FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ranking Member Waters, and distinguished members of the Subcommittee, we welcome the opportunity to testify today on the United States Government's efforts to help Nigeria consolidate democracy, restore a functioning economy, and promote sustainable economic growth.

The events in Nigeria over the last year and a half are the source of considerable hope for the future. The inauguration of President Obasanjo on May 29, 1999, was a clear success in the country's political transition and may represent a turning point in the country's history. There are other signs of democratic institutions taking hold including the increased freedom of the press and a reconstituted parliament. The expectations of the Nigerian people for visible and rapid improvement in their economic prospects now present an enormous challenge for the new government.

While the ultimate responsibility for meeting these expectations must lie with the Nigerians themselves, the Administration fully recognizes the importance of supporting Nigeria's return to democracy after almost two decades of military rule and of assisting its efforts to put the country on the path to sustainable and broadly-shared economic growth. Reflecting this importance, Secretary of State Albright has named Nigeria as one of the four key transitional democracies in the world.

Nigeria's vital leadership role in supporting regional stability through substantial peacekeeping efforts over the last decade demonstrates its importance to the region as well as its role in furthering US goals of stability for western Africa. Recently, the Nigerian military forces - as the key player in the Economic Community of West African States Monitoring Group or ECOMOG - have been central to international efforts to support peace in Liberia and Sierra Leone.

To introduce a more detailed discussion of the foundations necessary for sustained economic growth, Deputy Assistant Secretary of the Treasury for Africa, the Middle East and South Asia Steve Radelet will begin with some comments regarding the broad challenges facing Nigeria.

I will then discuss the role of the international financial institutions (IFIs) in supporting Nigeria's efforts to accelerate growth and fundamentally reduce poverty. Though our main focus today is not on the US bilateral program, my testimony will also touch on the important role that these activities will play in our efforts to support Nigeria. I will conclude by addressing the role of the Paris Club in helping Nigeria with its significant debt problems.

Mr. Chairman, Nigeria's importance in Africa is clear. Home to about one in five Africans and the second largest economy in Sub-Saharan Africa, there is no doubt that Nigeria's success or failure will have ramifications far beyond its borders. Economic and political stability in Africa's most populous nation is a crucial component in our Administration's broader efforts to address the many challenges currently confronting Africa.

Nigeria is also an important bilateral economic partner of the United States, as our second largest trading partner on the continent. The United States imports $4 billion of goods from Nigeria, almost entirely petroleum. In 1998, Nigeria was the 5^th largest crude oil exporter to the US, providing roughly 8% of total US crude oil imports.

Nigeria is in a position to play a strong continental and global role because it benefits from a large population of energetic, educated, and entrepreneurial people, as well as from an abundance of natural resources. Most apparent is Nigeria's oil wealth, which generated roughly $12 billion in export revenues in 1999. Nigeria also ranks among the top ten countries in the world in proven gas reserves, though exploration remains in the early stages. And while the agriculture sector is only a shadow of its former self, Nigeria in the past has been a significant producer and exporter of rubber, palm oil, cotton, cocoa, and food crops, and could be again.

The challenges are as impressive as the potential. Economic growth rates averaged only 1.2% per year from 1982-95, less than half the population growth rate of 2.9%. Nigeria's social indicators are only slightly above the sub-Saharan average and paint a portrait of a persistently impoverished country. Only one of two Nigerians has access to safe water and adult illiteracy exceeds forty percent. In addition, according to a USAID survey, AIDS prevalence rates have reached an estimated 5.4% of the adult population, a threshold considered by experts as marking the takeoff point for a health problem of epidemic proportions.

One factor behind the low growth rates is the lack of economic diversification in Nigeria. Currently, oil provides about 90% of foreign exchange earnings and 80% of budgetary revenues. This over-dependence on oil, and the resulting distortion of the country's financial and foreign exchange position, has contributed directly to the decline of the agriculture sector and left Nigeria excessively vulnerable to price fluctuations. Moreover, oil-dominated export earnings have failed to keep pace with rising import and development costs.

The nascent natural gas industry provides some scope for partial diversification, but Nigeria must also target labor intensive sectors that provide greater opportunities for job creation.

The enormous challenges confronting the Nigerian economy require a robust, comprehensive and sustained reform effort. Let me touch on six key components I see as necessary to provide the foundation for sustained economic growth.

1. Macroeconomic Stability: Although the Government has made important strides in restoring economic fundamentals, an oil-based economy such as Nigeria's remains extremely vulnerable to exogenous shocks as well as internal pressures for looser fiscal and monetary policy. It is imperative that Nigeria work to exercise prudent control over government expenditures and monetary growth. The experience of resource-rich countries around the world demonstrates the risks of spending extraordinary revenue from high oil prices and provides clear evidence of the need to prudently manage the higher revenues to facilitate long-term development.
2. The Government's Role in the Economy: Nigeria should reduce the role of the government in the economy. Privatization of state-owned enterprises is a critical requirement for stronger growth and improved governance. The public enterprises have been an unproductive drain on public resources, as well as a source of endemic corruption. Deferred maintenance, financial mismanagement, and politically motivated decision-making have led to the provision of inadequate services at unacceptably high costs. The large public sector presence has also served to exclude private investment in the sectors it dominates and to raise costs for investors in those sectors.

Privatization of key utilities such as power and telephones will increase the potential for private investment more broadly by fundamentally reducing the cost of doing business in Nigeria. We believe the Government should place a high priority on an open, transparent, and far-reaching privatization program. Slow progress so far raises some concern that the state will continue to inhibit economic growth through excessive intervention.

3. Improved Environment for Private Enterprise: In addition to attracting needed private capital in infrastructure and utilities, the Government should strengthen Nigeria's regulatory and judicial framework while liberalizing its trade and investment framework to provide a more hospitable environment for the private sector. President Obasanjo highlighted this need in meetings with President Clinton last October and our bilateral assistance program aims, in part, to address this problem. For investment in labor intensive sectors to occur, there will need to be adequate infrastructure and a consistent rule of law. In addition, corruption, business fraud, and poor protection of intellectual property rights further damage the international image of Nigeria and remain serious disincentives to investors.

In the banking sector, reforms in 1998-99 to increase the paid-up capital requirements were an important step toward rationalizing this sector. However, lending rates remain high and access to capital is limited. The authorities should work to increase the efficiency, transparency, and oversight of the banking industry to address these issues and promote private sector-led growth.

4. Improved Social Sector Spending: With prudent fiscal management, additional resources will become available to target the social sector in order to alleviate poverty. The government should focus on targeting investments in priority areas while building capable institutions to ensure the effective use of funds for Nigeria's development needs.
5. Open Trade Regime: During the past decade, Nigeria has taken steps to liberalize its trade regime, through reducing tariffs and eliminating a number of import bans and export licensing requirements. However, some agricultural import bans have been replaced with restrictive tariffs. Removing barriers to trade will increase the effectiveness and profitability of investment, create new jobs, integrate Nigerian firms with the global economy, and provide a conduit for new technologies which can serve as the foundation for long-term growth and development.
6. Transparency and Governance: Fundamental to a growth strategy for Nigeria is the strengthening of democratic institutions. Democratic processes benefit people by broadening representation and institutionalizing accountability but they also imply more complex decision-making. Because Nigeria returned to democratic government only last year, it is effectively starting from scratch in learning how to build consensus between the Legislative and Executive branches. It is clear that more transparent processes, reliance on the rule of law, and steady progress in targeting corruption and strengthening institutional capacity will be key to addressing the many challenges currently confronting Nigeria.

The Obasanjo Government has already begun to address these challenges and has made notable progress. The Government's early efforts to restore macroeconomic discipline are demonstrated by the increases in growth from 1.9% in 1999 to an estimated 3.9% in 2000, a rapid deceleration of inflation to an estimated 5.8% in 2000, recovery in international reserves after a precipitous fall under the Abacha regime, and the unification of the exchange rate. As a former Chairman of the Advisory Board of Transparency International, President Obasanjo has also placed a high priority on fighting corruption and promoting good governance. The Government has already taken steps to open the democratic process, including efforts to provide more details on spending and revenue in its annual budgets and to make substantial reductions in off-budget spending.

Improvements in these areas have helped lay the foundation for increased engagement, both with the US, as part of our bilateral assistance program, and with the international community, including the multilateral financial institutions.

I will now turn to my colleague, Bill Schuerch, who will address various means by which we are currently engaging Nigeria to help support long-term growth and development.