Intelligence Memorandum
Impact of Civil War on the Nigerian Economy
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COPY NO. 17
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N^EXUtsmVCI agency DirectorateIntelligence8
INTELLIGENCE MEMORANDUM
inpact of Civil War on the Nigerian Econon-.y
Summary
The civil war and the procoding monthspolitical crisis have haltedgrowth and dimmed prospects forthe next few years. Tho economic andframework has been disrupted,shifts have occurred, anddamage has been sustained. The wartribal rivalries that threaten anyarrangements that may energe. Theeconomic outlook for Nigeria, or forparts, is poor. The organizationof the dozen newly created statesthe country has been divided is likely tolong and costly process. Private,investment outside the petroleumnot likely to resume in significantandodicum of politicalbeen
In secessionist Biafra, the former Eastern Region, the level of economic activity in tha modern sector has declined much further than in tho Federal areas. Biafran plants dependent on imported raw materials have closedesult of tho blockade
tip to: This memorandum was produced solely by CIA. It watt crepared by the Office of Sconomio Research and was coordinated with the Office of Current Intelligence and tho Office of national Estimates.
imposed by the Federal Military Government (FMG) in Shortages of imported consumer goods are reportedly widespread. External trade ia confined to snuggling via tho creeks and back roadsat least untily occasional clandestine flights into Port Uarcourt. Theof the extended family system has enabled Biafra to absorbillion refugees from elsewhere in Nigeria and to increase, or at least maintain, the production of staple foodstuffs. This influx of skilled workers and technicians has also contributed toemarkable ability to adapt to the blockade and to innovate sufficiently toartime economy going. Biafra'a foreign exchange earnings have been drastically cut, however, and paying for arms and other imports will become more difficult unless new sources of money are found.
In Federally controlled Nigeria, much of the population lives in the traditional economy where events outside the villages, including the civil war, have relatively little effect. Good harvests of many important crops have sustained farm income and the demand for basic consumer goods. In the more modern sector, however, economic activity has fallen off, and some local shortages and dislocations have occurred. Internal trade is sluggish, and private investment and government development spending have slowed down. Exports have declined more than imports, and the trade balance turned unfavorable in Foreign exchange reserves are being depleted, and tho Foderal budget deficit is growing as military spending mounts. Although these problems are severe, they do not pose insurmountable economic difficulties for tho FMG in its war against Diafra.
Introduction
1* Nigeria, which was tho largest British colony in Africa, gained independence0ederation of three regions, each of whichajor tribal groupthe Hausa-Fulani in the North, the Vcruba in the West, and the Ibo in the East. Each region also contained oany lesser tribes, moat of which bitterly resented theirstatus. The eastern part of the Western Region, which is inhabited largely by small, non-Yoruba related tribes, became tho Mid-Western Region3 (sec
*
wide powers over such matters as regional develop plans, local taxarlon, and industrial development Federal government responsibilities included tho issuance of currency, external borrowing, defense control of mining and mineral extracting, and With more than half the total population, tho North dominated the national Parliament and the central government, and control by the conservative Moslem northerners became leas and less palatable
2. The regions were self-governing and held wide powers over such cutters as regional development
plans, local taxation Federal government
issuance of currency, external borrowing, defense!
the more modern and progressive southerners.
tx
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efforts to loosen the Northern gripstrengthen regional government byhad failed, an Ibo-led group killed orkey Hauaa-Fulani leaders and many ofin This coup resultedilitary regime headed byan Ibo, which in turn was overthrown inby northerners* Many Ibo officers werewaves of massacres of Ibos in the Northern
Region ledass flight of Ibos back to their Eastern homeland in the second half
between the Cast, headedmilitary governor. Colonel Ojukwu, and theheadod by General Gowon,and culminated in the East'sIndependence as Biafra on government decreed an increasinglyof the East, and by early July, whenout between Biafra and the Federation,of Biafran ports was practically complete.
Genital (rowon. Head of, the federal ColonelCklni
o& State
The Pro-Coup Economy
5. 15 the Nigerian economy appears to have grown fairly steadily. Rough estimates indicate that gross domestic product (GDP) increased at an average annual rateabout0 andercent per year thereafter. The prime source of growth over the whole period was tho expansion of production of cash cropscocoa, palm produco, rubber, and cottonwhich averagedercent per year by volume. Large-scale manufacturing, based chiefly on import-substitution, increased aboutercent per year over the period and, especially the oil industryapidly increasing inportar.ee. in spito of their rapid growth, large-scale manufacturing and the oil industry still made upmall part of the economy. Nevertheless, the oil industry was beginning to contribute materially to government revenues as initial tax and depreciation privileges were exhausted and the governmnnt's share of the pro fits increas ed.
6, Econcroic development has boon spread unevenly over the country because the southern area, comprising the Western Region, the Hid-Western Region, and the Eastern Region, attracted the bulk of domestic and foreign investment. esult, output per capita was considerably higher in the south than in the north. The general level of infrastructure, services, literacy, and skills was also much higher in the south. Under the system of allocating revenues between the Federal and regional governments that prevailed before tho former Eastern Region seceded, the southern regions were subsidising services and development in the poorer Northern Region. This subsidy would have increased under the formulas for distributing rapidly growing revenues from the oil industry located in tho former Eastern and Mid-Western Regions. The diminishing share of oil revenues that the East was allowed to keep was one of the factors contributing to Eastern dissatisfaction with the federal system before the outbreak of the
war
Before the6 coup, in which the civilian politicians were overthrown, prospects for the Nigerian economy were brighter than for ntany African countries. The diversity and volume of agricultural exports were such that Nigeria suppliedmall part of the world market for eachodity, and thus the country could expand output without adversely affecting the world price. The size and apparent stability of the economy were attractive to both foreign and domestic investors. Moreover, the rapid growth of petroleum production and of manufacturing promised further diversification of exports and expansion of domestic industries.
Major economic problems existed, however, especially rising urban unemployment and an increasing gap between urban and rural incomes. Ill-advised government pricing policies were partially responsible for this situation. All important cash crops, except rubber, are handled by government marketing boards which collect and sell the output. The price paid the farmer is much lower than. prices at the ports because the government levios export duties and sales taxes
and because the marketing boards oftenizable profit. These levies and profits contribute substantially to government revenues and havemuch of the money used to expand government services and finance development projects. 0 the prices paid to the farmers have declined markedly, and (at least in the case of palm oil) the price has been so low as to discourage soles for exports. esult, production of export crops has, in many cases, become relatively less attractive than the production of food.
failure of farm income to keep pacerise in urban wages* has contributed groatlyserious problem of urban unemployment. Asfor unskilled labor rose to over twicefarmer's income, many rural people,with some schooling, were attractod to Growing urban unemployment hasa shortage of labor in some rural areas.
Economic Effects of the Coups and Civil Wax
Effects on Biafra
detailed information on Binfrathe level of economic activity hassharply sincexports have Industries dependent on imports generallyproduction, and trade with the rest ofbeen greatly reduced. Although some tradeMid-West continues via the creeks and backthe permeable border, the introduction ofand Biafran currencies earlyeduced such trade to barter levels. oversoas have been confined to occasionalPort liar court and to coastal smuggling. Thethe Port Har court airfield to FMG forces inwill reduce airborne traffic. Shortagesluxuries have been reported, but supplies of
* S2ase, an index of prices paid southern farmers by the marketing boarae dropped fro*ilOO to about: thewage iaid unskilled labor by the Federal government roseon the eame perxod.
domestically produced food and conaumer goods apparently remain fairly satisfactory. operation of the oil refinery nt Port Harcourt (until it was captured inombined with previously acquired petroleum stores, has allowed continued operation of notor vehicles. Shortages of sparo parts, tiros, and batteries have been roportod, but the number of motor vehicles apparently is large enough to allow cannibaliz.ition to keep essential vehicles running. Although tho major textile plants are closed, cottage industry sooms to be providing the necessary minimum of cloth.
PKimitivt Ibo Village neat tnuga
11. The million or so refugees from northern violence who returned to the East after the September/6 massacres went mostly to thoir home villages, and consequently local food production seens to have risen. Many of the refugees are highly skilled and have contributed greatly to Diafra's ability to adopt to changed circumstances. Although Biafra has shown remarkable flexibility in meeting tho demands posed first by blockade and then by war, economic problems are certain to worsen as fighting continues, ibo civilians are retreating into the densely populated heartland as Federal forces advance, and shortages of protein foods and nodical supplies have bocome severe.
When war broke outiafra1 had perhaps as muchillion in foreign exchange in European banks, most of whichas been spent by now. In addition, it had at0 million in unissued Nigerian currency stored in its bank vaults to replace notes as they wore out. After secession, Biafra began selling those notes overseas at substantial discounts to get foreign exchange to pay for ams, other war materiel, and its substantial propaganda activities. Few, if any, of its major purchases appear to have been on credit.
In early8 the FMG issued new Nigerian notes, and the opportunities for Biafra
to sell its stocks of old notes abroad wore reduced. Sales of bonds and of its new stamps and currency to collectors may bring in additional foreignbut these sources of revenue would be relatively small. Biafran ability to continue to import sizable quantities of arris and other matoriel would thus appear to depend on the size of current foreign exchange holdings and on whatever assistance it may be able to obtain.
difficulties may soonproblem of obtaining foreign exchange,fall of Port harcourt has reducedto recoive arms shipments. The otherstrips that might be available are unlikelyable to handle the relatively large planesthe Port Harcourt airfield.
Effects on the Federal Economy
economic growthnd again7 when per capitadropped slightly. Overallhas been slowed down by the separationfrom tho Federal economy and by theand dislocations caused by the civiltheonths of deepening crisis precedingthe self-sufficiency of many ofaroes has enabled large sections of the
population to continue much as usual. Moreover, good harvests of many important croon67 have mitigated tho effects of lower prices on farm income, and the demand for basic consumer goods like beer, textiles, and cigarettes has been generally sustained.
16. The slaughter of thousands of Xbos and other easterners in6 and the oxodus of the remainder led to temporary but severeof skilled labor, especially of railroad and conununi cat ions workers, in many parts of the forme--Northern Region. There were further dislocations in the transport system as the eastern branch of
tho railroad, over which aboutercent of northern peanut exports moved to Port Harcourt, was closed to non-Biafran traffic. After an initial sharp decrease in rail service and efficiency, many of the problems were overcome through the recruitment of expatriate workers, by crash training programs for northerners, and by diverting northern rail traffic to Lagoa. Shortages of fuel and other imported goods in northern areas appear to have been largely overcone, partly becauseapid expansion of north-south truck traffic. Transport costs are now somewhat higher than prewar levels, but peanuts and other important northern exports seem to be moving at near normal rates. The transport system is under considerable strain, however, and severe port congestion at Lagos continues.
sealing off of Biafra hasoss
of market's for many producers in the rest of Nigeria, since the East normally accounted for atuarter of the Nigerian market. In FMG-controlled areas, sales of goods other than staples appear to be off, in line with the general decline in economic activity. Consumer prices rose rapidlyargelyeeult of the dislocations caused by the flight of easterners, whoarge share of local trade, and of the disruption of interregional trade patterns and organization. More recently, distribution has rocovered somewhat, and consumer prices have declined.
rapid changes in government sincecombined with decreasing revenues,affected development spending. has also declined. Official capitalestimatedillion0 million in the previous year,probably still lower
estimated net inflow of privatethat of the oil companies) was about
illion5 and dropped to5 millionDomestic private investment has probably followed the some trend. Private foreign investment, outside the oil industry, had not been expected to grow as rapidly67 as it did in earlier
years, because many of the most profitable import-substitution opportunities had already been taken up. Investment declined appreciably, however,esult of political uncertainties arising from the6 coup and aubsequont upheavals. Foreign investment in the oil industry probably remained high untilhen the full blockade and aubsequont hostilities ended exports from the Eastern Region and caused the evacuation of most oil company personnel from the affected areas.
The Oil industry
20. One of the more costly aspects of tho civil wax was the virtual cessation of oilafter hostilities began. Sinceand exports have been only aboutercent of the7 level, as indicated in the7 roduction of crude oil in
Thousand Parrels per Day
January
4
Oil oxportu rose rapidly throughoutu and had been expected to averagearrels per day Instead, they fell below the6 level, as shown below.
Day)
Annual Value of
Oil Exports (Million US S)
7
10
Government revenues derived from the oil industry rose slowly in thes because of tax concessions granted the companies and because the industry was still concentrating on exploration and development. Such revenues grew more rapidly4 as taxable profits increased and6 amounted to anillionillion, or more thanercent of combined Federal and regional revenues. illion of this revonue was from operations in the former Eastern Region. In spite of the sharp drop in productionil revenues probably remained high because Nigeria raised taxes and changed the capital allowances permitted the industry.
Before the war, aboutercent of the oil produced in Nigeria came from the former Eastern Region, but nearlyercont of Nigerian production was exported through the East's terminal at Bonny. Biafra's declaration of independence at the end of7 brought explorationalt as the companies began to evacuate personnel. Shell/BF and the Fronch firm SAFRAP continued to export through Bonny until Julyhen the FMGotal blockade of Eastern ports. Thereafter, only Gulf, which produces off tho Mid-West coast,to export oil (see
Moreover, the refinery at Port Harcourt, which had supplied tho bulk of all Nigeria's needs for products, ceased to supply the Federally aontrolled areas, and the FMG had to import The refinery continued to be operated intermittently by the Biafrans, at least through
and development havein the Mid-West, and production fromis expected to rise rapidly even if thein the eastern areas. Gulf isoperations in the Mid-Wost and expectsto averagearrels per day
Shell/BP has begun workew terminal off the Mid-West coast and on several pipelines and expects its Mid-West production to expand rapidly in9 and thes, if current forecasts prove correct.
return to normal operations in thetake place soon after order and stability Moreover, Sholl/BP, SAFRAP, andcompanies have new wells ready to bringin the former Eastern Region, andthat area could rlsa rapidly. Repair ofterminal is not expected to take moromonths, and plans are in hand to begin workaa the authorities allow company officialsturn there.
Foreign Trade and Finance
and exports now are well belowlevel and are not expected to recoveris restored. In the first halfhile imports remained fairly steadythe first half By August, however,balance turned unfavorable and remained so
for the rest of the year. Preliminary reports for the full7rade surplus of onlyillion comparedillion surplus in the previous year. Both imports and exports were lower than The Federal government has imposed increasingly strict controls over imports, and purchases of raw materials and consumer goods from abroad declined sharply. Imports of war materiel and mineral fuels rose, however, especially after the war began and the Port Harcourt refinery ceased supplying products to Federal Nigeria.
reserves fell fairly sharplyinvestment, aid, and exportsgold and foreign exchangefrom6 million in Decemberloss0 million by the end of Marchimports will probably benevertheless, the overall deficitbalance of payments probably will worsen long as the war continues.
Public Finance
estimated Federal governmentincreased fromillion in to2 million-in. Thebudget was prepared before the outbreak of
Xearng Haroh
hostilities andeficit5 million. The actual deficit probably was0 million. Since the civil war began. Federal revenues have declined because of the drop in exports and imports, which are the source of more than one-third of tax revenues. Nonrailitary expenditures also declined appreciably. The recently announcedudget envisions further sizable deficits, at least for the first half of the year.
The FMG has resorted to short-term borrowing to finance the budget deficits. Treasury bills outstanding rose from the equivalent0 million at the end of7 to5 million by the end of the year. Measures accompanying the new budget include amendment of the Treasury Bills Act to allow up0 million to be converted to two-year certificates, and additional duties and excise taxes. But as war expenditures continue and economic activity declines, the budget deficit is certain to worsen.
Estimates of Federal military spending are only approximate. The total military budget foray have been as much0 million, or about one-fourth of total government expenditures. The most recent estimates are shown below.
Million US $
Total government expenditures
Of which:
Defense expenditures
Of which:
Foreign exchange costs
467
56 t'o 84
30. The FMG probably paid cash for most of the military hardware imported over the past year, including an estimatedillion for planes and equipment from the USSR, armed jet trainers valued atillion from Czechoslovakia, andillion for arms and materiel procured from Western countries, mainly the United Kingdom. In recent months. Interest seems to have increased in deferred payment arrangements for new purchases. It Id not clear whether the estimated foreign exchange costs shown above were all disbursed iniscal year, although spending on that order is indicated by the drop in foreign exchange holdings.
The Economic Outlook
the outcome of the civil warform its settlement takes, thethe economy has The governmentthat emerge from the war willand pressing probloms of physicaltroop demobilization, establishmentnew state structure and allocation of powersunder whatever system is adopted. government revenues are not likely tomany months, and the country is likely toassistanceairly massive scalebudget deficits and the expected shortfall
in foreign exchange earnings- The government can be expected to turn to the International Monetary Fund for standby assistance and to the major British banks operating in Nigeria for short-term loans.
for example, wouldin the Federal army who expect toseparation bonuses. Militaryexpected to remain well above prewarthe FMG plans touchestablishment in the postwar period. new states established in8 ovolvesemiautonomous regions as some ofapparently envisage, the increasedcosts could absorb for years to come much
of the government surplus that would otherwise be available for investment. The quality of administration in much of the country wouldif the states demand exclusive use of local
tribesmen in their civil services and technical posts. This has begun to happen in many of the northern states where non-northerners formerly ran the region's government and ancillarylike the Marketing Board and Development Corporation. There is almost no chance that the six states into which the Northern Region has been divided can find trained native manpower to properly staff their administrations over the next few years.
If, as seems likely, the FMC achieves its goal of preventing Biafran secession, theof the Biafran areas into the Nigerian economy would depend almost entirely on Federal attitudes toward such questions as redeeming Biafran currency, providing aid for reconstruction and rehabilitation, and permitting Ibos to live and work outside of their homeland. If the Federal government is generous on all these points,arge measure of economic activity could resume fairly rapidly. Oil probably would start flowing within months, but the reopening of Port Ilarcourt could take longer if reports of harbor and channel silting and sunken obstacles prove true. Palmand rubber exports could resume as soon as the ports and transport system can accommodate them. Initial efforts to this end have already begun in the Calabar area "liberated" late Recovery of manufacturing is likely to be the most difficult and will depend on the availability of funds for repair and reconstruction of infrastructure.
If Federal policies toward the eastern area are harsh, then recovery would be much slower and guerrilla-like resistance could further hamper economic activity. The whole of the eastern area would likely be affected. It would be difficult, for example, to exchange the Biafran currency now used in the Rivers area without also including tho Ibo state, and the Federal government has asserted that Biafran notes will not be redeemed. If they are not, the liquid assets of much of the formor
' region would be wiped out and the inhabitants at least temporarily reduced to barter trade.
In eitheriafran surrender will not result in an automatic resumption of prewar levels of output and rates of growth. The fabric of the Nigerian economy has changed in the two-year process of coup/ counter-coup, and civil war, and the general climate for investment has been worsonod by the revelation of the depth of tribal and political divisiveness. The mass movement of population, the loss of Zbo skills in much of the Federal area, the disruption of internal trade patterns, and the expenditure of scarce resources on military endeavors all have reduced prospects for the early resumption of economic growth.
The longer run prospects for the economy will depend on tho levelpolitical stability achieved, which will in turn affect the levol of investment. Both domestic and foreign investors, with the exception of the oil companies, are likely to be deterred unlessarge measure of political stability is regained. Aid from the United States, the United Kingdom, and the IBRD, which totaled0ear before the war,
is unlikely to be restored to previous levels for some time. Nigeria will probably seek continued assistance from the Free World, however, and will probably also take up at least some of the Communist offers, which totalillion. The bright spot in the economic picture is oil. Oilexploration, and development could be quickly resumed; oil revenues amounting to well0ear by theseasonable prospect. Such revenues would ease the government's financial situation. Oil development of this magnitude, however, depends on the maintenance of order in the oil-producing areas and on whether the government refrains from any drastic revisions of the tax structure affecting the oil industry.
Original document.
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