ECONOMIC REPORT FOR THE FIRST HALF OF 1999
The tempo of economic activities in Nigeria during the first half of 1999 was influenced
by several factors, among which was the successful completion of the transition
programme from military to civil rule, which commenced in the last quarter of 1998. The
main objective of this report is to analyze the economic developments during the first
half of the year. In particular, it reviews and appraises macroeconomic policy pursuit,
noting the impact on domestic economic conditions. It also evaluates the influence of
international developments on the economy, as well as Central Bank of Nigeria’s (CBN)
policy initiatives and responses during the period. The report is in six parts. Part I is
an overview of the report, while Parts II and III are the review and appraisal of major
economic developments during the period. Part IV gauges the influence of policy
pursuits on domestic economic conditions. Part V evaluates some CBN’s policy
responses, while the final part presents the outlook for the rest of the year.

I.
GENERAL OVERVIEW
2.
A review of economic policy for the period indicates that its overall objective was
to attain a minimum of 3.0 per cent growth in non-oil GDP and sustain a single
digit inflation rate, which was subsequently revised to not more than 12.0 per
cent. This was to be achieved through the pursuit of appropriate fiscal, monetary,
trade and exchange rate, and real sector policies. In particular, the fiscal policy
planned to curtail fiscal deficits to about =N100,000.0 million for the half-year,
through cutback in capital outlays and curtailing the wage bill. Monetary policy
targeted the attainment of 4.1 and 10.0 per cent expansion in narrow and broad
money respectively, through more active Open Market Operations (OMO)
transactions, raising the cash reserve requirement and liquidity ratios, and the

transfer of retail banking functions of CBN to deposit money banks. External
sector policies eliminated the dual exchange rate system, liberalized the foreign
exchange market, abolished pre-shipment inspection of imports and replaced it
with destination inspection. Among the sector-specific policies were completion
of the turn-around maintenance of the refineries, incentives for promoting
agricultural and industrial production, and support for infrastructure and social
services.

3.
An appraisal of policy outcomes based on available information shows that the
fiscal operations of the Federal Government resulted in an overall deficit of about
=N245,701.0 million, surpassing the proportionate budgetary estimate by 143.2
per cent. This resulted mainly from substantial increase in expenditure in
support of the transition programme, in spite of the modest improvement in
revenue performance compared to showed set targets. Provisional data also
show that the consolidated fiscal operations of the State Governments resulted
in a deficit while that of the Local Governments was a modest surplus. The
financial sector was characterized by rapid monetary expansion - as narrow and
broad money rose by 37.5 and 30.6 per cent, respectively, exceeding the set
targets of 4.1 and 10.1 per cent; relatively stable but wide divergence between
lending and savings interest rates, and an active OMO transactions buoyed by
improved yield rates. The external sector was under severe pressure, as the
balance of payments resulted in an overall deficit of =N304,414.8 million (US
$3,397.7 million) as against =N75,168.0 million (US $972.5 million) in the
corresponding period of 1998. The financing was mainly from accumulation of

arrears of external debt obligations and draw-down on the stock of external
reserves. Exchange rate at the Autonomous Foreign Exchange Market (AFEM)
was relatively stable up to May, when it depreciated. On the average, the rate
depreciated by 7.0 per cent, compared to its level in the corresponding period of
1998.

4. The performance of the real sector was below expectation during the period.
The sub-sectoral analysis show that agricultural production expanded by 3.1 per
cent compared with 2.0 per cent in the corresponding period of 1998. Industrial
production fell by 4.8 per cent below the level in the first half of 1998, owing
mainly to the fall in mining production, as manufacturing output and electricity
consumption rose marginally. Available data from the Federal Office of Statistics
(FOS) put inflation rate at 12.2 per cent as at May, 1999, and it is projected at
12.6 per cent in June, 1999. This could be explained by the expansionary fiscal
and monetary policy outcomes during the period, as well as the rise in production
costs occasioned by the poor state of infrastructure and energy supply problems.

5.
World output grew at a lower rate than the previous year in spite of the resilience
of industrialised countries, the apparent resolution of the East Asian financial
crisis of 1998, strengthened demand and firmed-up of key commodity prices,
especially crude oil. This led to further expansion in world trade.

5. An appraisal of the CBN’s operations during the first half indicated that it faced
enormous challenges, posed in part, by the excess liquidity in the banking

system, precipitated by the huge government borrowing through ways and
means advances, and the transfer of public sector accounts to the deposit
money banks and partly to the deployment of these funds by financial
intermediaries to speculative transactions in AFEM, with consequent adverse
implication for exchange rate management. It relied mainly on OMO as the main
instrument of monetary management, that became less effective and had to be
supported by complementary measures which included: the issuance of Special
Treasury Bills in April and May, which mopped up =N161.1 billion from the
system; collateralization of AFEM demand in June, with mandatory purchase of
treasury bills worth 200.0 per cent of the bid, in addition to 100.0 per cent cash
cover; raising of the cash reserve requirement from 8.0 to 10.0 per cent and later
to 12.0 per cent, among others. The bank intervened 26 times in the AFEM, at
an average exchange rate of =N90.0 per US $1.00 and met in full the total
demand of US $2,887.3 million. It also engaged in increased surveillance of the
banking system.

7.
An analysis of the economic outlook for the rest of 1999 indicated that aggregate
output performance may be sluggish owing to the prevalence of structural
bottlenecks, while inflationary pressure may persist, arising mainly from fiscal,
monetary and exchange rates policy out-turns. In order to moderate these
effects, the report stressed the need for further fiscal and monetary restraints,
expenditure restructuring and provision of the right incentives for private sector
initiatives in agriculture, industry and other key sectors of the economy.

II.
MACROECONOMIC AND SECTORAL POLICY REVIEW
8. The main thrust of economic policy in 1999 was to ensure stable prices and
exchange rate, as well as encourage private sector-led growth. The programme
priorities for the year were the achievement of a minimum of 3.0 per cent overall
growth in the non-oil GDP and an end-period inflation rate of not more than one
digit. This was subsequently revised to 12.0 per cent under the Staff Monitored
Programme (SMP). The attainment of these targets were predicated on effective
implementation of the following fiscal, monetary and credit, foreign trade,
exchange rate and real sector policies that were proposed in the 1999 Budget as
well as under the SMP.

Fiscal Policy Measures
9.
Fiscal policy for 1999 was designed to address some of the negative
developments in the preceding year, especially the adverse consequence on
government fiscal operations which resulted from international oil price decline
and the disruption in crude oil production. To this end, emphasis was placed on
strengthening the non-oil revenue base of the Federal Government. The main
policy measures were focused on improved taxation and reduction in recurrent
and capital expenditure. Specifically, excise duty on tobacco, cigarettes and spirit
were reinstated at 40.0 per cent, while the 25.0 per cent import duty rebate was
abolished. In addition, the services of the Professional Import Duty
Administrators (PIDA) were discontinued with effect from June 30, 1999. In the
area of direct taxation, tax authorities were strengthened for more effectiveness
in the collection of personal and corporate income taxes. Specific measures

included the broadening of the coverage and enhancing the collection of Value
Added Tax (VAT), reducing the number of exemptions and establishing eight
zonal VAT tribunals. Moreover, state and local government’s shares of VAT
revenue were increased to 50.0 and 35.0 per cent from 45.0 and 30.0 per cent,
respectively, while the Federal Government’s share was reduced from 25.0 to
15.0 per cent. Finally, the Federal Government reduced its outlay on capital
expenditure, while at the same time containing the growth in Federal
Government wage bill.

9.
Total federally-collected revenue was projected at =N667.0 billion, compared with
=N424.0 billion in 1998. Of this amount, =N453.0 billion was estimated to come
from crude oil sales, based on a reference price of US$9 per barrel and an
exchange rate of =N86.0 to US$1, as against US$17 per barrel and an exchange
rate of =N22 to US$1 in 1998. The expected revenue from non-oil sources was
estimated at =N214.0 billion, compared to =N167.0 billion in 1998. A breakdown of
the estimated non-oil revenue shows that =N30.0 billion was expected from
companies’ income tax, =N72.0 billion from Customs and Excise Duties, =N12.0
billion from Federal government independent revenue, while =N50.0 billion each
was expected from Value Added Tax (VAT) and Petroleum Products Adjustment
Revenue. The Federal Government’s share of total federally-collected revenue,
was estimated at =N296.0 billion, 35.8 per cent higher than that of 1998.

10.
Total Federal Government planned expenditure was projected at =N498.0 billion,
about 20.0 per cent higher than the level in 1998. Total recurrent expenditure

was estimated at =N329.0 billion, while capital expenditure was expected to be =N
169.0 billion, compared to =N116.5 billion and =N143.2 billion, respectively for
1998. Expenditure on debt service was projected at =N168.0 billion (=N39 billion
and =N129 billion for internal and external debt, respectively), compared with =N
66.0 billion in 1998. The overall budget deficit was estimated at =N202.0 billion.
This was to be financed by draw-down on reserves/transfers from other accounts
of =N168.0 billion, leaving an effective budget deficit of =N34.1 billion. In addition
to the budget estimates, other policy initiatives for fiscal 1999 were as follows:
planned promulgation of a decree to give legal backing to the privatization
programme, enhancement of the funding of small and medium scale industries,
lifting of embargo on external borrowing in favour of concessional and projecttied loans, and intensification of efforts at facilitating the exploration and
exploitation of solid minerals.

Monetary and Credit Policies
11.
Monetary and credit policies adopted in 1999 were designed to maintain
macroeconomic stability and lay the foundation for a sustained economic
recovery. In order to achieve the objectives of the programme, monetary policy
was expected to be non-accommodating, so as to ensure efficiency in resource
allocation, and to support private sector activities.


12.
Specifically, the primary objectives of monetary policy were to maintain an

inflation rate initially targetted at a single digit but revised to not more than 12.0
per cent and achieve a minimum GDP growth rate of 3.0 per cent, in addition to
promoting employment growth and enhancing the overall efficiency of the
economy. Consistent with these goals, and bearing in mind the negative
developments in 1998, broad money (M2) and narrow money (M1) were targeted
to grow at not more than 10.0 and 4.1 per cent, respectively, while government’s
borrowing would not exceed 40.1 per cent.

14.
Open Market Operations (OMO) was to be the primary instrument of monetary
management, complemented by reserve requirements, discount window
operations, including repurchase agreements (REPOs), cash and liquidity ratio
requirements. As in the past, OMO was to be conducted weekly, while cash
reserve requirement (CRR) for commercial banks was increased from 8.0 per
cent to 10.0 and 12.0 per cent of their deposit liabilities in April and June,
respectively. The base on which the ratio was to be calculated included banks’
total deposit liabilities (demand, savings and time deposits), certificates of
deposit (CDs), promissory notes held by the non-bank public and other deposit
items.

15. The exemption granted to merchant banks from observing cash reserve
requirement continued. Though an initial liquidity ratio requirement of 30.0 per
cent for both commercial and merchant banks for fiscal 1999 was proposed, it
was raised to 40 per cent in June in the wake of the transfer of public sector
accounts from CBN to trading banks. Banks were required to hold 40.0 per cent

of their liabilities in eligible liquid assets. In addition, the base for calculating
liquidity ratio was to comprise the total deposit liabilities, CDs and promissory
notes held by the non-bank public as well as inter-bank transactions. However,
with effect from June 1999, inter-bank and Discount Houses placements were
classified as loans and, therefore, not countable as part of a bank’s eligible
assets for the purpose of meeting the new liquidity ratio requirement. Discount
Houses were required to continue to invest at least 60.0 per cent of their total
deposit liabilities in treasury bills, while banks were allowed unhindered leverage
in the structure of their liquid assets.

16.
One of the major policy initiatives in the monetary sector was the transfer of
retail banking functions of the CBN to commercial and merchant banks with
effect from 31st March, 1999. In the wake of the surge in base money that
accompanied the transfer of public sector accounts from the CBN, Special
Treasury Bills were issued to banks in April and May 1999. These were 90-day
securities that were not rediscountable for the initial period. The National
Savings Certificate (NSC), a medium-to-long term security of between 3 – 5
years’ maturity with relatively attractive yields, was introduced in the first half of
1999. Both banks and the non-bank public were free to invest in the instrument.
Finally, to promote soundness of the financial system, the cut-off date for
meeting the minimum paid-up capital requirement of =N500.0 million for banks
was not extended beyond 31st March 1999.
External Sector Policy Measures
17.
The main thrust of external sector policy was to maintain a viable balance of

payment, and mitigate some of the negative developments of the preceding
year. In order to achieve these objectives, the dual exchange rate system
was eliminated with effect from 1st January 1999, and the prevailing AFEM
rate was adopted for all foreign exchange transactions. In addition, all oil
exploration, producing and service companies, were required to sell their
foreign exchange receipts to the CBN at the prevailing autonomous rates.
Banks were to continue approving all applications in respect of transactions
not valid for foreign exchange, while transactions involving the use of bills for
collection and open accounts were allowed. However, the transactions
executed on private sector initiatives were to carry no government guarantee
or obligations. The remittances were to be made through the AFEM subject
to the prevailing conditions for payment and were to be channeled through
the authorized dealers. Government also resolved to abolish pre-shipment
inspection schemes for imports with effect from 1st April, 1999 and replace it
with destination inspection.

18.
In order to manage the steep decline in the external reserve position,
authorized dealers were required to provide treasury bill cover for their
foreign exchange demand in the AFEM with effect from 23rd June, 1999.
Under the arrangement, banks bidding for foreign exchange were to provide
the initial cash backing, while the amount demanded was to be collateralized
with 200.0 per cent worth of treasury bills. The treasury bills were to be held
for an initial period of one month and were not discountable.
Real Sector Policy Measures

19.
The 1999 Federal Government budget projected real GDP growth of 3.0 per cent
and a single digit rate of inflation. Fiscal, monetary and sector-specific policies
were designed to stimulate output growth in the real sector. The policy
measures that were intended to boost agricultural production included capital
allocation of =N5.8 billion or 4.3 per cent of total capital allocation for seed
multiplication, research activities and counter part funding of projects, as well as
for rehabilitation and completion of dams and other irrigation projects. Other
sectoral policy measures for promoting agriculture included retention of import
duty on fruit juice at 55.0 per cent, tomato puree at 45.0 per cent, while the
import of agricultural spraying guns remained duty free; reduction in import duty
on live/chilled chicken and eggs from 150.0 to 55.0 per cent and cooking oil from
55.0 to 35.0 per cent. In furtherance of the effort aimed at promoting non-oil
exports, beans, yam and rice were removed from the export prohibition list so as
to encourage investment, boost farm gate prices and enhance the income of
farmers.

20.
Recovery in the industrial sector was to be achieved through generous funds
allocation to some industry-related programmes such as substantial increase in
wages to stimulate demand, rural electrification, procurement of beneficiation
(upgrading) plants and other facilities for the National Iron Ore Mining Project,
airborne geophysical survey of solid mineral deposits, strengthening the Nigerian
Mining Corporation, continued rehabilitation of the Nigerian Railway Corporation
and reduction of the number of security and inspection agencies at the ports to
six in order to reduce the cost of imports and enhance faster clearance of goods.

The measures that were intended to boost mining operations included allocation
of US $2.0 billion to fund the NNPC joint venture cash calls, provision of
adequate funds for the turn-around maintenance (TAM) of the Warri refinery and
additional incentives to the gas sub-sector. The budgetary allocations to the
ministries and departments in the social sector were increased to mitigate social
problems.

III. MACROECONOMIC DEVELOPMENTS
Fiscal Operations and Developments
(a) Federal Government Finances

21.
The Federal Government fiscal operations during the first half of 1999 resulted in
an overall deficit of _245,701.0 million,
which was 143.2 per cent higher than the
proportionate budget estimate. The
deficit was financed largely through
Ways and Means Advances. Although,
there was improvement in revenue
performance compared with budget
estimates,
substantial
increases
in
expenditure outlay led to deterioration in
government finances.

22.
Provisional data showed that total federally collected revenue amounted to
-400
-200

Ret. Rev.
Tot. Exp.
Overall Balance
Chart I:Fed.Gov't Fiscal Operations
(=N=Billion;Annualised Except 1999)

_354,019.4 million, surpassing the budget estimate for the period by 6.1 per cent
and indicating an increase of 43.2 per cent over the level in the corresponding
period of 1998. The growth in revenue reflected largely the contribution of the oil
sector, which grew by 52.4 per cent over the level in the corresponding period of
last year and exceeded the budget estimate by 11.9 per cent following sustained
increase in crude oil prices during the period. In addition, non-oil revenue
recorded an increase of 24.2 per cent, compared with the corresponding half of
1998, although it fell short of budget projections by 6.1 per cent.

23.
At =N161,789.9 million, the retained revenue of the Federal Government for the
period was 17.4 per cent higher than the proportionate budget estimate and 6.8
per cent over the amount in the corresponding period of 1998. The retained
revenue was mainly made up of statutory allocation, excess crude oil earnings,
independent revenue and its share in value added tax.

24.
The aggregate expenditure of the Federal Government, at =N407,491.0 million,
recorded a substantial increase of 103.9 per cent over the level in the first half of
1998 and exceeded the budget projections by about 63.0 per cent. A breakdown
of the aggregate expenditure showed that non-debt recurrent outlay, at =N
98,400.0 million, exceeded its proportionate budget estimate by 22.2 per cent,
while capital expenditure amounting to =N216,180.0 million also overshot its
budget estimate by 155.8 per cent. Debt service payments (internal and
external) amounted to =N92,911.0 billion or 22.8 per cent of total expenditure.

(b) State Governments’ Finances
25.
Provisional data on the consolidated fiscal operations of the State Governments
indicated an overall deficit amounting to =N12,241.5 million. However, a current
account surplus which amounted to =N15,302.7 million was recorded, indicating a
decrease of 54.6 per cent, from its level in the corresponding period of 1998.

26.
Aggregate revenue of the State Governments amounted to =N62,729.9 million,
representing a decrease of 11.6 per cent below the level in the corresponding
period. This was accounted for by the general decline of 9.1 and 52.3 per cent
in the statutory allocation and internally generated revenue of the State
Governments, respectively. Total receipts from VAT amounted to =N15,496.7
million, indicating an increase of 99.6 per cent over the corresponding half of
1998. The share of VAT in total revenue was 24.7 per cent compared with 11.0
per cent in 1998. The substantial increase was due in part to the upward
revision of State Governments’ proportional share from 45.0 to 50.0 per cent in
1999 and partly to increase in VAT proceeds during the review period.

27.
The total expenditure of the State Governments rose by 8.3 per cent to =N
74,971.4 million, compared with =N69,226.0 million in the corresponding half of
1998. Their recurrent expenditure increased by 27.3 per cent to =N47,427.2
million and accounted for 63.3 per cent of the total outlay, while capital
expenditure decreased by 13.8 per cent to =N27,544.2 million and accounted for
the balance of 36.7 per cent.

(c) Local Governments’ Finances
28.
The fiscal operations of the local governments during the first half of 1999
resulted in an overall surplus of =N4,712.0 million, 64.4 per cent lower than the
surplus in the corresponding period of 1998.

29.
The statutory allocation to the local governments declined by 4.8 per cent to =N
26,905.4 million. However, allocation from VAT increased by 54.0 per cent to =N
7,942.0 million during the period under review. This was as a result of the
higher ratio of VAT allocation from 25.0 to 30.0 per cent in favour of the local
governments in the 1999 budget. Internally generated revenue also increased
by 4.6 per cent to =N2,681.3 million.

30.
Recurrent expenditure showed an increase of =N1,751.5 million or 12.0 per cent
when compared with the corresponding period of 1998, while capital expenditure
increased by a higher margin of 124.0 per cent to =N15,174.9 million. The rise in
capital expenditure resulted from the efforts of most local governments to
complete on-going projects before the end of the political transition period.