a publication of zenith bank issplc v ol. 2 no. 4 october

A Publication of Zenith Bank Plc ISSN: 0189-9732Vol. 2 No. 4 October, 2006

economic, financial and business indices

FOREIGN INSIGHTS

indo-nigerian trade:

exploring the new silk road

GLOBAL WATCH

third world and the foreign debt

albatross: which way out

FACTS & FIGURESw w w. z e n i t h b a n k . c o m

PERISCOPE

ISSUESmacroeconomic policies in

nigeria: lessons from history

and the way forward

- IK Muo

EDITORIAL

POLICY

globalization from the

business point of view

- John D. Sullivan

joint tax board guidelines for

the operation of PAYE scheme

for 2006 year

economy: the unfolding layers of reforms

EXPRESSION

the business case for

corporate citizenship

- Aleksandr Shkolnikov,

Josh Leachman

& John D. Sullivan

developing the nigerian software industry:role of nigerians in the diaspora

the economy, roadmaps,pilots & others

ZENITH ECONOMIC QUARTERLY : : October, 2006 1

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

MARCEL OKEKEEditor

TONI KAN ONWORDIDeputy Editor

EUNICE SAMPSONAssistant Editor

MUSA MICHAELProduction Assistant

UKUT SYLVESTERROTIMI AROWOBUSOYE

Layout/Design

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

GIDEON JARIKREPAT NWARACHEOCHUKO OKITI

UGO ANYANWU

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

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

All correspondence to:The Editor,

Zenith Economic Quarterly,Research & Economic Intelligence Group,

Zenith Bank Plc7th Floor, Zenith Heights

Plot 87, Ajose Adeogun Street,Victoria Island, Lagos. Tel. Nos.: 2781046-49,

2781064-65| Fax: 2703192.E-mail: [email protected],

[email protected]: 0189-9732

C O N T E N T S

PERISCOPEExamines key developments in various sec-tors and their effect on the economy in theperiod under review. Pg. 6-13

EXPRESSIONThe role of Nigerians in the diaspora as astrategic element in growing the Nigeriansoftware industry is analysed. Pg. 15-18

POLICYPolicy document detailing and summarisingthe guidelines of the payee tax scheme 2006.Pg. 20-25

ISSUES (I)A historical analysis of macro-economicpolicy frameworks with emphasis on theirsuccesses and failures. Pg. 27-36

ISSUES (II)Attempts a critical appraisal of globaliza-tion and its impact from a business perspec-tive. Pg. 38-43

ISSUES (III)Focuses on the imperative for good corpo-rate citizenship, while identifying the ben-efits inherent in the application of globalbest practices in this regard. Pg. 43-54

FOREIGN INSIGHTSAnalyses the potentials for economicgrowth and development inherent in theNew Silk Road as it affects Indo-Nigeriantrade. Pg. 56-60

GLOBAL WATCHFocuses on debt exit strategies employedby several countries while analysing theimplications of the strategy adopted by Ni-geria. Pg. 62-72

FACTS & FIGURESHighlights macroeconomic performanceusing charts and figures. Pg. 74-80

ZENITH ECONOMIC QUARTERLY : : October, 20062

From The Editorial Suite

2

Economic historians seem broadly divided as to whetherNigeria is what it is today “because of” or “in spite of” itspast efforts at plotting roadmaps for economic develop-ment. In the past sixty years (including 14 pre-indepen-dence), the country has packaged a ‘bagful’ of develop-ment plans, frameworks, roadmaps, visions, strategies—each intended to guide the meaningful and acceleratedeconomic development of the nation. Starting with the co-lonial Ten-year Plan of Development and Welfare for Ni-geria (1946-1956) successive Administrations, whether ci-vilian or military, had each devoted substantial resourcesto crafting fresh frameworks/policiesfor the economic development of thecountry.

Interestingly, virtually each one ofthese frameworks has been hailed ascomprehensive, well articulated andrealistic, especially at the time theywere articulated. Yet, authors and pro-moters of succeeding roadmaps hadalways found enough reasons to dis-credit and jettison each subsistingframework and embark on new initia-tives. Thus, our lead article in this is-sue, titled: “Macroeconomic policiesin Nigeria: lessons from history andthe way forward” presents an in-depthhistorical analysis of the macroeco-nomic policy frameworks with empha-sis on their aims, objectives, successes and failures. Theirdifferences, similarities and impacts (where discernible)are also explored.

Today, irrespective of what framework is in place, therole of Information and Communications Technology (ICT)as one of the key drivers of economic development can-not be overemphasized. Unfortunately, however, devel-oping countries including Nigeria are still lagging behindin terms of this invaluable and indispensable tool. In fact,this is the substance of the “Digital Divide” that seems tohave created a ‘bi-polar’ world—with the rich and industri-alized countries in one bloc and the rest in the other. Thus,under the topic: “Developing the Nigerian Software In-dustry: Role of Nigerians in the Diaspora”, the section Ex-pression, explores the critical role of Nigerians in thediaspora as a strategic element in growing the Nigerian

software industry—in the journey to bridging the digitaldivide.

Economic development, in the global context, has be-come inextricably intertwined with the issues of foreigndebts and international politics, with each developing coun-try literally sinking under the excruciating weight of a lin-gering external debt overhang. Debt management hastherefore assumed the front burner in all the developingcountries—with each plotting how to extricate itself fromthe pangs of highly debilitating external debts—both genu-ine and spurious types. Creditor nations, most of them,

rich and highly industrialized, have sincebunched themselves into ‘clubs’ to dic-tate the terms, modes and timing of ne-gotiations and settlement by debtorcountries. Our Global Watch therefore fo-cuses on the debt exit strategies em-ployed by several countries, while ana-lyzing the implications of the strategyadopted by Nigeria in its recent landmarkdebt treatment with the Paris Club.

In a related issue, under Foreign In-sights, the blossoming Indo-Nigeriantrade and its potential for the economicgrowth and development of both lead-ing emerging markets is explored andanalyzed. The imperatives for good cor-porate citizenship and the benefits in-herent in the application of global best

practices in this regard as well as some insight into global-ization and its benefits from a business perspective are allexamined under Issues. As usual, under Periscope, key de-velopments in the various sectors and their effects on theNigerian economy in the period under review are exten-sively examined. Other regulars like Policy and Facts &Figures are not left out in this issue. We believe that wehave, in this edition, once again succeeded in serving you,our readers, with our usual scintillating, incisive and mas-terly analysis of topical issues—from both national andglobal perspectives. Enjoy your reading !

Today, irrespective of whatframework is in place, the

role of Information andCommunications Technology

(ICT) as one of the keydrivers of economic

development cannot beoveremphasized.

Unfortunately, however,developing countries

including Nigeria are stilllagging behind in terms of

this invaluable andindispensable tool.


Mr. President expresses his appreciation for this thought-ful gesture, please accept his best wishes for your contin-ued success and well-being.” Taiwo Ojo, Special Assistantto the President

“I wish to acknowledge receipt of your lastquarter’s ZEQ edition which we found bothinteresting and informative, particularlybecause of its well researched coverageof the role and impact of the financial sec-tor in the economy. Indeed, the ZEQ suc-ceeds in juxtaposing the National contextand global perspective in a way that is in-structive to the reader.”Zondo Sakala, Resident Representative,Nigeria (African Development Bank Group)

“We acknowledge with thanks receipt ofyour letter dated June 23, 2006 and the en-closed ZEQ. We will be interested in con-tributing to your next edition highlightingthe work UNDP is currently undertaking inNigeria. We cannot confirm when our edi-torial will be ready, however, we will letyou know well in advance so you can pre-pare space in your subsequent edition.” -Alfred Fawund, Officer in Charge - UNDP

“We acknowledge with thanks the receiptof a complementary copy of your maga-zine: “Zenith Economic Quarterly” sent toour President/Chairman of Council. Wehope that you would continue to send uscopies of your subsequent publicationswhile urging you to continue to maintainthe quality of the magazine.” - TundeOlofintila – Head, Corporate Affairs (TheChartered Institute of Bankers of Nigeria.

“Thank you for the ZEQ journal. I mustcommend you on the excellent quality inproduction and content, consistent in alleditions published; I urge you to keep itup” - Foluso Phillips – Managing Director/CEO (Phillip Consulting Limited)

“We wish to acknowledge with thanks thereceipt of the July 2006 edition of your ZEQ,sent to us. Thanks for a job well done.” -Chief (Dr) I. Olusola Dada – Chief Execu-tive, Anchoria Investment & Securities Ltd.

“I acknowledge with thanks, receipt of the latest edition ofZEQ. Please keep up the good work.” - Abraham Idenyi –Nigerian Institute of Advanced Legal Studies

“We acknowledge with thanks the receipt ofyour Quarterly Economic Publication Vol. 1No. 7 of July, 2006. Thank you.” - FemiGbadegun - Director General, ManufacturersAssociation of Nigeria.

“Many thanks for kindly sending us a copyof your publication. The Honourable Minis-ter passed it to me and has asked me toconvey his congratulations to you and toconfirm that he enjoyed reading it. I am ajournalist and I was also very impressed bythe high standard you have achieved. Bestwishes.” - Donu Kogbara, Special Assistantto the Honourable Minister – Federal Minis-try of Transport

“I am directed to acknowledge the receiptof your July 2006 Edition. The publication isinteresting and extremely educative. Wewish your bank all the best in the subsequentpublications.” - Nwaiwu, P. C , ForHonourable Minister, Federal Ministry ofCommerce

“We have found previous editions very in-formative and interesting and thereforehave no doubts about the current edition.Thank you.” - Femi Okunade, Managing Di-rector/CEO – Xerox

“…. I am also directed to inform you thatthe Honourable Minister, after going throughthe publication found it really incisive, inter-esting and educative. Please accept the bestregards of the Honourable Minister of De-fence.” - M. A. Akinode

“I wish to acknowledge receipt of your let-ter of 25th April, 2006 and the enclosed copyof the above quarterly. I look forward toreceiving future editions in due course andif time permits to contribute feature articles.”- Chief Luke C. Okafor


R

PERISCOPE

* By Marcel Okeke

eforms—the fulcrum of the economic policy of the incumbentAdministration—continued with sustained momentum during thethird quarter 2006, manifesting in some sectors as further adjust-ments or new layers of the original actions. Notably, actors andregulators have become the drivers of this process in some ofthe sectors. Thus, while the banking sector has started undergo-ing what is widely regarded as the second phase of consolidation,the telecommunications industry evolved a new (universal) li-censing regime; some private power generating companies havebeen issued with licenses, just as the Federal Government hasalso commenced the payment of huge accumulated pension ar-rears. Privatization continued with renewed zeal, culminating inthe successful ‘disposal’ of some key corporations like NITEL andothers whose sale had been problematic.

Overall improvements recorded in the macroeconomic envi-ronment in the first half of the year were largely sustained in thethird quarter. The stability of the Naira exchange rate improved;inflationary pressure slowed down while external reserves expe-rienced significant growth—mainly due to the persisting high


PERISCOPE

prices of crude oil in the international market. The infla-tion rate which on twelve-month moving average basis,stood at 18% in January 2006, dropped to 15.5% by end-June and to 11.4% by August, and further to 10% by theclose of the quarter. This is attributable to the subsistingtight monetary policy, the appreciation of the exchangerate, sustained stable prices of petroleum products in thedomestic market as well as the narrowing of the bureauxde change (BDC) market premium.

Sustained liberalization of the foreign exchange mar-ket continued to translate into stability of the local cur-rency against foreign ones. The opening of BDC windowsby virtually all the deposit money banks during the thirdquarter also impacted positively on this trend. Thus, theweighted average exchange rate of the Naira vis-à-visthe US dollar which stood at 127.60 per dollar in June,remained relatively stable at 128.12 and 128.10 per dollarin August and September, respectively. The nation’s stockof external reserves which stood at US$38billion at end-July 2006, rose to US$40billion by the close of the quarter.Also, during the quarter, the money market was awashwith much liquidity arising from payment of some pensionarrears by the Federal Government, payment of outstand-ing debt to some local contractors as well as the disburse-ment of a chunk of the excess crude revenue to the threetiers of government. This translated into a moderatingeffect on interest rates in the money market—a generaldecline in banks’ deposit and lending rates. This is in spite

of the fact that the monetary authorities had removedcontrol on interest rates—by no longer pegging lendingrate to the Minimum Rediscount Rate (MRR), as was thecase earlier in the year. The high liquidity also spilled intothe capital market, mounting pressure on stock prices andcausing excess demand for stocks - a bullish run whichimpacted on all market indicators. Thus, for instance, theNigerian Stock Exchange All Share Index (ASI) which stoodat 26,161.15 at end-June rose steadily to hit 32,554.60 by theclose of trading in September 2006. Market capitalizationwhich stood at N2.95 trillion at end-June, rose to N4.084trillion by the close of third quarter 2006. During the quar-ter, a total of 12 billion shares worth N163.87 billion weretraded as against 7.15 billion shares worth N104.37 billiontraded in the second quarter of the year.

BANKING & FINANCEThe ‘second phase’ of consolidation in the banking sectorwhich commenced in the first half of the year, took vari-ous forms during the third quarter. While some banks thatare products of mergers and acquisitions were still tack-ling the challenges of evolving into truly distinct and cohe-sive entities, many others embarked on strategic expan-sion, positioning and market dominance. A number of theemerging entities embarked on the revision, restructur-ing and re-allocation of their ‘bloated’ share capital, toenhance their competitive capacity. Some of them includeSterling Bank, Access Bank, Skye Bank, Unity Bank, et


PERISCOPE

cetera.Owing to the business co-operation and partnerships

entered into by most of the 25 operating banks in thecountry with a number of global financial institutions,mainly during the quarter under review, the Central Bankof Nigeria appointed 14 of those foreign banks as exter-nal fund managers for Nigeria’s external reserves. Ac-cording to the CBN, the appointment of the fund man-agers is to “allow professional management, diversifi-cation of investment and to leverage on the expertiseof the foreign banks to transform Nigerian banks intoglobal financial institutions.” Under the new arrange-ment, each of the foreign banks is partnering with onebank in Nigeria. The CBN has traditionally kept the ex-ternal reserves as deposits with foreign banks. This isthe first time the apex bank is appointing foreign assetmanagers to manage part of its reserves , in line withglobal best practice.

In pursuit of the new arrangement, the CBN, as afirst step, awarded US$7billion to 14 out of 17 reputableglobal asset managers which not only met its require-ments for appointment as external assets managers,but also for partnering Nigerian banks. However, whilethe amount of the mandate to each asset manager is afunction of the size of the shareholders’ funds of its localpartner, the effective take off of each mandate is contin-gent on the strength of the partnership between the localbanks and their foreign partners. In a similar vein, theCBN redeemed part of the promise it made to reward thefirst and largest groups of banks to consolidate. The apexbank awarded deposit placements of US$50milion to eachof them, on the condition that the deposits shall be givento their foreign branches or reputable foreign partners.

Sequel to the growing confidence in the Nigerian bank-ing system, reputable foreign banks have begun over-tures to acquire or strengthen their equity stakes in somelocal banks. In this regard, during the quarter under re-view, IBTC-Chartered Bank signed a Memorandum ofUnderstanding (MoU) with Stanbic Bank Nigeria as an ex-ploratory step to a merger. Under the deal, Standard Bankof South Africa, the parent company of Stanbic Nigeriawill also buy existing shares of IBTC-Chartered Bank. Stan-dard Bank currently has operations in 17 African countriesand 21 nations outside the continent and plans to takeadvantage of the huge potential the Nigerian market of-fers.

Ecobank Nigeria is also making moves to acquire an-other bank even as preparations are still ongoing for thebusiness combination between its parent bank (Ecobank

Transnational Incorporated) and First Bank. Ecobank Ni-geria is exploring the ‘Purchase and Assumption’ or‘cherry-picking’ option to acquire the assets of one of the14 ‘un-recapitalized banks’.

In a similar vein, Union Bank of Nigeria raised its stakein the Banque Internationale Du Benin (BIBE) in Benin Re-public from 25 per cent to 56.7 per cent. This it did by inject-ing N950 million into BIBE, as part of its expansion drive inthe West African sub-region. Under the ‘Purchase andAssumption’ option, the monetary authorities last August,handed over the assets of former Lead Bank and Assur-ance Bank to Afribank Nigeria. Lead Bank and AssuranceBank are two of the 14 ‘un-recapitalized banks’. By thisarrangement, customers of the former Lead and Assur-ance banks were transferred to Afribank.

The CBN, in its effort to deepen and improve the effi-ciency of the money market for effective liquidity man-agement, commenced in August, the process of appoint-ing primary dealers/market makers in money market in-struments. The primary dealers to be made up of depositmoney banks and discount houses, are being selected inaccordance with the guidelines issued by the apex bankfor that purpose. Some of the criteria for qualification in-clude: (i) a primary dealer must be registered with the

Nigerian Banks and Partners

Source: CBN


PERISCOPE

Corporate Affairs Commission (CAC) and the Securitiesand Exchange Commission (SEC); (ii) maintain a minimumcapital base of N3billion and comply with the liquidity andother regulatory requirements of the CBN; (iii) an appli-cant shall have been actively involved in the securitiestrading over a period of time. Interested operators haveall turned in their applications in the prescribed format tothe CBN. Under the emerging arrangement, money mar-ket instruments include Nigerian Treasury Bills (NTBs),Nigeria Treasury Certificates (NTCs), CBN Open MarketOperations (OMO) Bills, among others—all securities withtenor not exceeding three years.

During the quarter under review, the CBN also set up a

committee charged with the responsibility of harmonizingall charges normally passed by banks to their customers.This is with a view to ensuring that bank charges are trans-parent and reasonably uniform. In a similar move, theCBN in August, inaugurated a technical committee to drafta long term financial framework with a horizon coveringup to 2020. According to the apex bank, the essence ofdrafting such a long term strategic plan, is to have a visionto drive the emergence of Nigeria as the largest economyin Africa in the next 14 years. The committee is composedof representatives of all regulatory bodies in the financialsystem, some financial consultancy firms, Money MarketAssociation of Nigeria, the organized labour and repre-

sentatives of Manufacturers Association of Nigeria. Thestrategic plan is expected to commence by the beginningof next year.

The re-capitalization efforts of operators in the insur-ance sector intensified during the third quarter 2006, withmany of them opting for mergers or outright acquisitionby a few major players. In fact, by end-September 2006, atotal of 18 insurance groups made up of 45 insurance com-panies had submitted their consolidation proposals to theNational Insurance Commission (NAICOM). Availabledata indicate that about four months to the close of theconsolidation exercise in the industry in February 2007,about 60 percent of the current operators may be able to

meet the re-capitalization deadline.The ongoing consolidation began inSeptember 2005, when the FederalGovernment announced variousnew levels of minimum share capi-tal for different categories of play-ers in the industry.

Under the new initiative, life in-surance firms are to raise their mini-mum capital from N150million toN2billion; general business compa-nies, from N200million to N3billion;composite insurers, fromN350million to N5billion and reinsur-ance companies, from N350millionto N10billion.

In aid of the ensuing mergersand acquisitions in the industry,NAICOM has secured some con-cessions from relevant regulatorsand facilitators of the processes.Thus, while the Securities and Ex-change Commission (SEC) has of-

fered to apply one per cent charge on the nominal valueof securities of the companies raising funds in the capitalmarket, instead of their market value, the Corporate Af-fairs Commission (CAC) granted 50 per cent reduction onall fees and dues payable by insurance and reinsurancecompanies for the purpose of the consolidation exercise.NAICOM and the Nigerian Insurers Association (NIA)have also set up a number of committees to assist theunderwriting companies in the re-capitalization exercise.

While the frenetic effort of the insurers to re-capitalizeis reaching a feverish pitch, indications are that some ofthem are attracting foreign direct investments (FDI) fromreputable institutions abroad. The International Finance


PERISCOPE

Corporation (IFC)—the private sector lending arm of theWorld Bank, for instance, is investing about $14million(N18.30billion) in one of the major insurance companies.The global financial institution is using that investmentchannel to assist in the development of financial marketsin the sub-Saharan Africa.

The bonds segment of the capital market remainedactive during the third quarter 2006. The first tranche ofthe N60billion bonds earmarked for sale by the FederalGovernment during the quarter (that isN20billion) was sold by auction on July26. The second, also N20billion, was auc-tioned on August 25. While these twotranches will mature in 2009, the third onewhich was issued in September is tomature in 2011. Also in September 2006,the 17.75 per cent FGN bonds 2006 issuedon October 27, 2003, were redeemedalong with the interest. In August 2006,the Federal Government commencedthe payment of N75billion pension ar-rears to about 270,000 eligible pension-ers whose claims were verified during apension verification exercise. The pay-ment was made under an arrangementby which some banks underwrote N75billion worth of a 3-year FGN bonds is-sued at a coupon rate of 12.5 per cent.Banks involved in the arrangement in-clude Zenith Bank Plc, United Bank forAfrica Plc, First Bank of Nigeria Plc, Guar-anty Trust Bank Plc and Fidelity Bank Plc.The Debt Management Office (DMO)had earlier in the year, appointed 15 fi-nancial institutions comprising 10 banks and 5 discounthouses to perform the function of Primary Dealers/Mar-ket Makers (PDMM) in the FGN Bonds.

By the close of the third quarter 2006, the CBN hadissued eight organizations with Approvals-in-Principle tooperate as microfinance institutions—this is further to themicrofinance policy it introduced in December 2005. Thebeneficiaries of these approvals include: AccionMicrofinance Bank, Lagos; Susu Microfinance Bank, Lagos;Integrated Microfinance Bank, Lagos; MIC MicrofinanceBank, Lagos; WizeTrade Microfinance Bank, Lagos; OsunState College of Technology (OSCT) Microfinance Bank,Esa Oke; Mustasons Microfinance Bank, Lagos; First Glo-bal Microfinance Bank, PortHarcourt.

The microfinance banks, according to the CBN guide-lines, are set up to provide such services as savings, loans,domestic funds transfer and other financial services thatare needed by the economically poor, micro, small andmedium enterprises to enable them carry out their busi-nesses. Organizations or existing community banks thatwant to transform into microfinance banks have up toDecember 2007, to meet the CBN requirements, includinga minimum capital base of N20 million. Each of them must

also produce an institutional assessment report, based onthe works of a reputable, CBN-certified rating agency aswell as a detailed feasibility report and a five-year busi-ness plan, among others.

EXTERNAL DEBTS/FOREIGN RESERVESFollowing Nigeria’s exit from the Paris Club debt in thesecond quarter 2006, the Debt Management Office (DMO)confirmed that the country’s public debt as at June 2006stood at N2.197trillion ($16.926billion). This is made up ofN630 billion ($4.847billion) external debt and N1.570 trillion($12.076 billion) domestic debt, which is predominantlymade up of debt owed local contractors and the huge pen-sion arrears. At present, the Federal Government has

Nigeria’s External Debt Profile (US$Billion)

Source: CBN; Debt Management Office; Research & EIG


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evolved “a documented” debt management strategy toensure debt sustainability. The plan is to ensure regularconduct of Debt Sustainability Analysis (DSA) and buildnational capacity for such analysis. Government has alsoinitiated moves to exit the London Club debt. In this re-gard, it has appointed a United States law firm as a legaladviser to assist in working out modalities for Nigeria’sexit from the debt which is put at $2.40 billion. The LondonClub debt which is made up mostly of oil warrants, prom-issory notes and par bonds, currently accounts for 49.5per cent of Nigeria’s outstanding external debt of $4.847bil-lion. This makes Nigeria one of the few countries outsidethe Organization for Economic Co-operation andDevelopment (OECD) with a debt to GDP ratio be-low 20%.

Like in the first and second quarters of the year,the nation’s stock of external reserves grew sig-nificantly during the third quarter 2006. Accordingto the CBN, the reserves which stood at US$38 bil-lion as at end-July 2006, rose to US$40 billion bySeptember 30, 2006. Owing to this quantum growth,the CBN, apart from appointing 14 foreign banks inpartnership with Nigerian banks to manage achunk of the reserves, has also invested a portionin bonds. JP Morgan Chase of the United States ofAmerica has been appointed as a Global Custo-dian to take custody of all securities purchased bythe appointed external managers of the nation’sforeign reserves.

POWER SUPPLYDuring the third quarter 2006, the Federal Governmenttook steps aimed at frontally confronting the perennialproblem of erratic electric power supply in the country. It

granted licenses to four indig-enous Independent PowerProviders (IPPs). The four lic-ensee companies are: FarmElectric Supply Limited, ICSPower Limited, Ethiope Lim-ited and Supertek Nigeria Lim-ited. The four companies areexpected to produce about4,500 MW and supply to thenation’s grid. Nigeria’s powergrid currently has an installedcapacity of 6,000 MW with lessthan 50% availability. All the

IPPs have acquired land, conducted environmental im-pact assessment and have had their financial and techni-cal proposals approved by the Nigerian Electricity Regu-latory Commission (NERC) before they were issued li-censes.

With the licensing of the IPPs, the country now hasabout fifteen power plants out of which eleven are ownedby the Federal Government. These include the new me-dium-sized power plants in the Niger Delta region, atIhovbor, Sapele, Gbarain, Egbema, Calabar and Omoku.There are four others at Geregu, Papalanto, Omotosho,and Alaoji—which are already nearing completion. TheFederal Government is also “on course” to complete about

557 “electricity constituency projects” which it embarkedupon earlier in the year. This is in addition to two pilot solarprojects already commissioned in Katsina and Bauchistates, and two others in Cross River and Ogun states—contracts for which have just been awarded. A number ofupstream oil companies are also building power-generat-

Newly Licensed IPPs

The Nigerian Telecommunications Market—Some Statistics

Source: NCC*Including operator with unified license who are licensed to do both fixed and mobile


ing plants across the Niger Delta region under the IPParrangement.

TELECOMMUNICATIONSFurther to the granting of new licenses to four companiesunder the unified licensing regime in May this year, theNigeria Communications Commission (NCC) during thethird quarter 2006, also granted such licenses to four othertelecommunications operators in the country. Sequel tothe expiration of the five year exclusivity period grantedthe four GSM service providers (MTN, Vmobile, Glomobileand Mtel), NCC in February this year introduced unifiedlicensing to the industry. The four companies granted newlicenses during the quarter under review include VGCCommunications Limited, Danjay Telecoms Limited,Bourdex Telecoms Limited and Mobile Telecommunica-tions Network Limited (MTN).

The four companies earlier granted unified licensesby the NCC are: Multi-links Telecommunications Limited,Prest Cable Limited, Satellite TV Systems Limited and In-tercellular Nigeria Limited. Under the unified licensingregime, each operator is allowed to offer multi-services,including mobile telephony, fixed,wireless services, broadband Internetas well as Very Small Aperture Ter-minal (VSAT) and other value addedservices. Some of the conditions tobe met by an operator to qualify for aunified license include: having exist-ing and operating network infrastruc-ture, a customer base of at least 10,000connected subscribers or justifiableevidence of financial capability forsubstantial network rollout and beingup-to-date on submission of annualaudited accounts. The NCC also ex-pects the new operators to spreadtheir services from operational basesto at least three states in each of thecountry’s six geo-political in the fiveyears, with effect from January 2007.

In order to check the relatively high cost of telephoneservices in the country, the NCC has liberalized the Voiceover Internet Protocol (VoIP) or Internet telephone. Ac-cording to the industry regulator, this is to facilitate themaking of telephone services available to un-served car-riers via broadband Internet or Very Small Aperture Ter-minal (VSAT). The NCC had in June announced adjustedinterconnect rates among telecommunications opera-

tors—which took effect from September. Under the newrates, near-end termination on a fixed network costs N10.80while far-end termination costs N9.10. The old terminationrate on a fixed network was N5.52. However, terminationon a mobile network was reduced from N11.52 to N11.40.NCC defines far-end termination as a situation where theoriginationg operator hands over a call to the terminatingoperator in the state in which the called party is located.The near-end termination on the other hand, refers to asituation where the originating operator hands over thecall to the terminating operator in a location that is notwithin the state in which the call party is located.

One of the key developments in the telecommunica-tions industry during the third quarter 2006 was Celtel’sacquisition of 65% in Vmobile for a record US$1.5 billion.Also during the period, Transnational Corporation of Ni-geria (Transcorp) emerged the core investor in NigeriaTelecommunications Limited (NITEL), buying 75% of theFederal Government’s equity in the telecoms companyfor US$750 million. The deal was struck with theprivatization agency—Bureau of Public Enterprises(BPE)—under a “willing buyer, willing seller” arrangement, fol-

lowing three failed earlier attempts to sell the company.The remaining 25% shares of NITEL shall be sold to Nige-rians through a public offer before year-end. Under thesales agreement, all liabilities and debts of NITEL will betransferred to Transcorp, except for those arising fromhuman related issues such as pension liabilities anddownsizing cost which will be borne by the Federal Gov-ernment. Transcorp has chosen the British Telecommuni-

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Annual Average Crude Oil Prices: 1996-2006

Source: OPEC & Research & EIG


cations as its technical partner to assist in the quick turn-around of NITEL.

CRUDE OIL PRICESCrude oil prices rose sharply during the third quarter2006—declining however in an undulating fashion towardsthe tail end of the period. Thus, while prices of crude in theinternational market stood at an average of U$55 per bar-rel by end-June 2006, the figure by mid-July wasUS$78.50pb; and by end-September, prices had averagedbelow US$60pb. In fact, for the first time since March 2006,crude oil price came below US$60pb on September 20,after the US President George W. Bush announced sup-port for diplomatic efforts to end the dispute with Iran—the world’s fourth largest oil supplier. On that date, thebasket price of crude oil from the Organization of Petro-leum Exporting Countries (OPEC), a weighted average ofvarieties of crude that is updated daily, fell to US$56.54pb,from the August average of US$68.81pb.

While the price of crude was rising in the internationalmarket during the period under review, its upshot in thelocal economy was high cost of importation of refined pe-troleum products. Specifically, the situation led to a rapiddrawdown on the N150 billion Petroleum Support Fund(PSF) set aside by the Federal Government. The Fund wasinitiated to subsidize cost of imported refined products,thereby providing succor to the consuming public. But at a

point during the third quarter 2006, owing to the prevailinghigh cost of imported petroleum products, Governmentwas providing N28.48 subsidy per litre of Premium MotorSpirit (PMS) and N29.31 per litre of Dual Purpose Kerosene(DPK). This had the effect of a quick depletion of the Fund,prompting the managing agency—the Petroleum Prod-ucts Pricing Regulating Commission (PPRC)— to make acase for additional money for the PSF.

The high but volatile prices of crude oil in the interna-tional market, especially during the third quarter 2006, wasattributable to a number of factors including the crises inthe Middle East (accentuated by Iran’s NuclearProgramme) which have defied several negotiations. Thiskeeps building up anxiety about disruption to oil suppliesfrom that region. The lingering youth militancy in the NigerDelta region of Nigeria (where over 90% of the nation’s oilis produced) is yet to abate—and continues to disrupt oilproduction in the world’s 7th largest oil-producing nation.There is also the demand/supply factor by which mostOPEC members are unwilling to see crude oil price dropclose to US$50 per barrel; such a level would move themto cut production and supply. The fear of hurricanes andpossible disruption to production in the Gulf of Mexicoduring the period (as was the case last year) was also aninfluence on the prices of crude.(* Marcel Okeke is the Editor, Zenith Economic Quarterly)

PERISCOPE


EXPRESSION

T * By Jim Ovia

he quotation above which was made byKofi Annan, Secretary General of the UnitedNations is a fitting prologue to this paper com-ing as it does in the wake of an auspicious andmomentous occasion; the launch of the Com-puter for All Nigeria Initiative (CANi).

This initiative like many others that havegone before it is aimed primarily at servingas a bridge for what is a huge lacuna, a veri-table digital divide separating Third Worldcountries like Nigeria from other technologi-cally developed and digitally advanced coun-tries.

There is no gainsaying the fact that Nige-ria like many developing countries is laggingbehind in terms of Information and Commu-nications Technology (ICT). A realization ofthis ICT challenge compels all stakeholdersto reflect on what this digital divide really isand to fully appreciate on what levels it af-fects us as a country and as a people.

The digital divide refers to a lack of pre-paredness on a nation’s part in terms of ICTinfrastructure and skills. The immediate con-sequence of this for Nigeria is the disadvan-

“The ‘digital divide’ is real. It is actually several gaps in one: a technological divide in infra-structure, with 70 percent of the world’s Internet users living in the 24 richest countries…withnearly 70 percent of the world’s Websites in English … and a gender divide, with women andgirls in many countries, rich and poor alike, enjoying less access to information technologythan men and boys.” – Kofi Annan, UN Secretary General at the International Day of theUniversal Declaration on Human Rights December 10, 2003.



EXPRESSION

taged position she occupies which has left Nigeria, as itwere, as a mere on-looker instead of a participant in thedigital economy.

This divide manifests in several ways from a debilitat-ing lack of awareness of the inherent potential of ICT, to apaucity of computers, low internet penetration and a lackof skilled manpower.

The nation needs an urgent ICT Revolution to help usbridge this yawning gap. A full appreciation of the magni-tude of this problem and the clear and present economicand technological danger it portends can be gleaned froma critical consideration of relevant data (see table 1 & 2).

The first step in ameliorating this situation lies in lay-ing the basic foundation for launching Nigeria into andensuring our active participation as knowledge workers inthe new digital economy. To launch this revolution Nigeria

must re-appraise her Networked Readiness which is de-fined by the World Economic Forum as “The degree towhich a community is prepared to participate in the Net-worked World, and includes its potential to do so in thefuture.”

The government has a major role to play in ensuringthat the digital divide is bridged and that the nation is net-work ready. The government must provide leadershipthrough its policy formulations and pronouncements.

It also needs to chart a new path to e-growth by evolv-

ing strategies that foster:• e-awareness – evolving policies that would create ICT

awareness• e-infrastructure – providing infrastructure to enable

the sector thrive• e-readiness – evolving policies that would benefit the

ICT sector• Tackling the nation’s image problem which militates

against investments• Ensuring security of investors• Building a digital database to provide information• Ensuring adequate power supply

It is heartening to note that President OlusegunObasanjo has consistently displayed an awareness of thepotentials inherent in ICT as a key driver of economicgrowth. Having identified ICT as a national priority, a na-

tional ICT Policy was approved in March 2001. The mis-sion statement was specific: To USE IT for Education,Wealth Creation, Poverty Eradication, Job Creation, Glo-bal Competitiveness.”

A National Information Technology DevelopmentAgency (NITDA), was subsequently established andcharged with the responsibility of policy implementationwhile, in what is an obvious confirmation of proper under-standing of the issue at hand, the private sector was iden-tified as key driver of growth.

Table 1: Global Internet Penetration 2006

(Source: UNCTAD)


EXPRESSION

The present administration has over the course of al-most eight years launched a string of remarkable ICT ini-tiatives which underscore its resolve to see Nigeria takeits rightful place on the information superhighway. Theseinitiatives include:

• Computer in School Initiative (CISI) – to increase PCdensity and access to school children

• Internet in School Initiative (ISI) – to increase internetpenetration in schools

• NCC’s Digital Awareness Programme (DAP) – promot-ing digital awareness

• Computer for All Nigerians Initiative (CANi) – makingcomputers affordable

• Abuja Technology Village – platform for creating a sus-tainable knowledge based economy.

• Nigeria Software Development Ini-tiative (NSDI) - This was set up at theinstance of the FG, and Incorporatedas a professional Business association,an umbrella body for software practi-tioners, committed to developing a soft-ware park in Lagos

Aside these efforts of the govern-ment, the Private sector continues towork as partners in progress with thegovernment and their pioneering andinnovating strategies are evident in theroles they are playing in initiatives likeCANi which is being spearheaded byOmatek, Zinox, Beta, Balogtek,Microsoft, Intel, IBM and hp with Ze-nith Bank, Skye Bank, Fidelity Bank andUBA as CANi financial partners

The Nigerian Software Development Initiative (NSDI),although conceived by the President, is being midwifedand nurtured by Nigerian software practitioners. On indi-vidual levels, corporate entities like Microsoft are pioneer-ing Nigerian language operating systems to facilitate ICTliteracy in indigenous languages while Zenith Bank is driv-ing the Youth Empowerment for Digital Revolution bypartnering with the US embassy at its annual CTO forumand also through donation of computers to and building ofcyber cafes for secondary and tertiary institutions.

Despite these laudable efforts, more still has to be donein the areas of capacity building and skill acquisition and itis in this regard that Nigeria must seek input and the ex-pertise from her citizens in the Diaspora.

This recourse to Nigerians abroad who have been ex-posed to the best technologies is not novel. Other coun-

tries like India who have leapfrogged into the informationsuper highway have taken the same path in their quest tobridge the digital divide.

India offers us a good example of how Nigerians in theDiaspora can help grow Business Processes Outsourcing(BPO) and IT-enabled Services (ITES). In India, Softwareand services export buoyed by assistance from Indians inthe Diaspora reached US $ 12.2bn in 2003-04 showing a30.5% increase from $ 9.6bn recorded in 2002-03.

Today, India is No.39 on the Networked Readiness In-dex with its IT hub in Bangalore. Bangalore was no morethan a mud fort in the 16th century until the Industrialpolicy declared in 1996 offered incentives that drew inves-tors. Bangalore is today, a powerful magnet for foreigncompanies like Cisco Systems, Delphi Automobiles,

America online, and EastmanKodak requiring BPO expertise.Bangalore boasts over 103 R&Dinstitutions.

The Indian ICT revolution blos-somed when GE and BA set upwholly owned subsidiaries in careof Indian managers pooled fromthe Diaspora. These returnee In-dians then began to staff these lo-cal subsidiaries from a pool ofskilled manpower drawn fromtheir former alma maters.

At present, the Indian BPO/ITES sector employs over 245,000professionals while the ITES andBPO services sector is expected

to generate revenues of US $62bn by 2008-09 which guar-antees India an over 10% cut of global BPO business whichgrew from $500bn in 2004 to $554bn in 2006 and is projectedto reach $682bn by 2008.

Nigeria can replicate the Indian example and reap iden-tical benefits because we are similar to India in many re-spects. We have a large population, a vast pool of edu-cated young people and a large expatriate communitybased abroad.

Latest estimates indicate that there are 1.1 million Ni-gerians in the Americas and over 185,000 of them are ITprofessionals. We also know from figures released by theWorld Bank that over $4m dollars is remitted back homeannually from the Diaspora. With this knowledge all thatremains is for us to find a way of turning this Brain Drain,which has hemorrhaged our best minds across the seas,

Despite these laudableefforts, more still has tobe done in the areas ofcapacity building and

skill acquisition and it isin this regard that we

must seek input and theexpertise of our

compatriots in theDiaspora.


EXPRESSION

to Brain Gain.By tapping into this vast pool of

Nigerians in the Diaspora, Nigeriastands to reap immense economicbenefits because Nigerians in theDiaspora can offer distinct advan-tages: They are much more conver-sant about their country of origin,usually speak the language and canthus negotiate better. Many of themgot their first degrees in Nigeria andcan take advantage of the old schoolnetwork. They possess unique own-ership advantages based on net-works abroad with customers for software as well as abil-ity to forecast new developments. They can also betterunderstand peculiar demands as well as country/culturespecific requests while being better positioned to mentorlocal entrepreneurs.

Tapping into the opportunities Nigerians in theDiaspora can guarantee will help the nation use ICT asEnabler, Enhancer and Equalizer in bridging the digital di-vide. It will also assist in opening doors to a large localmarket estimated at over $5bn, develop a pool of skilledICT professionals to meet BPO demands as well as a localskill pool for BPO and ITES jobs.

To understand the vast opportunities open to majorplayers in the information super highway and knowledgeeconomy, we must put the e-economy in perspective. Theglobal BPO market grew from $500bn in 2004 to $554bn in2006 and is projected to reach $682bn by 2008. The AfricanICT market on the other hand is worth over $11bn and at

an annual growth rate of 5.4% is expected to reach $18bnby 2008.

The Nigerian ICT market on the other hand is grosslyuntapped, worth over $5bn and grows at an average rateof 9.5% per annum and has capacity to contribute at least10% of the country’s GDP in the next 5 years.

Progress lies in a public and private sector alliancewith the private sector tapping into the vast resources atthe disposal of those in the Diaspora. Government musthelp drive private sector action and to ensure this, the FGshould start by including computer studies in the schoolcurricula and fully implement the Computer In School Ini-

tiative (CISI), Internet In School Initiative (ISI)as well as the Computer for all Nigerians Ini-tiative (CANi). In addition, the FG should alsodevelop the nation’s ICT Infrastructure, buildICT parks (NSDI & Abuja ICT Village), encour-age Government/Private Sector Cooperation,launch an Aggressive Public Awareness Cam-paign and fully implement ICT policy.

These steps would provide an enabling en-vironment for the private sector to collaboratewith those in the Diaspora and help in movingthe country from e-Awareness to e-Actionwhile transforming e-Action to e-Wealth.

To conclude we must return again to KofiAnnan who said: “We are going through a historictransformation in the way we live, learn, work, com-municate and do business. We must not do so pas-

sively, but as makers of our own destiny. Technology has pro-duced the information age. Now it is up to all of us to build aninformation society.”(*Jim Ovia is the Managing Director, Zenith Bank Plc)

Source: Nasscol

Table 2: Networked Readiness

(Source: World Economic Forum)


POLICY

INTRODUCTIONEmployers of labour are expected to use these PAYE guide-lines as the standard for making tax deductions and taxpayments to tax offices in respect of their employees on amonthly basis.

With the passage of the 2006 Federal Budget and thoseof the various States for the 2006 year, these PAYE guide-lines have been issued for the 2006 year.

The guidelines apply to all incomes (i.e. emolumentswhich include salary and allowances) of an employee de-rived or deemed to be derived from Nigeria whether ornot such income is received in Nigeria.

All Employers of labour, Agents and Consultantsshould ensure that all employees make full disclosure ofall their incomes at the beginning of the year (whether ornot such income is received in Nigeria or not) when taxforms ‘A’ are completed by them before returning same tothe tax office.

Such disclosure should encompass as required by lawall income earned, accruable, derived or accumulated inNigeria. This includes disclosure of income paid both inNigeria and outside Nigeria as well as full disclosure of Allsalaries and allowances paid either in cash or in kind.

Employers of labour, Tax Agents and Consultants, andEmployees who engage in incomplete disclosure of in-come are liable to be charged for concealment of infor-mation with intent to defraud the Government of Nigeria,an act chargeable under the criminal code of Nigeria.

The Board hereby urges all employers of labour bothin the public and private sectors, to fully implement thecontents of these guidelines in order to ensure a hitch freePAYE Scheme operation in year 2006.

2. DEFINITION OF TERMS2.1 “Assessable Income” refers to the income of an em-ployee for each year of assessment from each and everysource of his income.

2.2 “Employment” includes any service rendered byany person in return for any gains or profits including ap-pointment or office, whether public or otherwise, for whichremuneration is payable, and “employee” and “employer”

shall be construed accordingly; the gain or profit from anemployment shall be deemed to be derived from Nigeriaif the duties of the employment are wholly or partly per-formed in Nigeria, or the employer is in Nigeria, whetherthe gains or profits are received in Nigeria or not

2.3 “Emoluments” means total emoluments includ-ing all allowances, salaries, wages, perquisites, bonuses,and compensation;

2.4 “Fringe Benefits or Benefits-in-Kind” means ben-efits accruable to an employee when an

(a) Employer’s asset is put in the Employee’s use (Fortax purposes, the deemed value of such benefit accruingto the employee is 5% of the acquisition cost if known or5% of the market value of the asset at the time of acquisi-tion)

(b) Employer rents or hires an asset which he puts intothe use of an employee (For tax purposes, the employeewill be charged with the difference between the amountincurred by the employers and any amount refunded tothe employer by the employee)

2.5. “Income Tax Reliefs” in relation to any year ofassessment, means the sum of personal allowances andother reliefs given to an employee in a year of assess-ment;

2.6 “Taxable Emolument” means emoluments re-duced by tax-free emoluments;

2.7 “Tax Deduction Cards” means a tax deductioncard in the form prescribed by the relevant tax authorityor such other document as may be authorised by the rel-evant tax authority.

2.8 Total Income” means in relation to an individualfor a year of assessment, his aggregate assessable in-come for that year after the additions and deductions asallowed in the statute are factored in.

2.9. “Year of Assessment” means the period of 12months commencing on the first day of January of a year.

3 INCOME CHARGEABLE TO TAX3.1 An employee’s income chargeable to tax is the incomefor the year, from all sources inside or outside Nigeria,including any salary, wage, fee, allowance or other gain or

JOINT TAX BOARD GUIDELINES

FOR THE OPERATION OF PAYE SCHEME


POLICY

profit from employment including compensations, bo-nuses, premiums, benefits or other perquisites allowed,given or granted by any person to an employee otherthan

a. so much of any such sums as may be admitted bythe relevant tax authority to represent reimbursement tothe employee or expenses incurred by him in the perfor-mance of his duties, and from which it is not intended thatthe employee should make any profit or gain;

b. medical or dental expenses incurred by the em-ployee;

c. the cost of any passage to or from Nigeria incurredby the employee;

d. any sum paid in respect of the maintenance or edu-cation of a child if any provision of this Act provides thatany sum received by the employee during a year of as-sessment shall be deducted from the personal relief to begranted to him for the next following year;

e. so much of any amount of rent the employee istreated as being in receipt equal to the annual amountdeemed to be incurred by the employer under the provi-sions of section 4 of the Act;

f. so much of any amount of rent the employee is treatedas having received under the provisions of section 5 of the

Act;g. so much of the amount of rent subsidy or rent allow-

ance paid by the employer, to or on account, for the em-ployee not exceeding N150,000 per annum;

h. the amount not exceeding N15,000 per annum paidto an employee as transport allowance;

i. meal subsidy or meal allowance, subject to a maxi-mum of N5,000 per annum;

j. utility allowance of N10,000 per annum;k. entertainment allowance of N6,000 per annum;I. leave grant, subject to a maximum of ten per cent of

annual basic salary.3.2 The Board emphasizes that the fringe benefits and/

or benefits in kind of an employee are taxable whetherthey are monetised or in kind.

4. TAX RATES, RELIEFS AND ALLOWANCES4.1 Personal Income Tax Rate Structure:The tax rates in the table below are applicable to an

employee’s taxable income with effect from 1st January,2001 after reliefs have been deducted. The minimum taxrate payable is 0.5% for any emolument below N30,000.00per annum while the maximum tax rate is 25%.The detailed Tax rates are as follows:Employers of labour are required to adhere strictly to thistax rate structure unless new rates are issued by the JointTax Board.

4.2 Tax Reliefs (Allowances)An employee enjoys certain reliefs (allowances) which

are normally deducted from his salary before the balanceis subjected to tax. Such reliefs are stated in table 1.)

5 . PROCEDURES FOR ADMINISTERING PAYE5.1 The law stipulates that an employer is answerable

for PAYE taxes deducted or to be deducted and paid togovernment.

5.2 Collection of Tax Form A by Employer:5.2.1 Tax forms ‘A’ will be supplied free of

charge to employees through their employ-ers. Employers should approach the relevantTax Offices in their various States where theyoperate to collect tax forms ‘A’.

5.3 Completion of Tax Forms collected byall employees

5.3.1 Employers should certify the correct-ness of the salaries and allowances declaredin the forms by their employees to ensure thatcorrect reliefs are granted the employee.

5.3.2 Employees whose forms are not fullycompleted and certified by their employers

may experience delay in getting their tax deduction cards.5.4 Returns of Completed Tax Forms A by Employers5.4.1 All Tax Deduction Cards (TDC) used in the opera-

tion of the PAYE Scheme and End of Year returns for 2005should be returned to the relevant tax authorities not laterthan January 31st 2006.

5.4.2 Employers Annual Declaration Form H1 for usein 2006 should be returned not later than 31/1/06.

5.4.3 Tax Deduction Cards shall continue to be treatedstrictly as security documents when returned to the TaxOffice

Table 1


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5.4.4 Only authorized officers shall endorse the Cards.Employers of labour are therefore requested to familiar-ize themselves with the specimen signatures of the au-thorized officers in the relevant tax stations in the Statewhere they operate or the Federal Capital Territory whereapplicable.

5.4.5 Where an employer of labour is found operatingP.A.Y.E. System with forged or fake Tax Deduction Cards,appropriate sanctions will be imposed on such employer.Such employers are also liable for prosecution under theCriminal Act of Nigeria

5.5 Submission of End of Year Returns5.5.1 End of year returns must be submitted along with

Tax Deduction Cards not later than 31/1/06. The year’sreturns must show the name of employees, total emolu-ments, total reliefs granted and tax paid by the employ-ees.

5.5.2 Submission of evidence of payment (Receipts)tothe tax office

5.5.3 Granting of reliefs for employees on Tax Deduc-tion Cards and return of same to employers

5.6 Remittance of PAYE Deductions5.6.1 Remittances must be done within 10 days of the

end of each month in order to prevent payment of interestand penalty for late payment. A receipt must be collectedby the employer for any remittance made.

6. PROCEDURES FOR OBTAINING TAXCLEARANCE CERTIFICATE6.1 Any employee who wants a Tax Clearance Certificate(TCC) should submit an application for a TCC accompa-nied with a certificate of payment and tax (Form H2) show-ing 3 years tax payment for the 3 preceding years.

6.2 A Tax Clearance Certificate will be issued to allemployees on request subject to the return of 2005 TaxDeduction Cards (TDC’s) and End of Year Returns for 2005year showing evidence of payment of tax for the threepreceding years.

6.3 The Tax office will issue a TCC within 14 days fromthe date of receipt of the application from an employee orstate reasons for denial.

6.4 Applications for Tax Clearance Certificates by


POLICY

employers on behalf of employees should be accompa-nied by fully completed and certified Forms H2. Only therelevant tax offices are authorised to process such appli-cations.

6.5 Such applications should reach the Tax Offices atleast two weeks in advance of collection. Applications mustbe accompanied by, among other basic requirements, therelevant tax returns in respect of these employees.

6.6 Please note that unless the above requirementsare met, applications made would not be processed.

7. PROCEDURES FOR OBTAINING TAXREFUNDS IN THE EVENT OF OVERPAY-MENTWhere an overpayment by an employee is established,he is entitled to a tax refund as may be directed by the taxauthority.

The employer may be directed to refund the overpay-ment to the employee within the year of assessment dur-ing which period the employee obtained his tax relief.

Setoff of overpayments in a current year may also beavailable in the next year of assessment provided that full

taxes have been paid and remitted for the current andprevious years of assessment.

8. OFFENCES, PENALTIES ANDSANCTIONSAn attempt to willfully cover, conceal or evade taxes is acriminal act and therefore, offences are as prescribedunder the Criminal Code of Nigeria. In addition, there arespecific offences as stated in the tax laws and stiff penal-ties prescribed where an employer or employee commitssuch an offence.

8.1 An employer commits an affence when he fails toregister with a tax office within six months of commencinga business for the purpose of deducting income tax fromhis employees with or without formal notification or direc-tion by the relevant tax authority.

8.2 Making incorrect or false statements and returns

or failing to comply with the requirements of a noticeserved on an employer. It also includes understating anyincome liable to tax, preparing false accounts, unlawfullyrefusing or neglecting to pay tax.

8.3 Regulation 19 of the PAYE Regulations 2002, stipu-lates that: Where an offence under these Regulations orthe Act is committed by a body corporate or firm or otherassociation of individuals

(a) every director, manager, secretary or officer of thebody corporate;

(b) every partner or officer of the firm; or(c) every person concerned in the management of the

affairs of the body corporate, shall be severally liable forthe commission of the offence.

9. ADDITIONAL PAYE ASSESSMENTWhere an employer fails to disclose all emoluments paidto an employee or under deducts, or under remits taxfrom employees, the tax authority may assess such in-come to tax for the preceding six (6) years in hands of theemployers.

10. RIGHTS OF OBJECTION AND APPEALAn employee can object and/or appeal against an assess-ment raised by the tax office if he is aggrieved within 30days from the service upon him of a notice of assessment.

Such an aggrieved employee must state his ground ofobjection before the tax authority can review the assess-ment and make amendments where necessary.

11. RELEVANT TAX AUTHORITIES11.1 The Federal Inland Revenue Service has jurisdic-

tion over the following:11.1.1 Residents of the Federal Capital Territory11.1.2 Staff of the Armed Forces, Nigeria Police, Minis-

try of Foreign Affairs and non residents11.2 The States Boards of Internal Revenue have juris-

diction over individuals within their State.

Offences and related sanctionsOffence PenaltyUnder Deduction 10 per cent penalty plus interest at prevailing bank commercial rateNon Remittance 10 per cent penalty plus interest at prevailing bank commercial rateNon Deduction 10 per cent penalty plus interest at prevailing bank commercial rateLate Remittance 10 per cent penalty plus interest at prevailing bank commercial rateFalse and incorrectStatement or returns 5,000 and/or 5 years imprisonment.


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Contact information for the relevant tax authorities in the Federation


POLICY


ISSUES (I)

Aquestion that troubled ancient economists was the issueof government involvement in economic affairs. The Clas-sical Economists starting from Ricardo, Marshal, Pigou andSay had argued that the market was a self-regulatory sys-tem and that any form of external interference would leadto sub-optimal outcomes. They promoted the philosophyof the invisible hand of market forces, which always re-stored equilibrium whenever there were any disturbances.They argued that the market forces ensured that therewould never be any over-production or general unem-ployment through its automatic self-regulatory mecha-nism [Stonier & Hague; 1972: 393]. Government involve-ment was therefore not necessary.

The Great Depression dealt a fatal blow to the classicaltheory, as there was both over-production and unemploy-ment; supply was not able to create its own demand andthe classical school had no explanation or prescription forthe situation. Keynes provided an alternative perspectiveto the classical approach. In his General Theory of Em-ployment, Interest and Money published in 1936, he wenton to argue and indeed prove that self-regulatory mecha-nism would not guarantee full employment and price sta-bility in a capitalist set up. He argued that it was necessaryfor the Government to intervene in the economy through

*By Ik. Muo


It is now generally acceptedthat Governments exist topromote the welfare andhappiness of the citizens.

ISSUES (I)

a combination of monetary and fiscal policies.[Umo;1986:293]. In effect, government intervention in eco-nomic affairs owes its origin to Keynes.

It is now generally accepted that Governments existto promote the welfare and happiness of the citizens. Asocial contract is implied as the people ‘hand over’ theirsovreignity and collective resources to a group of peoplewho in turn make policies and deploy the available re-sources for the common good. In the past, the process ofdetermining the common good varied sharply accordingto the political system. Capitalist, open market economiesadopted the multiparty, democratic approach while so-cialist / communist economies adopted the one-party, cen-trally planned system. Of late however, the multi-partydemocracy/open market system has become generallyaccepted as the right way of determining both who shouldbe in charge and what the common good is-thanks to theunceremonious collapse of USSR, the resultant overbear-ing influence of America, and the activities of the multilat-eral financial institutions.

Under a democratic framework, what constitutes thecommon good is largely determined by two documents;the constitution-which is the supreme law of the land andwhich is supposed to be an encapsulation of the peoples’will and the basis of the social contract between the peopleand their leaders- and the manifesto of the ruling party-which shows how the party intends to promote the com-mon good within the confines of the constitution and onthe basis of which it campaigned for the people’s man-date.

The major aim of government involvement in theeconomy is to improve the overall welfare of the peopleand this is done through various processes aimed at en-suring economic development. In order to ensure thateconomic development occurs in an orderly manner, gov-ernments initiate economic blueprints, frameworks orroadmaps, which guide and coordinate economic activi-ties within the economy. This paper reviews the variousframeworks that have been adopted for eco-nomic development in Nigeria, drawssome lessons from their operationsand suggests some ways forwardfor the nation.

Traditional Macroeco-nomic ObjectivesFrom the Keynesian advo-cacy, a general model of Gov-ernment intervention in eco-

nomic affairs through macroeconomic objectives and poli-cies developed over time. The generic objective of gov-ernment intervention is to ensure economic growth anddevelopment. This broad objective has over the years beenbroken down into the following specific macroeconomicobjectives:

• The achievement of full employment [lowest level ofunemployment]

• The achievement of domestic price stability [lowestlevel of inflation]

• The achievement of exchange rate stability• The achievement of balance of payment equilibriumIt is generally agreed that these objectives involve

some element of tradeoffs; for instance, the pursuit of fullemployment ceteris paribus, leads to a higher level ofinflation.

Over the years, these macroeconomic objectives havebeen redefined and expanded to include issues like pov-erty reduction, economic diversification, equitable incomedistribution, economic efficiency, economic freedom andsecurity, and economic nationalism. [McConnel & Brue,1980:8].

Another development in this regard is the advent ofStabilization Policies, which many developing countrieswere pressurized or encouraged to adopt by the Multilat-eral Financial institutions. This resulted from years of debtoverhang, increasing fiscal deficits, strangulating inflation-ary trends and chronic balance of payment disequilibrium.The major objectives of these stabilization [Structural Ad-justment] policies are:

• Getting inflation under control• Restoring fiscal balance through reduced government

spending, higher taxes and financial systems reform• Eliminating current account deficit through exchange

rate control [devaluation] and increased exports[Todaro& Smith, 2003:734]

Another aspect of macroeconomic management thathas witnessed significant changes over the years is the

issue of how to measure economic development.Originally, the levels of GNP/GDP and the re-

sultant per capita income were used tomeasure development. These figures

were eventually discounted for infla-tion. They provided average mea-sures-and there has never been anaverage citizen- and did not reckonwith poverty, income distribution,unemployment and other indica-tors of well-being. Measures of de-


ISSUES (I)

velopment have expanded be-yond these indicators to includesome social factors. Proponentsof these new measures includeSen [1998 Nobel Laureate] whopropounded the CAPABILITIESconcept and the UNDP which de-veloped the Human DevelopmentIndex[based on longevity, knowledgeand standard of living]

From this new thinking, the following arenow generally accepted as the core values and objectivesof development [Todaro and Smith, 2003:20]

Core Values of Development:- Sustenance: The ability to meet basic needs- Self Esteem: To be a person- Freedom From Servitude: To be able to chooseObjectives of Development:- To increase the availability and widen the distribution

of basic life-sustaining goods- To raise the levels of living which enhances material

well-being and self esteem- To expand the range of economic and social choices

available to individualsGovernments have tried to achieve these various ob-

jectives through fiscal policies - manipulation of govern-ment expenditures, taxes and trade regulations; and mon-etary policies-manipulation of monetary variables by thecentral bank [Ackley,1978:148]

The Macroeconomic Policy Frameworks InNigeriaConstitutional FoundationThe Constitution declares that “the secu-rity and welfare of the people shall be the pri-mary purpose of government”, that the Stateshall “ control the national economy in such amanner as to secure the maximum welfare, free-dom and happiness of every citizen on the ba-sis of social justice and equality of status andopportunity”; ensure “that the economic sys-tem is not operated in such a manner as topermit the concentration of wealth or meansof production and exchange in the hands offew individuals or a group; that suitable andadequate shelter, suitable and adequate food,reasonable national minimum living wage, oldage care and pensions and unemployment, sickbenefits and welfare of the disabled are pro-

vided for all citizens”, that “the so-cial order is founded on the ideals offreedom, equality and justice”; thatall citizens without discrimination..have the opportunity for securing ad-

equate means of livelihood as well asadequate opportunity to secure suit-

able employment”; “that there are ad-equate medical and health facilities for all

persons; and that there are equal and adequateeducational opportunities at all levels”

Other aspects of the common good as constitutionallydefined include the sovereignity of the people, participa-tory democracy, humane governance, national integra-tion, non-discrimination amongst the citizens, establish-ment of a self-reliant economy devoid of corruption andabuse of power, and rule of law. It is obvious that theeconomy is the cornerstone for the achievement of thecommon good and that the other aspects of the funda-mental objectives and principles of the state policy arenot achievable unless the economic aspects are ad-equately addressed. As a result, economic policy formu-lation and execution remains the topmost priority of theGovernment as the surest way of achieving the commongood [the greatest good for the greatest number]. It alsoremains the usual means of assessing the performanceof governments all over the world.

Because of the need to ensure coordinated action to-wards the achievement of the common good, it becomesimperative for governments to establish all-embracingframeworks for economic action. In Nigeria, this frame-

Oil pipeline fire in the Niger Delta

A social contract is implied asthe people ‘hand over’ theirsovereignity and collective

resources to a group of peoplewho in turn make policies anddeploy the available resources

for the common good.


work for economic policy for-mulation and execution hasvaried over the years.

National DevelopmentPlansAt independence in 1960, werelied on National Develop-ment Plans, which providedthe “plan of attack” for theeconomic activities of all op-erators in the economy. TheNational Economic Council,which originally coordinatedthe plans said that they wereto ensure the “achievementand maintenance of the high-est possible rate of increase inthe standard of living”. Thefirst plan was launched in 1962and due to the disruptions caused by the political crises,military coup and the Biafran war of independence, it wasextended to 1970. It was followed successively by the 2nd

[1970-1974], 3rd [1975-1980], and the 4th/last [1980-1985]. Theplans provided coordination, control and milestones andindicated the economic aspirations of the country. The ob-jectives of the 3rd National plan for instance were to in-crease the per capita income, ensure more even distribu-tion of income, reduce unemployment, diversify theeconomy, achieve balanced economic growth and en-hance the indigenisation agenda.

Many informed commentators believe that Nigeriawould have fared better with the planning strategy. In fact,Nwankwo [2003:40] argues that the abandonment of na-tional planning is one of the factors responsible for thecurrent state of the economy. ‘The 5-year developmentplanning circle had the advantages of a holistic approachwith a ten-year perspective [5 years before and 5 yearsafter] of every sector of the economy. The publicity at-tached to its launching and the experiences acquired bothin its preparation and the writing of the series of progressreports provided opportunities for mobilizing commitmentto planning and implementation…As evidence suggests,the economy performed better during the planning re-gime[1960-1985]’

The Structural Adjustment ProgrammeBy the time General Babangida came on board, the great-est economic question of the day was the IMF loan, whichhe subjected to public debate. Babangida supposedly sur-

rendered to public opinion, rejected the IMF loan and in-troduced the Structural Adjustment Programme, a home-made alternative. SAP was as different from the IMF pack-age as six differs from ½ dozen. The key ingredients weredevaluation, deregulation, privatization and commercial-ization. SAP was launched on July 12, 1986 ostensibly toturn-around the economy but specifically with the follow-ing objectives:

Enthronement of efficient resource allocation and uti-lization through the instrumentality of the ‘invisible hand’[market forces] mechanism; minimising government in-volvement in purely commercial undertakings; restoringa healthy balance of payment position; positioning thecountry on a path to sustainable non-inflationary growthand development, establishing a ‘realistic’ exchange ratefor the naira; restructuring and diversifying the produc-tive base of the economy, minimizing our total reliance onoil and ensuring the rationalisation of government’s fiscaloperations through improved revenue and public enter-prise management to achieve fiscal balance.

With SAP, the trioka of Privatisation, Deregulation, andCommercialisation became our new economic creed; therewas a bank glut with the number of banks increasing bymore than 200% almost overnight in a dwindling economywhile several fringe banking institutions were established[Mortgage Banks, Peoples Bank, Community, Banks, Fi-nance Houses and Discount Houses]. The foreign ex-change market was deregulated through the Second TierForeign Exchange Market and its subsequent modifications,the interest rate structure was deregulated allowing banks

Macroeconomic reforms still far from their reach

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Every aspect of our nationallife-including human beingsand their very existence- has

been reduced to statisticalvariables to be manipulated

and controlled to achievemacroeconomic stability.

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for the first time to charge market-determined rates-asagainst charging rates determined by the CBN; a dog-eat-dog- competitive environment emerged and coupled withpolicy summersaults, public sector debts, political inter-ference in appointments, operations and credit process,greed, incompetence and regulatory laxity led to the emer-gence of bank distress which further distressed the Nige-rian populace.

Eventually we started tinkering with SAP, moving fromderegulation to re-regulation to guided deregulation. SAPled to the abolition of the corrupt and patronage –drivenimport license system. And through all this, the multilat-eral financial institutions maintained an overwhelmingpresence in Nigeria, tremendously influencing the eco-nomic policy thrust of the country. SAP also led to a suffo-cating attention to macro-economic stability as if it werean end in itself-instead of a means to an end. In the pro-cess, every aspect of our national life-including humanbeings and their very existence was reduced to statisticalvariables to be manipulated and controlled to achievemacroeconomic stability.

Vision 2010Another major attempt to create a fresh and enduringeconomic framework for Nigeria was made by the gov-ernment of General Abacha. On November 27, 1996, heset up the Vision 2010 committee under the chairmanshipof Chief Shonekan. The 250-member committee wassaddled with the responsibility of ascertaining why Nige-ria had not developed much despite her great potentials,developing a vision of Nigeria by 2010 and providing ablue print for concretizing the vision. Its report submittedon September 30, 1997 was one of the most comprehen-sive and well-articulated documents on the way forwardfor Nigeria.

The committee’s vision of Nigeria was “to be aunited, industrious, caring and God-fearingdemocratic society committed to mak-ing the basic needs of life affordablefor everyone and creating Africa’sleading economy” but it insistedthat the achievement of this vi-sion required a paradigm shiftin the mind set of all Nigeri-ans. The document identified13 Critical success factorswhich were grouped into fouras follows; Value System[norms/standards, anti-corrup-

tion, openness and cooperation]; Human Capital [educa-tion, health-care and population]; Governing System [lawand order, good and stable governance]; Global Competi-tiveness [science, engineering and technology, externalenvironment, competition and sustainable economicgrowth]. They also recognized 17 sustainable economicsectors and issues which were categorized into macro-economic [monetary, fiscal/international trade policies],real sectors [agriculture, petroleum, trade and distribu-tion, solid minerals and industry], development [rural andurban development, poverty alleviation, SMEs and infra-structure] and funding /capital mobilization [banking/fi-nance, debt and capital management]

The document stressed the need, and explained how,the Government could signify fundamental shifts in theareas of leadership, rewards, recognition and merit, pub-lic service reform, capital mobilization, human capital,privatization, corruption, protection of oil revenue sourcesand government expenditure patterns. It also dwelt onhow to ensure that the vision’s agenda was implementedthrough the establishment of the National Council on Ni-gerian Vision and the Nigerian Vision Foundation and howto mobilize the people for the programme which was allembracing. The roles and responsibilities of various stake-holders in the success of the vision were outlined whilethe plan of action was subdivided into four major timehorizons; immediate [October-December1997], short term[1998-2000], medium term [2001-2005] and long term [2006-2010]. It also established 22 desired 2010 milestones inareas such as GDP [10%growth rate], inflation[<5%], popu-lation growth rate[<2%], education and health[20% and 10%of budget], local content in oil and gas[50%], budget defi-cit[0-3%] and Human Development index[0.8]. It also in-cluded a detailed action plan indicating activities, timeframe and executing agencies.[Federal Government of

Nigeria,1997]The questions of whether Abacha wouldhave executed Vision 2010,to what ex-

tent he would have done so andhow it would have impacted on

Nigeria and Nigerians havebeen overtaken by events butmany believed [and somestill do] that the Vision 2010document –if faithfullyimplemented-would havebeen our surest route tosocio-economic El-dorado.


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Framework For Economic Growth and Devel-opment (2003-2007)When Chief Obasanjo came back in 1999[after the inter-regnum of General Abubakar], expectations of economicturnaround were high especially as he had promised thepeople bounteous dividends of democracy. One thing was

however certain; his economicoutlook was externally ori-ented. The administrationcourted external investors, ex-ternal creditors, external multi-lateral institutions, externalGovernments and external or-ganizations. The President wasvery eager to win and maintainthe friendship of these foreignbodies especially the IMF/World Bank and the variouscreditors. Resulting mostlyfrom this, his emphasis was onprivatization, commercializa-tion, deregulation, removal ofsubsidies, private-sector ledeconomic growth, reinvigorat-ing the civil service and in-creased south-south coopera-tion

It was therefore surprisingwhen on March 5, 2002 the Fed-eral Government announcedthat it was stepping aside fromIMF monitoring programmebecause it ‘values the benefitsof political stability, democraticconsolidation, credibility andaccountability and does nottherefore wish to continue witharrangements where only nar-rowly defined macroeconomictargets come into play.’ TheGovernment implied that its re-

lationship with IMF was prevent-ing it from achieving these noble

goals though many analysts be-lieved that Nigeria acted to preempt the

IMF which was about to divorce the coun-try for running foul of most of the terms of the

relationship. At the extended expiration of theSBA in June 2001 for instance, Nigeria could only

meet 4 out of 14 benchmarks agreed with IMF[Salami,2002:32]. Within that week, the then Economic Adviser, Dr.Magnus Kpakol announced the imminence of an indig-enous economic programme because of the need to “buildnational unity and ensure that democracy holds in thiscountry and to raise the level of security for the people


Yes, we need an economicroadmap. But the roadmapitself is not the end; it is

just a means to an end andthe outcome will depend on

how it is utilized.

ISSUES (I)

using sound macro economic policies.. there is no wayyou can achieve these things if the economy is not viable.There is no way you will have unity if the exchange rate isoverblown, inflation is high and the people are suffering”

In October 2003,the Federal government launched theenvisaged local policy initiative, the Framework ForNigeria’s Economic Growth And Development [2003-2007].The document was “simple.... multidimensional, consist-ing of diverse policy measures that will assure prosperityfor a strong united and stable Nigeria” with the FederalGovernment committing itself “to a prudent and trans-parent macroeconomic strategy that supports poverty re-duction in achieving economic growth and price stabilityand assuring National unity, democracy, good governanceand security.” The key macroeconomic targets for the pe-riod included: inflation rate of below 10%; real GDP growthrate of 7%; daily market-driven forex sales, stable ratesand minimal black-market operations, minimum of 6 monthforeign reserve levels, market driven interest rates, non-inflationary money supply growth, complimentary mon-etary and fiscal policies and budget deficit of <2%.

The Framework also promised budgetary discipline,fiscal stability, civil service reform and an efficient andcompassionate economy. Efficiency was to be achievedby “having a government that builds or supports mecha-nisms for maximizing productivity in the public and pri-vate sectors of the economy” while compassionate gov-ernance would be enthroned by supporting structures thatwill “give every working Nigerian the opportunity for shel-ter, food, power and security” There were policy propos-als and targets on agriculture, education, health, water,transportation, solid minerals, oil and gas, tourism andsports. Also included were strategies for optimal revenuegeneration and expenditure management, harnessing thebenefits of NEPAD and AU, creation of Growth Funds un-der the New Initiative for Growth, Employment and Re-distribution [NIGER], revamping of NAPEP and at-tracting Nigerian human and material re-sources abroad [FGN;2002:50]

The Framework was literally DO A [dead on arrival]. There werecomplaints that it was hurriedlyprepared; that the divorce orseparation from IMF wouldmake things rough for thecountry on the internationalfront and that we could notbe talking about the mediumterm while the immediate term

was in serious disarray. But the major blow to the Frame-work seemed to be political. It was launched at a timewhen the 2003 elections were on the front burner. And bythe time the President returned to Aso Rock for a secondterm the tune had changed. Professor Soludo replacedMagnus Kakpol as the Economic Adviser and the newemphasis was on National Economic Empowerment andDevelopment Strategy [NEEDS].

National Economic Empowerment andDevelopment Strategy (NEEDS)The NEEDS document was formally launched at a NationalStakeholders’ Forum in Abuja on March 15, 2004. The cir-cumstances that gave rise to NEEDS included poor GDPgrowth [2.8% in the 1990s and 3.5% between 1999-2003];low productivity, decapitalisation, undercapitalisation andlow savings/investment. Urbanisation growth rate was5.3%[one of the fastest in the world]; 50% of the populationmade up of children; high unemployment rate and violentcrimes; chaotic fiscal policy regime [budgetary indiscipline,weak tax effort, complicated tax system]; inadequate in-frastructure, weak and inadequate institutions, low levelof transparency and unsustainable debt burden.

The document contained a vision for the country; ‘tobuild a truly great African democratic country, politically united,integrated and stable; economically prosperous, socially orga-nized, with equal opportunity for all and responsibility from all, tobecome the catalyst of African renaissance, and making adequate,all-embracing contributions sub-regionally, regionally and glo-bally’. It also stated the mission of the Obasanjo adminis-tration to use the instrumentality of NEEDS as a nation-ally coordinated framework of action in close collabora-tion with State Governments and other stakeholders toconsolidate the achievements of the previous four yearsand build solid foundations for the attainment of our long-term vision. It is also intended that NEEDS would in the

medium term lay the foundation and achieve significantprogress in the areas of wealth creation, em-

ployment generation and poverty reduc-tion.

The strategy also intends to pro-mote the values of enterprise,

competition and efficiency at alllevels; equity and care for theweak and vulnerable; moral rec-titude, respect for traditionalvalues and extolling of our cul-ture; efficient and effective pub-lic delivery system to the


The third strategicdimension is the

implementation of a socialcharter since the NEEDS

agenda is about the people,their welfare, health,

education, employment,security, participation and

prosperity.

people; and discipline at all levels of leadership. NEEDSrecognizes and respects the constitutional and fundamen-tal objectives of state policy which emphatically state thatthe government exists for the welfare and security of thecitizens. In addition to this however, it has three core prin-ciples: an incentive structure that rewards and celebratesprivate enterprise, entrepreneurial spirit and excellence;new forms of partnership among all stakeholders in theeconomy to promote prosperity, among all arms of gov-ernment, the public and the private sector, civil societyand the international community; and a public service thatdelivers prompt and quality service to the people.

Ultimately, NEEDS rests upon four key strategies. Thefirst of the quartet is the reforming of Government andinstitutions. The goal of this strategy is to restructure, right-size and re-professionalise and strengthen the govern-ment and public institutions for optimal service delivery.This involves the elimination of waste and increased effi-ciency, war against corruption, increased transparency,the promotion of the rule of law and the enthronement ofa predictable and sustainable macroeconomic framework.

The second strategic thrust of NEEDS is to grow theprivate sector, turning it into an instrument of wealth cre-ation, employment generation and poverty reduction withthe government playing the roles of facilitation and regu-lation. This will be achieved through a more vigorous pur-suit of deregulation, liberalization and privatization; infra-structure development; sector-specific policies; long termcapital mobilization, appropriate regulatory framework,consistent/coherent trade policy, and regional/global in-tegration agenda.

The third strategic dimension is the implementation ofa social charter since the NEEDS agenda is about thepeople, their welfare, health, education, employment, se-curity, participation and prosperity. Special attention wouldbe paid to education-as over 50% of the populationare children, youth reorientation and em-ployment, healthcare delivery, pensionscheme and other aspects of so-cial services and policies. A keyaspect of the social charter isthe policy of inclusivenessand empowerment which in-volves “deliberate programmesto give voice to the weak andvulnerable groups through in-creased participation in decisionmaking and implementation andlaws/programmes to empower

women, children, the handicapped and the elderly”Finally, there is value re-orientation with the key mes-

sage of: “it is not business as usual’ Reduction in the sizeand scope of the public service would reduce rent-seekingavenues while the war against corruption and financialcrimes would increase accountability. Citizens would alsobe empowered to hold public officials accountable and bemobilized to promote/protect the values of honesty, hardwork, selfless service, moral rectitude and patriotism.

Like our previous economic programmes, NEEDS con-tained several intermediate targets, which are inbuilt con-trol and evaluation mechanisms. Some of them are 2mil-lion jobs by 2007 [2004-1m;2005-2007,2m yearly]; GDPgrowth of 5%,6% and 7% in 2004-2007;inflation rate of 9%by 2007; external reserves of $10.6bn by 2007, adult lit-eracy rate from 57% to65%; HIV prevalence rate from6.05% to 5%; electricity generation from 4000watts to 10000watts ; road rehabilitation of 7000kms in 2004/5 and 8000kmsin 2006/7.There are similar targets[2004-2007] for otheraspects and sectors of the economy.

NEEDS also has an inbuilt implementation and financ-ing plan. Current government policies and programmesare all designed in line with the NEEDS agenda; the Presi-dent is the chief coordinator of NEEDS with an indepen-dent Monitoring Committee reporting directly to him. Therewill be meaningful coordination and collaboration betweenthe Federal, State and Local Governments while all thestatutory organs of government are involved in the imple-mentation and coordination. A quarterly review of perfor-mance, constraints, unforeseen developments and pros-pects is also part of the document’s implementation tac-tics. On financing, concerted efforts would be made tomobilise the requisite financial shortfall while a standingFund Mobilisation Committee has been constituted for thatpurpose. One feature of NEEDS implementation is the en-

visaged collaboration between the tiers of Government.Thus, all the states and local governments are

expected to prepare and prosecute StateEconomic Empowerment and Devel-

opment Strategies (SEEDS) andLocal government Economic

Empowerment and Develop-ment Strategies (LEEDS),their own NEEDS equivalent.Currently therefore, NEEDSis the operating frameworkfor macroeconomic policy inNigeria

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There may be other significantvariables but the key problemswith these roadmaps have been

policy inconsistency, poorimplementation, instability, and

increasing alienation of the peoplefrom the development process andde-emphasising human beings asthe locus of development efforts.

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Lessons From the PastWhat lessons do we learn fromthese frameworks as have beenformulated over the years?

Instability of the roadmaps:The frameworks have becomeincreasingly unstable and thishas made it difficult for the na-tion to achieve the goals of eco-nomic development. From 1960 to1985, we had development plans butsince then, we have tinkered with up tofour major economic roadmaps and sev-eral minor ones. The NEEDS document madeefforts to differentiate itself from the rest by em-phasizing its participatory nature [which would ensure wideownership and sustainability]; its scope and coordination[it reflected federalist planning] and content [it is morefocused, realistic and reform based]. But the fact remainsthat these previous programmes had commendable goalsand targets that could have helped the nation on its marchforward if logically executed.

The major problem with all the programmes was imple-mentation-poor implementation, non-implementation oreven outright sabotage. There is also the penchant forNigerian leaders to always initiate their own programmesto the detriment of those initiated by their predecessors-and this is not a new development. The 1996 UNDP reportbemoaned this unfortunate tendency when it stated that“it is no coincidence that various military and civilian govern-ments of Nigeria have repeatedly announced new policies on vir-tually every aspect of the national life and there is no doubt thatthey will continue to do so in the future..” That report alsoregretted that the embarrassing policy turnover had notin any way improved the lot of Nigerian’s since they wereworse-off in 1996 than they were in 1960.

High Turnover of the operators: As the frameworks foreconomic development were changing by the day, therewas also a worrisome turnover of operators. The EconomicAdviser is supposed to be the economic powerhouse tothe president. Since 1999, we have had five different peopleoccupying such a sensitive post. We have had P. Asiodu,M. Kpakol, C. Soludo, Ode Ojowu and currently, Osita Ogbuin that order. Whereas these men may well have beenexperienced and capable, the turnover is embarrassingand with our tendency to always ‘do something new’, theeconomy has not been better for it.

Development has become a federal affair: Increasingly,all development efforts-policies and activities- have be-

come matters for thefederal government.As all powers and re-sources become morecentralized, the othertiers of governmentare being reduced to

the status of spectatorsin the development

arena. The states are con-tent to pay salaries [when

they are not in arrears], con-struct one or two poor quality

roads, build secretariats and feedthe people with massive advertisement

and PR gimmicks as to the dividends they have delivered.Amuta[2006:8] laments that the governors do not under-stand the meaning of development ‘We have state gov-ernments that have mistaken masonry for development.One state governor regales the media with daily photodisplays of the same buildings, roads and bridges whilestaff of government departments have gone without sala-ries for months’. The Local governments exist mostly asavenues for distributing federal revenue. Even where ef-forts are being made, the level of coordination and col-laboration is very poor especially, when the various tiershave different political inclinations

The Way ForwardWe have reviewed the roadmaps to economic develop-ment used in Nigeria since 1960. It is obvious that theseroadmaps have not delivered on their promises and thoselooking for hard core research evidence should acknowl-edge the simple fact that Nigeria and Nigerians were bet-ter in 1960 than the were in 1980. There may be other sig-nificant variables but the key problems with theseroadmaps have been policy inconsistency, poor implemen-tation, instability, and increasing alienation of the peoplefrom the development process and de-emphasising hu-man beings as the locus of development efforts.

Yes, we need an economic roadmap. But the roadmapitself is not the end; it is just a means to an end and theoutcome will depend on how it is utilized. The driver[s]using the roadmap should be capable, sincerely commit-ted to the journey/destination and must ply the road asmapped.

The issue is that the roadmap should be people ori-ented and be properly implemented. The high turnover ofeconomic roadmaps and their pilots will not do us any


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good. And whatever the roadmap we are operating, thefollowing are imperative.

• A technical knockout of corruption of all shades, sizesand in all spheres; at least, we can reduce it to the pre-warrate of 10%; and enthronement of transparency, fairnessand equity. The battle should be depersonalized and de-centralized and its current publicperception properly addressed

• Patronage of made in Nige-ria goods and services by every-body and organizations-includingthe presidency

• A 5-year moratorium on cer-emonies and events except thosethat are obligatory-and thesemust be done at low profile lev-els;

• Leadership by example,where leaders practice what theypreach. A situation where lead-ers do not wear belts at all andare calling on people to tightentheir belts is far from ideal.

• Ensuring that any pains thatmay ensue are shared equally byall. Government must stop pay-ing lip-service to safety nets;these should be adequately pro-vided before taking any actionswith social costs

• The rule of law and due pro-cess must be institutionalized.There should be no more sacredcows-and this should be in prac-tice.

• Prioritisation based on a Ni-geria First philosophy;

• Compulsory Poverty ImpactAssessment for all governmentpolicies and programmes.

• Policy consistency and fidel-ity - We should stop changing theeconomic roadmaps or frame-works everyday. There is noth-ing wrong with the road maps perse. Apart from the undue empha-sis of appropriate pricing by SAPand its successors without any at-tempt to concretely take care of

References

Ackley, G[1978] Macroeconomics: Theory and Policy New York, Macmillan

Amuta,C[2006] An Area of Sadness, Thisday, June 24th

Federal Republic Of Nigeria [1997] Report Of Vision 2010 Committee; Lagos,

Government Press

Federal Government of Nigeria[2002] ‘Framework For Nigeria’s Economic

Growth And Development; Thisday, October 18th

Federal Government of Nigeria [2004] National Economic Empowerment

and Development Strategy; Lagos, Government Press

McConnel,C.R & Brue,S.L[1990] Macroeconomics: Principles, Problems and

Policies [13th Ed.] New York, McGraw-Hill, Inc.

Muo,Ik.[2003] The Future of Nigerian Financial Services Industry;

Lagos, Impressed Press

Muo,Ik.[2004] Deeds, Not Needs; BusinessDay, 7th July

Muo,Ik.[2005] Debt relief and Crises of Expectations; BusinessDay, August

6th

Nwankwo,G.O[2003] The Grammar Of Management: The Nigerian Experi-

ence Lagos, Evergreen Associates Okonjo-Iwealla, N[2004] ‘Responding

To The NEEDS Of Nigerians’[Ministerial Briefing on the 2004 budget.

BusinessDay,23rd June

Salami,D[2002] ‘Business Outlook For 2002’; BusinessDay, 18th March

Stonier, A.W& Hague, D.C.[1972]

A Textbook of Economic Theory; London, Longman Thirlwall, A.P[1978]

Growth And Economic Development. London, Macmillan Todaro, M.P &

Smith, S.C[2003] Economic Development 8th Ed. Delhi,India,Pearson Educa-

tion Ltd

Umo, J.U[1986] Economics; An African Perspective; Lagos, John West Publi-

cations UNDP[1996] Human Development Report

the victims of such policies, all the roadmaps contain verylofty aspirations. Sincere implementation is what matterstoday and tomorrow.(*Ik. Muo is a lecturer at the Department of Business Administra-tion Olabisi Onabanjo University, Ago-Iwoye, Ogun State.)


GGlobalization has replaced the Cold War as the defining element of the internationalsystem. How one deals with globalization as a country, as a company, as a regionwill define much of what develops over the next 20 to 30 years.

There is an abundance of books and articles analyzing the impact of globaliza-tion. On the one side, there are plenty of arguments for the benefits of trade. On theother side, there is another series of books and articles saying that globalization willend the world as we know it. While it is easy to point out the benefits and the pitfalls,such an approach may be misleading. The reason is that because if you are forglobalization, you try to present the best picture, and if you are against it, the pictureyou present is the complete opposite. But among these debates on the pros andcons of globalization one key issue often remains overlooked – what does one doabout globalization and how does one deal with it? Similarly, globalization can be

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* By John D. Sullivan


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viewed in the framework described by Domin-ique Moisi of the French Institute of ForeignRelations, who said that discontent about glo-balization comes both from the fear of beingabsorbed into an artificial world culture, on theone hand, and the equal fear of being left out inan increasingly unequal world.

From the business perspective, the processof globalization entails a pressing need for thebusiness community to understand its impactand to properly respond. Those companies thatfail to do so risk being left on the sidelines. Infact, there is a growing gap between compa-nies that choose to join the global economyand those that try to exclude themselves fromit or lack the capability to join.

The Changing Global EconomyThe world has gone through tremendous changes in thepast several decades. When the United Nations (U.N.) wasfounded, two-thirds of the current members of the U.N.did not even exist as countries. In that brief period since1948, two-thirds of the countries in the world formed theirgovernments, and since that time the planet’s populationgrew from 2.5 billion people to 6.5 billion people, and itcontinues to grow.

The rapid growth of countries and economies is alsoevident in the increased growth in trade. Since the 1940s,world exports grew by a factor of ten, and a big part of thishas been the growth of trade within multinational compa-nies, i.e. within the global supply chain. As internationalcapital flows are no longer dominated by gov-ernment to government assistance andare rather defined by private sectorinvestment flows, countries beginto realize the need to create aproper investment climate nec-essary to draw those multina-tional companies and tradewith them. Those that fail to cre-ate such a climate, risk beingisolated from the globaleconomy.

In the last three to five years,China and India have both had eco-nomic growth rates of historic importance.They have emerged as dominant players in theworld economy. The old concept of thinking in terms of theFirst World, the Second World, and the Third World is gone.

It is no longer relevant. Brazil is poised to be another playerat that same level, and other countries, such as Mexico,are not too far behind.

There has also been a huge shift in the patterns offoreign direct investment. A little over a decade ago, verylittle investment went to Russia or the countries of Centraland Eastern Europe. Today they are big and importantplayers in the world economy, especially countries in Cen-tral and Eastern Europe who have recently joined the Eu-ropean Union (E.U.). Also, the United States is no longerthe dominant recipient of foreign investment, as Chinahas recently surpassed the United States as the world’slargest recipient of foreign direct investment.

Another factor in this emerging story of global-ization is the evolution of Europe, which has

changed fundamentally in the last sevenyears. One of the major changes is that

there are ten new countries that recentlyjoined the E.U.; but another factor is thedecline in economic status of Franceand Germany. Not so long ago, a storyin the Financial Times, the world’s busi-ness newspaper, said that Chinese en-

gineers working for Siemens developeda new cell phone technology.

This was not engineered in Germany;rather it was engineered by world-class Chi-

nese engineers who are creating innovative engi-neering products in China. This is a tremendous changefor Germany, and unless they can find a way to remaincompetitive, they will begin to see the outsourcing not just

Discontent aboutglobalization comes both

from the fear of beingabsorbed into an artificialworld culture, on the one

hand, and the equal fear ofbeing left out in an

increasingly unequalworld.


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of manufacturing jobs, but of in-novation. In fact, the rise of Chinaas one of the global economicleaders is changing the structureof most world economies, not justGermany, in ways that are verydifficult to foresee. What doesthis mean for business? For busi-ness, globalization as a processof change, the speeding up oftransactions and the flow offunds, is not new. It has been therein the past – the globalization ofthe early 1900s was interruptedfirst by the Great Depression andby World War II, then there wasa brief spurt in the 1970s, and anincreasing process in recentyears. But the real story is not in-creasing trade and flows of fundsand money – it is the development of an international sys-tem of rules. It’s a system of rules that governs today’sglobal economy which the business community must helpshape. If it fails to do so, the business community will endup living in a system of rules that it never built, but wascreated by someone else. And this is true for businessesregardless of industry or location – the need to ac-tively participate in the development of an in-ternational system of rules appliesequally to businesses from developedand developing countries.

The Drivers of ChangeThis process of developing an in-ternational system of rules hasseveral different drivers. Thefirst driver is the shaping of theinternational trade system,where of fundamental impor-tance are free trade agreements,both regional and international. Toillustrate the trends in trade, it is help-ful to look at exports as a percentage ofworld output – in 1870, exports as a percent-age of world output accounted for about five per-cent, in 1996, by comparison, the number had grown to 24percent, and today it’s probably closer to 28 percent. Moreimportantly, not just exports of goods, but exports of ser-vices have also grown, as barriers to trade have signifi-

cantly declined in manydeveloping countriesduring the last severaldecades. The secondmajor driver is financialflows, not just foreign di-rect investment, but re-mittances and othersources of global capitalflows. In terms of foreigndirect investment, in1990, foreign direct in-vestment flows toemerging markets wereabout $25 billion peryear. Last year, they to-taled $135 billion, al-though they are on a de-cline since topping $180billion in 1999. There are

a lot of spirals in foreign investment flows, including port-folio investment, equity investment, debt, lending, andbonds. In such an environment, one of the major chal-lenges for the international system is how to create aframework to smooth out the uncertainty. For businessesin developing countries it’s about creating a framework

that will lock in foreign investment once it is ac-quired. It is about making sure that it

doesn’t become fight-and-flight capi-tal, flowing in and flowing back out.

The third driver is the ex-panding process of commu-

nications. The discrepancybetween developed and de-veloping countries in termsof mobile phone use is as-tounding. In high-incomecountries, six people out often use mobile phones,

while in low and middle-in-come countries less than one

person out of ten uses it. In thecoming years, countries like China

and India will become the biggest mar-kets for mobile technology.

The fourth driver, closely related to the third, is thegrowth of technology. For example, in the market pen-etration of personal computers, high-income countries arefar ahead of low- and middle-income countries – with 416

But the real story ofglobalization is not increasingtrade and flows of funds and

money – it is the developmentof an international system of

rules. It’s a system of rulesthat governs today’s globaleconomy which the business

community must help shape. Ifit fails to do so, the businesscommunity will end up living

in a system of rules that itnever built, but was created by

someone else.


ISSUES (II)

out of 1,000 people having access to personalcomputers there compared to only 21 out of1,000 in the developing world. This is a largegap that clearly needs to be bridged, andmuch of this gap has to do with increasingeducational opportunities as well as connect-edness. Similarly, there is a gap in the use ofthe Internet as well, and it is very importantbecause, in today’s world, if one can’t com-municate and can’t use technology, one endsup feeling isolated.

And the final driver, of course, is popula-tion mobility. The flow of human capital fromdeveloping to developed markets has beenincreasing and is expected to grow further in the comingyears. This is true not only for low-skilled workers, but alsofor workers with high skills and advanced education. Work-ers are able to take advantage of better opportunities inother markets, and doing so is becoming easier as theglobal system evolves.

Rules-Based System is Under ConstructionUnderlying this process of globalization is the develop-ment of a knowledge system – the knowledge of how therules work and how the international trading system func-tions. This is an integral part of today’s international mar-ket economy of which you’re either part of or you’re locked

out of. The decisive factor that allows countries and busi-nesses to stay in the global economy as well as reap thebenefits of such membership is whether they play by therules and actively participate in shaping them or refuse todo so.

This global system is under construction – and thatconstruction is incredibly important for business. Unfortu-nately, governments have a tendency not to want to listentoo much to the views of businesspeople. Instead, deci-sions are made on the higher level as business is left todeal with decisions rather than participate in making them.And this is true of developed countries as well, although in


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the developing world theproblem is more perva-sive. Therefore, one ofthe things that businesshas to do is fight for aseat at that table wheredecisions are made.

And the table is notlocated in one place –rather, it has many dif-ferent centers, becausethere’s no central command-and-control operation in thisglobal system. The World Trade Organization, of course,is one of the dominant factors in trade, although the in-creasing numbers of regional free trade agreements havebecome very important as well.

Another place where these rules are being shaped,that many business people often ignore, is the Interna-tional Monetary Fund. Another location for global capitalthat is incredibly important is the Basel Commission onBanking Supervision of the Bank for International Settle-ments. The rules adopted there affect not just banks inEurope and the United States, they are also going to affectaccess to capital for companies in many developed anddeveloping countries. It is vital that such rules be broughtup and businesses start dealing with them.

The World Bank, of course, is another location wherethe rules are shaped. The International Labor Organiza-tion is also becoming more activeand is trying to become a moreprominent location for settingthese rules and standards. TheOrganisation for Economic Co-operation and Development(OECD) has developed a numberof standards that are very impor-tant. And then, finally, there are awhole series of international stan-dards that have been developed– such as quality standards likeISO 9000 and environmental stan-dards like ISO 14000. These stan-dards are incredibly importantand will become more importantin the future.

In the past decade and a halfwe’ve moved from a world domi-nated by the so-called “Washing-ton Consensus” that John

Williamson identified in thelate 1980s, which looked atissues like fiscal discipline,tax reform, and exchangerates, to the world of mac-roeconomic policy. In thisworld of macroeconomicpolicy property rights, goodgovernance, market entry,the rule of law, and accessto information require a

great deal of attention. Addressing these issues is vital, asdeveloping markets seek a seat at the table of globaliza-tion and want to become involved, not left out, as Domin-ique Moisi said. For the business community this comesback to how to create good, stable, democratic governance– governance that is very important for the business com-munity because businesses with such governance can thenbe heard in this process of creating a rules-based economy.

There are a series of guidelines for foreign direct in-vestment that presents a slightly different checklist thanJohn Williamson’s famous Washington Consensus. It in-cludes a number of issues – political stability, market ac-cess, the quality of the labor force, tax rates and incen-tives, and barriers to entry – but in the end it comes downto creating a stable and predictable economic environ-ment where rules are fair and thoroughly enforced. Incountries where the business environment is weak and

where the informal sector is largethere is a lot of work to do to create amarket system that will allow busi-nesses to take advantage of the glo-balization process.

Contrary to some opinion, this in-ternational architecture actually doeshave a structure. And the structure canbe found within the IMF under Reportson Standards and Codes (ROSC).There are 12 standards under con-struction, and they all very much af-fect the way in which business is con-ducted. One of these standards is cor-porate governance. It was very grati-fying to see that when the OECD heldtheir meeting in Paris to review theirglobal standard this year, a numberof private sector experts from devel-oping countries were asked to helpwith the revision. It signified the evo-


lution of global standardsthat is taking place todayas developing countriesare given an opportunityto participate in the cre-ation of those standards.Five years ago, sevenyears ago, when that stan-dard on corporate gover-nance was developed,there were no emergingmarket countries asked toparticipate. This is a veryimportant part of this newinternational standard andit is a very important partof this emerging structureof globalization. If coun-tries like Colombia suc-ceed in developing corpo-rate governance principlesand standards that servethe interests of their localbusiness community, all to the better. If countries don’t dothat, what’s going to happen is that the IMF, the WorldBank, the OECD, this international architecture of organi-zations will show up, work with local governments andbusiness will wake up one day and find that ithas to adhere to standards it never helpedshape. From the point of view of busi-ness people it’s better that they de-fine themselves through active par-ticipation in reform. Another bigpart of these international stan-dards – regarding fiscal transpar-ency, anti-money-laundering, andmarket integrity – comes back tothe famous words, “anti-corrup-tion.” In recent years, BusinessPrinciples for Countering Bribery(BPCB), developed by Transparency In-ternational, and the addition of the 10thAnti-Corruption Principle to the U.N. Global Com-pact have been important steps in developing these stan-dards. The private sector now recognizes its role in com-bating corruption, and internal mechanisms are becom-ing just as important as external ones. The defining char-acteristic of Latin America has been the gap between therich and the poor – the income disparity. As business people,

we really have to go back andtake another look at HernandoDe Soto’s work on the infor-mal sector. If we look at thesteps and stages for barriersto market entry, it is evidentthat countries with these bar-riers, where business peopleare locked out and cannot getinto the economy, run a ter-rible risk of having only verysmall parts of their econo-mies linked into the globalmarketplace. And as we lookat the WTO taking effect, aswe look at trade agreementstaking effect, the end of theMulti-Fiber Agreement, whatare the new sources of eco-nomic growth for countries?How do you attract these for-eign direct investors? How doyou attract your own domes-

tic investors? Improving the business marketplace not justfor firms in the formal sector but also for the informalsector, whether individuals choose to leave the informal

sector and come to work for companies, whether theychoose to create new companies and growth

companies in the market, that’s wherewe’re going to see emerging mar-

kets develop the kind of healthymarket economies that will in-creasingly attract and demandthe investment opportunitiesthat we all look for.

(*John D. Sullivan has been Ex-ecutive Director of the Center forInternational Private Enterprise

(CIPE), an affiliate of the U.S. Cham-ber of Commerce, since 1991. Mr.

Sullivan has a Ph.D. in international rela-tions from the University of Pittsburgh, and

is the author of a number of articles and publicationson the transition to democracy in Central and Eastern Europe,corporate governance, and market-oriented democratic develop-ment. We are grateful to the CIPE for permission to publish thisarticle.)

In countries where thebusiness environment is

weak and where theinformal sector is largethere is a lot of work todo to create a marketsystem that will allow

businesses to takeadvantage of the

globalization process.


T

ISSUES (III)

oday’s companies are not only purelyeconomic, but also civic entities. Theyexist in complex socio-economicstructures where they are a subjectto economic efficiency pressures ofowners and social responsibility pres-sures of governments, civil societygroups, and consumers. And al-though the debate on social respon-sibility of business is not new, it hasgained increased attention in recentyears in light of anti-globalizationmovements, corporate scandals, andthe continued plight of many devel-oping countries.

The traditional view of business,summarized by economists such asMilton Friedman in the 1970s, is thatthe responsibility of business is ac-complished by paying wages to work-ers in exchange for labor, providinggoods and services to consumers in

exchange for money, paying taxesto governments which in turn pro-vide public services to citizens, andobeying the rule of law by honoringcontracts.

Yet that traditional view is nolonger valid, as today’s business isabout much more than simply pro-viding goods and services to the con-sumers and paying a fair share oftaxes. While business’s role and par-ticipation in development, gover-nance, and society has evolved dra-matically in the past decades, sohave expectations.

Surveys reveal that consumerscare about the ethical behavior ofcompanies. The traditional response– that companies are only respon-sible to their owners – may no longerbe valid in today’s complex world,where consumers are presented

* By Aleksandr Shkolnikov, Josh Leachman & John D. Sullivan


ISSUES (III)

with a variety of options, investors look for stability andsecurity of their investment, and firms face significant le-gal fines and a myriad of social fears, concerns, and falsebeliefs. For firms, addressing the role of business in soci-ety is vital, because failure to do so can damage theirreputation and corporate image, impose additional costsof doing business, and reduce competitiveness. In fact,numerous studies show that responsible business prac-tices – attention to factors other than just maximizing short-term profits – help companies’ bottom line and that re-sponsible firms often outperform their competitors.

The benefits of good corporate citizenship are clear. Itcan be used as an effective tool to improve employee andcommunity relations, and it should be closely monitoredbecause it can help businesses mitigate risk, improve theirreputation, and market, sell, and define their brand withconsumers more effectively. In turn, ethical practices willreward business with higher profits.

While governments, consumers, communities, and themedia pressure companies to be more socially respon-

sible, the major motivating factors for good corporate citi-zenship programs are often internal. A recent survey ofover 500 U.S. executives from companies of different sizeand from different industries conducted by the Center forCorporate Citizenship at Boston College and the U.S.Chamber of Commerce Center for Corporate Citizenshipfound that corporate citizenship is driven mostly by com-panies’ internal traditions and values (75 percent) and con-cerns for reputation and image (59 percent).

Yet, despite increased attention paid to corporate citi-zenship by corporations, much work remains to be done.

A Gallup International global survey, conducted in late2002, revealed that citizens’ trust in national corporationshas dropped to 42 percent and trust in global companieswas a mere 39 percent. Another Gallup survey, conductedin 2003, revealed that 90 percent of Americans felt that theexecutives running corporations could not be trusted tolook after the interests of their employees and 49 percentfelt that the executives are there only for their personalbenefit.

These numbers demonstrate two issues. First, firmsneed to do a better job communicating the positive contri-butions of business to the economic and social develop-ment of countries. Second, it means that firms need to paygreater attention to the social consequences of their op-erations. If they fail to do so, they may become increas-ingly vulnerable in today’s rapidly globalizing world, whereconsumers are ready to punish companies through mar-ket mechanisms for practices they deem unfair.

In fact, Environics International’s recent Annual Cor-porate Social Responsibility (CSR) Monitor revealed that

27 percent of consumers in 25 coun-tries have punished companies forirresponsible business practices andanother 21 percent have considereddoing so. Another survey by TaylorNelson Sofres, an Australian market-ing information company, revealedthat 68% of Australian consumershave punished companies for unethi-cal behavior. Often, consumer pun-ishment is done in the form of switch-ing to a competitor’s products. Andalthough consumers in developedcountries seem to be more willing todo this, the trend is evident is someof the developing countries. ?e grow-ing citizen discontent with large cor-porations should be a wake-up call

for the business community to develop and implementeffective strategies to make the environments in whichthey operate better and to regain the public’s trust.

What is Good Corporate Citizenship?What is corporate citizenship and what does it mean for afirm to be a good citizen? Being a good corporate citizenmeans going beyond responding to the financial concernsof shareholders and responding to the concerns of all stake-holders – customers, managers, employees, community,media, and society in general. But, it is more than simply

Result of Oil spills in the Niger Delta


ISSUES (III)

engaging in philanthropy. Being a socially responsible cor-poration is going beyond charitable contributions – it meansbeing actively involved in educational programs and com-mitting to protecting the environment. Being a good cor-porate citizen means contributing time and effort at alllevels of an organization to make communities better,operating transparently and responsibly, and creatingsafe, high-quality goods and ser-vices.

In the developing world, be-ing a good corporate citizenmeans passing on know-how,creating business environmentsfree of corruption, opening upsocieties by exposing them todemocratic principles and therule of law, and helping nationsbuild institutions of governanceand become prosperous. It alsomeans looking beyond profitsand helping people raise theirstandard of living, protectinghuman rights, assisting coun-tries in the development of freemarkets, and bringing states onthe path of sustainable eco-nomic growth and political sta-bility.

Good corporate citizenshipmust be a habit, not a single oc-currence of a noble deed. It must be embedded in acompany’s culture, as corporations should constantlystrive for excellence beyond financial indicators. Respond-ing to the concerns of customers, employees, and com-munities must be a part of any firm’s decision-making pro-cess, as it can ultimately make a difference between com-mercial success and failure.

Ethics and LeadershipMuch of being a good corporate citizen has to do withbusiness ethics and moral leadership within companies.Conducting business ethically is often a difficult task foremployees at any level of an organization. Top executivesare under constant pressure from stockholders to improvethe company’s bottom line in the short term. Yet stake-holders often expect long-term, sustainable developmentstrategies. At the other levels of organizations, employ-ees and managers are often put in a difficult position, ex-pected to be ethical while at the same time having to think

about not damaging the company’s reputation or puttingtheir own job on the line.

The responsibility for designing principles of ethicalconduct and monitoring their implementation lies in thehands of the top executives. Leadership, therefore, playsa crucial role in ethics. Effective leaders not only talk aboutethical principles, but they also do what they say – they

are an example of ethical business conductfor employeesin their companies as well as for other firms in the indus-try. Effective leadership is even more crucial in buildingethical companies from scratch - in companies that havelittle ethics experience and lack a good cultural and moralfoundation. Leadership failures can have devastating ef-fects for companies and internal and external stakehold-ers, as recent corporate scandals in the United States andEurope have illustrated. A business can lose the trust ofinvestors and the general public overnight, but regainingthat trust takes time. Good leadership also contributes tothe overall good reputation of a firm – as recent studiesindicate, the reputation of a CEO can be responsible for asmuch as 50 percent of an overall corporate reputation.

Good leadership should also be assertive rather thanreactive. Responding to current challenges is important,but good leaders are able to stay a step ahead and ad-dress potential problems before conflicts arise. This in-cludes assessing the environmental record of business

A teacher addressing pupils in a local school


ISSUES (III)

operations on a consistent basis before disasters occur,introducing ethics codes as a responsive as well as a pre-ventative measure, setting up higher than minimumhealth and safety standards, constantly looking for waysto improve the safety and quality of products and ser-vices, focusing on new opportunities, encouraging respon-sible business practices in other companies in the indus-try, and communicating and involving others.

An integral part of business ethics, especially in thecontext of doing business in other countries, are efforts tocombat corruption. Companies’ refusal to participate incorruption is inseparable from good corporate citizenship.It is true for any environment, whether corruption is pri-vate sector or public sector driven. In countries wherebusiness is forced to participate in corruption by crookedgovernment officials who extort bribes, companies shouldactively promote the development of a fair and transpar-

ent system. In building such a system, special attentionneeds to be paid not only to the development of account-ability mechanisms, but also to the elimination of opaqueand inconsistent rules and regulations that are often asource of corruption, as well as strengthening the rule oflaw so that rules are not only put on a paper but alsothoroughly and fairly enforced.

In countries where business is a facilitator of corrup-tion by providing bribes to gain access or receive prefer-ential treatment, companies should make sure that inter-nal integrity standards are thoroughly enforced, both intheir structures and through the supply chain. Combating

corruption in the context of corporate citizenship is ex-tremely important because by engaging in corrupt prac-tices, especially on a larger scale, while conducting busi-ness overseas, corporations could help support oppres-sive regimes and closed societies that deny people theirbasic rights and liberties.

Human RightsGood corporate citizenship also has a lot to do with therole of the business community in the protection of hu-man rights. The link between responsible business andhuman rights has become more evident in recent years.As globalization becomes more widespread and multina-tional corporations are increasingly active in emergingmarkets worldwide, human rights evolve into a tangiblepart of responsible business operations. Addressing hu-man rights issues while not endangering economic growth

prospects is becoming one of themore serious challenges for thebusiness community.

General labor standards andthe use of child labor have alsoemerged as issues of acute con-cern in the corporate citizenshipdebate. Adhering to the laborstandards of the countries inwhich they work and striving to im-prove those standards should liewithin an organization’s core strat-egies. This includes creating asafe working environment, payingcompetitive wages, establishingnormal work hours, providinghealth benefits, assuring freedomof association, treating employeesfairly, and prohibiting forced labor.Another important aspect is a

commitment to not using child labor and instead helpingchildren in developing countries receive an education andbecome the future economic and political leaders in theircountries.

It should be stressed that most multinational corpora-tions do favor higher labor standards, even in the contextof globalization. A common misconception is that compa-nies search for countries with low labor standards wherethey can obtain cheap labor force. However, data pointsin the opposite direction. An International Labor Organi-zation (ILO) study of foreign direct investment among 127countries suggests that the majority of investment goes


to countries with higher civil liberties, even if the laborcosts are higher. Moreover, in surveys of foreign inves-tors, issues that play a key role in securing their invest-ment, such as contract enforcement, corruption, and prop-erty rights, are often of greater importance than low laborcosts.

Health Issues: HIV/AIDSOnce seen narrowly as a health issue, the effects of theunchecked spread of HIV/AIDS have now proven to be amajor economic issue not only for countries but also forthe companies that do business in those countries. ?espread of the disease is a heavy tax on the already weakhealth and social service infrastructures of many devel-oping countries. Moreover, the spread of HIV/AIDS hasalso negatively impacted the private sector by raising thecosts of doing business by reducing the availability andquality of the workforce. As death and disability cre-ate constant turnover in the workforce, corpora-tions are faced with higher costs, as, in someparts of Africa, they must hire two peoplefor each open position knowing that onlyone will be available for work.

The benefits of active corpo-rate participation in pro-grams combating thespread of HIV/AIDS are,therefore, twofold. By imple-menting effective education andhealth programs corporations helpcountries achieve political stability, asthe depopulating effects of HIV/AIDS arenow surfacing as a politically destabilizingforce. The reasons lie within citizens’ dissatisfac-tion with an ineffective government response to thehealth crisis itself and the crisis’s economic effects. Asgovernments are unable to effectively combat the spreadof the disease or even unwilling to recognize the problem,political stability is threatened while people look elsewherefor better responsiveness and better strategies. In addi-tion, companies help themselves by reducing training andother costs associated with high workforce turnover.

Some of the more active responses to the crisis havebeen employee health education programs run by corpo-rations, especially those that include other members ofthe community. Another successful private sector re-sponse has been active corporate participation in foster-ing a healthy dialogue between the government, citizens,and the business community, and assistance to national

institutional development efforts. Failure to prevent thespread of HIV/AIDS is partially attributable to the institu-tional weaknesses that exist in developing countries suchas lack of a free press and lack of public forums for airingideas and grievances. As the same institutional weak-nesses impede the emergence of free-market democra-cies, the private sector plays an important role in helpingcountries achieve a more open society and healthyeconomy while helping to combat the spread of HIV/AIDS.

Safe Products and ServicesProviding safe products and services also lies at the rootof good corporate citizenship. Companies exist becausethere are consumers who buy their products and if con-sumers choose their competitors’ products, companies, in

turn, will cease to exist. Providing customers with prod-ucts and services that they can trust is, therefore,

crucial to the very existence of a business entity.Moreover, product safety and quality are be-

coming even more important as the glo-balization process becomes more wide-

spread. As markets open up andtrade flows increase, prices are

no longer the single factor ofa purchasing decision.Increasing internationaltrade results in more

consistent pricing throughdifferent markets. As it be-

comes harder for consumers todifferentiate products solely based on

price, they turn to other aspects – suchas product safety and quality, the environ-

mental impact of a product or its production,and the human rights record of the company pro-

ducing the good.The emergence of this concept, known as “ethical con-

sumerism,” can’t be ignored. Studies show that althoughconsumers are often unaware of the ethical features ofproducts they buy, when provided with that informationthey will lean toward more responsible companies thatprovide safer, environment-friendly products. The nega-tive publicity that civil society groups can generate com-pels companies to include ethical consumer is in their de-velopment strategy. Many companies are taking the leadand voluntarily provide product safety information to con-sumers and assume responsibility and take care of theaccidents if they take place.

It should be stressedthat most multinational

corporations do favorhigher labor standards,even in the context of

globalization.

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ISSUES (III)

Community InvolvementThe capacity to do good often depends on a company’ssocial or economic position. This places corporations andtheir executives in the unique position of being able topromote good causes more easily than the average citi-zen. Philanthropic giving is in fact expected by many com-munities from those who are in a position to do so. Com-panies give to meet this expectation and to demonstratetheir concern for society. While philanthropy is a greatthing, companies should proceed with caution with regardto their donations, as simply donating to charities is oftenseen as a company’s superficial effort to buy a good repu-tation. Consumers are also more aware today of whatcharities corporations support and will desist their busi-ness relations with a company if they find that it isdonating to groups that are contrary to theconsumer’s political or ethical ideology. Acompany’s philanthropic efforts need tohave a connection with the communi-ties in which the company worksand its core business activities,reflect the values of their cus-tomers and employees, or addvalue to products or services. With-out these connections much of thegood intent and goodwill that philanthropycan create is lost.

MNCs, Small and Medium Companies,and Local BusinessThe case for corporate citizenship is often made for largemultinational corporations, which have been the driversof socially responsible business practices. In recent years,however, the case for corporate citizenship is increasinglymade for small and medium enterprises (SMEs). Largecorporations can be effective in improving business prac-tices on the larger scale, setting up an overall climate ofbusiness responsibility, and promoting international stan-dards and agreements, while smaller firms play a veryimportant role in developing the local communities in whichthey operate. In many countries, SMEs constitute a largeshare of economic growth, and their participation in cor-porate citizenship programs is imperative. It is also im-portant to make a case for responsible business practiceswithin local companies in developing countries. Their ad-herence to fair, responsible, and transparent proceduresis necessary for the advancement of corporate citizen-ship reforms worldwide. Multinational companies may try

to remain transparent and responsible, but if their suppli-ers and partners in developing countries choose to ignoregood corporate citizenship, these efforts are simplywasted.

SMEs are often focused on internal issues. They fre-quently address corporate citizenship issues indirectly bymaking efforts to create a better working environmentand build company culture, but often lack the financial andtechnical resources to go beyond employment issues.Studies of corporate citizenship programs within the SME

sector indicate that many firms indirectly implementsome of the responsible business policies but they

rarely tie them into a concept of corporate citi-zenship integral to their business strategy.

However, business associations are in-creasingly viewed as one of the solu-

tions to the lack of resources andtechnical expertise that many

SMEs experience. By joiningbusiness associations and

combining their re-source SMEs can de-

velop and successfullyimplement industry-wide

corporate citizenship programs.It can be argued that SMEs

have historically recognized the impor-tance of responsible business practices

and good relations with the community. How-ever, frequently SMEs, especially in a context of

the broken policy environment of developing coun-tries, have been unable to uphold responsible business

practices because the institutional system of rewards insuch environments does not function. The common ex-cuse in such countries is that firms are bound to break thelaw in order to exist. The challenge, therefore, is to ad-dress the institutional deficiencies of countries from a busi-ness perspective. By creating a business-friendly envi-ronment that provides proper incentives, companies canaddress good corporate citizenship from a business view-point. If such an approach is taken, corporate citizenshipcan be driven by long-term profits, not only by societalpressures and moral obligations. CIPE work with local part-ners in over 90 countries to reform local institutions, re-move barriers to business, and create more efficient eco-nomic environments can be viewed as such a business-oriented approach to SME involvement in promoting goodbusiness practices.

A good corporatereputation allowsfirms to not only

attract new consumersbut also keep the

existing ones.


Benefits of Corporate Citizenship ProgramsEnhanced reputation and brand imageResponsible business practices strengthen brand imageand enhance corporate reputation. In modern corpora-tions reputation is a value creating mechanism and stake-holders pay close attention to it. There is little doubt that aCEO, manager, or employee would much rather work fora company with a good reputation than otherwise. Butdoes reputation really make a difference and does goodcorporate image reward companies with increased salesand higher profits?

Corporate reputation is perceived as one of the lead-ing measures of corporate success, according to the WorldEconomic Forum “Voice of the Leaders Survey” conductedin late 2003. The results of thesurvey that was distributed to1,500 executives of more than1,000 leading global corpora-tions show that almost 60 per-cent of those surveyed esti-mate that good reputation cancontribute as much as 40 per-cent to market capitalizationof companies. A good reputa-tion also contributes to com-panies’ ability to sustain prof-its and performance overtime, as was revealed in thestudy of performance of For-tune 1000 companies duringthe 1980s and 1990s. More-over, the same study showedthat even in the environmentswhere external stakeholdersmay not be able to directly ob-serve the quality of reputation,corporate performance is stillaffected by it.

Economic theory makes agood case that, in markets with asymmetric information(inadequate information provided to consumers about aproduct), a good corporate reputation allows firms to notonly attract new consumers but also keep the existing ones.In environments where consumers are unaware of thequality or other features of a product, they can rely on atrustworthy corporate image and a company’s past his-tory. If a company with a reputable name has deliveredquality goods and fulfilled its promises in the past, con-sumers’ purchasing decisions will be positively affected.

If a company is known for taking advantage of its custom-ers, the opposite is true. Numerous surveys show thatcustomers value their trust in firms and are willing to paya premium for honesty and commitment to promises. Therecognition of consumers’ interest in corporate image canbe seen in the fact that firms spend significant resourceson not only building up a good reputation, but, more im-portantly, on sustaining it. Also, a company’s good reputa-tion is viewed as an asset in the case of mergers andacquisitions.

Improved access to capitalThe importance of a good reputation for sustained corpo-rate performance leads to another benefit of responsible

business practices – improved position in the credit mar-kets. Essentially, socially responsible companies can at-tract more capital and borrow at lower total cost. Thegrowth of socially responsible investing (SRI) in the U.K. isa good example. SRI is based on the idea that investmentsare made not only on the basis of an investor’s needs andconcerns but also on the merit of the social contribution ofthat investment. One part of SRI is community invest-ment – an investment strategy that is aimed at supportingdevelopment initiatives in under-performing communities

ISSUES (III)


in the home country as well as abroad. According to theWashington, D.C.-based Social Investment Forum, dur-ing the last year more than $2 trillion of assets in profes-sionally managed portfolios in the U.S. were of a SRI na-ture, which is an 80 percent increase since 1997 – a re-markable accomplishment considering a significant eco-nomic downturn during that period.

A study of SRI in Europe reveals similar trends of SRIgrowth in the past years. A survey of European fund man-agers, financial analysts, and investor relations officersshowed that 50 percent of investment leaders view socialand environmental considerations as becoming significantfeatures of the mainstream investment decisions of thenext 2 years. Non-financial risks are increasingly viewedas important in the investment process, with slightly morethan 50 percent stating that investment professionals al-

ready systematically take corporate governance and riskmanagement as well as customer relations into account.

Investors and financial analysts are increasingly in-terested in the social aspects of corporate operations andare willing to invest in responsible companies. Also, re-sponsible businesses have a key role in promoting corpo-rate governance mechanisms, such as transparency, in-dependent audit, and board oversight, which in turn helpmake investments more secure. Economists have alsohighlighted the link between responsible companies andthe interest rates on loans. In short, reputation is of avalue to lenders, who provide credit to borrowers who do

not default at lower interest rates and who are respon-sible in the financial management of their resources.

Greater ability to attract higher quality employees,improved morale and commitment

In addition to the external benefits of good corporatecitizenship, firms benefit inherently from their improvedstanding. Socially responsible business practices can ef-fectively enhance a company’s ability to attract and retainhigher quality workers. For example, a study by the Repu-tation Institute, an international private research institute,found that undergraduate students, when considering em-ployment after finishing school, are more attracted to com-panies that have a good social reputation. Firms withstrong corporate citizenship programs typically noticeimproved employee moral. Also, greater transparencyand openness about the business process can change the

dynamic of labor relationsand union negotiations fromantagonistic to a more coop-erative relationship.

Reduced business risk andcostsParticipation in corporate citi-zenship programs and envi-ronmental efforts yieldsmore favorable fines and rul-ings for companies that haverun into problems with thelaw. The fact is, a firm’s expo-sure to fines in legal proceed-ings can be greatly reducedif it can demonstrate that itwas making a concerted ef-fort to avoid the problems ithas been found guilty of. Thepublic is more accepting of

failures when it can be shown that a company was notirresponsible and did not attempt to cover up but ratherdid everything to prevent it from happening. Responsiblebusiness practices can also prevent many disasters fromoccurring in the first place.

Improved financial performanceSimply put, corporate citizenship makes sense from a fi-nancial standpoint. There are a number of studies thatexpose the link between responsible business practicesand improved financial performance. The financial impactof corporate citizenship can be inferred from the benefits

ISSUES (III)


ISSUES (III)

listed above; data analysis studies as well as various sur-veys of corporate executives support the theory. In fact,in a recent survey of the US firms, 82 percent of the sur-veyed executives stated that good corporate citizenshiphelps their bottom line10. Another study by the AustralianGraduate School of Management shows that companieswith good corporate citizenship programs are more likelyto perform well financially.

Corporate Citizenship and InternationalDevelopmentMany international development organizations, civil soci-ety groups, citizens and governments are urging the pri-vate sector to take the lead in strengthening democraticinstitutions and designing sustainable solutions to pov-erty in the developing world. Both developed and devel-oping countries increasingly recognize the effectivenessof the private sector in poverty alleviation and democ-racy building. The resources of the private sectoralso make a difference – in fact, the role of theprivate sector has changed dramatically inthe past several decades, as today it isthe largest supplier of foreign capitalto developing countries. In con-trast, three decades ago for-eign assistance dominatedcapital flows to developingcountries. Yet, while there are in-dustry leaders that actively partici-pate in international development, full,committed business participation is still lack-ing. To ensure active business involvement insustainable development it is imperative to makea business case for such participation.

Simply put, globally competitive business can’t existin failed, unstable, corrupt, undemocratic countries. Com-petitive business can’t operate in markets marred by theabsence of property rights, inefficient legal systems, largeunderground economies, and weak enforcement mecha-nisms. And it certainly can’t survive in societies that arehobbled by human rights violations, barriers to entrepre-neurship, restrictions on freedom of speech, and abuse ofthe democratic process.

There is an abundance of business opportunities in thedeveloping markets – by investing and expanding theiroperations to new countries, firms can gain access to newcustomers and suppliers and discover new trading part-ners and cost-saving technologies. But taking advantageof those opportunities is often a challenge due to system-

wide economic and democratic deficiencies. Poor protec-tion of property rights, corrupt political systems, and alack of fair contract enforcement can deter business fromentering markets. Economic and legal uncertainties canmake even the highest rate of return unattractive. Hence,the institutional underdevelopment of countries limitsgrowth opportunities for MNCs and at the same timethreatens job creation and investment flows in develop-ing countries. It is in the best interest of the business com-munity to help countries build efficient markets and openpolitical systems and it is in the best interest of countriesto welcome such initiatives.

Advancing corporate citizenship programs and ensur-ing fair labor practices, honest and transparent businesscontracts, environmental protection, and product safetyand quality cannot be accomplished without functioninglegal systems and strong enforcement mechanisms. Theenvironment within which responsible business practices

are implemented is often taken for granted – in devel-oped countries the challenge is merely to put re-

sponsible business measures in place. In thedeveloping world, on the other hand, de-

signing proper codes of conduct or anyother corporate citizenship program

is problematic, and ensuringproper enforcement of such pro-

grams is an even a greater chal-lenge. For example, while companies

may try to establish responsible envi-ronmental operations in a certain country,

opportunities for shirking the new frameworkmay be abundant. Local managers may be

tempted or encouraged to bribe public officials in ex-change for less stringent requirements or fewer inspec-

tions. Even the best intentioned corporate citizenship ef-forts are put at risk in developing countries if the laws andregulations are opaque and contradictory and cannot beproperly enforced.

Widespread institutionalized corruption may also jeop-ardize firms’ efforts to become responsible. Corruption,recognized as one of the keys to why so many local re-forms and international development efforts fail, is a seri-ous impediment to business development, trade expan-sion, and the globalization process. It is also one of theprimary barriers to ethical, effective business. Corruptionmay seem like a good strategy to get things done, but inreality it translates into higher costs, economic uncertainty,poor protection of property rights, lack of fairness andmarket competition, and foregone profits. After all, if you

To ensure activebusiness involvement

in sustainabledevelopment it is

imperative to make abusiness case for such

participation.


can pay a bribe and gain preferential treatment, how canyou be sure that someone will not pay a bribe tomorrowand gain preferential treatment over you, leaving you onthe sidelines?

Simply refusing to engage in corruption is not enough.While managers and employees will be able to uphold acompany’s internal ethical standards by not giving bribesand accepting favors in return, nothing prohibits less ethi-cal competitors from taking advantage of the situation.Therefore, a sincere effort on the part of the private sec-tor is required to curb corruption in developing countries.Doing so requires looking at corruption as a symptom of aproblem not a problem in itself.

Corruption results from institutional deficiencies. Itprospers in environments where the rule of law is lacking,regulations are opaque, enforcement mechanisms areweak, government officials have excessive discretionarypowers, accountability mechanisms are absent, and themedia is heavily restricted. To remain ethical and to up-hold industry standards, companies need to address theinstitutional deficiencies that sustain corruption andthreaten the implementation of codes of conduct. Thesame institutions are responsible for strengthening freemarkets and creating democratic societies where citizenscan enjoy the responsible initiatives of business.

The benefits of good corporate citizenship are not one-sided. In emerging markets, businesses, particularly fac-tories and industries involved in western market supplychains, are realizing benefits from corporate citizenship-based initiatives, with quantified improvements in infra-structure and processes, market access, productivity, andrisk management. As social responsibility can prove to bea barrier to development in regions that do not have thecapital, technical ability, or the level of development toraise their standards to comply with international codesand guidelines regarding environment and labor practices,there are efforts to help the developing world raise theirstandards and become more competitive by supplyingthem with the funds and technical expertise to design anddevelop programs that address their corporate citizen-ship issues. For example, an initiative by the World Bankcalled the CSR Practice Work Program implements a trust-funded technical assistance project.

ConclusionIn today’s competitive business environment, businessesare not solely economic entities. The success of today’sbusiness doesn’t depend only on its ability to find the mostefficient way of converting inputs into goods and services,

but also its ability to address social concerns. And thereare a number of studies that illustrate a direct link be-tween a business’s social record and its financial perfor-mance.

The need for good corporate citizenship systems ap-plies to all firms. It doesn’t matter if you are a multina-tional corporation or a small local company, if you operatein the developing markets or in the developed countries, ifyou manufacture toys or provide financial services. Nomatter what kind of company you are, to succeed youhave to create a pleasant and fair working environmentfor your employees, address the concerns of your cus-tomers, be an active player in your community, and helpgovernments and NGOs build better societies and stron-ger markets.

Being a good corporate citizen must go beyond philan-thropy and cause marketing. To be successful in address-ing the concerns of various stakeholders, systems andpolicies have to be internalized and must become part ofcompany’s culture and everyday operations. Good corpo-rate citizenship policies can lead business to prosperity,yet at the same time help develop better societies, pro-tect human rights, and facilitate the development of na-tions.

Globalization has redefined the rules of competition,behavior of markets, and communication strategies. But ithas also redefined the way companies operate and therole business plays. Due to globalization, industries areno longer confined by the traditional boundaries. As mar-kets spread and open up, competition evolves as well.Multinational companies increasingly play a key role indefining markets and influencing the behavior of a largenumber of consumers who buy their products, the locali-ties where they do business, and the governments whodesire their presence for creating jobs and investment.But just as the influence of corporations on consumers,environments, and governments has evolved, expecta-tions of their responsibility to societies and governmentshave evolved as well. Corporations are expected to putforth measures to help countries build better markets andstable political environments that rest on a foundation ofstrong institutions.(*CIPE Authors: Aleksandr Shkolnikov, Global ProgramOfficer, John Leachman, Research Assistant, John D.Sullivan, Ph.D., Executive Director. We are grateful to theCIPE for permission to publish this article.)

ISSUES (III)


F REIGN INSIGHTS

A recent report emanating from the World Bank has underlined thegreat economic potentials inherent in the burgeoning trade betweenthe African continent and the sub-continent of India as well as Asiangiant and emergent World economic and political super power, China.

The report entitled “Africa’s Silk Road: China and India’s New Eco-nomic Front” documents the future prospects of the growing tradealliance between Africa and China which is the world’s fastest growingeconomy as well as India which is setting the pace in the sub-continentand beyond. The study makes clear that with China and India in thelead, Asia now gets 27% of Africa’s exports, triple the amount in 1990.It also shows that Asian exports to Africa are now growing at 18% per

* By Toni Kan-Onwordi



F REIGN INSIGHTS

annum, faster than any other global re-gion.

What the report also points to is a criti-cal drawback to African nations’ ability toreap commensurate gains from this busi-ness alliance. To mitigate this drawback,the document recommends that China andIndia’s tariffs on African exports should beeliminated.

This request may not seem importantat the present time since African exportsto Asia constitute only 1.6% of what Asiansbuy from the rest of the world, while Chinaand India’s African purchases total only13% of Africa’s total exports. But the po-tentials for growth are there especiallywhen you consider the vast difference between the newtrade alliance and what transpired in the past in Africa’sformer dealings with the Northern hemisphere in whichAfrica was no more than a supplier of raw materials andimporter of finished goods. But things are changing asHarry Broadman, the author of the report who is the WorldBank’s Africa Region Economic advisor, points out. Ac-cording to him, “This new ‘Silk Road’ potentially presentsto Sub-Saharan Africa home to 300 million of the globe’spoorest people and the world’s most formidable develop-ment challenge - a significant, and to date, rare, opportu-nity to hasten its international integration and growth.”

This growing South-south alliance positions Africa dif-ferently because it extends the continent’s customary roleas a hub for trade and investment in natural resourcesand positions it as “a processor of commodities and a

competitive supplier of labour-intensive goods and ser-vices to Chinese and Indian firms and consumers.”

This report is significant in many respects as we con-sider the trade relations between India and Nigeria. First,let us consider the reference to the Silk Road. “The SilkRoad or Silk Route was an interconnected series of routesthrough Southern Asia traversed by caravan and oceanvessel, and connecting Chang’an (today’s Xi’an), China,with Antioch, Asia Minor, as well as other points. It ex-tends over 8,000 km (5,000 miles). Its influence carried overinto Japan and Korea. These exchanges were significantnot only for the development and flowering of the greatcivilizations of China, ancient Egypt, Mesopotamia, Per-sia, India and Rome but also helped to lay the foundationsof our modern world. Silk road is a translation from theGerman Seidenstraße, the term first used by German ge-

ographer Ferdinand von Richthofen during 1877.”The Silk Road refers, therefore, to a new era of

prosperity in relation to the trade between Africa onthe one hand, and China and India on the other hand.

What does the Silk Road portend for Nigeria? Toanswer this one must consider trade between Nige-ria and China and India. Trade between Nigeria andthe Asian countries has been on the rise. Statisticsavailable from the CBN indicate that non oil importsfrom Asia (excluding Japan) grew by 67% from N343bnin 2002 to N573bn in 2005. Specific non-oil imports fromChina recorded a more significant growth of about63% from N93bn to N251bn in 2005. Oil exports to Chinafor the period also reflected the same growth mov-ing by about 228 % from N2.8bn in 2002 to N9.2bn in2005.

Trade between India and Nigeria has been no lessdramatic. Non-oil imports from India to Nigeria grew

Non- Oil Imports from India, China andAsia (Naira [million]) 2002 - 2005

Oil Export to India, China and Asia(thousand barrels)

• A bubbling indian boutique

Source: CBN & R&EIG

Source: CBN & R&EIG


F REIGN INSIGHTS

by 64% from N76.7bn in 2002 to N125.5bn in 2005. Oilexports to India for the corresponding period re-corded a 290% growth from N17.9bn to N69.9bn. Oilexports to India stood at N712bn at end of 2005.

India is gradually emerging as an A-list tradingpartner to Nigeria as the figures point to with thebalance of payment tilting in Nigeria’s favour duespecifically to large Indian imports of crude oil. Thereason for the present trade reality is easy to see.In the last couple of years, India has emergedamong Nigeria’s top 7 trading partners, competingagainst the US, UK, China, Germany, Brazil, andItaly. Nigeria has also emerged as India’s biggesttrade partner in Africa. This blossoming trade re-lationship is best appreciated in the light of resump-tion of direct flights between Lagos and Mumbai.Direct flights between India and Nigeria resumedin June 2005 when Bellview Airlines flights com-menced between Lagos and Mumbai (formerly known asBombay).

It is significant to note that trade between India andNigeria is not a recent development. The Indo-Nigeria re-lationship began before Nigeria became an independentcountry when India established a diplomatic mission inNigeria in 1958.

The first Indian company, K. Chellarams opened shopin 1923. Since then, other Indian companies have set outdeep roots in the Nigerian economy cornering sizeableand very valuable market shares in sectors as diverse astextiles, chemicals, electrical equipment, pharmaceuticals,plastics, fishing etc.

A document released by the Indian high commissionemphasizes areas of mutual interest for both nations by

noting that “Both countries have been in the forefront ofthe worldwide anti-colonial and anti-apartheid struggle.Similarities in colonial struggle, ethnic diversity and geo-political situation have created affinity and mutual good-will between the two countries. Both India and Nigeria aremembers of UN, NAM, G-15, G-77 and the Commonwealthand have collaborated at various international organiza-tions. Both share common perspectives on internationalpolitical, social and development issues and these havemanifested in various meetings at UN, WTO, etc.

With a population of almost 150 million, Nigeria offersa huge market for Indian products, making her India’slargest trading partner in Africa with annual bilateral tradeturnover in excess of US$ 3 billion.

In terms of import and exports, Nigeria remains themajor African importer of Indian pharmaceuticals. Otherimported items include machinery and mechanical appli-ances, electrical machinery and equipment, rice, automo-biles, iron and steel, cereals, plastic and rubber, paperand paper products and cotton textiles. India’s major im-ports from Nigeria on the other hand remain Crude oil,metal scrap, wood, cashew nuts, iron and steel with crudeoil accounting for 96% of Indian imports from Nigeria fol-lowing an MOU in May 2005 between the NNPC and In-dian Oil Corporation (IOC) sealing a deal to supply 40,000BPD to IOC.

India’s interest in Nigeria’s oil extends well beyondbuying of crude. It is basically three pronged encompass-ing: crude purchases, equity participation in the upstreamsector as well as in refineries. A November 2005 visit by anIndian Government delegation reaped a number of long

Comparative Indices: Nigeria & India

• A garlanded Indian bride

Source: CBN & R&EIG


F REIGN INSIGHTS

term economic benefits for both nations. An MoUwas signed between the Nigerian Government andan Indian company ONGC-Mittal Energy Ltd(OMEL) for a US$ 6 billion oil-for-infrastructuredeal. Under the terms of the MoU, ONGC-MittalEnergy Ltd (OMEL) will source for 450,000 BPD ofequity oil and 200,000 BOPD per day equity gas[totaling 650,000 BPD oil + oil equivalent and gas -equivalent to 32.5 MT] per year over 25 years. Onits part, India will assist Nigeria in the establishment of a2000 MW thermal power plant, set up a refinery and up-grade Nigeria’s moribund railway infrastructure. On May19 2006, OMEL was awarded two oil blocs.

There have also been significant developments in theupstream sector. An Indian company, ONGC Videsh (OVL)won a 15% stake in Block II of the Joint Development Zone(JDZ) of Nigeria and Sao Tome Principe (May 2005). OVLis also exploring the possibility of acquiring some oil blocksin Nigeria.

With the ink barely dry on a May 2005 agreement forthe NNPC to supply 40,000 bpd of crude oil to the Indian OilCorporations (IOC), the IOC signified its intention to setup a refinery in Edo state. Other Indian companies likeEssar are also exploring the refinery option too.

Business process outsourcing has brought an eco-

nomic boom to India which has emerged as an Informa-tion and Communications Technology (ICT) super power.Onshore or near-shore outsourcing is a well-establishedbusiness phenomenon but outsourcing to an off-shore lo-cation is a comparatively recent trend. This new trendwas facilitated by the discovery that some of the develop-ing nations are cost effective destinations. This realiza-tion made off-shoring to some of these third world coun-tries a profitable proposition for the business giants of theWest.

According to Shashank Bhide et al in their paper“Outsourcing of Business Processes: The Indian Experi-ence as an Offshore location”, India tops the list with lowcost, high quality abundant manpower, which led a fewindustry majors to experiment with off-shoring of busi-ness processes and consumer-related tasks to centers inIndia. The experiment began with the establishment of

Networked Readiness for Nigeria, India and Select Countries

• A busy street in India

Source: CBN & R&EIG


F REIGN INSIGHTS

wholly owned subsidiaries by the likes of GE and BritishAirways. There has been no turning back since then. Thirdparty players then started investing in the market with thebacking of venture capitalists and met with considerablesuccess.”

India’s revenue from Business Process Outsourcing(BPO) and Information Technology Enabled Services(ITES) points to the huge potentials inherent in the BPO

and ITES sectors. Sofware and services export reachedUS12.2bn between 2003 and 2004 showing a 30.5% increaseover the $9.6bn figure recorded in 2002 and 2003.

Available statistics also show that the Indian BPO/ITESsector grew at a rate 0f 52.3% during the 2003-2004 periodand projections estimate that the Indian BPE/ITES indus-try will generate revenue in excess of $62bn between 2008and 2009.

Nigeria is a major contributor to the Indian ICT sectoras evident from existing agreements between major In-dian IT companies like Infosys, Satyam, NIIT, and Aptechwith local companies and banks to set up training insti-tutes and to promote their products in Nigeria.

Another key sector in which Nige-ria and India has forged a strong tie isin the area of steel manufacturing. Ithas taken the expertise of Indian steelmajor and Mumbai-based Ispat Groupof Companies which was formed in1985 to turn around the almost coma-tose state-owned Ajaokuta Steel Plant.Ajaokuta is now back on its feet thanksto the management acumen broughtto bear on its operation by Ispat’s Ni-gerian subsidiary Global InfrastructureNigeria Limited.

The subsisting technical manage-ment agreement provides for the In-dian company to rehabilitate, operate

and manage the steel plant complex for the next 10 years.The plant which was built by a Russian firm in 1984 at anestimated US$ 4 billion has been refurbished and produc-tion has commenced with imported billets.

In February 2005, Delta Steel Company, Aladja as wellas the Itapke Iron Ore Mining Company were handedover by the Federal Government to the Ispat Group whileanother Indian steel company Bhushan Steels is conclud-

ing discussions towards setting up a steel rolling mill inOtta, Ogun State.

As the future beckons, trade between Nigeria and In-dia is sure to continue to blossom as the new deals matureand more are consummated. And Nigeria’s interactionwith India is also expected to help the country reap hugedividends as she attempts to bridge the debilitating digitaldivide by pointing her to the path of success.(*Toni Kan Onwordi is the Deputy Editor, Zenith EconomicQuarterly)

Source: CBN Annual Report 2005 Source: CBN Annual Report 2005


E

GLOBAL WATCH

xternal debt is defined as the total public and private debt owed to nonresi-dents repayable in foreign currency, goods, or services. External debt is aborderless, universal problem that is not common to any particular country orregion. All nations of the world are indebted to a greater or lesser extent. The20 most indebted countries are actually the highly developed economies, eventhough it is in the Third World that the impact of debt burden is most felt. Thereasons for this are glaring: aside from the prevalent poverty, low industrialproductivity and paltry export earnings, the burden of the usually dollar-de-nominated debt is compounded by high exchange and inflation rates whichare usually unfavourable to the developing economies.

Third World Debt ProfileIdeally, Third World debts should derive their origin from the quest to sourcefunds to put in place basic social amenities for their citizenry, such as electric-ity, dams, railways, highways and far-reaching industrialisation projects thatcould create job opportunities. While this is true in some cases, in some oth-ers, external borrowings are actually undertaken to fund the repression ofcivil uprisings or to build armouries that would deter or ward off foreign inva-sions. In yet other cases, corrupt political leaders and military dictators use

*By Eunice Sampson


G L O B A L W A T C H

the names and seals of their homecountries to borrow for self-enrich-ment in the guise of executing wide-elephant projects which make no im-pact on the lives of the ordinarypeople.

For whatever reasons, foreigndebt has since the early 1980s becomea channel through which scarce for-eign exchange from the impoverishedSouth is siphoned to the already su-per-rich North.

For some developed economies,especially of Europe, Third Worldlending has become a highly lucra-tive business venture – an increas-ingly parasitic rather than symbioticeconomic relationship. The hugeThird World debt has acceleratedwidespread poverty in the lands.Much of the resources that wouldhave been used for the provision ofbasic public needs like health, educa-tion and the fight against HIV/AIDSare diverted to the servicing and re-payment of unsustainable debts. Thisis especially true of the African conti-nent whose total debt of $300bn is solarge compared to its GDP that it justcannot be repaid without decimatingits over 900 million, mostly impover-ished population.

Today’s Debt Management StrategiesEssentially, the objective of any debt management strat-egy is to reduce the cost of debt service, including interestpayments and outright payback, to the minimum possible.Developing countries seek debt relief in order to reducetheir debt burden to a sustainable level that would freescarce resources for other priority projects. The more anation pays for debt management, the less it has to caterfor other basic necessities.

Traditionally, the debt management options open toindebted countries would include:

• Outright debt forgiveness/cancellation• Outright debt repayment• Debt rescheduling• Debt servicing• Debt trading• Debt buyback arrangements

In today’s uni-polar world, developing countries find itincreasingly difficult to negotiate, as they are more at themercy of powerful nations who are united in their resolveto get their debts repaid at whatever cost to the impover-ished economies. This is why creditor nations have cometogether to form cartels such as the ‘Paris Club’, to enablethem speak with one voice in the demand for the repay-ments of their credits.

But the question for most developing countries iswhether they have the economic muscle to sustain exter-nal debt servicing while also struggling (and at times bor-rowing more) to sustain public infrastructure developmentand sector reforms, which are essential for the attain-ment of the Millennium Development Goals.

The ultimate aspiration of every Third World nation istherefore to secure 100% debt cancellation. Several groupshave emerged in the global stage lending their voice to

The table below shows the magnitude of the debt burden weighing down mostdeveloping countries, especially when viewed vis-à-vis their purchasing powerparity and external reserve. As the table shows, some countries’ debt burden isover 50% of their GDP.

*Nigeria has settled the over $30bn it owes its major creditor, the Paris Club. It now owesan estimated $4.847bn, mostly to the London Club. If ranked today, Nigeria wouldimprove from its 44th position on the list of the world’s most indebted countries as at 2005to about 99th-100th, a remarkable improvement



the urgent need for outright forgiveness of all Third Worlddebts.

In all fairness, the developed economies have paid lipservice to the need to cancel debts owed by the world’spoor nations. Far-reaching, practical demonstrations ofsuch verbose declarations are however yet to be seen.

In 1999, the G8 in their Summit in Cologne agreed towrite-off up to $100bn of Third World debt in line with theHighly Indebted Poor Countries (HIPC) initiative. Close toa decade after this resolution, only a small percentage ofthe world’ poor countries have benefited from it.

In the G8 Summit of July 6-8, 2005 which held inGleneagles, Scotland, the developed countries yet againpledged debt forgiveness which was greeted in most quar-ters as grossly inadequate. The influential group of eightalso promised up to $50bn in aid to the poor countries, tobe disbursed over ten years.

On June 11, 2005, an agreement was reached to writeoff the entire $40bn debt owed by 18 HIPCs to the WorldBank, the IMF and the African Development Fund. An-other 20 underdeveloped economies with a debt of $15bnwould be considered eligible for debt relief if they metconditions such as fighting corruption and putting in placestructural adjustment programme, that would liberalizetheir economies, eliminate government subsidies, andreduce budgetary expenditures. But such economic mea-sures have been known to drag some of these develop-ing countries into more complex economic woes. Zambiain the 1980s and early 1990s was compelled to undertakemassive budgetary cuts on health, education and childimmunization initiatives, a move that for several yearsdeprived the Zambian people of welfare packages thattheir counterparts in Europe and America take forgranted.

In the drive to manage their debts to sustainable lev-els, Third World economies are continually at the mercyof their wealthy bilateral creditors and even themultilaterals which directly or indirectly are also underthe tight control and influence of the rich bilateral credi-tors.

Debt Management Experiences from SelectEconomiesGuyana – From the late 1980s, Guyana made series ofattempts to manage its debt profile to a sustainable level.It entered into rescheduling agreements with its bilateralcreditors, including the Paris Club which was its main credi-tor.

Guyana’s accumulated stock of arrears and debt ser-

vice payments were consolidated and rescheduled on non-concessional terms with 20 years maturity, including 10years of grace, for medium- and long-term debts. Shortterm debts were also capitalized with 10 years maturity,including 5 years of grace.

In 1990, Guyana was extended some relief by the ParisClub under the Toronto terms in which the participatingcreditor countries offered three options. “First, 33% of debtservice obligations were written off and the remainderconsolidated at market rates of over 14 years, including 8years of grace. Second, 100% of the debt service was ex-tended over a period of 25 years, including 14 years ofgrace. Third, 100% of the debt service was consolidated atpreferential rates with a repayment period of 14 years,including 8 years grace”.

Guyana, in addition secured debt forgiveness fromsome countries including Canada, the United Kingdom,the United States, Netherlands and Brazil, saving over $342million in the process. The World Bank through the IDADebt Reduction Facility also provided Guyana with US$11



million to buy back commercial bankdebts of U$94 million.

In May 1996, Guyana received astock of debt reduction from its ParisClub creditors. Under the “Naplesterms,” Guyana received a 67% debtcancellation from the Paris Club, andan additional $110 million in a “top-ping-up” of previously rescheduleddebts. The total debt relief forGuyana as a result of the May 1996agreement is estimated at $585 mil-lion.

Consequently, the share ofGuyana’s bilateral debt fell from 43%to 22% of the total, while the share ofmultilateral debt increased from40.9% to 56.4%. Guyana has beenlucky in securing bilateral debt treat-ment that is considerable relative toits debt size, and without much of the stringent economicside-effect that goes with most debt concession deals.

Argentina – But Argentina was not so lucky. Beginningin the mid-1990s, Argentina went through economic crisesculminating in a recession from 1999 to 2002. Economicanalysts around the world blamed Argentina’s woes onthe IMF which placed the country under series of com-plex structural adjustment measures that arebelieved to have crippled the economy inthe name of debt-restructuring.

The debt restructuring processwas long, complex and tedious. Atthe end, Argentina offered a steepdiscount on its obligations (ap-proximately 70%) and finallysettled the matter with over 76%of its defaulted creditors, exclud-ing the IMF.

In December 2005, Argentinadecided to liquidate its debt to theIMF in a single payment, without refi-nancing, for a total of $9.81bn. The pay-ment was partly financed by Venezuela,who bought Argentine bonds for $1.6bn.

In May 2006, Argentina reentered international debtmarkets selling US$ 500 million of its Bonar V five yeardollar denominated bonds, with a yield of 8.36%, mostly toforeign banks. The country’s debt rating (Moody’s) rose,from B- to B. As at January 2006, Argentina’s public debt

was put at $124bn (69% of GDP)and with no hope of debt forgive-ness in sight.

Haiti – Haiti is the most impov-erished country in the Americas;80% of its population lives in ab-ject poverty and one out of ninechildren die before reaching theirfifth birthday. Average life expect-ancy in the country is 53 years andnearly half the population is illit-erate. Under the grip of politicaldictatorship, the country’s debtskyrocketed over time. In 2005,the country’s total external publicdebt reached $1.3bn with a GDP(PPP) of $1.7bn and an external re-serve of $100 million.

Haiti’s legacy of debt beganshortly after gaining indepen-

dence from France in 1804. In 1825, the French govern-ment demanded that Haiti compensate it for France’s rec-ognition of Haiti as a sovereign republic. France demandedpayment of 150 million francs (modern equivalent of $2bn).Haiti was forced to choose between paying this exorbitantsum, which was about five times its annual export rev-

enue, or facing a bloody combat with the French militarytroop.

This enormous debt exacted consid-erable toll on the upcoming economy.

And so, instead of investing in infra-structure and the provision of so-

cial services, the Haitian govern-ment was compelled to send allavailable cash to France, culmi-nating in a heavy debt burden thecountry is yet to recover from tilldate.

Past Haitian leaders also con-tributed to the miserable debt situ-

ation. About 45% of the country’s cur-rent external debt was incurred by

years of father-to- son dictatorship (theDuvaliers regime) and corrupt self-enrichment.

Not only did these loans fail to benefit the Haitian people,the consequent debt service payments continue to costthe country millions of dollars that could be better spenton the provision of basic human needs.

The dream of all Haitians today is to secure immediate

For some developedeconomies, especially of

Europe, Third World lendinghas become a highly

lucrative business venture –an increasingly parasitic

rather than symbioticeconomic relationship. Thehuge Third World debt has

accelerated widespreadpoverty in the lands.



and complete debt cancella-tion from all its creditors. InApril 2006, Haiti was addedto the World Bank and IMF’slist of Highly Indebted PoorCountries (HIPC) eligible forcancellation of debt owed tothe multilaterals. Ironicallyhowever, from the conditionsspecified, Haiti will not qualifyfor cancellation until Decem-ber 2009 at the earliest – bywhich time the country willhave paid $220 million in debt service, scarce resourcesthat would have gone into alleviating the abject poverty inthe land, and which would have enhanced the country’schances of meeting the much-preached about MDGs.

Rwanda – Rwanda is rated in the list of the 20 poorestcountries in the world with about 90% of the populationengaged in mainly subsistence agriculture for a living.Primary foreign exchange earners are coffee and tea.

The history of Rwanda, since its independence fromBelgium in 1962 has been dominated by ethnic conflict be-tween the Tutsi and the Hutu, culminating in the 1994 geno-cide in which an estimated 800,000 Rwandans were killed.The conflict further depleted the Rwandan economy, se-verely impoverished the population with millions of womenand children displaced.

Rwanda’s heavy indebtedness is the result of domes-tic policy failings and external factors beyond its control.Much of the country’s external borrowings in the1980s and 1990s went into managing its civil con-flicts.

During and immediately after the civil conflicts,Rwanda received significant aid from many do-nor nations. At a time, 80% of its foreign exchangeinflow came from foreign aids (mostly from Franceand Belgium), though this has since dropped toabout 30%. But at the same time, its external debtwas pilling up, rising from about $150million as at1980 to $1.1bn in 1998. This was to rise further to$1.4 billion in 2004, while its export revenue forthat year was a mere $89.5 million, with a GDP of$1.5bn.

Rwanda has since the late 1980s and 1990sspent an average of 35% of its export earnings on debtservicing annually. As part of its debt management strat-egy, Rwanda negotiated and benefited from some debtrescheduling arrangements from its creditors. In July 1998,

67% of the country’s debt to theParis Club was rescheduled ac-cording to the Naples terms. Thisbrought only temporary relief es-pecially since its bilateral debt isrelatively small, at only 16%. Thebulk is owed to the multilaterals.

In the name of loan conces-sions, the World Bank and IMF hadsince 2000 put Rwanda throughseries of stringent economic ad-justment exercises. The local cur-rency was devalued; restrictions

were placed on imports and subsidies; protection of localproducers was lifted. As a result inflation grew at an un-precedented rate, export earnings fell by half, since thelocal food producers could not compete with the low pricesoffered by the highly-subsidized US and European pro-ducers.

In April 2005, the IMF and World Bank agreed thatRwanda had taken sufficient economic steps to reach theCompletion Point under the enhanced Initiative for HeavilyIndebted Poor Countries (HIPC), the 18th country to achievethat feat. This entitles it, in nominal terms, to a total relieffrom all its creditors for its debt estimated at $1.4bn. Byimplication, in the first ten years after the CompletionPoint, Rwanda would save approximately US$48 millionannually in debt service costs. But whether a debt write-off of a meagre $1.4bn was worth the years of stringenteconomic control measures is debatable.

Rwanda today is in urgent need of total debt write-offas millions of children die of hunger and curable, prevent-able diseases. Many children of school age are unable togo to school. HIV/AIDS spread is on the rise in that coun-

Source: Jubilee Research

Source: ADB; World Bank; Jubilee Research

Rwanda's Rapid debt Growth:1970-2005

Profile of Rwanda’s Creditors



try.Prior to the genocide, Rwanda was a relatively stable

African economy whose human-development indicatorswere better than the regional average.

But there’s still hope for Rwanda after all. The country’saverage annual economic growth rate since 1995 has beena steady 9%, one of the highest growth rates in the world.Its construction industry has been growing at an annualrate of 21%.

Like other Third World nations, Rwanda desires anddeserves immediate and complete debt write-off from allits creditors. This would go a long way in complementinggovernment efforts at alleviating the poverty and squalorin this economy.

The Nigeria Model – Worth Emulating?Nigeria is the most populous African nation and rated asone of the poorest countries in the world, despite its hugecrude oil reserves. Nigeria’s debt was accumulated dur-

ing three decades of military dictatorship with most of theforeign exchange earnings siphoned out of the countryand deposited in foreign bank accounts.

As at December 2005, Nigeria had about $36bn in ex-ternal debt, over 14% of Africa’s total debt, and most of itwas owed to the Paris Club of creditors. More than half ofthe Paris Club debt is owed to Britain, France, and Ger-many. Nigeria owed the Club $30.8bn, comprising an out-standing principal of $25.1bn and arrears of $5.6bn.

Nigeria’s debt has grown by about 400% since the 1980s,and bilateral debt has grown by 3,350% within the sameperiod. Half of the growth is a result of arrears and penal-ties; the other half from export credits.

Since 1980, debt servicing has taken much of the bud-getary portion hitherto reserved for education and health.

For example, spending on education has dropped from4% to 1.3%; while debt servicing spending has increasedfrom 1.9% to 8% per GNP, despite the fact that Nigeria wasonly servicing its huge debt in parts.

Saddled with infrastructure decay, falling life expect-ancy with 2.6 million HIV/AIDS victims ;rapidly falling stan-dard of education; high unemployment rate and with over100 million of its population living on less than a dollar aday, it had long become obvious that Nigeria’s debt bur-den was unsustainable.

Since the return to democratic rule in 1999, the countryhas fought hard to secure significant debt relief, to no avail.Nigeria was originally classed as a HIPC but in August1998, the IMF and World Bank took it off the list. By implica-tion, the country was not qualified for debt forgiveness.

Now, the debt albatross off the neck of the Nigerianpeople, government would be saving almost $1bn annu-ally from debt servicing, a significant sum which could bechanneled into the provision of the much needed basic

amenities to the people.With these realities facing it, the Nigerian gov-

ernment became desperate to exit from the costlyburden of the Paris Club debt. The outcome of theG8 summit in July 2005 was another indication thatthe West was not yet ready for a significant forgive-ness of Third World debt. That year, the Nigerianparliament analyzed the history of the country’s debtburden and threatened debt repudiation if the credi-tor nations remained unwilling to negotiate.

Following a series of discussions with all stake-holders championed by the then Nigeria Minister ofFinance, Dr. Ngozi Okonjo-Iweala, the Paris Clubagreed to a ‘framework’ for reducing Nigeria’s debtwhich involved two steps. First, Nigeria has to clear

about $6bn in arrears. Then she can negotiate a reductionwith the Paris Club on the so-called Naples terms for theremainder, which would include a discounted buyback.

On June 29, 2005, Nigeria reached a new agreementwith the Paris Club which saw it gaining $18bn in debt can-cellation (about 60% of the total owed the Club) at theprice of a $12.4bn repayments (representing regulariza-tion of arrears of $6.3bn, plus a balance of $6.1bn to com-plete the exit strategy) to be effected over a six-monthperiod.

On Monday October 31, 2005, Nigeria paid the firsttranche of $6.4bn arrears to the creditors. In April 2006,the balance of $6.1bn was paid, marking Nigeria’s exit fromthe Paris Club debt.

From about $37bn as at 2005, Nigeria’s external debt is

Source: CBN, Debt Management Office, Research & EIG

Growth of Nigeria’s Debt Burden: 1970 - 2006



today put at about $4.8bn, mostly owed to the London Club.In the last couple of months, the Nigerian governmenthas made efforts to settle the remaining debt and also exitthe London Club before the end of the present adminis-tration in the second quarter of 2007.

Despite mixed reactions from its citizens about the jus-tification for parting with $12.4bn in the face of abject pov-erty, global observers of Nigeria’s debt deal with the ParisClub have praised the country for “making the best of aterrible situation”. “Nigeria has already paid these creditors$11.6bn in debt service since 1985 and yet the capital continues togrow.”

On the other hand, the Paris Club members have beencriticized for taking advantage of an impoverished nationlike Nigeria to further enrich themselves. The views ofmany analysts are that the $30bn debt could have been100% cancelled. The rich creditor nations could have af-forded to let go of the credit without doing any harm totheir economies.

The IMF and its role under the Policy Support Instru-ment (PIS) has also been criticized for mid-wifing the re-payment of such huge debt with dubious, illegitimate ori-gin:

“This agreement extracts $12.4bn from Africa and trans-fers it to a group of wealthy countries who do not reallyneed the money,”. “It is an outrage that creditors simplyplan to use this payment to fill their treasuries. The annualbudget of such creditors as Japan and the United King-dom is over 100 times that of Nigeria. Surely we can dobetter than taking billions from the world’s poorest conti-nent. We expect more from the G8 nations, who promisedAfrica so much in their Gleaneagles declaration inJuly”……Dr. Paul Zeitz, Director of the Global AIDS Alli-ance.

For a country as poor as Nigeria, payment of $12.4bnin six months is quite a huge sacrifice. But the courageousmove would also have significant economic impact.

• The country would save about $1bn annually which


would otherwise have goneinto debt servicing

• More budgetary alloca-tions would be available forhealth, education, fight againstHIV/AIDS, Infrastructure de-velopment, etc

• International credit wor-thiness rating would improvesignificantly

• There will be less in thenational coffers for corruptpoliticians to embezzle

• More will be saved for thedevelopment and funding ofthe productive sector of theeconomy

• The country would likelyenjoy enhanced international goodwill and trust whichcould increase foreign investment and aids.

• The development, hopefully would serve as usefullessons for current and future leaders on the nuisance offoreign debts and macroeconomic mismanagement.

But the big question is, should other highly indebtedThird World nations emulate the Nigerian model of debtexit?

“….the creditor countries are extracting a pound of flesh inthe form of $12bn worth of payments from Nigeria …. On a morepositive note, the deal has set the scene for a more assertivenegotiating stance by other indebted develop-ing countries…” -Sony Kapoor, Senior Advi-sor, Christian Aid (UK)

Nigeria’s position as an oil-richnation at a period of record-highoil price, and the unprecedentedrise in external reserve (about$28bn as at the time of the re-payment) account for thecountry’s daring step. Macro-economic prudence andgovernment’s strong determina-tion to free the country from itshuge debt burden are also key fac-tors that expedited the move. It isworth mentioning that Nigeria as at Sep-tember 2006 had a little over $40bn in externalreserve after the $12.4bn debt repayment. Its new reservelevel is second in size only to that of Algeria’s $56bn on theAfrican continent.

While the Nigerian model is commendable as a for-ward looking step, it is certain that very few Third Worldcountries would wish to adopt such an option, and for goodreason.

The best option open to Third World countries today isto agitate for outright, total debt forgiveness from all credi-tor countries. Third World countries are so far away frombreaking-even economically that they do not pose anyimmediate threat to the superpowers who are also thecreditor nations. In the same vein, the creditor nationsare so rich that forgiving the debts of these poor countries

would do no harm to their economic survival.Afterall, over $1 trillion has so far been spent

on the war against terrorism.

Debt Albatross and TheMDGsAbout 2 decades ago, Tanzania’sPresident Julius Nyerere, asked hiscountry’s creditors: “Should we reallystarve our children to pay our debts?”

In September 2000, about 189countries, including 147 Heads of State

gathered together at the UN GeneralAssembly to discuss prevalent poverty

in the Third World and unanimously adoptedthe Millennium Declaration – the Millennium De-

velopment Goals and targets. The declaration repre-sents a partnership between the developed countries andthe developing countries to reduce global poverty by halfby 2015.


Source: CBN; Debt Management Office, Research & EIG

Nigeria’s External Debt Profile (US $billion)

About 2 decades ago,Tanzania’s PresidentJulius Nyerere, asked

his country’screditors: “Should

we really starve ourchildren to pay our

debts?”



About the greatest threat facingthe realisation of the Millennium De-velopment Goals today is the prob-lem of Third World debt burden. Eventhe IMF acknowledges that “Low-in-come countries striving to meet theirMillennium Development Goals(MDGs) have large financing require-ments”. It has been estimated that$45.7bn would be required for 62 coun-tries to meet the Millennium Devel-opment Goal. Out of this sum, theParis Club of developed nations have,through Nigeria’s debt buy-back deal,reduced Third World chances of meet-ing the MDGs by $12.4bn.

The question is: with the debt al-batross hanging on the neck of mostdeveloping economies, how wouldthese ‘large financing requirements’ bemet on or before 2015? With an esti-mated debt burden of over $1tillionfor developing countries, and with atleast 10% of this going into debt ser-vicing annually, the Millennium devel-opment Goals set for 2015 are at bestover-ambitious, over optimistic andpossibly, unrealistic.

Multilaterals, G8 and DebtForgivenessThe debt forgiveness drive by theWorld Bank and IMF has proven inef-fective, more like a ploy designed tobuy time.

The HIPC initiative which is thelatest and the most applauded debtrelief scheme recently introduced by the world bodieswas first launched in 1996 with the aim of ensuring that nopoor country faces a debt burden it cannot manage. “TheInitiative entails coordinated action by the international finan-cial community, including multilateral organizations and govern-ments, to reduce to sustainable levels the external debt burdens ofthe most heavily indebted poor countries” - IMF.

Exactly ten years later, underdeveloped economiesstill groan under the heavy burden of unsustainable debt.

The conditions for debt concession are so tedious thatvery few countries can survive them. For a country to beconsidered for debt relief in the HIPC initiative for ex-

ample, that country must:• *Be IDA-only and PRGF-eligible• Face an unsustainable debt burden, beyond traditionally available debt-relief mechanisms• Establish a track record of reform and sound policies through IMF and IDA-supported programs• Have developed A Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process.Usually, it takes years of near macroeconomic suffo-

cation before (if ever) a country is certified as having metthese stringent requirements.

Seven Basic Millennium Development Goals

Source: The United Nations

(*World Bank’s International Development Association (IDA) and IMF’s Poverty Reduction and Growth Facility (PRGF))


Debt relief initiatives by the G8 and the multilateralorganizations have been criticized for many reasons:

• The number of benefiting countries are infinitesimal compared to the number of countries that actually need debt relief• The conditions such as the structural adjustment programme are so stringent that the impact on the common man could at times be worse than actually paying off the creditors in the first instance• Most debt relief offers are only in parts, that is, those owed multilaterals like the World Bank, IMF, African Development Bank. Bilateral debts owed creditor groups like the Paris Club, the London Club, etc are usually not included. Countries like Nigeria, Guyana, etc owe over 75% of their debt to these latter groups• The problem of ineligibility is a major challenge. The criteria for deciding which countries qualify and which do not are questionable• Some of the G8 countries sometimes show reluc tance to effect the agreed debt relief packages• The relief package is almost always inadequate. The 23 African countries now covered by the HIPC Initiative still spend $2bn on debt repayments annu ally. In 2004 Ethiopia with almost half of its population


living in extreme poverty, still spent$100m on debt servicing, despite re-cent $2bn debt relief

However, some improvement (es-pecially in the area of spending on hu-manitarian needs) has been noticed inthe countries that have benefittedfrom debt concessions. According tothe World Bank, public spending onhealth and education has risen by al-most 2% of gross domestic product incountries receiving debt relief. Savingson debt repayments have helped fi-nance free primary education in Tan-zania and Uganda, anti-HIV/Aidsprogrammes in Senegal and rural de-velopment in Ethiopia.

ConclusionThird World debt treatments like theHIPC initiative might be convenient,but are they broad enough to cater forthe peculiar socio-political and eco-nomic situations in each of the in-

debted countries? Nigeria’s debt situation and its ineligi-bility for concessions under the different debt relief initia-tives is a case in point. The country’s perceived ‘privilegedeconomic status’ bestowed on it by its position as theworld’s 7th largest crude oil producer does not reflect thetrue state of things. Important socio-economic param-eters like high rate of corruption, internal conflicts, andyears of oppressive military rule are deliberately ignored.

The world (at least on paper) stands united in its re-solve to half global poverty by 2015. But the actualisationof this ‘dream’ goal must start from somewhere – a deter-mined and sincere effort to forgive the external debt ofThird World nations by 100% before 2010.

While billions of US dollars are spent by rich countriesannually on fighting real and perceived terrorism as wellas global insecurity, it is significant to note that abject pov-erty is one of the biggest threats to global peace and secu-rity in these modern times. As a popular dictum puts it: “Ahungry Man is an Angry Man”. Fighting global poverty wouldbe a lot cheaper in the long-run, than fighting the Iraqi war.

Poverty is the greatest injustice that exists in the worldtoday. Addressing Third World debt burden once and forall would be a win-win situation for all parties.(* Eunice Sampson is the Assistant Editor, Zenith EconomicQuarterly)

Source: IMF

List of Countries That Have Qualified for, are Eligible or Potentially Eligible andMay Wish to Receive HIPC Initiative Assistance (as of end - August 2006)


FACTS & FIGURES

ZEQ DATABANKMacroeconomic EnvironmentThe economy seems to be defying analysts’ projections that growth would slow down in 2006 as the CBN announced thatGDP growth has risen to an estimated 7.1% by end of Q2 2006. This is an improvement over the 6.2% recorded in 2005.Analysts indicate that the growth may not be unconnected with the stability in the foreign exchange market. Negativeprojections had been fuelled by the drop in oil prices, oil production and supply disruptions in the Niger Delta as well asrising inflation.

GDP Growth Rate (2001 - 2006)

FOREIGN EXCHANGE MARKETThere was an appreciable increase in Net inflow of foreign exchange for the period which has been attributed primarilyto the decline in debt service obligations. Cumulative inflows and outflows through the economy in the first sevenmonths of the year stood at US$34.98 billion and US$12.50 billion, respectively, compared with US$26.42 billion andUS$9.98 billion in the corresponding period of 2005. Consequently, the cumulative net inflow stood at US$22.48 billion,compared with US$16.44 billion recorded in the corresponding period of 2005.

FOREX Flows Through The CBN Jul 05 - Jul 06

Toni Kan Onwordi

Source: CBN/RESEARCH&EIG/EMU

Source: CBN


FACTS & FIGURES

In the quarter under review, the CBN has tried through a number of measures to maintain the exchange rate conver-gence between the parallel and official markets which has taken years to achieve. This development is a sure valida-tion of the CBN’s monetary policy stance as well as its liberalization of the foreign exchange market especially therecent policy change which now allows banks to also operate Bureaux de change.

The target now is to achieve convertibility of the naira against other major currencies while freeing the system ofunwieldy documentary processes.

FX Parallel Jul - Sept. 2006

FX Official July - Sept. 2006

Source: CBN/MMAN

Source: CBN/MMAN


FACTS & FIGURES

INFLATIONThe CBN’s ongoing efforts to achieve a single digit rate of inflation seem to be making the desired impact, with themonthly average showing a progressively steady slide down from 17.9% in January 2006 to 10% in September, 2006. Thedecline in the rate of inflation has run counter to prognostications to the contrary especially with the Federal Government‘sstill on-going repayment of debts owed to local contractors as well as arrears of pensioners.Analysts still believe that except the CBN is able to sustain its inflation management initiatives, we may well see a spikein the inflation level as Christmas approaches and political activities heat up in the last quarter of the year.

Inflation Rate Jan. - Sept. 2006

FOREIGN RESERVESSix months after the nation paid up its Paris Club debts with a huge $12bn payment under the Naples term, the nationseems to have fully recovered from that massive payout which had raised a lot of dust with opponents of the debtrepayment arguing that the money could have been put to better use. Five months down the line, the superior argu-ment of the members of the Federal Government Economic Team seems to have carried the day as the accretion in thenation’s foreign reserves continues to attest.The nation’s foreign reserve level stood at $38.07 at end July 2006 and had hit the $40bn mark by end of September, 2006.The current level can, according to the CBN finance about 31.9 months of foreign exchange disbursement, comparedwith 24.9 months in June, 2006.

Level of Foreign Reserves (Jan.-Sept. 2006)

Source: CBN/FBS

Source: CBN


FACTS & FIGURES

PUBLIC DEBTThe country’s total public debt has been put at $16.926bn as at June 30, 2006 by the Debt Management Office (DMO). Thetotal public debt, which is made up of an external debt figure of $4.847bn and domestic debt of $12.079bn, represents adecline of 47.6 per cent over the December 2005 figure of N32.306bn. While the DMO has noted that the task of attainingdebt sustainability had become difficult due to resource gap, the nation’s exit from the $31bn Paris Club debt through thepayment of $12.1bn has been identified as a key reason behind the reduced debt burden. Debt reduction was alsoachieved through the FG’s payment of N4.5bn, part of the outstanding sum of N150bn owed local contractors.

Foreign Debt Stock (2001 -2006)

Domestic Debt Stock (Ntrillion)

As at June 30, 2006

As at June 30, 2006

Source: CBN

Source: CBN


FACTS & FIGURES

INTEREST RATEThough the CBN maintained the MRR at 14%, interest rates continued to oscillate in response to the liquidity situationin the market. While prime lending rates hovered between 17 and 18%, other rates continued to move based on theliquidity level in the market place. As usual, the release of monthly statutory allocations, the withdrawal of NNPC’saccumulated credit to oil marketers as well as the ongoing sale of government bonds continued to impact on the costof funds and rates in the inter-bank market. Mid-august, the withdrawal by the NNPC of the N45bn accumulated creditit gave major oil marketers for product supply affected cost of funds (interest rates) at the inter-bank and saw call andovernight funds trading at 50 and 60% respectively. N20bn Federal Government of Nigeria bonds were auctioned onAugust 21, 1006. The auction was in keeping with the DMO’s Bond Auction timetable for the third tranche of FGN bonds,which opened in July. The government expects to sell a total of N155bn of debts, through the issuance of bonds tofinance outstanding domestic obligations.

Nibor Rates July - Sept. 2006

Select Lending Rates July - Sept.

Source: MMAN

Source: MMAN


FACTS & FIGURES

CAPITAL MARKETThe NSE continued to witness bullish transactions with the banking sub-sector driving activity in the market. The marketclosed August 18, 2006 with a record making market capitalization which crossed the N4 trillion mark to close at N4.057trillion up from N3.999 trillion recorded the previous week. The all share index also closed at a record high of 35,068.84points on the same date. The quarter ended in high note with market capitalization at N4.084 trillion while the All ShareIndex closed at 32,554.60. The influx of pension funds has continued to deepen the market and market players arealready seeking additional investment outlets as funds continue to flood the stock market.

NSE Index July - September, 2006

NSE Market Capitalisation July - September 2006

Source: NSE

Source: NSE


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