Conjoncture

Nigeria: convalescent

The sub-Saharan Africa’s largest economy is having hard time to recover. External  
rebalancing has showed some progress. But imports remain well below pre-crisis levels. In  
addition, the rebuilding of FX reserves is being accompanied by increased financial  
vulnerability, which puts pressure on monetary policy as the authorities give the priority to  
exchange rate stability. Weak public finances are an additional constraint. In the short term,  
and despite its strong potential, the economy is expected to grow more slowly than the  
population. As well as improving macroeconomic stability, the authorities will have to  
address the deep-seated factors that are holding back the economy as a whole.  
p.2  
p.4  
p.6  
Tepid economic  
recovery  
Macroeconomic stability:  
still fragile  
Medium-term outlook: remove  
structural constraints  
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Conjoncture // July 2019  
economic-research.bnpparibas.com  
The sub-Saharan Africas largest economy is having hard time to recover. External rebalancing has showed some progress. But imports  
remain well below pre-crisis levels. In addition, the rebuilding of FX reserves is being accompanied by increased financial vulnerability,  
which puts pressure on monetary policy as the authorities give the priority to exchange rate stability. Weak public finances are an  
additional constraint. In the short term, and despite its strong potential, the economy is expected to grow more slowly than the  
population. As well as improving macroeconomic stability, the authorities will have to address the deep-seated factors that are holding  
back the economy as a whole.  
Nigeria is a long way from staging a full recovery from the 2014 oil  
shock. Although economic growth has recovered somewhat, it remains  
well below pre-crisis levels. Above all, forecasts show no significant  
Nigerias recovery from recession in 2017 was initially driven by the  
improvement. There are various factors holding back the economy,  
including a tight monetary policy, weak public finances and external  
accounts, and deteriorating bank balance sheets. The ability of the  
authorities to addressing the underlying structural problems is also  
questionable.  
rebound of oil production after some major acts of sabotage in the Niger  
Delta in 2016. Excluding the agriculture and hydrocarbon sectors,  
growth remained negative in 2017 (-0.6%) before recovering slightly in  
2018 (+2%) due to firm momentum in the information and  
communication technologies (ICT) sector. Without the ICT sector, the  
picture would have been even gloomier, with real GDP growth of only  
0.9% as opposed to 1.1% in 2017. The situation was similar in Q12019.  
Excluding ICT, which contributed for more than half of non-oil GDP  
growth (Chart 2), activity was at best sluggish (in the manufacturing,  
retail and real-estate sectors) and at worst continued to contract  
According to the latest figures from Nigerias National Bureau of  
Statistics, economic growth slowed from 2.4% in Q42018 to 2% in  
Q12019 (Chart 1). This slowdown was not exclusively the result of poor  
performance in the hydrocarbon sector, where value added fell by 2.4%.  
Outside the hydrocarbon sector (91% of real GDP), growth also  
decelerated from 2.7% in the Q42018 to 2.5% in Q12019. This shows  
that the slowdown is not just a blip and illustrates the fragility of the  
economic recovery that has been taking place since real GDP  
contracted in 2016.  
(
finance and insurance). Even agricultural performance was  
disappointing, despite growth of 3.2% in Q1. Stronger growth was  
expected after a particularly tough 2018, when growth was 2.1% against  
4.5% on average between 2010 and 2014.  
Powerful headwinds remain. The agricultural sector is suffering from a  
number of conflicts in central and northern Nigeria, and whole swathes  
of the economy are continuing to be affected by restrictions imposed on  
around 40 products. Domestic demand is also depressed.  
Economic growth  
Contribution to non-oil GDP growth  
Agriculture  
Information & communication  
Non-oil GDP  
Secondary  
Other services  
y/y, %  
%
1
0
8
6
4
2
0
2
4
10  
8
Real GDP  
Non-oil GDP  
6
4
2
0
-
-
-
-
2
4
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Chart 1  
Source: NBS  
Chart 2  
Source: NBS  
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Conjoncture // July 2019  
economic-research.bnpparibas.com  
Since 2014, real GDP per capita has fallen constantly. Weak non-oil by 30%, and then in April 2017 introduced a new window allowing  
growth combined with sustained rise in the labour force (+4.5%) has investors and exporters to access foreign currency at rates set by  
caused the unemployment rate to surge from 10% at the end of 2015 to market mechanisms.  
2
3% today, while a further 20% of the labour force is underemployed. In  
Credit to the private sector  
addition, inflation is persistently high (Chart 3): after falling between the  
end of 2017 and mid-2018 thanks to exchange rate stability, it has been  
around 11% since, propped up in particular by serious upward pressure  
on food prices (50.7% of the index).  
y/y, %  
Real growth  
Nominal growth  
30  
20  
10  
0
Inflation  
y/y, %  
Total  
Food  
Excluding food  
2
2
1
1
5
0
5
0
5
0
-
-
-
10  
20  
30  
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Chart 4  
Source: Central Bank  
Soundness indicators of the banking system  
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
%
Non-performing loans ratio  
Capitalization ratio  
Chart 3  
Source: Central Bank  
20  
1
1
1
1
1
8
6
4
2
0
8
6
4
2
0
Finally, growth in bank lending to the private sector remained negative  
in late April 2019, in both real (inflation-adjusted) and nominal terms  
(
Chart 4). Banks are highly exposed to the oil sector (30% of lending to  
the economy) and so have seen a sharp deterioration in their loan  
books (Chart 5). The non-performing loan ratio rose from 3% at the end  
of 2014 to 15% in mid-2017, before falling back to 11% in 2018 thanks  
to higher oil prices. According to the IMF, the large proportion of  
restructured loans could even mask a more deteriorated financing  
situation, and capitalisation ratio remain 3 points lower than its pre-crisis  
levels. Besides, high-yielding Treasury bonds are crowding out lending  
to the economy, and this is likely to continue in the near term.  
T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4 T1 T2 T3 T4  
2014  
2015  
2016  
2017  
2018  
Chart 5  
Source: Central Bank, IMF  
Interest rates  
Nigerias monetary policy raises some questions. After more than two  
years of very tight monetary policy, the Central Bank of Nigeria (CBN)  
carried out a homeopathic cut in its policy rate from 14% to 13.5% in  
late March.  
%
Policy rate  
Interbank rate  
Growth of broad money  
6
0
50  
4
3
2
0
0
0
There are several factors that limited the extent of this move. The CBN  
mainly manages liquidity through large-scale issues of securities. As a  
result, interbank rates have been regularly above the key policy rate  
since 2015, diluting the signals it transmits (Chart 6), not to mention the  
high cost of such a policy (1.1% of GDP in 2018 alone according to the  
IMF). In addition, inflation is still above the monetary authorities’ target  
of 6-9%, and the risk is also on the upside in line with the decision to  
increase the minimum wage by two thirds (for both the private and  
public sectors), although the effects are hard to assess at this stage.  
Above all, the CBN is constrained by exchange-rate policy. To cushion  
the external shock resulting from the decline in oil export revenues, the  
monetary authorities initially devalued the naira’s official exchange rate  
10  
0
-10  
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Chart 6  
Source: Central Bank  
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Conjoncture // July 2019  
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The NAFEX rate thus became the reference rate, moving into line with soaring debt service costs also put public finances under strong  
that of the parallel market (Chart 7). The gap between the NAFEX rate pressure.  
and the official exchange rate has narrowed to 20% after reaching a  
peak of 60% in February 2017. More than 70% of transactions are  
Current account  
taking place through this window, at an exchange rate that has rapidly  
%
of GDP  
stabilised around NGN360 to the dollar. The official rate is NGN305 to  
the dollar and is mainly used for imports of petroleum products and  
external debt servicing.  
Nigeria  
Other oil producers, Sub-Saharan Africa  
1
0
5
0
5
Despite the distortions that creates, Nigerias president and the  
governor of the CBN are not in favour of seeing the two rates converge,  
because they believe this would push up inflation.  
-
Exchange rates  
-
-
10  
15  
NGN/USD  
Official  
Parallel  
NAFEX  
600  
500  
400  
300  
200  
100  
0
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
Chart 8  
Source: Central Bank, IMF  
The improvement in Nigerias external accounts came to an abrupt halt  
in 2018. Despite firm oil exports, the current account surplus halved to  
USD 5 bn due to a surge in imports of services. With Nigeria being an  
importer of refined petroleum products, the increase in the global oil  
prices also pushed up goods imports by more than USD 3 bn.  
2
015  
2016  
2017  
2018  
2019  
Chart 7  
Source: Central Bank, Bloomberg  
Yet, both the current account as well as the structure of external  
financing remains fragile (see below). In particular, the CBN, by issuing  
huge amounts of securities to mop up liquidity in the last few years, has  
made Nigeria more vulnerable to capital flight. At the end of April, non-  
resident investors held the equivalent of USD 15 bn compared with a  
stock of FX reserves of USD 45 bn. As a result, Nigeria cannot allow  
yields on government bonds (including those issued by the CBN) to fall  
too sharply, since that could affect the stability of its exchange-rate  
regime. In other words, the scope for monetary easing will remain very  
limited.  
A mega-refinery is under construction, and could be operational within  
2
-3 years. It should be able to cover the needs of the local market. Until  
then, oil imports will continue to represent the equivalent of 20% of oil  
exports.  
Forex reserves  
6
0
12  
10  
8
USD bn  
In month imports of G&S (RHS)  
50  
40  
30  
20  
6
With more than 90% of exports coming from the oil sector, Nigeria has  
experienced a large macroeconomic shock. External accounts fell into  
the red in 2015, leading to external liquidity shortages and so to the  
decision by the authorities to implement import restrictions. Since then,  
undeniable progress has been made.  
4
10  
0
2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Unlike other African oil-producing countries, Nigeria’s current account  
moved back into surplus in 2016 (Chart 8). Combined with significant  
Chart 9  
Source: Central Bank, IMF  
capital inflows in 2017, Nigeria was able to rebuild FX reserves at Moreover, Nigeria was also affected by massive capital outflows from  
comfortable levels. However, the balance of payments came under April 2018 (USD 9 bn according to the IMF), the impact of which was  
renewed pressure in 2018, showing how fragile the countrys external partially offset by a new eurobond issue in November 2018  
stability was. The authorities inability to increase non-oil revenue and (USD 2.86 bn) following that of February (USD 2.5 bn). As a result, FX  
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Conjoncture // July 2019  
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reserves shrank by 10% in the last nine months of the year, ending the The external position relies on an increasingly volatile financing profile.  
year virtually flat after doubling October 2016 and end-2017.  
Of the USD 7.6 bn of capital inflows in Q1 2019, USD 7.1 bn consisted  
of portfolio investments, of which 80% went into short-dated debt  
securities. This extremely high proportion of short-term capital inflows  
could be explained by tensions relating to the presidential election held  
in late February. However, portfolio flows have accounted for half of the  
surge in capital inflows in the last two years (Chart 11), while foreign  
direct investment has remained desperately low (0.7% of GDP on  
average). There is little reason for this to change in the near term, since  
financial conditions in Nigeria are sufficiently attractive for foreign  
investors looking for high yields. As a result, the stock hot money,  
already high (130% of FX reserves in Q1 2019, Chart 12), should  
Since then, the pressure has eased. FX reserves grew by almost  
USD 3 bn between January and May 2019, reaching USD 45 bn  
(
Chart 9), fairly close to their all-time high. However, the overall picture  
remains mixed. Expressed in months of imports of goods and services,  
FX reserves have fallen from ten months in early 2018 to less than  
seven months of goods and services imports. Although that remains  
comfortable for dealing with a shock in the short term, large exposure to  
portfolio investments means that Nigeria will need a greater cushion to  
ensure its long-term external stability.  
The pronounced decline in the global oil price, to USD 60.4, pushed the continue to rise, making the countrys external position increasingly  
current account back into the red in Q12019 (Chart 10), barely a few vulnerable to a downturn in investor confidence.  
months after a similar poor performance in Q32018 due to a surge of  
Indicator of external vulnerability  
capital goods imports (linked to the construction of the new refinery). At  
this stage, we still see the current account remaining into a slight  
USD bn  
70  
ST external liabilities  
FX reserves  
Hot money ratio (RHS)  
%
surplus of 1.0-1.5% in 2019 and 2020, provided that: 1/ global oil price  
stabilises at USD 65; 2/ imports do not exceed USD 40 bn, which  
supposes that protectionist policies adopted after the oil shock should  
be maintained. In 2014, imports of goods amounted to USD 61 bn.  
140  
120  
100  
80  
6
5
4
3
2
1
0
0
0
0
0
0
0
External accounts and oil prices  
60  
USD bn  
USD  
1
0
8
6
4
2
0
2
4
6
8
Current account  
Brent (RHS)  
140  
40  
1
1
8
6
4
2
0
20  
00  
0
20  
0
2005  
2007  
2009  
2011  
2013  
2015  
2017  
2019T1  
Chart 12  
Source: Central Bank, BNP Paribas  
0
-
-
-
-
0
0
The fiscal situation is also difficult. Very low progress in improving tax  
collection is a particular source of concern. Having fallen to the  
historically low level of 5.6% of GDP in 2016, general government  
revenues have recovered since thanks to the upturn in oil prices.  
However, they only reached 8.7% of GDP in 2018, one of the lowest  
ratio in sub-Saharan Africa. More worrying still, non oil-related revenues  
fell to the exceptionally low level of 3.7% of GDP in 2018, down 0.4  
points compared with 2015.  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Chart 10  
Source: Central Bank, IMF  
Capital inflows  
4Q rolling sum  
Other  
Portfolio investments  
FDI  
3
3
2
2
1
1
5
0
5
0
5
0
5
0
5
This is having various consequences. Firstly, it makes any prospect of a  
rapid of a rapid consolidation of public finances a distant possibility,  
even if oil prices remain stable. Budget deficit, which narrowed slightly  
to 4.9% of GDP in 2018 after peaking at 5.3% in 2017, is set to remain  
above 4% this year and in 2020 (Chart 13), twice the ratio seen in 2014.  
Secondly, the government has very little room for manoeuvre.  
Unsurprisingly, Nigerias public spending expressed in % of GDP is also  
among the lowest in sub-Saharan Africa (Chart 14). In particular, public  
investment was estimated to be 3.3% of GDP in 2018, 1 point lower on  
average than others African oil-producing countries, even though they  
are also subject to major fiscal constraints.  
-
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Chart 11  
Source: Central Bank, BNP Paribas  
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Conjoncture // July 2019  
economic-research.bnpparibas.com  
Low domestic revenues also weigh on the states creditworthiness. The between 12% and 14% (Chart 16). The need to defend the peg, high  
widening budget deficit since 2014 has caused public debt to rise inflation and the governments large borrowing requirement (20% of  
rapidly. Although public debt remained moderate relative to GDP at domestic debt consists of Treasury bills) suggest that interest rates will  
22.4% in 2018, it represented 2.5 times the governments revenue. not fall far from their current level. With interest payments likely to  
Most importantly, debt has become much more expensive since 2014 continue absorbing more than 20% of the budget in 2019 and 2020,  
because of rising interest rates in the domestic market. Interest Nigeria will continue to have limited fiscal leeway to face any new  
payments now absorb more than 20% of the government revenue, up setbacks.  
from 9% in 2014 (Chart 15). The government is trying to get around the  
problem by borrowing more on the international financial markets. The  
goal is to increase the share of debt denominated in foreign currencies  
to 40% from 32% today.  
General government debt  
% of government  
revenue  
External debt  
%
of GDP  
25  
20  
15  
Domestic debt  
25  
20  
15  
10  
5
Budget balance  
Interest payments (RHS)  
NGN bn  
% of GDP (RHS)  
1
000  
0
1
0
-1 000  
-2 000  
-3 000  
-4 000  
-5 000  
-6 000  
-7 000  
-8 000  
10  
5
-
-
-
-
-
1
2
3
4
5
0
0
2010  
2011  
2012  
2013  
2014  
2015  
2016  
2017 2018e  
Chart 15  
Source: DMO, IMF, BNP Paribas  
Treasury bond yield  
-6  
2
010 2011 2012 2013 2014 2015 2016 2017 2018e 2019p 2020p  
%
3-month  
6-month  
1-year  
Chart 13  
Source: IMF, BNP Paribas  
2
5
0
Government expenditure  
2
%
of GDP  
25  
20  
15  
10  
5
15  
1
0
5
0
2014  
2015  
2016  
2017  
2018  
2019  
Chart 16  
Source: Central Bank, Datastream  
Nigeria  
Angola  
Other oil producers Sub-Saharan Africa  
Source: IMF, BNP Paribas  
Chart 14  
This seems to be a coherent strategy but it’s not without risk as it  
exposes public finances to exchange rate risk. Public debt denominated  
in foreign currencies is low, below 6% of GDP, and refinancing risk is  
moderate because the first large repayments of principal on its  
eurobonds are not due until 2025. In addition, with a spread of 500  
basis points (in line with other African issuers), financing conditions  
should remain more favourable than in the domestic market.  
How long will it take for Nigeria to get growth back to its pre-crisis level?  
The country has undeniable potential. Despite the difficulties of the last  
few years, Nigeria remains Africas largest economy with GDP of  
USD 435 bn.  
According to the UN, its population is likely to more than double to  
4
10 million between now and 2050, with 70% of people expected to live  
Although interest rates have fallen since non-resident investors returned  
to the local debt market, yields on short-dated Treasury bills are still  
in urban areas against 50% today. That would make Nigeria the worlds  
third most populous country. However, given that its socio-economic  
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Conjoncture // July 2019  
economic-research.bnpparibas.com  
needs are already huge  GDP per capita is only USD 2,000  these these problems, international oil companies have turned their attention  
demographic trends could be seen as either a threat or a huge to deepwater offshore reserves, but high production costs and  
investment opportunity. At the moment, pessimism is prevailing. With uncertainties about regulatory reform are reducing their attractiveness.  
economic growth set to recover only slightly to 2.5% in 2020 before  
The reform process is complex and has been going on for more than a  
stabilising, real GDP per-capita will continue to contract (Chart 17),  
decade. It includes notably tax reforms, the restructuring of the national  
underlying the urgent need to tackle the many structural constraints that  
oil company NNPC and the role of the Nigerian state as shareholder. In  
are hampering the economy.  
particular, the state is apparently seeking to reduce its interest in its oil  
Economic growth  
joint ventures with foreign companies to 40% by the end of 2019, as  
opposed to 55-60% today. However, the current context is not helpful  
for this kind of initiative. Above all, president Buhari showed little  
interest in reorganising the oil sector during his first term of office, which  
does not suggest that major changes lie ahead.  
y/y, %  
Real GDP  
Real GDP per capita  
1
0
8
6
4
2
0
2
4
6
Reforms are not just crucial for the future of the oil industry, but also for  
the rest of Nigerias economy if not more so.  
-
-
-
The economy is facing huge challenges. Various business-climate  
surveys rank Nigeria as one of the worlds most difficult countries to do  
business. For example, the World Banks survey puts Nigeria 146th out  
of 190 countries. In addition, the overall ranking must be kept into  
perspective.  
2000-2010  
2012  
2014  
2016  
2018  
2020p  
2022p  
2024p  
Chart 17  
Source: IMF  
Investment rate  
%
of GDP  
2010  
2014  
2018  
3
3
2
5
0
5
At first sight, Nigerias oil industry is performing fairly well. Production  
has risen back almost to 2 million barrels per day (bpd) after falling to  
1
.8 million in 2016 because of sabotage. In addition, production has just  
started at the huge Egina oilfield, which is expected to add some  
00,000 bpd (ie 10% of Nigerias total production). However, Nigeria  
2
20  
could be doing much better taking into account its huge reserves (a  
third of Africas total) and the maturity of its oil industry, where  
international oil companies have been operating since 1950.  
1
5
10  
5
Oil production  
0
Nigeria  
Other African Oil Producers  
Sub-Saharan Africa  
Million of barrel / day  
3
Chart 19  
Source: IMF, BNP Paribas  
Although Nigerias position has risen more than 20 places in the last  
three years, it is only in line with the average for sub-Saharan Africa,  
which is well below international standards. In addition, Nigerias  
progress has resulted mainly from efforts to simplify regulatory  
procedures, not an improvement in infrastructure, which remains a real  
obstacle to the development of the private sector. Power generation is  
particularly lacking. Nigeria has a total capacity of 12,500 MW for a  
country of 190 million inhabitants, and needs virtually double that  
capacity. Most importantly, power generation can fall below 4,000 MW  
because of limited grid capacity, forcing corporates and individuals to  
resort to more costly alternative systems. The additional costs arising  
from the lack of physical (ports and roads) and health infrastructures are  
also significant. It is therefore not surprising that Nigeria shows  
entrenched low levels of investment.  
2
1
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020  
Chart 18 Source: JODI, BNP Paribas  
Oil production is expected to amount to 2.1 million bpd in 2020  
Chart 18), still well below the peak levels seen in 2005 and 2010.  
Ongoing security problems in the Niger Delta area remain one of the  
(
main factors holding back the oil industrys development. To overcome  
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Conjoncture // July 2019  
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The situation has even worsened in the last few years due to rising risk Foreign direct investment  
aversion of banks, subdued economic growth and strong pressure on  
public finances. In 2018, gross investment was below 14% of GDP,  
down from 16% in 2014 (Chart 19). By comparison, the average for  
other African oil-producing countries was 23% and 25% for sub-  
Saharan Africa. Nigeria is also finding it increasingly difficult to attract  
foreign direct investment (Chart 20). In 2018, it received less FDI than  
Ghana, despite its GDP being six times larger. FDI into Nigeria is also  
concentrated mainly on the hydrocarbon sector, with limited knock-on  
benefits for the rest of the economy.  
% of GDP  
Nigeria  
Sub-Saharan Africa  
4
3
2
1
0
Governance is another stumbling block. If reforms should stimulate  
investment, they also need to be executed properly. However, Nigeria’s  
ranking in terms of the World Bank’s governance indicators (Chart 21)  
shows that it has a long way to go in this area.  
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Chart 20  
Source: UNCTAD, IMF, BNP Paribas  
***  
Governance indicators  
The 2014 oil shock seems to have caused long-term damage in Nigeria.  
Although access to foreign exchange access has improved,  
macroeconomic conditions are not currently allowing the economic  
growth to get back on track in a meaningful way.  
Percentile  
Nigeria  
Sub-Saharan African  
Voice and Accountability  
Emerging countries  
Political stability  
5
4
3
2
1
0
0
0
0
0
0
On positive side, the re-election of president Buhari has removed a  
major source of uncertainty. His clear victory in the first round of the  
election and the firm grip of the ruling party, APC, on the National  
Assembly and the Senate give him the necessary leeway to go ahead  
with reforms included in the Economic Recovery and Growth Plan  
Control of Corruption  
(
ERPG 2017-2020). The overview of the economic situation that the  
plan describes is shared by main international organisations. Upgrading  
Nigerias infrastructure, particularly energy infrastructure, developing  
sectoral policies aimed at speeding up the diversification of the  
economy, and revitalising the oil industry are among the main priorities.  
Rule of Law  
Government Effectiveness  
Regulatory Quality  
Chart 21  
Source: World Bank, BNP Paribas  
However, to translate good intentions into action, a greater cohesion  
between the various levels of the power will be necessary in order to  
overcome Nigerias long-standing challenges amid a weak international  
climate and a strong financial constraint.