ECONOMIC REPORT FOR THE FIRST HALF OF 2000

This Report reviews economic developments during the first half of 2000 and
articulates the major policy responses of the Central Bank of Nigeria (CBN) to those
developments. The Report is structured into five parts. Part 1 presents a summary of
the Report, while Parts 2 and 3 review macroeconomic policy objectives as well as
sectoral developments and policy appraisal. Part 4 evaluates CBN’s policy responses
during the period, while the final Part discusses the prospects of the economy in the
rest of the year. A statistical appendix is attached to the Report.

I. 0

stood at US $7,272.4 million, which could support about 11 months of imports.
However, the naira exchange rate depreciated slightly during the period due to excess
demand arising mainly from the liquidity surfeit in the
There were mixed developments in domestic economic conditions. While the
agricultural sector recorded further improvement, the industrial sector deteriorated.
Inflationary pressures moderated significantly. Provisional estimate indicat
per cent inflation rate compared with 12.1 per cent attained in the corresponding
period of 1999. The socio economic situation was relatively unfavourable as it was
characterized by labour unrest as well as reports of violent crimes.
international economic and financial developments influenced the
domestic economy during the first half of 2000. The price of crude oil in the
international market rose significantly and was accompanied by increased output.
However, the prices of other primary commodities fell. World output, trade and
inflation maintained a steady growth.
A review of CBN policy responses indicated that considerable effort was
devoted to liquidity and foreign exchange management, as well as the surveillance of
An assessment of economic prospects for the rest of the year indicated that
improvement in the industrial sector could come from the increase in aggregate
demand, arising from the increase in minimum wage.
2.0 MACROECONOMIC POLICY OBJE
The year 2000 economic policies were designed to sustain the rate of inflation at
single digit, as well as stimulate output and employment growth. The strategies for
achieving these objectives include further commitment by the Federal Government to
fiscal prudence, complemented by a tight monetary policy. Specifically, the policy
thrust anchors on guided privatization of public enterprises, private sector led growth,
rehabilitation and upgrading of infrastructural facilities and implementation of a
poverty alleviation programme. Details of policy measures are outlined below.
The fiscal measures in Budget 2000 were formulated to improve government
revenue, as well as enhance economic growth. Specific measures ou
Budget included the provisions of generous tax incentives to encourage production,
while provision for low income tax rates was designed to enhance consumers’
purchasing power. In order to broaden the tax base and enhance greater efficiency
tax collection, the administrative capacity of the tax authorities was to be further
strengthened. In the area of the Value Added Tax (VAT), the flat rate of 5.0 per cent
on VAT was retained, while the 50 VAT offices established in 1999 would become
erational. Furthermore, a VAT clearance certificate was to be introduced by
government and issued to all VAT payers. Other measures included: a
comprehensive port reform and streamlining of port charges/levies and a review of
existing incentives and set offs as they relate to the oil and gas sector, while the new
memorandum of understanding on the scheme was expected to come into effect
during the year. There was also a provision for the enforcement of compliance with
tax assessment by small and medium scale enterprises. In addition, the Federal
Government would embark on the deregulation of the petroleum industry such that the
crude oil delivery to Nigeria National Petroleum Corporation (NNPC) for domestic
consumption would be at a price equivalent to what it is in the international market,
thereby eliminating subsidy.
collected revenue was projected at 1,686.0 billion for the year,
representing an increase of 68.9 per cent over the revenue estimates for 1999. Of this
al receipts from petroleum were projected at
1,340.0 billion (about 79.5
per cent of total receipts) based on a bench mark oil price of US $20.0 per barrel and
an estimated output level of 2.04 million barrels per day. Non
rease by 44.7 per cent to
345.6 billion compared to an increase of
43.0 per cent in the preceding year. Revenue from customs and excise was projected
to rise by 31.6 per cent to
100.0 billion, while revenue from Company Income Tax
Tax (VAT) were expected to increase by 113.1 and 62.5 per
65.0 billion each. Revenue from independent sources, at
constituted 14.5 per cent of the total non oil revenue, compared with the ratio of 5.0

per cent (N12.0 billion) in 1999. Out of the total collectible revenue, the share of the
Federal Government was projected at 48.5 per cent, while the State and Local
Governments would receive 24.0 and 20.0 per cent, respectively. The balance of 7.5
per cent was set aside as special funds.


Total Federal Government planned expenditure was projected to be N653.1
billion for the year, representing an increase of 86.7 per cent over the estimate in
1999, and about 16.7 per cent of GDP compared with 10.4 per cent in the preceding
year. This was to reflect largely the anticipated increase in personnel cost, the
implementation of poverty alleviation programme and the substantial allocations for
the revamping of infrastructural facilities. Total expenditure comprised of N341.5
billion for recurrent expenditure while capital expenditure was projected at N311.6
billion. Thus, with a projected expenditure of N653.1 billion and retained revenue of
N556.5 billion, the overall budget deficit was put at N 96.6 billion, representing about
2.5 per cent of GDP.

2.2
Monetary Policy Measures

Monetary and credit policies for the year were primarily designed to maintain
macroeconomic stability as basis for sustainable growth. The main thrust of the
policies was to sustain inflation at single digit by containing excess liquidity in the
banking system. Specifically, the main targets of the monetary policy were to ensure
the attainment of a growth rate of 14.6 per cent for broad money supply (M2), while
aggregate bank credit, (credit to government and to the private sector) was targeted to
expand by 27.8.


Open Market Operations (OMO) would remain the major instrument of
monetary management to be conducted weekly in short term government securities.
This was to be complemented by discount window operations, repurchase
agreements (REPOs), cash and liquidity ratio requirements. The cash reserve
requirement (CRR), which is applicable only to commercial banks, remained at 12.0
per cent, while the minimum liquidity ratio (LR) applicable to both commercial and
merchant banks remained at 40.0 per cent as in 1999. In order to reduce the cost of
funds to banks and influence movements in market interest rates, the CRR and the LR

were reviewed downward to 11.5 and 35.0 per cent, respectively, in April, 2000.
Earlier in April 2000, the CBN’s Minimum Rediscount Rate (MRR) was reduced by 100
basis points to 17.0 per cent following the ease in economic and market conditions,
occasioned by the sustained decline in the inflation rate. Interest rates remained
deregulated in consonance with the prevailing market-based techniques of monetary
management, while the CBN would continue to influence interest rates through its
intervention rate on various money market instruments, such as the Minimum
Rediscount Rate (MRR) and the stop rate at the weekly tender for treasury bills. As
in the recent past, the CBN would place emphasis on creating a more competitive
financial environment and the introduction of complementary monetary instruments.
In this regard, the Bank would continue to encourage investment in treasury securities
by the non-bank public and also initiate policies to strengthen community banks and
other deposit taking institutions to attract savings and enhance credit delivery to microenterprises. It was envisaged that these actions would reduce the persistent wide
spread between savings and maximum lending rates.

In order to complement current efforts aimed at addressing the problem of
excess liquidity in the economy and promote financial savings, the CBN would in
conjunction with the Federal Government explore the possibility of issuing the National
Savings Certificate, a medium-to-long term security of 3-5 years maturity, which was
approved in 1998. The Bank would also work with the Federal Government with a
view to resuming the floatation of Federal Government development stocks, which
was suspended in 1988 to improve the financial environment for monetary policy and
encourage the government to source its long-term financing needs from the capital
market.

In pursuance of the objective of deepening the financial sector as well as
enhancing its efficiency, the CBN would continue to allow merchant banks that meet
the necessary conditions to convert to commercial banks, while approval in principle
was granted for the introduction of universal banking in Nigeria. Meanwhile the
minimum paid-up capital requirement for existing banks remained at N500 million as in
1999, while that for new banks was raised to N1.0 billion with effect from January
2000.

The capital base of the Agricultural Credit Guarantee Scheme Fund (ACGSF) was
raised from N100 million to N1.0 billion to enhance its operational effectiveness, while
refinancing schemes would be established to cater for the needs of medium and largescale borrowers. In order to promote growth in the real sector in general, banks were
encouraged to set aside 10 per cent of their profit before tax of the previous year for
equity investments in small and medium scale enterprises (SMEs).

The CBN would continue to engage in moral suasion through regular dialogue with
banks and other financial institutions, under the aegis of the Bankers’ Committee and
other channels, in order to enhance efficiency in the banking industry, especially with
respect to interest and exchange rate management.

2.3
External Sector Policy Measures


The external sector policies in the year 2000 were designed to ensure a stable
naira exchange rate as well as the attainment of external balance under a deregulated
exchange rate mechanism. To this end, the Inter-bank Foreign Exchange Market
(IFEM) would continue to exist and operate freely. However, operators were expected
to adhere to the relevant laws and regulations governing the operations of the market.
Foreign exchange purchased from the CBN at IFEM was to be used for eligible
transactions. Oil and oil service companies were free to sell their foreign exchange to
any bank of their choice to meet their domestic expenses. In line with the policy of
divesting CBN of retail banking, all government parastatals, government companies,
agencies and companies in which the government had majority shareholding were
directed to transfer their foreign currency domiciliary accounts to commercial banks.
Furthermore, any traveller entering and leaving Nigeria was required to declare any
amount above N10, 000.00 (Ten thousand Naira only) in his/her possession at the
time of arrival in, or departure from the country on Forms TM and TE, respectively. In
order to minimize the delay in foreign exchange transactions, the prescribed minimum
documentation requirements for all visible and invisible trade transactions were
retained, while all Authorized Dealers should continue to render promptly, accurate
and coordinated returns on foreign exchange transactions on the prescribed

schedules. Sanctions would be imposed on defaulting authorized dealers and those
that rendered inaccurate returns. In the area of external debt, the Federal
Government would intensify efforts at securing debt service and debt stock reduction.

2.4
Real Sector Policy Measures

The 2000 Budget envisaged the achievement of a minimum of 3.0 per cent
growth in real GDP, a single digit inflation rate, reduction in unemployment and
poverty, improvement in agricultural and industrial production, as well as social
services, including the rehabilitation and upgrading of infrastructural facilities. Specific
policy measures on agriculture in the budget include, the provision of fiscal incentives
to institutional lenders and borrowers in support of agricultural enterprises, exemption
from Value Added Tax (VAT) on all agricultural equipment and inputs, encouragement
of state governments to specialize in the production of a crop in which they have
ecological advantage, reactivation of the Agricultural Development Projects (ADP)
through a US $77.986 million loan to be drawn from the on-going World Bank and IMF
facility, privatization of fertilizer procurement and other farm inputs supply, as well as
a reassessment of the Agricultural Credit Guarantee Scheme.


Industrial sector policies and programmes included the privatization of
government investment in public enterprises quoted on the stock exchange as a way
of enhancing their efficiency, the establishment of regulatory framework for effective
private sector participation in preparation for privatizing public utility companies, the
establishment of Niger Delta Development Commission to reduce the perennial
disturbance of oil production. Other measures include, emphasis on aerial geophysical surveys and exploration of solid mineral deposits in order to encourage
private investment in the sector, provision of appropriate protection of domestic
industries against stiff competition from imports and dumping by foreign industries.
Such protection was designed to allow for survival of local industries in the face of
global onslaught and trade liberalization.

3.0 SECTORAL DEVELOPMENTS AND POLICY APPRAISAL
3.1
Fiscal Operations and Developments

(a) Federal Government Finances

The fiscal operations of the Federal Government during the first half of year 2000
resulted in an overall deficit of N59,945.2 million which was 84.2 and 67.4 per cent of
the proportionate budget estimate and the outcome in the corresponding period of
1999, respectively (Figure 1). On a proportionate half year basis, the deficit in the
review period was 3.1 per cent of GDP compared with 14.3 per cent in the
corresponding period of 1999. Available data showed that total federally-collected
revenue amounted to N796,315.0 million, which is by 124.9 per cent higher than the
level in the corresponding period of 1999 but fell short of the proportionate budget
estimate by 5.5 per cent. The lower revenue, relative to the budget projections, was
attributable to the low receipts from non-oil sources as a result of the lull in economic
activities during the period. Total oil receipts grew by 162.3 per cent over the level in
the corresponding period of 1999 and exceeded the budget estimate by 0.7 per cent,
while non-oil revenue recorded an increase of 30.4 per cent when compared with the
corresponding half of 1999 although, it fell short of the budget projections by 23.8 per
cent. The sum of N435,738.9 million or 54.7 per cent of the total federally-collected
revenue was credited to the Federation Account as against 36.1 per cent in the first
half of 1999.


The retained revenue of the Federal Government for the period was
N214,878.7 million indicating an increase of 28.8 per cent over the amount in the
corresponding period of 1999, but was 22.8 per cent below the proportionate budget
projection. The aggregate expenditure of the Federal Government, at N274,823.9
million declined by 15.8 and 32.6 per cent below the proportionate budget estimates

for the first half
Figure 1: Federal Government Fiscal Operations
in the First Half of the Year
(N'Billion)

Billion Naira
Ret. Rev.
Tot. Exp.
Recur Bal.
Overall Bal.
Ret. Rev.

Tot. Exp.

Recur Bal.

Overall Bal.


of 2000 and 1999, respectively. The relatively low expenditure resulted largely from
the late approval of the year 2000 budget and the low disbursement on capital
expenditure, which was 60.0 per cent lower than budgeted for the period.

(b)
Statutory Allocations to State Governments
and the Federal Capital Territory

Statutory allocations to State Governments and the Federal Capital Territory
amounted to N108,739.8 million in the first half of year 2000, representing an increase
of 157.0 per cent over the N42,317.8 million received in the corresponding period of
1999. The statutory allocations consisted of N95,981.1 million from the Federation
Account and N12,758.7 from the Value-Added Tax (VAT) pool account. Receipts from
the Federation Account rose by 209.2 per cent over the level in the corresponding
period of 1999 as a result of the upward review of the total amount disbursed to all the

beneficiaries of the Account and the payment of 13.0 per cent derivation to the mineral
producing areas.

(b) Statutory Allocations to Local Government Councils


Available information showed that total statutory allocations to Local
Government Councils from the Federation and VAT pool accounts increased
significantly by 155.7 per cent to N856.5 million when compared with the
corresponding half of 1999. Gross allocation from the Federation Account, at
N76,795.3 million, indicated an increase of 199.9 per cent over the level in the
corresponding period of 1999 and accounted for 89.4 per cent of total allocation for
the period under review.

(d)
Public Debt

Domestic debt outstanding at the end of June 2000 stood at N794,806.5 million
indicating a marginal decrease of N190.0 million from the level in end-June, 1999
(Figure 2). The Federal Government redeemed a total of N190.0 million development
stocks, which matured during the review period. Available data on external debt
outstanding showed that the debt stock at end-June, 2000 stood at US

$27,062.74million,
while
external
debt
service
payments
for
the
first
Figure 2: Public Debt Outstanding

Billion Naira

Billion US Dollars
Int.(N)
Ext.($)
Int.(N)

Ext.($)


half of the year amounted to US $1,213.5 million compared with US $729.9 million
in the corresponding period of 1999. Of the total debt service payments, 25.3, 45.7,
8.2, 5.2 and 15.3 percent accrued to multilateral institutions, the Paris Club of
creditors, the promissory notes holders, London Club and other bilateral creditors,
respectively.

3.2
Financial Sector Developments
(a)
Institutional Developments
Following the granting of licence by the CBN to Regent Bank Limited to
commence commercial banking activities in the country, the number of banks in
operation at end-June, 2000 increased by 1 to 91 (59 commercial and 32 merchant).
Branch network also increased by 90 from 2530 (2401 commercial and 129
merchants) in December 1999, to 2,620 (2,483 commercial and 137 merchant)
following the opening of new branches. A merchant bank converted to commercial
bank during the period, bringing the number of such conversions to 6. Those granted
approval-in-principle (AIP) to convert increased from 4 to 7. The number of banks that

met fully the N500 million minimum paid-up capital requirements as stipulated in the
Prudential Guidelines remained at 80. Effective January 2000, the minimum paid-up
capital requirement for new banks was raised to N1 billion.


In order to streamline the functions of development finance institutions (DFIs),
the Presidency constituted a Committee comprising the office of Head of Service, the
Ministries of Finance, Industries and Justice, to work out modalities for the merging of
three DFIs namely, NBCI, NIDB, and NERFUND.


In continuation of the distress resolution options, six more banks were
approved for sale to successful bidders in the review period. These were Nationwide
Merchant Bank, Eagle Bank (First African Trust Bank) Ltd, New Nigerian Bank Plc,
African Continental Bank Plc, Orient Bank of Nigeria Plc, and Nigerian Universal Bank.
National Bank had earlier been sold and is in the process of commencing banking
business. The number of distressed banks remained unchanged at 10.


A survey of Primary Mortgage Institutions (PMIs) was conducted during the
period to determine their viability as a prelude to their reforms. The Report on the
revised guideline for the operation of the PMIs is currently receiving attention of the
CBN management. Meanwhile, the number of PMIs in operation remained at 195 as
was reported in December 1999.


The number of finance companies with AIP stood at 21 while those issued
operational licence dropped from 280 to 72 at end-June, 2000 following the
cancellation of 462 AIPs and the revocation of licences of 208 finance companies.
The number of community banks also remained at 1,014, the same as at
end-December, 1999.


Efforts to resolve the financial distress continued during the review period. The
joint CBN/NDIC Technical Committee on problem

banks discovered that some of the funds from prospective investors bidding to
acquire some distressed banks were from unstable sources and hence unacceptable
as capital deposit for acquisition of distressed banks. In another development, one of
the distressed banks, First African Trust Bank (now Eagles Bank) was handed over to
the new owners after meeting the requirements for acquisition. Meanwhile, the Credit
Risk Management System (CRMS) took off during the review period. Banks have
started rendering their returns on-line instead of the old diskette system.

(b)
Monetary and Credit Developments
Consistent with the target expansion rate for fiscal 2000, the growth in broad
money supply (M2) was moderate during the first half of the year. However, narrow
money (M1) accelerated rapidly, particularly in June, owing largely to the sharp
increase in foreign assets (net) of the Central Bank. Provisional data indicated that M2
rose by 5.4 per cent to N 737,477.0 million within the stipulated target of 14.6 per


cent for fiscal 2000 compared with the 19.5 per cent increase recorded in the
corresponding period of 1999 (Figure 3). Narrow money (M1) expanded by 10.3 per
Figure 4: Banking System's Credit to the Economy
During the First Half Year (Per Cent Growth Rate)

PER CENT
AC
CG
CP
AC

CG

CP


cent to N433,427.0 million, surpassing the 9.8 per cent target for the entire year and
was marginally higher than the 9.5 per cent achieved in the comparable period of
1999. The growth in M2 reflected wholly the substantial increase in M1, as quasimoney fell during the period. The growth in M1 during the review period reflected the
sharp rise in foreign assets (net) of the banking system, and the decline in quasimoney. However, the significant decline in aggregate credit, particularly to the
Federal Government, as well as the decline in other assets (net), exerted a
moderating influence on the growth of M1.

Aggregate bank credit to the economy fell significantly during the first half of 2000,
reflecting entirely the sharp fall in net credit to the Federal Government. Provisional
data indicated that, aggregate bank credit fell by 18.2 per cent, compared with the
27.8 per cent target growth rate envisaged for fiscal 2000 and the 17.2 per cent
increase observed in the corresponding period of 1999 (Figure 4).

Net credit to the Federal Government declined sharply by 84.9 per cent in the
half-year, as against the target increase of 37.8 per cent stipulated for fiscal 2000 and
the increase of 6.6 per cent recorded in

Figure 5: Share of Governement and Private Sector in
Banking System's Credit to the Economy

PER CENT
CG %Tot
CP % Tot
CP % Tot

CG %Tot


the first half of
1999 (Figure 4). Accounting largely for the decline in net credit to the Government
was the sharp fall of 338.2 per cent in CBN net claims, following Government’s fiscal
prudence, particularly in the first five months of the year, as well as the relatively tight
monetary policy adopted during the period. Figure 5 shows that net credit to
government accounted for 5.2 per cent of the banking systems’ credit to the economy
during the period.


Credit to the private sector increased by 7.7 per cent, less than 21.9 per cent
projected expansion rate for fiscal 2000 and the 21.3 per cent growth recorded in the
first half of 1999. Also, credit to state and local governments fell by 21.0 per cent, as
against the 52.7 per cent increase in the corresponding period of 1999. Credit to
‘other’ private sector, which constitutes the bulk (91.0 per cent) of private sector credit
increased by 7.1 per cent, compared with the increase of 26.0 per cent in the
corresponding period a year earlier.

(c)
Interest Rates

Reported bank deposit and lending rates indicated mixed movements during
the first half of 2000. This reflected largely the impact of the liquidity overhang in the
banking system, coupled with the reduction in CRR and liquidity ratio. Available data
indicated that the average rate on commercial banks’ savings deposits rose marginally
from 5.3 per cent in December, 1999 to 5.4 per cent in March, 2000 but fell to 5.1 per
cent in June. Similarly, the average rates on time deposits of various maturities,
which increased from a range of 8.4-12.7 per cent in December 1999 to 8.7-13.4 per
cent in March, moved downward to between 8.6-12.5 per cent at the end of June. The
average prime lending rates of commercial banks, which stood at 21.3 per cent at
end-December, 1999 rose marginally by 0.6 percentage point to 21.9 per cent in
March before declining to 20.8 per cent in June. Their maximum lending rate also fell
from 27.2 per cent in December 1999 to 27.1 per cent. Deposit and lending rates of
merchant banks fluctuated downward during the half-year. For example 3-months
time deposit rate fell from 17.6 per cent in December 1999 to 16.8 per cent in June
2000. Similarly, the average prime and maximum lending rates fell from 25.8 and 30.0
per cent, respectively in December 1999 to 23.2 and 27.7 per cent in June 2000. The
wide spread between bank deposit and lending rates persisted during the half year of
2000, as the gap between commercial banks’ savings and maximum lending rates
stood at 22.0 percentage points in June. Also, the spread between merchant banks’
7-day deposit and their maximum lending rates stood at 16.8 percentage points at the
end of June, 2000. Bank deposits and lending rates were, positive in real terms
during the review period as inflation rate moderated to an estimated 1.3 per cent in
June.

Figure 6: Selected Commercial Banks' Interest Rates (Per Cent,
Half Year)

Per Cent
MRR
Inter-Bank
Savings
Prime
Max
MRR


Inter-Bank
20.9


Savings

Prime
20.2
20.3

17.5

20.9
20.8
Max

20.8
20.8

21.1
23.4
27.1

Following the downward review of CBN’s MRR from 18.0 to 17.0 per cent in April,
2000, in an effort to narrow the gap between banks’ deposit and lending rates, and the
sustained moderation in the rate of inflation, treasury bill issue rate declined from 17.0
to 16.0 per cent during the review period.

(d)
Financial Savings


At N340,581.7 million, aggregate financial savings at the end of June 2000 was
21.6 per cent over the level attained in December 1999. This represents 8.7 per cent
of GDP compared with 8.6 per cent attained in June 1999. Time and savings deposits
with commercial and merchant banks, as in the past years, constituted the bulk of
aggregate institutional savings, accounting for 97.5 per cent of the total compared with
97.0 and 97.1 per cent in December and June, 1999, respectively. Of the institutional
savings, commercial banks, accounted for 81.5 per cent, merchant banks 16.0 per
cent, while other institutions accounted for the balance.

(e)
Inter-bank Funds Market

The inter-bank funds market witnessed a significant increase in the volume of
transactions during the first half of 2000, compared with the corresponding period of
1999. The increase largely reflected the sustained pressure on the foreign exchange
market, which compelled banks to source funds from the market during the review
period. At N380.1 billion in the first half of the year, the aggregate value of
transactions rose by 15.5 and 78.1 per cent over the levels in the preceding half-year
and the corresponding period of 1999, respectively. The inter-bank call placements,
which constituted the bulk (46.2 per cent) averaged N29.2 billion, compared with
N24.0 billion in the preceding half-year and the N15.2 billion in the corresponding
period of 1999. Gross rediscounts totalled N134.9 billion in the first half of the year,
compared with the N136.9 billion recorded in the corresponding period of 1999

(f)
Capital Market Developments


The Nigerian Stock Exchange was active in the first half of 2000. The volume
and value of equities traded rose by 115.7 and 61.5 per cent from their levels in the
corresponding period of 1999 to 2,084 million and N9,100.8 million in the review
period. Also, activities in Federal Government Development Stocks, which had been
dormant, picked up during the review period as 8.7 million stocks valued at N8.1
million were traded. Similarly, Edo State Government offered for subscription N500
million First Edo State 21 per cent Floating Rate Revenue Bond 2002/2006 to finance
its housing project. Market capitalisation and value price indices thus rose from
N281.3 billion and 5,978.0 to N361.1 billion and 6,466.7, respectively, in the review
period. This reflected largely investors’ confidence in the market.

(f)
Central Banking


Provisional data indicated that total assets/liabilities of the Central Bank
increased by 2.6 per cent over its end-December, 1999 level to N1,469,021.2 million
in June, 2000. This represented an increase of 16.6 per cent when compared to its
level in the corresponding period a year earlier, thus reflecting the increase of 18.4 per
cent in the Bank’s foreign assets holding which was induced by the positive
developments in the international petroleum market.

Domestic assets, mainly investments in government securities, fell by 6.9 per
cent to N829,829.3 million, in sharp contrast to the 37.8 per cent increase in the
comparable period of 1999. The fall was induced largely by the sharp decline in the
Bank’s holding of treasury securities following increased participation of the
commercial and merchant banks and other investors in the securities market. The
Bank’s other assets, on the other hand, rose by 2.7 per cent to N388,344.8 million
during the first half of 2000.


Total deposit liabilities of the Bank rose by 4.8 per cent to N644,546.7 million,
while other liabilities (unclassified items) increased by 2.5 per cent to N607,514.7
million during the review period. The Bank’s currency liabilities, on the other hand,
declined by 3.6 per cent to N201,025.5 million while its paid-up capital and general
reserve remained at the end-December 1999 levels of N500.0 million and N15,434.3
million, respectively.

(h)
Commercial Banking

Total assets/liabilities of commercial banks rose by 19.0 per cent to
N1,272,905.4 million during the first-half of 2000 compared with the increase of
N287,501.9 million or 41.4 per cent in the corresponding half of 1999. Thus, they
accounted for 88.6 per cent and 91.2 per cent of total assets and deposit liabilities of
the banking system, compared with 84.4 and 90.1 per cent, respectively, in June
1999. This category of banks also contributed 89.4 per cent of the banking system’s
capital and reserves compared with 68.9 and 70.4 per cent in the preceding half-year
and the corresponding period of 1999, respectively. Their dominance was further
enhanced by the conversion of six merchant banks to commercial banks.
Funds available to the banks during the period amounted to N207,946.1 million,
compared with N290,406.9 million during the first-half of 1999. The funds were
sourced through increases in deposit liabilities (42.2 per cent), central government
deposits (39.5 per cent) and unclassified liabilities (18.7 per cent), among other
sources. The funds were utilised to increase banks’ investment in government
securities (15.2 per cent), claims on the private sector (23.6 per cent), acquisition of

foreign assets (5.6 per cent) and unclassified assets (42.6 per cent), among other
uses.


Loans and advances, which over the years constituted the bulk of investment
portfolio, increased by 13.8 per cent during the period under review, compared with
15.9 per cent recorded in the corresponding period of 1999. Aggregate liquidity ratio of
commercial banks improved from 48.1 and 50.9 per cent, respectively, in June and
December 1999 to 56.2 per cent in June 2000 relative to the new statutory
requirement of 5.0 per cent. Loan/deposit ratio of the banks, however, dropped to
39.9 per cent from 63.4 and 54.1 per cent in June and December, 1999, respectively.

(i)
Merchant Banking

Merchant banks’ position continued to be relatively weak in terms of assets,
deposit liabilities and capital/reserves during the period under review. Assets of the
banks constituted 11.4 per cent of the banking system’s total assets in June 2000,
compared with 15.6 per cent in June 1999. The banks also accounted for 8.8 per cent
of total deposit liabilities as against 9.9 per cent in the corresponding period of 1999.
Their contribution to the system’s capital and reserves was 10.6 per cent compared
with 10.9 and 30.0 per cent, respectively, in December and June 1999.


At N163,585.9 million in June, 2000, merchant banks’ total assets increased by
31.9 per cent. Total funds available to the banks amounted to N39,895.4 million,
compared with N51,238.9 million in June 1999. The funds were sourced mainly from
increases in deposit liabilities (55.1 per cent), other liabilities (22.1 per cent) and
capital accounts (7.5 per cent), among other sources. The funds were utilised for the
purposes of increasing other assets (54.6 per cent), claims on the private sector (39.3
per cent) and acquisition of foreign assets (4.3 per cent), among other uses.


At N74,722.3 million, merchant banks’ aggregate credit increased by 7.1 per
cent compared with an increase of 22.9 per cent in the comparable period of 1999.
Loans and advances granted amounted to N62,546.9 million, representing 83.7 per
cent of aggregate credit of the banks. The aggregate loan/deposit ratio was 82.6 per

cent in June 2000 compared with 91.2 per cent in December 1999. The average
liquidity ratio of merchant banks was 59.3 per cent in June 2000, which reflected an
improvement over the 55.3 per cent attained in December 1999.

(j)
Discount Houses


The number of discount houses operating in Nigeria remained unchanged at 5.
Their total assets/liabilities amounted to N22,758.5 million at end-June 2000,
indicating an increase of 51.2 per cent over the level in December, 1999. The
investible funds generated by the houses, which amounted to N8,566.8 million, were
sourced from increases in money at call (62.8%), other liabilities (27.9%) and increase
in capital/reserves (3.5%), among other sources. The funds were utilised to increase
investments in government securities (43.0%), other investments (7.0%) claims on
banks (39.5%), among others.

3.3
External Sector Developments

(a)
Balance of Payments

Provisional estimates for the first half of the year revealed that the pressure on
Nigeria’s balance of payments abated as the overall position resulted in a modest
surplus of N78,323.3 million (US $782.4 million), as against the huge deficit of
N304,878.4 million (US $3,397.7 million) in the first half of 1999. The favourable
development in the external sector was largely as a result of the huge surplus of
N320,906.6 million (US $3,205.6 million) in the current account which more than offset
the deficit of N235,605.9 million (US $2,353.5 million) in the capital account.
Government’s policy of reserves build-up received a boost as the gross reserves grew
by 33.7 per cent from end-December 1999 level of $5,440.7 million to US $7,272.4
million. At that level, the external reserves could finance 11.6 months of imports. The
improvement in the current account, which started in the second half of 1999, was
sustained in the review period. The trade account deficit of N5,106.8 million (US
$57.0 million) recorded in the first half of 1999 swung into surpluses of N412,291.6
million (US $4,345.4 million) and N80,962.1 million (US $4,804.4 million) in the second

half of 1999 and the review period, respectively. The surpluses were traceable to
increased inflow from crude oil exports occasioned by the rise in average crude oil
prices from US $13.5 per barrel in the

Billion Naira
Figure 7: Balance of Payments (Annualized: 1993-96; Ist Halfyear: 1997-2000)
Cur. Acct
Cap. Acct
Overall Bal.
Cur. Acct

Cap. Acct

Overall Bal.


first half of
1999 to US $22.5 and $27.1 in the second half of 1999, and the review period,
respectively. In addition to the significant oil export increases, import bills dropped by
14.6 per cent from the level in the first half of 1999 to N376,434.3 million (US $3,760.3
million) (Figure 9). Although, non-oil export performance continued to be weak, it
increased from N11,244.0 million (US $125.5 million) in the first half of 1999 to
N14,826.1 million (US $148.1 million).

The deficit in the services and income account persisted, although the net
position in the account improved from N244,689.4 million (US $2,731.1 million) in the
first half of 1999, respectively, to N195,351.6 million (US $1,951.4 million). This
reflected decreases in expenditures in respect of all the components of invisible
transactions, including the Joint Venture Cash (JVC) Calls. However, the surplus in
unrequited transfers declined from N47,852.0 million (US $534.1 million) in the
corresponding half of 1999 to N35,296.1 million (US $352.6 million), an indication of a
slow down in home remittances by Nigerian residents abroad. The pressure on the
external sector manifested more in the capital account with the deficit enlarging from

N99,735.7 million (US $1,113.2 million) in the first half of 1999 to N263,766.4 million
(US $2,780.0 million) in the second half of 1999 but declined to N235,605.9 million
(US $2,353.5 million). Scheduled debt service payments and Nigeria’s short-term
claims on foreigners were responsible for the unfavourable performance of the capital
account. Consequently, the overall surplus of the balance of payments was
Figure 8: Exports and Imports (Annualized:1993-97; 1st Half
year: 1997-2000)

Billion Naira
Expt.
Impts.
Trd. Bal.
Expt.

Impts.

Trd. Bal.


achieved through deferment of some portion of the debt service due, amounting to
N59,015.4 million (US $589.5 million).

(b) External Assets

Nigeria’s total external assets as at the end of the first half of 2000 stood at
N921,028 million ($9,012.0 million), compared with N625,400.8 million ($6,591.5
million) at end-June, 1999 and N698,874.3 million ($7,116.9 million) at end-December,
1999. This represented increases of 47.3 and 31.8 per cent above the level achieved
at end-June and end-December, 1999 respectively. The Central Bank of Nigeria’s
(CBN) holdings stood at N743,240.7 million ($7,272.4 million) as against N453,291.0
million ($4,777.5 million) at end-June, 1999, representing 80.7 per cent of the total
external assets, compared with 72.5 per cent in the corresponding period of 1999.
The bulk of the CBN holdings was in foreign bank balances. The combined share of
commercial and merchant banks’ net assets increased from N169,503.1 million

($1,786.5 million) at end-June 1999 to N177,764.3 million ($1,739.4 million) at endJune, 2000.

3.4
International Economic and Monetary Developments

(a)
International Foreign Exchange Market


International foreign exchange market during the period under review was
dominated by the US dollar. The dollar was supported at the foreign exchanges by
the sustained expansion of the US economy, which triggered large movement of longterm capital from the Euro-zone to the US. Overall, the US dollar appreciated against
the pound sterling, Deutsche Mark, French Franc, Dutch Guilder, Swiss France and
the Euro by 3.2, 12.1, 11.3, 12.3, 11.5 and 14.1 per cent, respectively. The strength of
the dollar was supported by positive economic fundamentals such as the GDP growth
rate of 7.3 per cent, interest rate of 6.76 per cent and low inflation rate of 3.0 per cent
in the first quarter of 2000.

(b)
Developments in the International
Commodity Organizations


The International Coffee Organization (ICO) and Inter-African Coffee
Organization (IACO) met in London in May 2000 and discussed the persistent decline
in coffee prices in the past three years. They decided that the Coffee Retention Plan
should come into force by June, 2000 in member countries in order to reduce the total
world coffee exports by about 20.0 per cent so as to boost coffee price. The average
composite price of coffee in the international market was US $0.675 per pound in May
2000, compared with US $0.9128 in the first four months of 1999, representing 26.0
per cent decline. The retention committee would decide, whether or not, to release
retained coffee stocks whenever the price indicator reaches US $0.95 per pound. The
release of stocks would, however, be mandatory when the price indicator rises up to
110 U.S. cents per pound.


The International Cocoa Council (ICCO) at its sixty-first regular session in

London in March 2000 resolved to invite the World Bank and the IMF to assist cocoa
producing countries in finding suitable ways of marketing their produce within the
framework of liberalized trading system. The intention was to moderate the harmful
effects of exclusive spot market, encourage forward sales and relax the downward
pressure on cocoa prices. The Council would promote stronger cooperation between
the Common Fund for Commodities (CFC), the World Bank and the ICCO to assist
producing countries in stabilizing the cocoa market in the short-run through increased
use of price-risk management instruments.

(c) International Monetary Institutions/Cooperation

(i)
World Bank/IMF


The Spring Meetings of the International Monetary Fund (IMF) and the World
Bank were held in Washington D. C., United States of America in April, 2000. The
issues discussed included world economic outlook, the strengthening of the IMF’s role
in the global economy, review of Fund facilities, safeguards and misreporting and
private sector involvement in the resolution of financial crisis. Other issues were
transparency and accountability as well as the heavily indebted poor countries (HIPC)
Initiative for Poverty Reduction and Growth Strategies.


The meetings endorsed the decision of the IMF Board to streamline its
operations by eliminating four facilities - the Currency Stabilization Fund, Support for
Commercial Bank Debt and Debt Service Reduction, the Buffer Stock Financing
Facility, and the Contingency Element of the Compensatory and Contingency
Financing Facility. The Fund also endorsed the requirement that all countries making
use of its resources should publish annual central bank financial statements that are
independently audited in accordance with internationally accepted standards in order
to check cases of misreporting and misuse of resources provided to members under
IMF arrangements.


The Fund noted the need for fairness in the treatment of different cases of
private creditors, and agreed that private sector involvement should proceed on the

basis that no class of creditors should be considered as inherently privileged. The
Fund reiterated the importance attached to greater transparency in policy making by
improving the functioning of national economies as well as the international financial
system.


On the HIPC Initiative and Poverty Reduction and Growth Facility (PRGF), the
IMF and the World Bank have embarked on the implementation of poverty reduction.
programmes. However, progress in the implementation of the debt reduction has
been slow as only five countries - Bolivia, Mauritania, Mozambique, Tanzania and
Uganda - earlier considered under the Initiatives, have reached their decision points
under the new framework. A key requirement for reaching the completion point under
the enhanced HIPC Initiative and for drawing from PRGF is the adoption of a fully
developed Poverty Reduction Strategy Programme (PRSP) that is endorsed by the
World Bank and IMF.

(ii)
Association of African Central Banks


The Assembly of Governors of the Association of African Central Banks
(AACB) met in Abuja, Nigeria in January, 2000. They agreed that the Central Bank of
Nigeria should continue to act as an Interim Secretariat of the AACB until the issue of
a permanent secretariat was resolved. A working group was mandated to make
proposals on the cost implications of establishing a permanent secretariat for
submission at its next meeting in Tanzania. The executive body of the Association
was reconstituted into a technical committee to draw up an Action Programme for an
African Monetary Cooperation to be presented for consideration at its next meeting.
Other issues discussed were the interim report of the liquidated African Centre for
Monetary Studies (ACMS) and the amended statute of the AACB, and recommended
that the final reports of the two issues should be submitted at the next meeting.

(iii)
ECOWAS Single Monetary Zone


The Heads of State of Ghana, The Gambia, Guinea, Liberia, Nigeria and Sierra
Leone expressed commitment to establish a Second Monetary Zone by 1st January

2003 to facilitate attainment of the ECOWAS Single Monetary Zone. This was in line
with the decision of the Heads of State and Government of ECOWAS that two or more
countries could take initiative to accelerate integration in the region. Consequently,
they agreed to take concerted actions to attain the following quantitative primary
convergence criteria, which are preconditions for the establishment of a Second
Monetary Zone: single digit inflation rate by the Year 2000 and 5.0 per cent by 2003;
gross external reserves to cover at least 3 months of imports by end 2000 and 6
months by end 2003; central bank financing of budget deficit to be limited to 10.0 per
cent of previous year’s tax revenue; budget deficit (excluding grants) to GDP ratio of
not more than 5.0 per cent by 2000 and 4.0 per cent by 2002.


A three-stage action plan covering the period January 2000, to December,
2003 for the implementation of the convergence criteria was adopted. The first stage
would involve the harmonization of macroeconomic policies and concepts, review of
the institutional, administrative and legal framework for establishing the second
monetary zone, sensitization of public, etc. The second and third stages of the Action
Plan include: the establishment of macroeconomic data base and studies on
Compensation and Stabilization Mechanism, Exchange Rate Mechanism and
preparation of a project document for technical assistance from the IMF and the World
Bank, all of which would lead to the establishment of a Common Central Bank and the
introduction of a common currency by December, 2003. This would be merged with
the existing CFA franc of the UEMOA group by December 2004 to form a single
currency under the ECOWAS Monetary Cooperation Programme.


The Committee of Governors of ECOWAS Central Banks met in Dakar,
Senegal in May, 2000 and agreed that the macroeconomic convergence criteria
adopted by the second sub-regional monetary zone were consistent with those
prescribed by ECOWAS Heads of State and Government in Lome in December, 1999.
The Governors also identified phases of activities which would facilitate the creation of
ECOWAS Single Monetary Zone as follows: harmonisation of economic and financial
management, revitalization of West African Monetary Agency (WAMA), review of
eligible transactions through the clearing system, review of member countries

economic adjustment and harmonisation of domestic taxation system and the
establishment of a single Central Bank.

3.5
Real Sector Developments

There were mixed developments in the domestic economic conditions during the
first half of 2000. While agricultural sector recorded further improvement, the
industrial sector deteriorated slightly. Inflationary pressures moderated, but the sociopolitical situation was relatively unfavourable.

(a)
Agricultural Production


The steady increase in agricultural production observed in the preceding five
years, was sustained in the first half of 2000. At 217.7 (1984 = 100), the aggregate
index of agricultural production increased by 3.3 per cent, compared with 3.1 and 2.0
per
cent
growth
recorded
in
Figure 9: Index of Agricultural Production (1984 =
100; 1st Half Year)

Number
Crops
Livestock
Fishing
Forestry
Aggregate
Fishing
62.9
67.1

48.6

46.9
56.1
58.8
Livestock
161.6
164.1


Crops


254.9
261.8
268.7
Aggregate
211.1
218.1


F
t
124 7

130 8
122 9
124 3

126 6
130 4

the first half of
1999 and 1998, respectively. All the sub-sectors contributed to the observed growth.
Crop production rose by 2.6 per cent, compared with 2.7 per cent in 1999. The output
of staples increased by 4.2 per cent higher than the 2.5 per cent recorded in the
preceding half year. Also, cash crop production rose by 3.0 per cent compared with
3.7 per cent (Figure 10). The improved agricultural performance during the half year

was attributed mainly to favourable weather conditions, especially rainfall which was
timely, adequate and well distributed throughout the country, except in the case of few
states in the north -eastern part of the country that reported late rains. Other factors,
which supported intense farming activities during the period, included low incidence of
pests and diseases, as well as better distribution and availability of farm inputs,
especially fertilizers, though at a high cost.


The prices of Nigeria’s major agricultural export commodities at the London
Commodities Market in the first half of the year continued the downward trend, which
began in the first half of 1998. At 50.5 (1985 = 100), the all commodities price index,
in dollar terms, declined by 17.7 and 21.6 per cent below the levels in the first half of
1999 and 1998, respectively. Of the six commodities monitored, palm oil recorded the
highest price decline of 15.2 per cent, while cocoa, coffee, cotton, soya bean and
copra recorded price losses of 14.3, 11.9, 8.6, 7.6 and 3.2 per cent, respectively. As
in the preceding year, increased international supply of most of the commodities,
coupled with slack in demand, accounted mainly for the general decline in prices.


The domestic retail prices of most selected food items fell during the period. Of
the eight commodities monitored, only one registered price increase while the
remaining seven recorded price declines relative to their respective levels in 1999.
The price decreases ranged from 1.8 per cent for beans (brown) to 34.5 per cent for
millet, while the price of rice increased by 19.5 per cent. The price increase was
attributable to rising production and transportation costs due to the poor condition of
some rural roads, which made evacuation of farm produce to the urban centres
difficult.

(b)
Industrial Production


The deterioration in industrial output continued in the first half of 2000. The
provisional index of industrial production, at 130.0 (1985 = 100), fell by 0.8 per cent
from the level in the first half of 1999, but indicated a 2.2 per cent increase over the
level in the preceding half year. The fall in output from the level in corresponding
period was accounted for by 1.3 and 5.6 per cent drop in mining output and electricity

consumption, respectively, as manufacturing production rose marginally by 0.6 per
cent. The increase recorded over the second half of 1999 reflected improvements in
mining operations as the manufacturing and electricity sub-sectors suffered some
set-back. Also, aggregate manufacturing capacity utilization rate, at 33.8 per cent,
represented an increase of 0.6 percentage point over its level in the first half of 1999,
but indicated a fall of 2.3 percentage points from the level in the preceding half year
(Figure 11).
Figure 10: Index of Industrial Production (1985 =
100; 1st Half Year)

Number
Manu
Mining
Electricity
All Sectors
Mining

Manu

All Sectors

Electricity


The continued poor performance of the manufacturing sub-sector was
attributed largely to the uncertainty associated with the late approval and
implementation of the year 2000 budget. Other factors included numerous communal
and religious clashes in some parts of the country, which adversely affected
manufacturing activities. Another major constraint was high cost of production
ascribed to high exchange and interest rates, multiple taxes and levies imposed by
state and local governments and poor performing economic infrastructure.


Mining output fell in relation to the corresponding period of 1999, owing to the
decline in the production of all the principal minerals, except columbite. Crude oil
production, including condensates, estimated at 311.77 million barrels, fell by 0.5 per
cent from its level in the first and second halves of 1999, respectively. The average

daily production was 2.00 million barrels, compared with 2.04 and 2.00 million barrels
recorded in the corresponding period of 1999 and the preceding half-year,
respectively. Domestic output was sustained in spite of the disruptions of operations,
occasioned by communal clashes in the oil producing communities. Nigeria’s
production quota (excluding condensates) averaged 2.00 million barrels per day (mbd)
during the period. It was raised from 1.97 to 2.033 mbd from April following an
increase in total OPEC quota to 24.69 mbd.


Aggregate crude oil exports, at 311.8.0 million barrels, declined by 0.5 per cent
below the level in the first half of 1999, while a total of 54.8 million barrels were
supplied for processing and local consumption, almost the same as in the
corresponding period. The first Port Harcourt Refinery was undergoing a Turn-Around
Maintenance (TAM) during the review period. The other three refineries (Kaduna,
Warri and Second Port Harcourt) processed 2.29 million tonnes of crude oil, indicating
a decline of 44.6 per cent from the level processed in 1999. The total output of
petroleum products from the refineries was 2.11 million tonnes, representing a decline
of 45.2 per cent below the corresponding period’s output. Consequently, the average
capacity utilization rate of the refineries dropped from 30.4 to 25.7 per cent. The
major constraints on refinery operations during the period were delayed TAM at the
second Port Harcourt Refinery, and equipment and power plant failures at the Kaduna
Refinery. The Warri Refinery operated for only two months as a result of the
explosion of one of its heaters, which paralyzed its activities.

At $27.06 per barrel, the average price of Nigeria’s reference crude, the Bonny
Light (37o API), rose by 93.9 and 23.4 per cent above $13.95 and $21.93 recorded in
the corresponding period and the second half of 1999, respectively. The upward
movement in price during the review period was attributed largely to increased
demand for crude oil by the major consumer nations, especially the United States of
America and the East Asian countries, as well as disruption in crude oil supply in
Norway by oil workers strike in April.


At 17,926.9 million cubic metres (MMm
3), the output of natural gas declined by
0.8 and 0.9 per cent below the levels in the corresponding and second halves of 1999,

respectively. Total gas flared at 13,207.7 MMm3 accounted for 73.7 per cent of total
production and indicated a decline of 2.6 percentage points from the proportion flared
in the first half of 1999. The reduction was attributed to various gas-flaring reduction
measures adopted by oil producing companies. Gas re-injected rose by 26.2 per cent
to 2005.6 MMm3, while the volume sold to industries increased by 29.0 per cent to
1428.0 MMm3. Also, gas converted to NGLs increased by 9.6 per cent to 113.4
MMm3. In contrast, gas used for pressure lift in oil wells fell by 11.5 per cent to 4405.9
MMm3.


A total of 4.6 million tonnes of petroleum products were consumed during the
period under review, representing a fall of 0.4 per cent from the level in the first half of
1999. Except the consumption of liquefied petroleum gas (LPG) and premium motor
spirit (PMS), which increased by 25.7 and 4.0 per cent, respectively, the consumption
of all the other products recorded declines. In addition, the bulk of the consumption
was mainly imports as local production was severely constrained. The decline in
consumption was attributable mainly to arbitrary increases in prices by dealers, official
upward adjustment in prices in late May and the social unrest, which disrupted
products distribution.


Aggregate production of solid minerals at 0.92 million tonnes, declined by 13.2
and 10.0 per cent below the levels in the first and second halves of 1999, respectively.
The decrease in output was accounted for by all the components except columbite
production, which increased by 3.3 per cent relative to the first half of 1999. The
decline in the aggregate output of the solid minerals sub-sector was attributable,
among others, to shortage of spare parts and mining equipment.


Electricity consumption deteriorated further during the first half of 2000. At
4,005.0 million KWh, projected electricity consumption plummeted by 5.6 and 7.6 per
cent from the levels in the first and second halves of 1999, respectively. All the three
major electricity-consuming components accounted for the drop. Residential
consumption which accounted for 51.2 per cent of total consumption, declined by 5.9
per cent to 2,048.6 million KWh. Commercial/street lighting and industrial components
which represented 26.7 and 22.1 per cent of total consumption fell by 6.4 and 4.1 per

cent to 1,069.3 and 887.1 million KWh, respectively. Similarly, compared with
consumption levels during the preceding half year, residential, commercial/street
lighting and industrial consumption fell by 8.4, 7.7 and 5.3 per cent, respectively. The
general reduction in electricity consumption reflected reduced supply occasioned by
the precarious state of electricity infrastructure nation-wide, which resulted in three full
system failures during the period. Other major bottlenecks of the sub-sector included
vandalization of NEPA facilities, as well as poor maintenance, broken down
transformers and cables, owing largely to inadequate funding.

(c)
Transportation


The performance of various transportation modes in the first half of year 2000
was mixed. Shipping and Railway services improved slightly, while road transportation
services declined. The estimated number of ships that berthed and departed the
Nigerian ports was 1,467 and 1,119, respectively, indicating increases of 6.8 and 9.8
per cent. The volume of goods evacuated from the hinterland to the seaports by all
modes of transportation also rose by 19.2 per cent to 713 million tonnes. The shares
of road, water, rail and other modes (pipelines, conveyor belt and suction pipes) in
total haulage were 41.6, 7.7, 6.7 and 44.0 per cent, respectively. The improvement in
rail services during the period was as a result of the re-opening of some routes,
following the rehabilitation of their tracks. This improvement had led to increased
passenger revenue and passengers/Km carried.

(d)
Consumer Prices

The downward trend in inflationary pressure observed in the second half of
1999, continued in the first half of 2000. Data from the Federal Office of Statistics
(FOS) showed that the composite consumer

Figure 11: Consumer Price Indices and Inflation
Rate (1985 = 100; 1st Half Year)

Numbers

Per Cent
Composite
Food
Urban
Rural
Inflation
Composite
780.6 1105.1 2094.9 2699.2 2723.4 3204.7 3469.9 3780.2
Food
855.6 1115.1 2107.3 2715.4 2687.6 3134.7 3218.1 3515.8
Urban
846.5 1232.3 2156.4 2867.7 2935.4 3262.9 3560.7 3575.0
Rural
767.7 1080.4 2083.0 2666.4 2682.2 3193.4 3452.3 3435.9

price index (CPI) for June 2000 was estimated at 3780.2 (1985 = 100),
representing an inflation rate of 1.3 per cent, as against 12.1 per cent in June 1999
(Figure 12). Analysis of the components of the CPI revealed that the food index
increased by 9.3 per cent while some non-food items such as transportation,
recreation and other services increased by 1.5, 9.1 and 13.1 percentage points,
respectively, when compared to the first half of 1999. In contrast, the index for
medical, clothing and footwear however, fell by 1.8 and 0.2 per cent, respectively.
The decline in inflation rate was traced largely to favourable harvests of some food
crops, and the late release of the 2000 appropriation bill, which led to a general lull in
economic activities.

(e) Labour Market


Although labour statistics were not available from the Federal Office of
Statistics and the Federal Ministry of Employment, Labour and Productivity, anecdotal
evidence indicate that the unemployment situation deteriorated. Projections indicated
that the national unemployment rate was 5.1 per cent compared with 4.7 per cent
estimated for the same period of 1999. The rural unemployment rate was projected
at 4.3 per cent as against 3.9 per cent recorded in the corresponding period of 1999.
In contrast, the urban unemployment rate declined by 0.2-percentage point from 6.5
per cent estimated for 1999 to 6.3 per cent for year 2000. The unemployment
statistics should, however, be interpreted with caution, as evidence abounds that

unemployment was larger than reported, owing to labour lay-offs and staff
rationalization in many states and the Federal Public Service. Furthermore, private
sector employment generation capacity was constrained by structural bottlenecks,
including fallen demand for goods and services, frequent power outages and
infrastructural inadequacies.


Industrial relations were strained during the period following the wage review
initiated by the Federal Government. Many state governments were yet to agree with
the labour unions on the new wage structure, hence the numerous strike actions by
workers. In addition, an upward review of petroleum product prices led to a
nationwide strike, which paralyzed the economy for a week.

(f) Social Services

The delivery of social services was impaired during the review period owing largely
to the late passage of the 2000 Appropriation Bill. Protests against the increase in
petroleum product prices by the Nigerian Labour Congress (NLC) and the industrial
actions by state government workers for the harmonization of salaries and wages with
federal workers were some of the factors that disrupted the provision of social services
during the first half of the year. However, some activities of the sub-sector received a
boost through the launching of specific programmes, such as the Federal
Government’s Poverty Alleviation Programme (PAP) and the Universal Basic
Education Scheme. The former has the objective of providing direct jobs for 200,000
unemployed persons nationwide, while the latter is aimed at ensuring that all children
of school age acquire at least primary education free of charge. The problem of social
insecurity, with threats to lives and property remained intractable in the first half of the
year with reported cases of riots and civil strikes in some parts of the country. Armed
robbery and other criminal activities persisted. However, to effectively address the
security issues the law enforcement agencies were provided additional equipment with
a view to enhancing their operational capabilities. Also, more personnel were
recruited to ensure increased surveillance and policing of the country.

4.
CBN POLICY RESPONSE AND OPERATIONS

The CBN policy response and operations during the review period was guided
by the desire to keep inflation within a single digit level, through the maintenance of
appropriate monetary and exchange rate regime, as well as improved the overall
confidence in the financial system. Although inflationary pressure was at its lowest
ebb, rising stock of liquidity in the system following the substantial monetization of the
enhanced foreign exchange receipts from crude oil sales and transfer of government’s
deposits to deposit money banks was a potential threat to monetary stability. Also,
there was an unprecedented surge in foreign exchange demand, which threatened
exchange rate stability. These problems were the main underlying factors, which
informed the policy responses during the period.

(a)
Liquidity Management


Open Market Operations (OMO) remained the primary instrument of liquidity
management by the CBN during the first half of 2000. Total bids and sales rose
sharply, compared with the preceding half-year and the corresponding period of 1999.
The levels, which fell in January 2000 compared with the preceding month, increased
significantly in February following largely the liquidity surfeit in the banking system. It,
however, fell in March due to the increased pressure in the IFEM before recovering in
April. Reflective of the sudden growth in the level of liquidity in the banking system
during the last two weeks of June, aggregate bids peaked at N106.6 billion during the
month, but aggregate sales amounted to only N16.96 billion, following the paucity of
the intervention securities in the CBN portfolio. In spite of this development, total bids
and sales stood at N304.4 billion and N165.4 billion during the first half of 2000,
compared with N77.7 billion and N72.1 billion in the preceding half-year and N104.0
billion and N95.5 billion in the comparable period of 1999.

There was an over-subscription in the primary and secondary markets during
the review period. Total issues of treasury bills, amounting to N129,564.6 million,
were made to refinance maturing bills in the first half of 2000, compared with
N71,267.2 million in the corresponding period of 1999. Thus, total treasury bills

outstanding remained unchanged at end-December, 1999 level of N361,758.4 million.
The surge in banking system liquidity for most part of the review period, coupled with
the attractiveness of the treasury bill rate, accounted for the significant rise in
subscription by banks and non-bank public in the primary market, compared with the
level in the first half of 1999. Owing to the observed patronage by these investors,
Central
Bank’s
take-up
constituted
only
27.7
per
cent
of
the
total
Figure 12: Structure of Treasury Bills Holdings in Nigeria (% of Total)
1st Half 2000 1st Half 1998 1st Half 1999
CBN
CBs
MBs
NBPub
67.6
11.3


26.2
0.5
20.4
issues,
while
the commercial and merchant banks accounted for 46.2 and 1.1 per cent,
respectively. The balance of 25.0 per cent went to other investors. Similarly,
following the large liquidity overhang and low rediscounts at the end of June, Central
Bank holdings of the security fell significantly to an all-time low of N10,400.0 million or
2.9 per cent of total outstanding in June, 2000, compared with N79,860.5 million or
22.1 per cent at end-December 1999 and N219,665.4 million or 60.7 per cent in June,
1999. Commercial and merchant bank’s holdings increased sharply from N186,142.7
million and N12,723.3 million in December 1999 to N292,692.1 million and N14,576.3
million, respectively in June, 2000.


In order to reduce the cost of funds to banks and minimize the distortion in the
financial markets, as well as induce down ward movements in the lending rates, the
CRR and the LR were reduced from 12.0 and 40.0 to 11.5 and 35.0 per cent,
respectively, in April 2000. Earlier in April 2000, the CBN’s Minimum Rediscount Rate

(MRR) was lowered by 100 basis points to 17.0 per cent following the ease in
economic and market conditions.

(b)
Financial Sector Surveillance

The CBN intensified its efforts geared towards the supervision and surveillance
of the financial system during the review period. The Bank carried out routine/
target/maiden examinations of 42 financial institutions made up of 19 commercial
banks, 8 merchant banks, one (1) development bank, one (1) primary mortgage
institution, 7 finance companies, 11 community banks and 2 discount houses during
the period. In addition, 39 special investigations were carried out based on allegations
and complaints by clients, which indicted some financial institutions of various
malpractices. The report of the investigations showed that most of the examined
institutions were characterized by poor record keeping, poor credit administration and
ineffective recovery procedures, weak assets quality and weak internal control. They
were also characterized by infractions of the provisions of BOFI Decree 1999 and
various other circulars issued by the CBN. Appropriate penalties were imposed on
defaulters.

The routine examinations of the foreign exchange operations of 14 banks were
also carried out during the period. In addition, 14 special investigations on foreign
exchange issues were carried out on commercial and merchant banks. The
examinations and investigations revealed the usual infractions such as non and/or late
repatriation of export proceeds to the CBN, excess charges on customers processing
forms “M” clause “NOT VALID FOR FOREIGN EXCHANGE”, failure to distribute the
naira proceeds of the repatriated interest to eligible LC customers; poor recording
keeping and weak internal controls. During the period under review, spot checks on
foreign exchange utilization were carried out on 6 banks to determine the reasons for
the high demand for foreign exchange. The exercise revealed that 3 of the banks
released foreign exchange on the basis of spurious documents, engaged in fraudulent
transactions and were appropriately sanctioned along with their customers.

During the period under review, the Money Laundering Surveillance Unit
conducted routine examinations of 17 commercial banks, 10 merchant banks, one (1)
community bank, one (1) development bank and one (1) primary mortgage institution
to ascertain their level of compliance with the provisions of the Money Laundering
Decree, 1995. Also, the unit carried out investigations on Advance Fee Fraud cases
referred to it by the police and Foreign Operations Department of the CBN. As part of
the Banks effort to sensitize operators in the financial system on the issues involved in
money laundering, the Bank provided resource persons to assist in the workshops
organized by two banks.


The Bank carried out follow-up examinations of 20 commercial banks, 24
merchant banks, and 12 other financial institutions. The follow-up visits were aimed at
verifying their level of compliance with the recommendations contained in the CBN
examination reports. The follow-up examinations revealed non or partial compliance
with the CBN directives/recommendations, which resulted in the imposition of
appropriate penalties on the erring financial institutions. In addition, the analysis of the
Returns of frauds and forgeries sent to the Bank during the period under review
indicated that 66 fraud cases were perpetrated against the banking system valued at
N95.56 million.

(c)
Foreign Exchange Management


The Central Bank of Nigeria intervened 121 times at the Inter-bank Foreign
Exchange Market (IFEM) in the first half of the year, compared with 26 AFEM
interventions during the same period of 1999. The CBN met in full, all the foreign
exchange demands by the authorized dealers. A total sum of $3,151.5 million was
sold to banks as against $2,909.73 million in the corresponding period of 1999. The
CBN, however, purchased a total sum of $44.1 million from the banks during the first
half of year indicating a net trading position of $3,107.35million. The average IFEM
rate was N100.51 = $1.00 in the first half of the year, representing a depreciation of
10.94 per cent, compared with the average AFEM rate of N89.51 = $1.000 during the
corresponding period of 1999. Similarly, the bureaux de change and parallel
segments of the market witnessed the depreciation of the naira as it exchanged at the

rates of N105.85 and N105.61 to a dollar, signifying depreciations of 8.04 and 8.16 per
cent, respectively, compared to N97.34 and N96.99 per dollar in the first half of 1999.
The increase in forex demand and naira depreciation during the period under review
was largely attributable to excess liquidity in the banking system.

(d)
Debt Conversion Programme


Transactions under the Debt Conversion Programme picked-up as 12
applications valued at US $206.65 million were received compared with 6 applications
worth US $101.0 million received in the corresponding period of 1999. The improved
performance was attributable to the renewed investors’ confidence in the Nigerian
economy, following the restoration of democratic governance. Of the total applications
processed, 7 valued at $116.2 million received approval in principle compared with
same number valued at $37.1 million in the first half of 1999. Thus, the cumulative
number and value of approvals granted since the inception of the programme stood at
368 and $3,245.47 million, respectively.


As a result of improved participation in the programme, debts cancelled during
the first half of the year stood at $38.63 million, indicating an increase of 52.1 per cent
over the level in the corresponding period of 1999. Conversion proceeds amounting
to N2,675.50 million was disbursed to various beneficiaries during the review period
compared to the sum of N1,051.35 million disbursed in the corresponding period of
1999. A breakdown of the disbursement showed that 76.1, 13.3, 9.3 and 1.2 per cent
accrued to non-profit organizations as cash gifts and grants, manufacturing subsector, hotel and tourism and services, respectively.

(e)
Agricultural Credit Operations


The tempo of activities under the Agricultural Credit Guarantee Scheme Fund
(ACGSF) increased during the review period. The volume and value of loans
guaranteed rose by 52.0 and 42.4 per cent to 1,490 and N38.15 million, respectively
over the level in the corresponding period of 1999. This reflected commercial banks’
renewed interest in the scheme following the increase in the capital base from N100.0

million to N1.0 billion and the response to CBN’s moral suasion on the need to
enhance agricultural production. The cumulative loans guaranteed from inception of
the scheme in April 1978 to date stood at N2.0 billion for the benefit of 270,614
farmers.


A breakdown of loans guaranteed during the half year showed that as in the
past, the food crop sub-sector accounted for the bulk with 1,202 loans (82.7 per cent)
valued N24.18 million (75.5 per cent). The livestock sub-sector received 159 loans
(10.7 per cent) valued N6.59 million (17.3 per cent), while the fisheries sub-sector
attracted 47 loans (3.2 per cent) valued N0.70 million (17.3 per cent). Farming
enterprises aggregated as ‘others’ accounted for 76 loans valued N6.41 million.


In terms of size, small scale farmers borrowings between N5,000 and N20,000
under the ACGSF as in the past accounted for the higher volume (1,001 or 67.2 per
cent) and valued (N13.24 million (or 34.7 per cent) of loans). Medium scale farmers
borrowings between N20,001 – N50,000 attracted 227 (15.2 per cent) loans valued
N7.46 million (19.6 per cent) while large scale farmers’ share of total guaranteed loans
was 39 loans (2.6 per cent) valued N9.37 million (24.6 per cent). Small scale farmers
borrowings N5,000 and below received 145 loans (9.7 per cent) which amounted to
N1.27 million (3.3 per cent).


A total of 7,409 loans valued N113.41 million were fully repaid. This
represented a decline of 4.4 per cent in the number but an increase of 45.2 per cent in
the value of loans repaid. The small-scale borrowers accounted for the highest
volume and value of repayment, 3,567 loans or 48.1 per cent valued N45.19 or 39.9
per cent, while the large-scale borrowers accounted for the least number of 21 (0.3
per cent) value N13.59 (12.0 per cent).

5.
ECONOMIC OUTLOOK FOR THE REST OF FISCAL 2000

The developments in the economy in the first half of the year were mixed but
generally more favourable than in the corresponding period of 1999. A measure of
macroeconomic stability was achieved, reflected by fiscal and monetary restraint,

moderation in inflationary pressures and a modest surplus in the balance of payments.
In addition, the growth of key monetary aggregates was within targets. However, the
pressure on the foreign exchange market continued with further depreciation of the
naira exchange rate, while infrastructural deficiencies contributed to the less than
satisfactory performance of the real sector. On the whole, the projections of major
economic aggregates to the end of the year, point to the likelihood of achieving a real
growth rate of 3.0 per cent, single digit inflation and the restoration of both internal and
external balance, as envisaged in the Budget.


The prospects for further reduction in fiscal deficit during the second half of the
year would depend largely on the intensification of revenue collection efforts and
expenditure restraint. The average oil price will exceed the $20.0 per barrel on which
the Budget was predicated, thereby boosting oil revenue. Also, the resolve by the
Government to ensure transparency and accountability in project implementation
would help to reduce waste and enhance effective implementation of projects.


Given the high level of excess liquidity in the economy, the maintenance of
monetary stability would remain an arduous task. This situation may be aggravated
given the possibility of increased inflow of external resources following improved
perception of the Nigerian economy by the international community and the continued
monetisation of the excess receipts from oil. The recent increases in salaries and
wages, as well as the modest increase in the prices of petroleum products, would
threaten monetary stability in the second half of the year. This underscores the need
for fiscal and monetary restraint in the remaining months of the year. The recently
announced policy, requesting government ministries and parastatals to transfer their
capital vote to the Central Bank of Nigeria would help in assuaging the liquidity
problem.


The wide margin between deposit and lending rates observed in the first half
may continue unless action is taken to minimise the distortions in the system. Savings
rates may continue to be low, given the reluctance of banks to finance productive
activities with their excess reserves. Low deposit rates may fuel speculation in the
foreign exchange market and weaken further the confidence in the financial

intermediation process. Therefore, there is need to remove the structural bottlenecks
that militate against investments in the real sector to ensure higher returns on
investments in this area.


Aggregate domestic output performance for the rest of the year will remain
moderate. Agricultural output is expected to record further growth if the current
conducive weather conditions continue and the supply of complementary inputs are
adequate and timely. Also, it is expected that the current effort to reduce the level of
pest and disease infestation to the barest minimum would be sustained. Output of the
industrial sector may improve if the existing structural constraints on manufacturing
activities are reduced. These include the deplorable state of economic infrastructure,
particularly NEPA’s power generation and distribution facilities and the petroleum
refineries.


Inflationary pressures may increase further during the second half of the year, if
fiscal and monetary stance becomes expansionary. Also, the poor states of utilities
and basic infrastructure that have persistently constrained production have the
potential of fueling inflation. This may however, be dampened if some of the effort of
rehabilitating them and the increase in agricultural output growth are sustained. Also,
the harvesting season is expected to exact a dampening effect on inflation.


Relative stability of the naira exchange rate could be attained in the second half
of 2000 with the successful management of the excess liquidity in the banking system.
The resolve to return the capital votes of ministries and parastatals to the CBN may
help in this regard. Also, the price of crude oil, which has remained consistently above
the $20.0 budget price, may assist to provide resources for funding the IFEM.
However, negotiations on a Stand-by Agreement with the IMF need to be concluded in
order to pave the way for the successful external debt reduction and thereby freeing
more resources for internal growth and development.


Finally, it is desirable that some socio-economic problems that had constrained
productive activities in the recent past are urgently addressed. Matters calling for
urgent attention include decline in the quality of social services and public utilities.

There is also, the need for concerted efforts to deal with the serious issues of
maintaining law and order and the protection of life and property.