita income, which on PPP basis is ten times that of Ni-geria (Table 3).

Nigeria is a small player in the global economy withnominal GDP at $100 billion, roughly about the same sizeas the economy of Algeria. On PPP basis, Nigeria’s GDP of$175 billion accounted for 0.28 percent of world’s GDP in2005 (Table 3). The nominal GDP of South Africa, the otherAfrica’s economic giant, is more than twice that of Nigeria.Although, its population is the ninth largest in the world, itseconomy is ranked 45th in the world and 28th among emerg-ing market economies. While the country’s population isabout 45 percent of that of the United States, Nigeria’sGDP is less than one percent that of the United States. Thecountry’s GDP is about the size of the Gross State Prod-ucts (GSP) of US$ 100 billionfor Nevada, a State with apopulation of 2.4 million (U.S.Census Bureau, 2006 and Bu-reau of Economic Analysis, USCommerce Department,2005).

Nigeria’s economy re-mains largely informal (Chart2). At 58 percent of GNP, thecountry’s informal economy isestimated to be one of the tenhighest in the world. Nigeria’sscore is highest among itspeers and twice the average

of 28.8 percent for its peers, with China having the lowestscore at 13.1 percent. As a ratio of GNP, the informaleconomy in Nigeria is 6 times higher than that of the UnitedStates (8.8). While the informal nature of the country’seconomy may have inspired entrepreneurial spirit, it re-flects the low level of development in the global economiccontext. It also has implications for the conduct and chan-nel of transmitting formal fiscal, monetary, and structuralpolicies as well as measuring the impacts of these poli-cies. The challenge is to bring the wide range of informalsector activities into the formal sector without discourag-ing innovation and dynamism of these activities.

Flows of Goods, Capital and Labour: To provide furtherinsight on Nigeria’s relative global competitiveness, thissection examines three key channels through which thecountry is connected to the global economy. These chan-nels are the flows of goods and services (trade); capitalflows in and out of the country (capital); and the flows ofpeople (labor). An immediate striking fact is that Nigeria isrelatively more dependent on the global economy com-pared to its peers. Its trade to GDP ratio is one and a halftimes the average of 45 percent for its peers (Chart 3).

In 2004, Nigeria ac-counts for 0.34 percent oftotal world exports.Among merchandise ex-ports, Table 3 indicatesthat Nigeria is ranked 47in 2004 compared to China(3), Mexico (13), Brazil (25),and South Africa (37). Af-ter rising modestly in the1990s, the value of mer-chandise exports in-creased by 32 percent and57 percent in 2003 and 2004respectively. Oil and gas


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exports continue to contribute the major share of thecountry’s total exports. The oil sector contributed 97 per-cent of total exports in 2005. Nigeria is the largest oil pro-ducer and exporter in Africa, and the 8th largest in theworld.

Compared to its peers, Nigeria’s commercial serviceexports have been very modest at $1.5 billion or 0.07 per-

cent of world’s total and ranked 84. In 2004, Nigeria’s larg-est single export destination was the United States, whichaccounted for 38.3 percent, while Europe accounted for afifth of total exports. It is interesting to note that Nigeria’strade with India and Brazil has been growing rapidly,with those two countries now absorbing 10 percent and7 percent of Nigeria’s exports respectively.

Nigeria’s share of total world merchandise importswas 0.15 percent in 2004. Imports are primarily gearedtowards capital goods and raw materials, which ac-counted for about 60 percent of total imports in thepast years, with the rest mainly accounted for by non-durable consumer goods. A third of Nigeria’s importsoriginated from within the European Union, while an-other 15 percent and 7 percent came from the UnitedStates and China respectively. External trade shouldbenefit from reforms relating to rationalization of tar-iffs, which would reduce un-weighted average tarifffrom 30 percent to 20 percent, while phasing out allimport bans by 2007.

According to Table 4, in the past five years, Nigeriahas been a marginal player in the global emerging

bonds and equities markets,and loans syndications. Thecountry’s external financingthrough these privatesources, mainly loan syndi-cation, had been, on aver-age, less than half a billiondollar per annum. In con-trast, South Africa and Bra-zil recorded an average ofeight and fifteen times what

Nigeria obtained from bonds and equities markets, andloans syndications combined. Relative to the size of theeconomy, Nigeria received 0.5 per cent of GDP comparedto 2.3 percent and 2 percent of GDP respectively for SouthAfrica and Brazil. Nigeria’s low access to these sources ofexternal financing had been due in part to lack of interna-tional credit rating rendering the country non-creditwor-

thy. In 2005, Nigeria was rated BB-for the first time.The financial sector is crucial to the process of be-

ing a major player in the global capital markets. In thiscontext, the pace of consolidation in the banking sys-tem over the past two years is to be commended. Thefinancial sector, however, remains underdevelopedrelative to the size of the economy. As Governor of theCentral Bank of Nigeria recently pointed out, SouthAfrica’s largest bank, Standard Bank Group in 2004 had

about the capital base and three times the combined as-sets of all the current 25 banks in Nigeria. The capitaliza-tion of Nigeria’s stock exchange is less than 10 percent ofJohannesburg stock exchange in South Africa. Total credit

Nigeria’s future economiccompetitiveness position will depend

not just on trading in extractive oil, butin participating in an increasingly

global knowledge economy.


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from the banking sector is 20percent of GDP in Nigeriacompared to more than 100percent in South Africa. Mort-gage loans represent lessthan one percent of GDP inNigeria compared to 20 per-cent of GDP in South Africa(Soludo, 2006b).

In absolute terms, For-eign Direct Investment (FDI)to China is 30 times that in Ni-geria (Table 5). FDI in Nigeriacompares relatively well to other Af-rican countries, ranging between 3-5percent of GDP during 2002-2004. Asa ratio of GDP, FDI to Nigeria also com-pares well with other peer group in-cluding India, Brazil, Mexico, andChina. FDI is relatively more signifi-cant in capital formation in Nigeria,accounting for a fifth of gross invest-ment, more than twice for its peergroup. FDI in Nigeria has tradition-ally concentrated in the oil sector.However, recent sector reforms andprivatization are beginning to attractforeign investments into such sectorsas telecommunications and bankingindustry. As a result, the non-oil sec-

tors attracted about $3 billion of FDIin 2005. Such investments need to con-tinue to be spread across a broadrange of industries throughout theeconomy in order to generate higheremployment, build skills and know-how.

UNCTAD (2005) indicates thatNigeria’s FDI inflows performanceranking improved from 82 in 1999-2001to 44 in 2002-2004 ahead of all its peers,including China, which ranked 45. Incontrast, South Africa’s ranking wors-ened from 114 to 126 in the same pe-riod. While South Africa has not at-tracted higher FDI inflows, it has beenestimated that the stock of South

Africa’s FDI in the rest of Africa hasincreased from 5 percent of thecountry’s outward stock in 2000 to 9percent in 2003 (Arvanitis, 2006). Ni-geria has been one of the principaldestinations of FDI from South Africa.

In addition to the flow of goodsand capital, Nigeria’s economic linksto the rest of the world also involvethe movement of people, particularlyskilled professionals. The skilled emi-grants from Nigeria represent two-thirds of total emigrants from thecountry to OECD countries, slightlyhigher than the skilled emigrationrates for India (60.5 percent) andSouth Africa (62.6 percent) (Docquier,

Frederic and AbdeslamMarfouk, 2005). Skilled emi-gration or brain drain hasits downside for a sourcecountry as Nigeria, espe-cially if the education ofskilled emigrants wasfunded through public sub-sidies. Emigration also haspositive economic feed-back effects, through returnmigration after additionalknowledge and skills havebeen acquired abroad, thecreation of trade and busi-ness networks, and remit-tances from abroad. ForNigeria, remittances nowaverage US$ 1.5 billion peryear, including around US$


1.3 billion per year from theUnited States alone (around1.9 percent of GDP in 2004).For India, remittances areestimated to range be-tween 3 and 4 percent ofGDP.

Nigeria’s future eco-nomic competitiveness po-sition will depend not just ontrading in extractive oil, butin participating in an in-creasingly global knowledgeeconomy. Nigeria lags be-hind its peers, particularly, Brazil, In-dia, China, and South Africa, on anymeasure of the knowledge economyincluding literacy, skills, research anddevelopment, patents and informa-tion technology. With respect to in-dustrial property, WTO (2005) notesthat Nigeria recorded no granted pat-ents or registered marks, while Indiarecorded 2160 patents and 8010 re-spectively in 1999. Unlike Nigeria, In-dia, in particular, has become an at-tractive destination for off-shoringand outsourcing. It is estimated thatthe high tech and outsourcing sectorsaccounted for 4 percent of India’sGDP in 2004, with Indian labour beingused within India by foreigncompanies for business, ad-ministrative, and informa-tion technology servicessupport (Wilson, Beth Anneand Geoffrey N. Keim(2005).

Barriers to GlobalCompetitivenessNigeria is a well-endowedcountry with strong poten-tial to compete in the globaleconomy. To realize thesepotentials the country wouldneed to overcome key chal-lenges relating to adminis-trative barriers to business,

governance, infrastructure bottle-necks, and low human development.Historically, the high cost of doing busi-ness, due to factors including corrup-tion, administrative barriers, and poorinfrastructure, has hampered the de-velopment of the private sector in Ni-geria.

The World Economic Forum pro-vides a measure and ranking of na-tional competitiveness with the glo-bal competitiveness index (GCI). TheGCI has three components: the qual-ity of the macroeconomic environ-ment, the state of the country’s publicinstitutions, and the level of its tech-nological readiness. As noted earlier,

Nigeria’s economic reforms may bepaying off slowly in terms of improv-ing macroeconomic environment forbusiness. Although it ranks below itspeers, Nigeria’s ranking on the GCIhas also been improving from 93 in2004 to 88 in 2005 (Table 6). Among itspeers, India and Egypt showed im-provements, while China, Brazil,Mexico, South Africa and Algeriaslipped on the global ranking between2004 and 2005.

The 2006 World Bank’s Annual Re-port on Doing Business also providesa global ranking of 155 nations on keybusiness regulations and reforms. Theease of doing business index ranks

economies from 1 to 155based on 10 sets of busi-ness environment indica-tors: starting a business,dealing with business li-censes, hiring and firingworkers, enforcing con-tracts, registering prop-erty, getting credit, payingtaxes, trading across bor-ders, protecting investors,and closing a business.

In 2006, Nigeria standsat 94 within the 4th quintileof the aggregate globalranking, which consists ofa total of 155 countries and5 quintiles (Charts 4 and 5).

ISSUES (I)


Among its peer group,China, India, and Brazilalso fall within the 4th

quintile. South Africa isthe only country withinthe 1st quintile with aranking of 28; andMexico with a ranking of73 falls within the 2nd

quintile. Algeria andEgypt are in the 5th

quintile. A detailed breakdown of thescore indicates that Nigeria rankswithin the 1st quintile in the ability ofbusiness to hire and fire. It ranks inthe 2nd quintile on getting credit, pro-tecting investors and closing a busi-ness. The country ranks in the 3rd

quintile on paying taxes, starting abusiness, dealing with licenses, andenforcing contracts. The worstrankings are in registering property(152) and trading across borders (139),with both in the 5th quintile.

The challenges of starting a busi-ness in Nigeria show that entrepre-neurs can expect to go through 9 stepsto launch a business over 42 days onaverage, at a cost of more than two-thirds of per capita income in 2004. Toobtain a business registration num-ber, a business owner must depositalmost half of per capita income in abank. It costs three and a half timesper capita income and takes 16 stepsand 465 days to complete the processof complying with licensing and per-mit requirements for ongoing opera-

tions in Nigeria. It takes 21 steps and274 days to register property. The costto register property in the country isalmost one-third of overall propertyvalue, the worst in the global ranking.A medium size company must make36 payments, spend 1,120 hours, andpay 27.1 percent of gross profit intaxes. It takes 23 steps and 730 daysto enforce a contract, while the cost

of enforcing contracts is 37.2 percentof debt. The picture that emerges isthat business competitiveness in Ni-geria can be further improved bystreamlining administrative require-ments and obstacles to the privatesector

In the short-to medium term, Ni-geria faces two main challenges onthe governance front. First, since the

return to democracy in 1999, out-breaks of ethno-religious violencehave gained momentum. In the pasttwo years, fighting has escalated inthe Niger Delta leading to hostage-taking and disrupting oil production.The run-up to democratic elections in2007 could put further strains on thefragile situation. Second, althoughprogress has been made in respectof economic governance, much still

remains to be done. While Nigeria hasoften been associated with a high levelof corruption, economic governancehas improved considerably in the pastthree years. The Government hasembarked on various anti-corruptionmeasures including the creation of theEconomic and Financial Crimes Com-mission (EFCC) and the Independent

Corrupt Practices Com-mission (ICPC), as wellas the removal of high-ranking civil servantsfrom office on thegrounds of corruption.To improve accountabil-ity, the Government in-troduced the Fiscal Re-sponsibility Bill and thePublic Procurement Bill,while establishing a

ISSUES (I)

As noted earlier, Nigeria’s economic reformsmay be paying off slowly in terms of improving

macroeconomic environment for business.


Budget Monitoring andPrice Intelligence Unit incharge of public sectorcontracting and procure-ment contracting. To in-crease transparency inthe dominant oil sector,the country has takensteps to participate in theG8 Extractive Industriesand Transparency Initia-tive (EITI), under whichfull audits of the annual oilaccounts of relevantagencies will be imple-mented and published.

To be competitive inthe global knowledgeeconomy, emphasis mustbe placed on develop-ment of human capacity. The qualityof skills development has been af-fected by poor facilities for scienceand technical education. Further-more, Nigeria has the third highestnumber of poor people in the world,after China and India. Among its peergroup, Nigeria has the highest per-centage of its population living on lessthan US $2 a day (Table 7). The UNHuman Development Index 2005ranks Nigeria 158, a ranking worsethan its entire peer group. To addressthe challenges of poor human and

social development, annual savingsfrom debt service to the tune of $1billion due to Paris Club are now be-ing directed to the social sectors ofeducation and health.

A modern and efficient physical in-frastructure is important to underpinand sustain productivity and global

competitiveness. However, the poorstate and inadequacies of Nigeria’ssystems of roads, rail, ports, airports,telecommunications, and power gen-eration and distribution have contrib-uted to the high costs of doing busi-ness. Power generation amounts to atenth of that in South Africa, which hasa population less than one-third ofNigeria (Lyman, 2004). In particular,generation and delivery of electricityare low and unreliable, with the pri-vate sector incurring huge cost on

stand-by power generators. Recentsurvey suggests that Nigerian manu-facturers rely on private power gen-eration for more than two-thirds oftheir operations, which underminecost competitiveness. Recent invest-ments in the power sector are pro-jected to increase generation capac-

ity to 5,200 MW and 10,800 MW by endof 2006 and 2007 respectively (FGN,Budget Speech 2006). The country hasa road network of 195,200 km, with halfin poor state due to low maintenance.In the past five years, communica-tions network coverage has improvedwith the growth of cellular subscrib-ers due to liberalization of the sub-sector. Nevertheless, Nigeria still lagsconsiderably behind its peers interms of access to cellular, fixed main-line and internet facilities. In 2003,about 7 out of 1000 people have ac-cess to both fixed lines and internetcompared to more than 100 people inMexico and 500 people in the USA re-spectively.

ConclusionsNigeria has abundant human, mate-rial and natural resources with thepotential to become Africa’s largesteconomy and a major player in theglobal economy over the next fewdecades. In the previous three de-cades, poor economic policies, corrup-tion, and the high costs of doing busi-ness have combined to keep these

ISSUES (I)

However, in the past five years, Nigeria has started laying the foun-dations for rapid economic growth. The on-going policy and insti-tutional reforms, if sustained, could help competitiveness as theprivate sector becomes positioned to seize the opportunities andmeet the challenges of globalization.


ISSUES (I)

potentials basically untapped. How-ever, in the past five years, Nigeriahas started laying the foundations forrapid economic growth. The on-goingpolicy and institutional reforms, if sus-tained, could help competitiveness asthe private sector becomes posi-tioned to seize the opportunities andmeet the challenges of globalization.If current economic growth rates aresustained Nigeria would be amongthe fastest growing and large emerg-ing economies in the world over thenext few decades. To harness theseopportunities and its considerable po-tentials, the country would need toovercome the burden of several de-

Bibliography

cades of poor governance, infrastruc-ture bottlenecks, and poor socio-eco-nomic conditions.

(1 Temitope W. Oshikoya is an Econo-mist and a Chartered Banker with the Af-rican Development Bank (ADB). A Com-monwealth scholar, he has a PhD degree inEconomics and ACIB (Banking). He is alsoa Fellow of the Chartered Institute of Bank-ers, England and Nigeria respectively. Heis a member of the Nigerian Economic So-ciety, American Economic Association, andNational Association of Business Econom-ics, USA. He has served as member of theCorporate Board of Directors of East Af-rican Development Bank based in Uganda,IMF’s East Africa Regional Technical As-

sistance Center based in Tanzania, and theSecretariat for Institutional Support forEconomic Research in Africa based inSenegal. He has served on the EditorialBoard of several international professionaleconomics journals. He was Joint GuestEditor, Business Environment in Africa,Journal of African Economies, published byOxford University Press. He is the authorof the Book titled “The NigerianEconomy: A Macroeconomic and In-put-Output Model.”

2 The views expressed in this paper arethe author’s and do not reflect those ofthe African Development Bank. The au-thor would like to thank Kupukile Mlamboand Peninah Kariuki for comments.

• African Development Bank (2005), African Development Report2005, Oxford University Press.• Arvanitis Athanasios (2006), “Foreign Direct Investment in SouthAfrica: Why Has It Been So Low?” in Nowak, Michael and LucaAntonio Rici (eds., 2006), Post-Apartheid South Africa: The First TenYears, IMF.• Arora, Vivek (2006), “Economic Growth in Post-Apartheid SouthAfrica: A Growth-Accounting Analysis,” in Nowak, Michael andLuca Antonio Rici (eds., 2006), Post-Apartheid South Africa: TheFirst Ten Years, IMF.• Beth, Wilson A. and Geoffery N. Keim (2006), India and the GlobalEconomy, Business Economics, January 2006• Commission for Africa (2005), our Common Interest.www.commissionforafrica.org/english/report/introduction.html• Docquier, Frederic and Abdeslam Marfouk (2005), InternationalMigration by Education Attainment, 1990-2000. World Bank• Federal Government of Nigeria (FGN), 2006 Budget Speech,www.budgetoffice.gov.ng• FT Africa Oil and Gas, Financial Times, Wednesday, March 1st 2006.• IMF (2006), Regional Economic Outlook: Sub-Saharan Africa, April2006• IMF (2006b), World Economic Outlook, April 2006• IMF (2005), Nigeria: Poverty Reduction Strategy Paper NationalEconomic Empowerment and Development Strategy; IMF CountryReport 05/433; December 1, 2005, www.imf.org/external/pubs/ft/scr/March2005/cr05433.pdf• IMF (2005), Press Release: IMF Executive Board Approves a Two-Year Policy Support Instrument for Nigeria, www.imf.org/external/pubs/ft/scr/2005/cr05229.htm• IMF (2005), Nigeria: 2005 Article IV Consultation Staff Report; StaffSupplement; and Public Information Notice ; IMF Country Report 05/302; June 24, 2005, www.imf.org/external/pubs/ft/scr/2005/cr05302.pdf• Lyman, Princeton (2004), Nigeria’s Economic Prospects: An Inter-national Perspective, www.cfr.org

• Nigerian Planning Commission (2004), MeetingEveryone’s Needs: National Economic Empowerment anddevelopment Strategy, www.nigerianeconomy.com/down-loads/part1.pdf• Nowak, Michael and Luca Antonio Rici (eds., 2006), Post-Apartheid South Africa: The First Ten Years. www.imf.org/external/pubs/nft/2006/eng/pasoafr.pdf• Kaufmann D., A. Kraay, and M. Mastruzzi 2005: Gover-nance Matters IV: Governance Indicators for 1996-2004.• Soludo, Charles (2006), “Beyond Banking Sector Con-solidation in Nigeria.” www.cenbank.org/out/speeches2006/govadd29-3-06.pdf.• Soludo, Charles (2006),”Nigeria’s Economic Drivers andFinancing Challenges.” www.cenbank.org/out/speeches2006/govadd4-4-06.pdf.• Soludo, Charles (2006), “State of the Macro-Economy:Outlook for Monetary, Banking and Exchange Rate Re-gimes.” www.cenbank.org/out/speeches2006/govadd4-4-06.pdf.• UNDP, Human Development Report, 2005.• UNCTAD (2005), World Investment Report 2005.www.unctad.org/wir and www.unctad.org/fdistatistics• World Bank (2005), Doing Business Report 2005.www.doingbusiness.org• World Trade Organization, 2005. Stat.wto.org/CountryProfiles.• U.S. Dept of Commerce, Bureau of Economic Analysis,Regional Economic Accounts. www.bea.gov/bea/regional/gsp.htm.• U.S. Census Bureau. 2005. International Database, http://www.census.gov• World Economic Forum, 2006. Global Competitivenessreport 2005-2006• World Bank (2002) Nigeria Private Sector Assessment,Regional Program on Enterprise Development (RPED).www.worldbank.org.


I

ISSUES (II)

t is a known fact that the problem Nigeria haswith the budget is not with the crafting of beauti-ful budget couched in the most appropriate lan-guage. The problem has always been with imple-menting the budget. Some of the reasons why

budgets were not implemented in the past in-cluded the difficulty of mustering the requisitediscipline. The managers of the economy areaverse to the restriction to their freedom to actwhich an attempt to maintain fidelity with the

provisions of the budget would imply. They wouldprefer to be free to act as the exigency of run-ning the economy dictates, to take advantage ofthe confusion which such a development wouldgenerate and be in position to extend patronage

to party loyalists, cronies, friends and relations.The other development which had accounted fornon successful implementation of the budget isthe fact that routinely the budget is not timelypresented at such a time as to allow sufficient

* By Boniface Chizea


ISSUES (II)

time for the National Assembly to exercise its due pro-cess on the budget before sending it to the Executive forapproval to become a bill. The present administration sinceinception has undertaken a lot of reforms to address theseand several other issues. It is very important to note herethat the Budget Office of the Federation (with Bode Agustoat the helm of affairs) has championed these reforms.

Timeliness in Budget PresentationIn this regard, the President on presentation of Budget2006 to the National Assembly did observe the fact that itwas being presented two months later than budget 2005.He also noted that the delay was due to the understandingwith the House that there was the need to avoid the expe-rience with Budget 2005 which though was presented inOctober, 2004 encountered significant delays and difficul-ties in the appropriation process. This was due mainly tothe fact that the various relevant Committees of the Na-tional Assembly had not had enough discussions and dia-logue with respective ministries over the provisions priorto the presentation of the Appropriation Bill. The Presi-dent then expressed the hope that for Budget 2006 be-cause of the co-operation and collaboration that had beenthe hallmark of the process, the approval process wouldproceed at a much faster pace. In the event, Budget 2006

was assented to by the President on Wednesday, Febru-ary 22, 2006.

To put matters in their proper context and perspective,the President was candid when he observed in presentingbudget 2006 that because budget 2005 was not approveduntil April 12, 2005, it was difficult to adhere to the spend-ing plan particularly for the capital budget. There is also apeculiarity with the preparation of budget in the polity.This is the situation when upon the presentation of thebudget, the President commits himself to the implemen-tation of an indicated percentage of the capital budget.We understand that this is due to the challenges of com-mensurate cash flows. But be that as it may, it is better toprepare the budget with a mindset of its complete, totaland holistic implementation. Anyone familiar with the bud-get process appreciates the fact that it would be a coinci-dence if the budget is implemented to the letter. This isone particular reason why there is often a resort to contin-gency provisions in budgeting.

Monitoring Budget ImplementationThe administration has made quite a lot out of the fact ofits declared intention and determination to monitor andpresent its report card on the implementation of the bud-get. The President having made a promise to the National

Assembly that he would improve on the moni-toring of the budget as well as render an ac-count of progress, in mid 2004 presented a bud-get implementation report. And taking into con-sideration delays associated with the implemen-tation of budget 2005 the President also prom-ised that a full year report would be presented.The President promised that for Budget 2006,both mid and full year budget monitoring andimplementation reports would be presented.We hope that the President would keep faithwith this promise given the need to prepare fora successful election year and smooth transi-tion in 2007.

Job CreationBudget 2006 has a focus on; “Building Physicaland Human Infrastructure for Job Creation andPoverty Eradication.” But Budget 2006 is not likelyto create too many jobs. Infact, it could evenlead to job losses owing to the implications ofmany of its policies. For samplers, consider thefact that reforming the public sector had so farled to about 2,000 job losses with a projected

Source: Budget Office


ISSUES (II)

anticipated total of 30,000 job losses tocome. We are informed that what is de-laying the conclusion of the retrench-ment exercise is to correct errors de-tected in the first phase of the exercisewhereby some staff were wrongly in-cluded in the list of those to be off loadedinto the unemployment market. It is alsoclear to all that job losses in the bankingsector following the conclusion of thefirst phase of reform agenda is a hem-orrhage which no one could predictwhen it would abate. It is also likely thatjob losses would occur in many sectorsvisited by the privatization and the re-form program. For instance the port concessioning exer-cise is projected to result in job losses in the hundreds.

Poverty AlleviationGiven the spate of retrenchments in privatized establish-ments, poverty and misery level are unlikely to abate. Inthe telecommunications sector which could be consideredas one of the bright spots in the economy where somegrowth had been recorded, it is probably fair to observethat this sector has had its growth period and if there areany job gains at the moment, it could only be marginal.

It is also a fact that nothing impoverishes the massesmore than spiraling inflation. The government would like

to see inflation down to single digit. There is no doubt thatthe pledge to keep down the prices of petroleum productthrough the provision of subsidy would help. But it is alsoworthy of note to observe that the prices of diesel andkerosene have gone through the roof. The President be-moaned the fact that the price of diesel was at some pointin time higher than the price of fuel. But the situation nowactually is the prevalence of scarcity of particularly kero-sene that compatriots are even fortunate to find the prod-uct no matter the price. As I put this paper together thescarcity of kerosene persists even as NNPC had not livedup to its promise of flooding the market through importa-tion and the releases of strategic reserves. We have ar-



ISSUES (II)

gued in another paper thatthese measures are es-sentially of the nature ofpalliatives which, wouldnot provide the lasting so-lution required. The ques-tion is why the suddenscarcity of kerosene as theexplanation that diversionto the Aviation industry isresponsible cannot be thewhole fact. The issue is what has sud-denly changed to make diversion un-usually attractive and to result in thisunjustifiable and biting scarcity.

The problem of poverty is so wide-spread that even the special purposevehicles established by the govern-ment, such as National Poverty Eradi-cation Program (NAPEP), are over-whelmed and could hardly make sig-nificant impact. What is even moreworrisome is that in undertaking allthe reform programs in the country,all of which so far have resulted in joblosses, deliberate efforts at mitigat-ing the unsavory impact of job losseshave not yielded much dividend.

Growing theEconomyThe government would wishto see the economy grow by10 percent to put the coun-try on course to meeting theMillennium DevelopmentGoals (MDG) of halving thenumber of the poor in thecountry by the year 2015.The growth in GDP reportedby Government was 6 percent by the end of 2005 withthe reassuring developmentthat non-oil GDP growth wasapproximating 8 per cent in-dicating that efforts at the di-versification of the economyaway from its unwholesomedependence on oil have

started to yield dividends. Agriculturegrowing at 7 per cent had contributedcommensurately to this growth. Agrowth rate of 7 per cent has beenprojected for 2006 moving the ratecloser to the medium term target of10 per cent per annum.

The prospects for attaining thislevel of growth is not to be taken forgranted particularly as the privatesector that is expected to be the en-gine to drive the economy under thisreform regime looks disadvantagedthrough the implementation of theECOWAS Common External Tariff(CET), which places local manufactur-ers at a disadvantage vis-à-vis im-ported items. In fact it is argued that

the local producer bears a bur-den the equivalent of an addi-tional 35 per cent because ofpoor socio-economic infrastruc-ture. There is also the problemof multiple taxation, high costand falling purchasing poweramongst a generality of thepopulation.

The President promised togive comprehensive treatment

in 2006 to all outstanding arrears par-ticularly debts owed local contractors.To this end an allocation of the sum ofN25 billion was made in the budget.The President promised that contrac-tors owed below N100 million wouldbe paid and those owed above thisamount would be accommodatedthrough the issuance of 2 to 5 yearbonds. We are aware that an attemptwas made during the year to issuebonds but we are not in a position tovouch for the success of the issue. Butthe authorities must recognize the im-portance of keeping to this promiseas it would also impact the bankingsector that in most instances wouldbe the ultimate beneficiaries as they

bore the exposure in the firstplace and it also has the po-tential of giving a desired fil-lip to the economy and fasttracking its rapid growth.

There is no aspect of in-frastructure availability thathas been of more concern toa generality of the populationsuch as power generation.And this is one area wheregovernment had committeditself to attaining some im-provement and for which con-siderable resources havebeen expended. Unfortu-nately peak power generationonly reached 3,500 MW wellbelow what should be pro-duced to ensure the required




ISSUES (II)

and desired regularity in power sup-ply. What is even of more concern isthat the peak generation attainedcould not even be sustained. The gov-ernment has continued to make sig-nificant investments to upgrade thegeneration and transmission ca-pacity. It remains to be seenwhether these efforts wouldadd to generation capacitysuch that by the end of 2006the capacity of generationwould reach 5,198 MW aspromised by government withthe peak reaching an optimallevel of 10,806 MW by Decem-ber, 2007. All efforts must bemade to grow the economy asthat is the only sure basis forsustainable poverty allevia-tion.

Revenue ProjectionsThe revenue projections in budget2005 at N1.8 trillion, a 38 per centgrowth over budget 2004 estimateswas highly expansionary. It was how-ever revised downwards to N1.4 tril-

lion. Also, the implementation of sub-sidies in deference to the wishes ofNigerians to limit the price increasesin petroleum products played somerole in this regard. In projecting therevenue for Budget 2006, an oil price

of $33 per barrel was assumedas well as a production level

of 2.5 million barrels per day.The price of crude is cur-rently in excess of doublethe price of what was as-sumed for the preparationof the budget. We couldhave been celebrating bynow a bursting of the ex-cess crude account but forthe unfortunate develop-ment in the Niger Delta,

which had resulted to dis-rupted production activities.

The price of crude is currentlyin excess of double the price ofwhat was assumed for thepreparation of the budget. Wecould have been celebrating bynow a bursting of the excesscrude account but for theunfortunate development in theNiger Delta, which had resultedto disrupted productionactivities.


ISSUES (II)



There is also disruption ofgas supplies from the NigerDelta region negatively im-pacting power generation ca-pacity and resulted in in-creased dependence on rela-tively high cost diesel for theoperation of generators,worsening the cost profileand to that extent exacerbat-ing the inflationary pressure.There is no doubt that the pro-jected volumes of crude oilproduction as included in thebudget would not be realizedthis year. The only savinggrace is the development re-garding the unprecedentedhigh price of petroleum prod-ucts and this factor has intro-duced some uncertainties inthe entire scenario. What-ever happened to revenuegeneration during the year, we com-mend the government and recom-mend the sustenance of the practiceof sterilizing revenue in excess of pro-jection in the excess crude account tobe subsequently shared amongst thetiers of government using the ap-proved allocation formula.

Re-living the PastIt is expected that sooner than laterthe experience of budgeting in thecountry would transcend some of the

problems associated with budgetingas encapsulated by Professor MichObadan in his very useful and insight-ful book titled; “National Develop-ment Planning and Budgeting in Ni-geria”. Some of these undesirablefeatures of budgeting in the countryinclude; poor fiscal management asreflected in low public expenditure re-sults, lack of expenditure control andpersistent budget deficits, and corrup-tion in contracts and procurementpractices. Budgetary targets were not

observed due to a combina-tion of under-budgeting andweak expenditure controls.Budget indiscipline as re-flected in the implementationof projects and programs notincluded in the budget while,leaving out those initially in-cluded. There is also the ab-sence of multi-year budget-ing to safeguard against op-portunistic decisions in thepreparation of the annualbudget and which would ne-cessitate the taking into ac-count, well in advance of me-dium-term financial conse-quences of new programs orproposals. Non-release oruntimely release of appropri-ated funds, sometimes dueto low revenue flow. Effectivebudget monitoring capable of

ensuring that projects and activitiesimplemented were commensuratewith the resources committed hardlytakes place due to such factors as in-adequate funds for the exercise, in-adequate or untimely supply of datafor monitoring as well as inadequateaudit. No doubt this administrationlike with most other sectors of theeconomy has made some progressin improving fiscal management, inensuring value for money and the en-throning of transparency but there is

some considerable mileage tocover in ensuring that we attainbest practice in formulating,implementing, monitoring andreporting on performance andachievements and in using thebudget as a blue print to facili-tate rapid national growth anddevelopment.(Dr. Boniface Chizea is a Princi-pal Consultant, BIC ConsultancyServices, Lagos.)


F REIGN INSIGHTS


F REIGN INSIGHTS

wo hundred years ago, NapoleonBonaparte made a prediction that is coming true by the day.The great French Emperor had told the world: “Let China sleep,for when she awakes, she will shake the world.”

What Napoleon predicted is coming true with the emer-gence of China as a major global force both politically andeconomically. With the end of the cold war, the attenuation ofthe East/West divide and the crash of the Iron Curtain, tradelines have become more fluid and nations which would havebeen considered strange bed-fellows are today entering intostrategic partnerships in the era of Globalization.

Former communist China is one such nation which contin-ues to make in-roads into areas hitherto considered off limits.Today, China’s major oil company, China National Offshore OilCorporation (CNOOC) has former American Secretary ofState, Henry Kissinger, on its advisory board and is also pros-ecuting a $4.3bn petrochemical project with Anglo-Dutch con-

TTTTT* By Toni Kan Onwordi


F REIGN INSIGHTS


F REIGN INSIGHTS

glomerate Shell in what is consid-ered China’s biggest joint venture in-vestment. The agreement for a 50/50 joint venture project which took12 years to conclude is the largestforeign investment ever in China.

It is true that as leader of Com-munist China, Chairman Mao did es-tablish links with many developingAfrican nations but those weremoves aimed at perpetuating thecommunist and socialist agenda. To-day, the prime consideration is capi-talism. Ideology has given way tomarket forces.

China’s current forays are predi-cated on a few factors top of which is the voracious hun-ger for natural resources to fuel its booming economy.There is also the issue of China’s current romance withcars. Other key factors include the need to find new mar-kets for the products – shoes, textiles, TV sets and cars -

rolling out from its booming factories.China’s eyes, once turned towards the West, are now

focused firmly on Africa and nothing underlines this morethan Chinese President Hu Jintao’s African tour which sawhim criss-crossing Africa in April.

Sino-African trade is growing rapidly and reports fromthe BBC indicate that trade between Asia and the conti-nent is now worth more than $30bnand still rising with a record inflowof $175m recorded in the first 10months of 2005. There are currently,over 700 Chinese factories doingbusiness in Africa while China hasbeen hailed as leading in FDI inflowsinto the continent. And unlike manywestern countries which give aid toAfrica, China’s aid and investmentcome without strictures or precon-ditions demanding democracy, good

governance or reduction of corruption. This trade, whichis driven as much by economic and political reasons hasseen China scrapping tariffs on 190 different types of im-ported goods from 28 of the least developed countries in

Africa. China’s total exports rose by 31.3% to$546.4bn in 2005 while imports rose by 16% to$478.1bn in the same year. Chinese exports to Af-rica amounted to $15.25bn or about 2.8% of totalChinese exports for 2005 while imports from Af-rica stood at $16.92bn.

All China seems to require from its tradingpartners in Africa is support in its “One ChinaPolicy” with regard to its ongoing conflict with Tai-

wan. African nations seem to be responding positivelybecause most of the 53 African nations have severed tieswith Taiwan.

Infact, the communiqué issued at the end of Hu Jintao’stwo day visit to Nigeria, was explicit on this score: “TheNigerian side reiterated its adherence to the one-Chinapolicy and opposition to “Taiwan independence” in any

Sino-African trade is growing rapidly andreports from the BBC indicate that tradebetween Asia and the continent is now worthmore than $30bn and still rising with a recordinflow of $175m recorded in the first 10 monthsof 2005.


F REIGN INSIGHTS

form including “de jure Taiwan independence” and toTaiwan’s participation in any international or regionalorganization whose membership applies only to sover-eign states. The Nigerian side also reiterated its posi-tion of not having official relations or contact with Tai-wan and its support for all efforts made by the Chinesegovernment to realize national reunification. The Chi-nese side highly appreciated the above-mentioned po-sition of the Nigerian side.”

To assuage its thirst for oil, China which accountedfor 40% of total growth in oil consumption in the pastfour years, has overtaken Japan to occupy the No. 2spot behind the US as the world’s largest oil consumer(See Chart), and appears to be strategically targetingSudan and Nigeria, Africa’s largest oil producers. Infact,China was the first to smell the whiff of oil coming fromSudan.

In Nigeria, China has been a bit more direct. Duringthe state visit to Nigeria, China agreed to buy a controllingstake in Nigeria’s ailing 110,000 bpd refinery in Kaduna. Italso pledged to build a railroad system and power sta-tions to help ease the epileptic power supply. The totalinvestment expected in the wake of the visit is a whopping$4bn expected to go primarily to oil and infrastructure.

In return, the Nigerian government offered the Chi-nese right of first refusal on four oil blocks which were upfor grabs during the mini-licensing round which took placeon May 19, 2006. Two of the oil blocks are in the oil produc-ing Niger Delta region while the other two are in the Chadbasin which is significantly higher risk and where oil is yetto be produced. CNOOC has also announced that it has

concluded deals to buy a stake in Akpo oil field in Nigeriafor $2.3bn. The oil field, its largest overseas acquisition isexpected to produce 225,00 barrels of oil when it comes onstream in 2008.

Meanwhile, Chinese companies have set up scores offactories in Nigeria with interests in plastics and textileswhile a Free Trade Zone to be sited in Lagos has just beenlaunched in a pioneering joint venture agreement betweenthe Lagos state government and a Chinese consortium.The first Chinese factory in Nigeria which was set up in2004 with an initial investment of $6m is currently produc-ing air conditioners which have a ready market.

Other areas in which the Chinese have expressed in-terest include investments in power stations, low cost hous-ing projects, cassava plantations, an agro-research cen-tre, an Aids medicine factory and a medical equipmentfactory.

In early 2006 the Federal Government signed a memo-randum of understanding with Guangdong Xinguang In-ternational Group, a Chinese government-owned com-pany, to enhance Nigeria’s rail network. The $2 billion dol-

lar MOU includes a fast rail system betweenLagos and Abuja, a light rail system from MurtalaMohammed International Airport to NnamdiAzikiwe International Airport in Lagos and Abujacity centre as well. Oil is, however, not the onlynatural resource attracting the Chinese. Chinesedemand was responsible for a 74.1% globalgrowth in export items using ferrous materials.World wide prices for steel, copper oil and ship-ping have also spiked due to the huge demandfrom China. Copper prices soared to a 16 yearhigh in June 2005 as demand from China causeddepletion in global stockpiles.

What does this trade partnership portend forNigeria whose GDP growth rate for 2005 stood at 5.6% asagainst China’s 9.5% for the same period?

Analysts consider the Sino/Nigerian partnership asmore beneficial compared to that between African na-


F REIGN INSIGHTS

tions and the West. With the West, African nations con-tinue to replicate what transpired in the colonial times whenAfrica shipped inexpensive raw materials abroad to theindustrialized nations, which would then turn around andsell the finished products back to Africans. The Chinese,are however, different. Thoughprimarily interested in oil theyhave shown commitment to-wards improving the poor infra-structure in these African na-tions seen from their commit-ment towards constructingroads, rail lines and telecommu-nications infrastructure.

According to Hu Yuji, Headof the Commercial Office of theGeneral Consulate of thePeople’s Republic of China inLagos, FDI inflow from China, inthe past few years, has crossedthe $30m mark, while there areover 30 Chinese factories oper-ating in Nigeria as wholly owned,joint venture or co-managemententerprises in Nigeria.

It is not a rosy picture all theway though. There are fears fromlocal manufacturers who arescared that the influx of cheapgoods from China will ultimatelywreck home grown industries.

There are also apprehensions overthe effect the Chinese insistence onusing skilled Chinese labour will alsohave on home grown skilled workers.These fears are not unfounded. TheChinese experience in South Africaprovides a backdrop for justifyingthese misgivings.

In South Africa, a contractawarded to CITIC-ARCE, a Chineseconsortium by South African Steelmaker Ispat Iskor saw the influx ofhundred of Chinese workers tohandle the construction of IspatIskor’s plant in Northern Kwazulu.

Sasol, South Africa Energy Com-pany is also planning to import about

2000 qualified Chinese artisans to handle their projects.This deluge of Chinese artisans which has been replicatedin other parts of the continent is expected to occur in Nige-ria leading to deep-seated concerns on the fate of indig-enous skilled workers especially since the Federal Gov-ernment has not made any plans to protect local jobs.

With the Chinese economy show-ing no signs of slowing down, theWorld Bank has just revised its pro-jections indicating that its previous9.2% growth rate for 2006 was wrong.The new figure is 9.5% even thoughChinese Bureau of Statistics has putthe projection for 2006 at 10%. TheOrganisation of Economic Coopera-tion and Development (OECD) pro-jected a growth rate of 9.4%. Chineseforeign reserves, on the other hand,which stood at a record $875.1bn by

March 2006 is expected to cross the $1trmark by the end of the year.

Governor Bola Ahmed Tinubu wasspot on when he said during the launchof the Lagos Free Trade Zone that theChinese have the money while wehave the enabling environment. Whathe failed to say is what this blossomingrelationship portends for the future.

Only time will tell.(* Toni Kan Onwordi is an AssistantEditor, Zenith Economic Quarterly)


F REIGN INSIGHTS (II)

* By Mercedes B. Suleik

Corporate governance has already taken root in developmentfinancing institutions in Asia and the Pacific. The Asian finan-cial crisis of 1997 has indeed been a defining point for coun-tries in these regions, stressing the need not just for corpo-rate reform in the business community, but also the need forreforms in national development financing institutions (DFIs).Heeding this call has been the Association of DevelopmentFinancing Institutions in Asia and the Pacific (ADFIAP), thefocal point of all development banks and other development-oriented institutions engaged in the financing of developmentin the region.




DFIs, established by their govern-ments as specialized financial institu-tions, provide long-term financing andtechnical assistance to enterprisesthat contribute to their countries’economies, and have come to playan important role in their economicdevelopment and growth. DFIs areconsidered “trailblazers” in the sensethat they finance start-up projects thatother financial institutions tend toavoid because of inherent risks andlong-term gestation. As well, DFIsnow form an integral part of their fi-nancial systems. In recent times,these have also come to play a cen-tral role in advancing corporate gov-ernance reforms in the region, first

by instituting good corporate gover-nance practices themselves. ADFIAPspearheaded this important task byundertaking, since February 2003, the“DFIs for Corporate GovernanceProject.”

ADFIAP was established on Oc-tober 1, 1976 with 31 original chartersignatories under the auspices of theAsian Development Bank (ADB), aspecial member of the association.ADFIAP is a non-governmental orga-nization in consultative status with theUnited Nations Economic and SocialCouncil (UNECOSOC). Its permanentsecretariat is based in the Philippines.

The idea of an association of de-velopment bankers first surfaced inthe 4th Regional Conference of De-

velopment Financing Institutions ofAsia and the Pacific held in Manila in1969 under the auspices of the ADB.The idea gained further impetus dur-ing the UNIDO Bankers Meeting in1970 in Paris and a subsequent meet-ing in Caracas where it was learnedthat two regional associations, one inLatin America and another in Africa,had been organized, and that similarinstitutions were being contemplatedfor the Arab countries and for coun-tries in Eastern Europe. The DFIs fromthe Asia-Pacific region attending thatmeeting in Caracas considered ittimely to accelerate the establish-ment of an association for Asia-Pa-cific DFIs.

On October 1, 1976, the ADFIAPcharter was signed during the annualmeeting of the ADB in Manila by 31DFIs, among them the DevelopmentBank of the Philippines and the Pri-vate Development Corporation of thePhilippines (PDCP). ADFIAP’s missionwas “to advance sustainable devel-opment by strengthening the devel-opment finance function and institu-tions, enhancing the capacity ofmembers, and advocating develop-ment financial innovations.”

The 31 charter members repre-sented 17 countries in the Asia-Pacificregion, namely, Bangladesh, Indone-sia, Malaysia, China, Singapore, thePhilippines, Thailand, Ceylon, SouthKorea, Japan, India, Pakistan, Fiji,

Western Samoa, Iran, Nepal, andAustralia plus the Overseas Eco-nomic Cooperation Fund. ADFIAPbecame operational in April 1977, itsmembers electing Vicente R. Jayme,President of the PDCP, as Chairmanof the Management Committee.

The governance structure of theassociation is as follows: (1) the high-est body is the General Assemblywhich meets every two years to electthe board of directors and passesupon organizational matters; (2) theBoard of Directors, which is the gov-erning body that passes upon policymatters, is composed of not morethan 30 duly elected voting members,who elect from among them the

Chairman, three Vice-Chairmen,and the Treasurer; the Secretary-General is an ex-officio Memberof the Board; and (3) manage-ment, which is headed by the Sec-retary-General assisted by ser-vice unit heads that constitute thesecretariat, a fully functioningbusiness center and full-time pro-fessional staff .

The current Chairman ofADFIAP is Jesus P. Tambunting,

Chairman and CEO of PDCP.ADFIAP’s current Secretary-Generalis Octavio B. Peralta. Mr. Peralta hasattended the Institute of CorporateDirectors (ICD) Professional Direc-tors Program.

When ADFIAP embarked on its“DFIs for Corporate Governance”Project in partnership with the Wash-ington, D.C.-based Center for Inter-national Private Enterprise, it was aclear response to its mission of ad-vancing sustainable developmentthrough the promotion of mechanismsof good corporate governance as akey to business sustainability in theregion. ADFIAP has obviously seenthe need for DFIs to adopt and insti-tutionalize good corporate gover-

As rationalized, the adoption of a corporategovernance rating system for DFIAP countriesis suitable because their corporate sectorsshare similar structures and legal frameworks.



nance policies and practices in theirmember organizations not only be-cause it is the “right thing to do,” butbecause it is essential to businesssuccess. This reminds me of a remarkof former DBP Chairman and CEOAlfredo C. Antonio, “when doing goodis also doing well.”

ADFIAP’s governance process, infact, spells out the role of its Board ofDirectors in setting the future of theassociation, setting its vision, missionand operating goals. While by ordi-nary corporate standards its board ofdirectors may appear overly large, itsunique configuration as an associa-tion of now 58 members from 30 coun-tries all over Asia and the Pacific pre-sumably justifies it. Moreover, it spells

out in detail the functions of the Chair-man, Vice-Chairman, Board Mem-bers, Board Treasurer, CommitteeChairs, and Board Secretary (who isthe Secretary-General and Chief Ex-ecutive of the association) for a prop-erly functioning organization. It alsohas formulated a “Statement of Com-mon Values and Beliefs of the Mem-bers of the Association.” In addition,it has conceptualized a “Frameworkof a Code of Conduct for its MemberInstitutions,” and a “Framework of aCode of Conduct for Officers and Staffof Member Institutions,” which havebeen recommended for adoption.

Addressing the weakness of cor-porate governance in the region,ADFIAP encourages Boards of Direc-

tors to develop and accept codes ofcorporate governance, and to appointa Senior Officer (or unit) to oversee,direct, and manage a sustainablegood corporate governance programin their institutions. This would espe-cially be relevant to those memberinstitutions whose countries have notyet required the observance of theOECD principles of corporate gover-nance and/or the OECD guidelines forcorporate governance in state ownedenterprises.

ADFIAP’s strategy to improve cor-porate governance among its mem-bers comprises (1) conducting a mem-bership survey of members’ obser-vance of corporate governance poli-cies and practices; (2 organizing a re-

gional symposium-workshop to de-velop an action agenda; (3) organiz-ing national workshops to focus on“local” corporate governance pro-grams; (4) assisting members to de-velop a framework and to sustain theircorporate governance polices andprograms; (5) promoting the projectthrough the association’s regular pub-lications (a new one being Governance)and website; and, (6) visiting institu-tions to assist members in develop-ing their corporate governance sys-tems, using best practices learnedfrom the surveys, seminars, and otherinteractions with them.

Along this line, ADFIAP embarkedon a new project to develop a corpo-rate governance “scorecard” for DFIs

and their clients. In a regional work-shop held in Manila was developedan assessment and monitoring instru-ment called the ADFIAP CorporateGovernance Rating System (ACGRS),which, being consistent with otherexisting international governance rat-ing methods, monitors the areas forgovernance reforms.

As rationalized, the adoption of acorporate governance rating systemfor DFIAP countries is suitable be-cause their corporate sectors sharesimilar structures and legal frame-works. Its importance, particularly toconcerned government, multilateral,and private institutions, is viewedfrom a better capability to compareand monitor corporate governance

reforms among the DFIs in theregion. The competition for in-vestments in the regional finan-cial markets highlights the impor-tance of good governance prac-tices.

The ACGRS has been re-viewed, tested, and revised in fivenational workshops held in Ma-laysia, Pakistan, Mongolia, Fiji,and Vietnam. After developing

the final version in Manila, the ACGRSwill be distributed to the member-in-stitutions of ADFIAP. The handbookwill serve to help them assess andmonitor their governance reform pro-cess.

In fact, the ACGRS contained inthe handbook is an adaptation andexpansion of two rating instruments:(1) the German CG Score-card devel-oped by the German Society of In-vestment Analysts and Asset Man-agement; and (2) the one repared andused by the Institute of CorporateDirectors (ICD) in the Philippines. ICDprovided the conceptual frameworkin developing and formulating theACGRS, and helped in trainings con-ducted under the project.

ADFIAP’s governance process, in fact, spells out therole of its Board of Directors in setting the future ofthe association, setting its vision, mission andoperating goals.



The ADFIAP scorecard adaptedthe German scorecard to better fitADFIAP member institutions and con-sists of five elements: (1) ShareholderRights; (2) Commitment to CorporateGovernance Reforms; (3) Board Gov-ernance; (4) Disclosure; and (5) Au-diting.

These elements are similar to thefive OECD Principles of CorporateGovernance. It might be mentionedthat the ADFIAP scorecard has twoversions for shareholder rights: forcommercial banks and financial insti-tutions other than DFIs, the focus isthe shareholders; for DFIs, the focusis on stakeholders’ and beneficiaries’rights, i.e., the sectors of the economyand society that are served by them.

The ACGRS instrument is in theform of a questionnaire that requiresa respondent to assess the corporategovernance (CG) practices in his in-stitution.

There are two versions, one forDFIs and another for commercialbanks and other financial institutions.A Survey Administrator converts theresponses to a weighted score foreach question using a predetermined

point equivalence system. The scoresfor each of the criteria are consoli-dated into an overall weighted aver-age CG score of the institution. Theweights for each governance crite-rion are as follows: shareholder rights,25%; commitment to corporate gov-ernance, 20%; board governance,25%; disclosure and transparency,15%; and auditing, 15%. The point sys-

tem is detailed in accordance withvarious checklists for each of the fiveelements.

In all, the ADFIAP Corporate Gov-ernance Rating System Handbook

contains four important question-naires:

1. A “Governance Rating Standardfor DFIs in the Asia-Pacifi c Region,”which is prepared by a Director orCommittee of Directors (usually theCorporate Governance Committee, ifthere is one, or the Audit Committee)authorized by the Board to conductthe task.

2. A “Governance Rating Standardfor Commercial Banks and Other Fi-nancial Institutions in the Asia-PacificRegion,” which is prepared by a Di-rector or Committee of Directors (theCorporate Governance Committee, if

there is one, or the Audit Committee)authorized by the Board to do so.

3. A “Checklist of Indicators of theQuality of Corporate Governance ofCorporate Borrowers,” which is pre-pared by the Relationship Manageror Account Officer in charge of thecorporate borrower’s loan.

4. A “Governance Rating Standardfor Commercial Banks and Other Fi-

nancial Institutions in the Asia-PacificRegion” to be filled out by a respon-dent financial institution.

In sum, ADFIAP considers that thepractice and institutionalization of

corporate governance reforms inDFIs is an initiative that is well taken.Indeed, it may consider this as an-other of its “trailblazing” actions thatcan provide its member institutionsthe opportunity to become models ofgood corporate governance in theAsia-Pacific region, not to mentionother regional organizations, therebycontributing to a global effort to “makea better world.”

ADFIAP is the focal point of all devel-opment banks and other financial institu-tions engaged in the financing of develop-ment in the Asia-Pacific region. Its mis-sion is to advance sustainable development

through its members. Founded in1976, ADFIAP has currently 64member institutions in 32 coun-tries.

The views expressed by the au-thor are her own and do not neces-sarily represent the views of theCenter for International Private En-terprise.

The Center for International PrivateEnterprise is a non-profit affiliate of theU.S. Chamber of Commerce and one of thefour core institutes of the National En-dowment for Democracy.

(* Mercedes B. Suleik is of the ADFIAP.Permission for this publication is thank-fully acknowledged from CIPE.)

In sum, ADFIAP considers that the practice andinstitutionalization of corporate governancereforms in DFIs is an initiative that is welltaken.

DFIs are considered “trailblazers” in the sense that theyfinance start-up projects that other financial institutionstend to avoid because of inherent risks and long-termgestation.


F REIGN INSIGHTS (III)

Democracy and free enterprise ideasare under attack in Latin America,and the rise of populism and leftwing-oriented governments does not comeas a surprise.

Despite countless efforts towardreforming economic and political in-stitutions to promote economic free-dom, many of these reforms havebeen perceived as “recipes” imposedby international financial organiza-tions and foreign governments - acostly misperception exacerbated bythe top-down approach used to de-velop public policies that are designed

* By Hugo Maúl Rivas

and debated exclusively by techno-crats. In countries that urgently needbroad based institutional reforms,from political parties to economic in-stitutions to social practices, the prob-lems are so ubiquitous, so deeply re-lated with everyday life, that techno-crats do not know how to handle them.

Polarized and fragmented societ-ies lack democratic mechanisms topromote dialogue and understanding.Not only do bureaucracies have a ten-dency to not pay attention to theneeds of their client beneficiaries, butin most cases the beneficiaries of a

particular policy do not have effec-tive mechanisms to organize them-selves to express their opinions in aneffective manner. Furthermore, sincepolicymakers rarely pay attention tothe “voice” of the beneficiaries of aproposed policy, ordinary citizens donot perceive reform policies as theoutcome of a legitimate process.

The exponential growth of the in-formal economy is a clear exampleof an absence of communication be-tween policymakers and the businesscommunity.

While policymakers are always





devising new ways to “capture” in-formal entrepreneurs, the entrepre-neurs are always discovering newways to “escape” from governmentregulations. Without open and directcommunication between the twosides, it is almost certain that the in-formal economy, in the long run, willwin the battle.

However, beyond the task of or-ganizing the beneficiaries of a particu-lar policy, the challenge for reform-ers is to develop consensus amongall beneficiaries as to the role of in-centives, government intervention,scope of the market, etc. To achievesuch a consensus, reformers have tolearn from the private sector, fromentrepreneurs, about their needs andrealities. In turn, it is important to haveactors inside the private sector ca-pable of articulating and promotingthe needed changes because thosechanges cannot be made from theoutside. Thus, as participativemechanisms to organize thevoices of the beneficiaries aredeveloped, a consensus interms of pro-market and freeenterprise friendly reforms canbegin to emerge.

In the future, successful eco-nomic reforms will be the outcome ofan effective communication processbetween the public and private sec-tors. The Guatemalan National Eco-nomic Research Center (CIEN) hasbeen working to frame public policydevelopment in this manner for manyyears, based on the firm belief thatreform success lies not in the tech-nocracy or bureaucracy, but in freeenterprise.

Developing a Reform AgendaThe first step in developing a reformagenda is to identify prominent eco-nomic sectors, such as the export busi-ness sector in Central America. Ex-

porters are the businesspeople whomost frequently confront internationalcompetition and the rigors of interna-tional trade, and, it can be said thatthey often have the best ideas andare more amenable to enactingsweeping reforms. Various exportersalso represent very well the overallstructure of the economy.

One of CIEN’s initial efforts at con-sensus-building focused on competi-tiveness as the top priority for a re-form agenda. The results of a surveyCIEN conducted illustrate the difficul-ties of building a consensus. CIENasked exporters, business associa-tions, and public servants to identifythe most important factors in improv-ing Guatemala’s competitiveness -the issue that everybody regarded asthe most important tool for participat-

ing in global markets. Whereas ex-porters rated access to markets asthe most important factor, it was onlythe sixth-highest priority for the busi-ness association representatives andcivil servants.

After countless meetings, publicpresentations, and interviews withbusiness leaders, union leaders, poli-ticians, and policymakers, CIEN andother reform-minded groups helpeddevelop a National CompetitivenessAgenda1 for 2005-2015, which wasadopted by the Guatemalan govern-

ment. This Agenda is designed to im-prove the competitiveness of the na-tion through free market reforms andparticipatory mechanisms. A strate-gic alliance between CIEN andAGEXPRONT (the Guatemalan Ex-porters Association) organized ex-porters and gave them a voice inidentifying specific areas of reform,prioritizing them, and proposing en-trepreneur-based solutions.

The second reform priority is theneed to base a reform agenda ondemocratic principles. CIEN usescompetitiveness to define the impor-tance of using freemarket reforms toadvance democratic principles and toincrease the leadership role of the pri-vate sector. The impetus for reformflows from the grassroots to the gov-ernment – not in the opposite direc-tion. As people identify and discover

their strengths and needs, theymobilize the government to

cooperate with them toovercome obstacles.

To do so, however,they must eliminatepractices that have be-come well-established in

developing countries,such as pervasive crony

capitalism. They must developan equally powerful force on their

side – organizing regularbusinesspeople and identifying busi-ness leaders who are not crony capi-talists and are willing to participate inthe system openly and implement re-forms. To mobilize this broad support,reform leaders can use the nationalbusiness agenda, which in its essenceis a democratic mechanism for con-sulting with the business communityto identify obstacles hindering busi-ness capacity and develop prioritiesabout reforming public policy. Themethodology of the national businessagenda is based largely on focus

In the future, successful economicreforms will be the outcome of aneffective communication processbetween the public and privatesectors.



group interviews and surveys.Through the national businessagenda, it is possible to get in touchwith the real experts – entrepreneurs– who go every day to get a permit tooperate a truck or to pay taxes, or toregister a business. In Guatemala,Nicaragua, and Honduras, CIENhas worked with more than tenbusiness associations that countmore than 500 entrepreneursand business leaders as mem-bers to identify the problemsthey face and devise some so-lutions to those problems.Through this national businessagenda advocacy process, CIEN hasbeen able to legitimize businessneeds.

What Are the Obstacles?What obstacles to doing business didCIEN find in Guatemala through thenational business agenda process?Surveys and interviews revealed thefollowing six major reform prioritiesin addition to the problem of the top-down reform approach describedabove:

• Access to credit is hampered bythe judicial system. It is impossible tomake borrowers repay their loans, sobanks will not lend money to anybody.CIEN participated in formulating anew law regulating the use of collat-eral in the banking system that is cur-rently under discussion by the gov-ernment. If enacted, the new law willspeed up the process of adjudi-cating disputed debts in thecourts.

• In housing, construc-tion is costly because regu-lations are not uniform –every municipality has itsown labor and buildingcodes. To address poor incen-tives for owning a home, CIENhas been designated by the govern-

ment to evaluate the possibility ofadopting a more beneficial tax sys-tem to encourage home ownership,including the possibility of abolishingan existing 12% tax on every sale of

a house and allowing a tax deductionon mortgage interest payments. Ho-mogenizing the disparate labor andbuilding costs remains on CIEN’s re-form agenda.

• Stolen property sold on the blackmarket results in unfair competitionfor honest firms. Thieves go to thesame markets as legitimate firms,who find their own products for saleat half of their cost. CIEN joined analliance with the Chamber of Com-merce and a citizen-based NGO(Acción Ciudadana) that is working todenounce and combat fraud and cor-ruption as well as modernize customs.The alliance has helped achieve no-table improvements in customs op-

erations over the last two years andis also working to promote transpar-ency in the management of publicfunds.

• Labor regulations, such as theminimum wage and other man-

dated worker benefits, imposetoo many costs for firms

and reduce productivity.CIEN has been work-

ing with leaders in thelabor unions and infor-mal economy to show

them the dangers of apolitically influenced mini-

mum wage policy. CIEN andthe National Federation of Ag-

ricultural, Commercial, Industrialand Financial Organizations (CACIF)have joined forces to push for reformin the minimum wage law, featuringthe introduction of productivity indi-cators into the mechanism for settingthe wage rate. The minimum wagerate rose by less than 10% last year,the lowest increase of the last fiveyears. CIEN is also working with theEconomic Commission and LaborCommission in the Congress to intro-duce greater flexibility as part of a re-form of the Labor Code.

• The taxes paid by small- and me-dium-sized enterprises are levied ata fair rate, but the costs of compli-ance are very burdensome. SMEs donot have in-house lawyers or accoun-tants and seek an easier way to com-ply with their tax obligations. In 2004,

CIEN publicly proposed the abo-lition of the income tax on firms

and the adoption of a flat-taxfor individuals. The Con-gress approved a new in-come tax regime based ona pseudo-fl at tax of 5% on

gross income. Tax revenuesfrom this system are above ini-

tial estimates.• The lack of good infrastructure,

The lack of goodinfrastructure, exemplified bypoor roads and airports and

seaports with inadequatefacilities, raises transport costs

and delivery times

Access to credit is hampered by thejudicial system. It is impossible tomake borrowers repay their loans,so banks will not lend money toanybody.



exemplified by poor roads and air-ports and seaports with inadequatefacilities, raises transport costs anddelivery times. Joint public and pri-vate sector partnerships have led tointernational certification forGuatemala’s two major ports, the re-construction of its international air-ports, and the expansion of the Atlan-tic Highway - the most important roadin the country - to four lanes.

By defining these top reform pri-orities in Guatemala, CIEN and otherprivate sector representatives canapproach policymakers to ask for spe-cific solutions to a specific problem;many of these problems do not re-quire additional public spending, justpolitical willingness to implement thechanges. CIEN plans to review therecord of policymakers and issue areport card that will provide anaccount of their commitmentto implementing reforms.

Lessons LearnedCIEN has learned manylessons in developingand implementingthese reform initiatives.In particular, the followingfindings deserve specialmention.

• To achieve consensus aboutthe need for reform, the private sec-tor needs to speak the same lan-guage. To accomplish this, CIEN used“competitiveness,” to define how tooperate in a modern, free-marketeconomy. One also has to identify themost developed sectors, such as ex-porters in the case of Guatemala, tolead the change within the privatesector, and business leaders must bewilling to deal with the costs associ-ated with leading the initiative. Gov-ernment officials must be willing tolisten and work with the private sec-tor. Think tanks have a special role

and can be helpful to business lead-ers and government officials by try-ing to mediate between them to helpthe reforms advance.

• Another lesson is that organiz-ing the voice of businesspeople is aunifying process. In Guatemala, CIENstarted with exporters, but soon,manufacturers, farmers, builders,and others joined the competitivenessframework and the business agenda.If there is a legitimate way of present-ing the problems and needs ofbusinesspeople, the others that arenot as advanced as the exporters willhave a way to participate.

• Spreading the word will pay off.CIEN and some of the chambers par-ticipating in the process held hundredsof press conferences, participated in

TV and radio shows and wrote in theprint media. These efforts are worthit because when a group starts tomake noise, politicians, political par-ties, and civil society will listen. If thatgroup has a democratic-based re-form agenda, they don’t have any wayto oppose that.

• Democratic principles legitimizeprivate sector proposals. Even in Gua-temala, a highly polarized societywhere the private sector is largelyignored by those on the left, politicalopponents were won over by CIEN’s

methods. When they learned howCIEN built the business agenda, basedon democratic principles and the sug-gestions of regular businesspeople,they were won over because theycould not use the argument that CIENwas just promoting crony capitalism.

This approach to reform is not atraditional private sector proposal,but a new way of presenting the prob-lems and needs of regularbusinesspeople. It challenges the tra-ditional perspective that all progressis made using a top-down approach,and shows how reformers can startdoing things on a grassroots level, likeentrepreneurs and businesspeople doevery day. In this way, reformers canset free the spirit of free enterpriseand provide people with means totake advantage of economic oppor-tunities.

1The National CompetitivenessAgenda is based on the national

business agenda process.Hugo Maúl Rivas is direc-

tor of economic programs atthe National Economic Re-search Center (CIEN) in Gua-

temala. He is a professor of eco-nomics at the University Francisco

Marroquín, focusing on fiscal, macro-economic, and competitiveness issues. Mr.Maúl is currently the project manager ofThe Center for International Private En-terprise-funded informal sector project“Building Consensus to Reduce the Infor-mal Sector in Guatemala” whose permis-sion to use this piece is thankfully acknowl-edged.

The views expressed by the authors aretheir own and do not necessarily representthe views of the Center for InternationalPrivate Enterprise.

CIEN has been working withleaders in the labor unions andinformal economy to show themthe dangers of a politicallyinfluenced minimum wagepolicy.


T*By Eunice Sampson

GLOBAL WATCH

hank God! The global economy continued onthe path of sustainable growth in the firstquarter of 2006 with most economies record-ing more growth than decline. Perhaps,things could have been a lot better but forthe energy crises that pervaded much of thequarter. From North to South, most econo-mies were confronted with a major commonchallenge – the unrelenting rise in the priceof crude oil.

Rising from its $52.31 per barrel positionin December 2005, crude oil for May delivery,on April 21, 2006 traded at a high of $75.35,going up by over $23 per barrel in just fourmonths. Compared to first quarter 2005,crude oil price was up by 30% this first quar-ter. Concerns over Iran’s nuclear programmeand continuing supply disruptions in Nigeriawere the major factors responsible for the


G L O B A L W A T C H

price hike.This article analysis the global economy in the first

quarter of 2006 with specific focus on the impact of thehigh cost of crude oil on consumer pricing and inflationarytrends, and the level of drawback this might have had oneconomic prosperity.

Q1-2006: How did Economies Fare?Except for Japan, which dropped in growth from the 4.3%recorded in 4th quarter of 2005 to 1.9% (quarter-on-quar-

ter), for most developed economies,the quarter under review was better than the preced-ing one.

For Japan, the 1.9% growth on year-on-year basis wasimpressive, far higher than earlier projections of 1.1%. Withthis performance, Japan’s economy remains on a recov-ery path propelled by strong export and domestic produc-tivity. In response to high energy cost and increasing do-

mestic demand, consumer price index rose by0.1% year-on-year, marking its first annual in-crease in eight years.

Year-on-year, US economy is believed tohave grown by 4.8% in the first quarter, a re-markable improvement on the 1.7% growth inthe last quarter of 2005, and the best growthsince the third quarter of 2003.

In the Eurozone, GDP grew by 2% year-on-year in the first quarter of 2006, better than the1.8% (y/y) growth in the fourth quarter of 2005.The region is expected to advance from its 1.3%

Source: http://europa.eu;World Bank;OECD;economic reports;R&EIG



annualized growth in 2005 to 2.1% this year.French economy recorded 0.5% growth in the first quar-

ter of 2006 compared to 0.1% rise in the same period lastyear. This falls short of the 0.6-0.7% growth predicted byeconomists and the Bank of France for the period.

Germany dropped from its 1.7% growth position as atlast quarter of 2005, to 1.4% this quarter. The decline isattributed to the coldest weather in a decade which im-pacted negatively on the construction sector. The 1.4%advancement is a robust growth all the same, consistentwith its average performance in the last three quarters.

High consumer spending was the key fac-tor that accelerated growth in most nationaleconomies this quarter; but this, coupled withthe unprecedented, persistent rise in crudeoil price in the international markets helpeddrive up inflation and interest rates in mosteconomies.

Energy Cost and Rising Inflation:Inflation (consumer price) firmed up in manyeconomies in the first quarter of 2006, mostlyon account of high crude oil prices which roseabove $70 per barrel at the end of the quarter.To curtail this, many central banks had tight-ened monetary policies, which in many in-

stances resulted in a hike in interest rates. Inter-estingly, however, most economies experiencedrobust growth despite these set-backs.

In the United States where consumer spend-ing on durable goods rose by 21% in the first quar-ter, high energy prices helped push up commod-ity prices. The Federal Reserve Bank at the endof the quarter jacked up interest rate to its target5% to curb mounting inflationary pressure. Thereare already speculations that rates might get upto 5.5% before the end of the second quarter.

In April, the European Commission cut its eco-nomic growth forecasts for the first three quar-ters of 2006. Inflation rose to 2.4% as oil pricestouched record highs. Contrary to expectationshowever, the European Central Bank (ECB) keptthe benchmark interest rate at 2.5% till the end ofthe quarter; but an increase is expected early inthe second quarter.

The United Kingdom sustained its steadygrowth within the quarter, with rising house pricesboosting economic confidence and buying power.Inflation was however curtailed, remaining atabout 2% at the end of the quarter, from its 2.2%

position as at last December.For most developing economies, growth was sustained

in the first quarter. In the Asian continent, Korea, China,and Singapore were among those that recorded remark-able growth. Korea grew year-on-year by 6.2% and China,10.2%, far stronger than most analysts or even the Chi-nese authorities had anticipated.

But inflationary pressure also mounted in most of theseeconomies. In India, the inflation outcome during the pe-riod was influenced mainly by the price movements ofpetroleum products. Energy -related inflation alone con-

Source: African Central Banks and Quarterly reports

Source: OECD, Research & EIG



tributed about 41% to the headline inflation.In China, the central bank raised interest rates by 0.27%

to 5.85%, to curtail growth in lending and help cool thesurge in liquidity which put pressure on the general pricelevel. China remained one of the world’s biggest consum-ers of crude, importing 37.13 million tones in the first quar-ter of 2006 alone despite the high cost.

In Japan, economic growth slowed sharply comparedto same period in 2005 followinga drop in consumer spendingand rise in cost of import, fuelledby the high global energy cost.However, private consumption,which accounts for nearly 55%of the Japanese economy, grew0.4% in the first quarter, easingdeflationary pressures and raising hopes that the Bank ofJapan might soon scrap its zero interest rate policy.

In Israel, the Bank of Israel at the end of March raisedthe interest rate on its sources for the month of April by0.25% to 5.00% in anticipation of upward inflationary move-ment in the coming months. In February, the consumer

price index went up by 0.6%, double of what was expected,in response to a 5.5% rise in fuel price.

For some, the sharp rise in inflation actually slowedgrowth prospects. In Africa, many economies sufferedthis setback. Of particular notice is the case of East Africawhere the central banks of the three countries in that re-gion (Tanzania, Uganda, Kenya) cut down the GDP growthforecasts for the first quarter of 2006, primarily due to

rising inflation and the high cost of crude oil in the interna-tional market, worsened further by drought in the region.

In Tanzania, previous projections put economic growththis year at 7%; this has been trimmed down to 6.8%. Kenyaprojected a 5.2% growth, but first quarter results showthat 4.3% is more likely; while in Uganda, the growth pre-

Germany dropped from its 1.7% growth position as at lastquarter of 2005, to 1.4% this quarter. The decline isattributed to the coldest weather in a decade which impactednegatively on the construction sector.



diction of 6.2% has been trimmed down to5%.

The three countries also experienced in-flationary pressures almost double their tar-gets for the quarter - Uganda’s inflation fig-ure rose from 3.5% as at December 2005 toan average of 6.5% for the quarter; Tanza-nia, from 4.0% as at year-end 2005 to 6.9%;and Kenya, from 11.7% at December 2005 to19.4% at the end of March 2006.

But the story is not the same in all Afri-can economies. South African consumerspaid 21% more on fuel than they did sameperiod last year. But inflation rate remainedwithin the 5%-6% average it has sustainedsince late 2003.

Despite the global energy crises, Nige-ria actually experienced a drop in inflationfrom 12% as at last December 2005 to about8% at the end of the quarter. In both coun-tries also, no significant change was ob-served in interest rates between last quar-ter and this.

While the favourable situation in SouthAfrica may have been boosted by strongdomestic and international competition aswell as increased productivity; that of Nige-ria may have been supported by strong out-put (especially in the agricultural sector) and rising for-eign exchange earning resulting from the high cost of itsmajor export commodity – crude oil. In addition, Nigeriangovernment had in its 2006 budget set aside a total ofabout N150bn ($1.2bn) to hedge a possible rise in the pricesof crude oil in the international market.

Also in Egypt, a slow-down in economic growth rate,high interest rates and excess capacity in the productivesector are helping to check inflation despite the high en-ergy cost.

The Oil Price Puzzle – for how much Longer?Though its short-term impact on economic growth wasminimal for many countries during the first quarter, therising crude oil price is still a major threat that should beclosely watched. Rising global demand, its all-time essen-tiality and volatile pricing regime makes crude oil a verydifficult puzzle to solve.

Figures by OPEC and energy agencies show that glo-bal demand for crude oil was slightly higher than supply inthe first quarter, at 84.7/84.4 million barrels per day. While

supply worries have always been an issue, yet over 37%rise in crude oil price in the first quarter of this year alonecannot be attributed to the rather insignificant differencebetween supply and demand within the period.

From the crude oil demand and supply balance projec-tions made by OPEC and the US Energy Information Ad-ministration, supply will most likely surpass demand inthe second quarter of 2006. But so long as the prevailingproblems persist, this might not mean an automatic low-ering in price. Market speculations arising from develop-ments in major oil producing economies; setbacks in re-fining capacity; natural disasters, and the failure of majoroil consumers to achieve energy efficiency and a cut indemand, are some of the factors that would once againdictate global energy cost in the remaining quarters of theyear, and perhaps, global economic growth as well.(* Eunice Sampson is an Assistant Editor, Zenith EconomicQuarterly)

Source: OPEC

Source: US Energy Information Administration; Reserve Bank of India


FACTS & FIGURES

ZEQ DATABANKMacroeconomic EnvironmentNigeria’s macroeconomic environment continued to improve on its 2005 year end showing for varied reasons- continu-ing, upwardly stable, crude oil prices, sustained macroeconomic stability, improved public expenditure managementand an early passage of the 2006 Federal budget, improved international perception of Nigeria’s economic environ-ment due to the successful implementation of the Paris Club debt exist scheme, the recent historic BB- rating by FitchInternational Ratings etc. The financial sector seems to be coping fine with the ‘trade-offs’ in the ongoing reforms, withthe insurance companies now on the road, seeking fresh injection of equity especially from the capital market. FDI inflowand remittances from Nigerians in the Diaspora have improved significantly, the privatization programme remains oncourse with the recent concessioning of the Ports. A lot could be said to have changed or is changing- kudos to thenational economic management team which has succeeded, so far, in keeping away from the politics of the day. Theoverall view is that the foundation for growth is being properly laid and the sustained high crude oil prices and theaccretion of excess crude oil earnings rather than spending it all, would continue to provide a strong basis for improvedcredit risk perception of Nigeria irrespective of the trend in recent political discourse. How well the citizenry is copingwith the fall-out of reform is, admittedly (another issue) with mixed feelings.

Gross Domestic Product (GDP)Government’s projection is that the Agricultural sector would lead the extractive sector in contributions to GDP andemployment generation. Currently Agriculture employs over 70% of the workforce and contributes over 40% to totalGDP. With an annual growth rate of about 7% consistently over the past three years, this projection would be surpassedin 2006. GDP in 2006 is estimated to hit the $120bn mark, up from an estimated $108bn at December 2005. The prospectsfor growth remain strong and it is expected that the GDP would grow at a rate of about 8% in 2006, with non-oil sectorcontributing about 3.5% and the Oil sector 4.5%.

Size of the Nigerian Economy

Source:FOS/CBN/R&EIG

Manufacturing Capacity UtilizationThe prospects of an improved level of capacity utilization seem assured by the sustained high crude oil prices whichclearly would help support the ongoing reforms in the foreign exchange market and in particular, ensure supply side isefficient and hence lead to further appreciation of the Naira. Except for the usually poor energy supply situationpreceding the rainy season, it is expected that manufacturers would witness an increase in capacity utilization this year.The estimated level for first quarter 2006 is 52%.

Manufacturing Capacity Utilisation 1981-2005 (est.)

Source:CBN/R&EIG


FACTS & FIGURES

Interest RateThe money market continues to exhibit the same pattern at the beginning of the year – gradually taking off due to thelow/slow tempo of activity after the festive seasons. Generally, inter-bank rates were affected by the slow/late releasesfrom the Federation Account in February and in March, by the population census. By and large, however, the usualpattern of statutory-allocation-sensitive rates was observed.

NIBOR:First Quarter [Jan. - March, 2006]

Source: MMAN / R&EIG

NIBOR: Dec 2005 - Mar.2006

While average interbank rates peaked at 17% in March, up from an average of 14% in February, OBB rates rose to about8%, up from a 1.5% low in February.

Meanwhile the FGN Bond Market continues to experience growing interest as the DMO auctioned the 3rd N10.0bn FGNBond 2009, (3yr tenor) and N20.0bn 2011 (5yr tenor) at a coupon rate of 12.5% and 14.5% respectively. This has beenfollowed by another series in March. Although there is noticeable decline in the pricing, no doubt foreign investors havebeen attracted to this market and government’s intention to achieve a single digit interest rate seems on course in spiteof the current double digit rate.

Open Buy Back [OBB]: First Quarter [Jan. - March], 2006.

Source: CBN/MMAN/R&EIG


FACTS & FIGURES

The average interest rate for banks in the first quarter seemed to have remained generally at the same level after itopened the year marginally higher. Rates on Savings deposits was about 4% while rates on various tenors hover aboutthe same level at between 11%-12.5%. However rates increased marginally, hovering between the 18%-20% mark formedium to lower segment borrowers, tenor did not seem to have mattered much. This followed a marginal decline inthe month of February (except for longer tenured funds which has continued to improve, though marginally).

Average Interest Rate of Banks: First Quarter [Jan. - March], 2006.

Source: MMAN/CBN/R&EIG

InflationYear –on-year inflation figures indicate a stable trend in the last quarter at slightly below the 10% mark, ending thesignificant downward trend from the last quarter and especially the significant decline in the monthly average inNovember and December of 2005. This was largely due to the continued harvesting of agricultural produce whichmoderated food prices (and the relatively stable prices of petroleum products), and hence the general price levels.

Inflation Rate in Nigeria

Source: FOS/CBN/R&EIG


FACTS & FIGURES

Foreign ExchangeThe much promised Wholesale Dutch Auction System (WDAS) was introduced by the CBN in February as part of itsefforts at deepening the foreign exchange market and managing the foreign exchange rates across the various mar-kets. This would eventually lead to a further liberalization of the other segment of the market under its control-BureauDe Change (BDC).

The foreign exchange demand at the WDAS has continued to rise, from $252.0m in January to $359.30m in February andan estimated $423.5m in March. In spite of this gradual rise the Naira exchanged at a significantly stable rate (belowN129.0/$1.0) to the US dollar in the quarter, following the trend in 2005, underscoring the strong macroeconomic showingof the economy in the recent past.

Official Foreign Exchange Rates [Jan. 2004 - March 2006]

Foreign exchange net inflow into the economy remained positive all through the quarter ($2.4bn, $3.1bn and estimated$4.2bn in January, February and March respectively) due largely to the consistently high price of crude oil.

Parellel Market Foreign Exchange Rates [Jan. 2004 - March 2006]

Source: R&EIG

Source: CBN/R&EIG


FACTS & FIGURES

The increased demand pressure in the foreign exchange market, which started in February, due in part to the switchfrom the weekly to the Wholesale Dutch Auction System (WDAS) continued to the end of the quarter and predictablyinto the next quarter as manufacturing and trading activities peak up for the year.

Source: MMAN/R&EIG

NIFEX Spot Rate: First Quarter [Jan. - March], 2006

The CBN continues to meet the supply side effectively and this reform seemed to have sustained the continuingappreciation of the Naira, thanks to the crude oil earnings which have enabled the CBN to guarantee supply. Unfortu-nately, as can be seen from the graphs, the premiums between the parallel and official exchange rates have continuedto widen, tending towards the 15% mark.

Average exchange rate

External ReservesNigeria has never had it so good in the last quarter of a century, supported by a soaring crude oil prices which in the pastfew years have remained significantly above the $50.0 pb mark. In spite of the demands of the Paris Club Debt exitscheme, external reserves have continued to grow, from a $19.0bn mark in January 2005 to $34.3bn as at end ofFebruary in 2006.

Estimated to be $36.80bn at March ending, Nigeria’s external reserves which opened the year 2006 at slightly below$30.0bn mark, can finance over 64 months of foreign exchange disbursements, at current exchange rate commitments.This represents a major development in the national economic management indices and underscores the strongregime of fiscal prudence. (Hitherto significant increases in crude oil earnings have translated to increased budgetaryspending with corresponding decreases in budgets when oil glut forces prices down).

Nigeria External/Foreign Reserves[Jan. 2005 - MAR. 2006]

Nigeria External/Foreign Reserves [Jan. 2005 - Dec. 2005]

Source: CBN/R&EIG


FACTS & FIGURES

Capital MarketNigeria’s capital market in the New Year started on a low tune and became bullish in February, as reflected in theappreciation in the stock price of blue chips and the sustained marginal increase in the All Share Index. Total sharestraded rose in number and value in each successive month of the quarter.

Due to promising year end (December 2005) results and the expected influx of new public offerings from insurancecompanies seeking to raise new funds, the market is expected to be very busy, especially the primary market. This isnot unexpected as Union Bank’s Rights Issue and Public Offer to raise over N40.0bn closed in the quarter. In the samequarter also Zenith Bank’s Public Offering of N50.7bn was also offered. The projection is that with the effective take-offof PFCs and PFAs, the equities market would begin to experience more transactions.

Crude OilNigeria’s crude oil production suffered from the seeming restlessness in the Niger Delta Region with incidents ofdisruptions to production and threat to life and property. These incidents and the heightening of tension over theIranian nuclear policy helped contribute to increases in the prices of crude oil. Crude oil production disruptions inNigeria meant that targets were generally not met (2.3mbpd as against 2.5mbpd) and this impacted on projectedrevenues for the quarter as earlier indicated.

The Nigerian Stock Exchange [All Share Index]

Prices of Crude Oil: World/Bonny Light

Source: NSE/R&EIG

Source: CPI/R&EIG

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