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Confronting ethnic and religious tensions

Shortly after Obasanjo's election, the place of Islamic sharia law became a major debate in Nigerian politics. Since the country's independence, sharia had been restricted to civil cases between Muslims in the northern states; criminal cases were not governed by sharia law, something that offended some Muslims. In September 1999, the Governor of Zamfara State, Ahmed Sani, announced the full introduction of sharia as the basis of that state's penal code, although specified that it would only apply to Muslim residents and not the non-Islamic minority. This sparked alarm among Christian minorities across northern Nigeria, with protests and counter-protests generating violence, especially in Kaduna. Across Nigeria, Christian opinion was very hostile to the introduction of sharia as the basis of state penal systems. Both houses of the National Assembly urged Obasanjo to take the issue to the Supreme Court. He was eager to avoid this, not wanting the role of sharia to become a constitutional issue. Publicly he sought to distinguish what he called "genuine sharia" from "political sharia", praising the former while insisting that the latter was a fad that would fizzle out. By refusing to intervene, Obasanjo drew criticism for a lack of courage from many southerners, while Muslim hardliners in the north mocked him. Amid popular demand from Muslim communities, four more northern states adopted sharia penal law in 2000 and seven more in 2001. Obasanjo later stated that the issue was the biggest challenge he ever faced as president.

When Obasanjo came to power, he was appalled that Nigeria was experiencing widespread unrest and violence, resulting in thousands of deaths. This violence was being exacerbated by a rapidly growing population which brought with it spiralling urbanisation and competition for scarce land in rural areas. To deal with this, Obasanjo doubled the country's police force from 120,000 to 240,000 between 1999 and 2003. Little was done to deal with police brutality, with the torture of suspects remaining widespread under Obasanjo's administration. Also fuelling the violence were ethnic tensions, with different ethnic and regional groups calling for greater autonomy, leading various commentators to predict the breakup of Nigeria. For Obasanjo, keeping the country united became a major priority. Only on select occasions would he turn to the military to quell unrest, preferring not to have to mobilise the army unless state governors requested it. In his words, "we must utilise military force only when all else has failed. That is my own principle and philosophy." He saw greater value in forgiveness, amnesty, and reconciliation to achieve harmony than in retributive criminal justice of perpetrators. Under Obasanjo's presidency, the levels of violence and disorder in Nigeria declined.

A major hub of secessionist sentiment was in the Niger Delta region, where indigenous groups wanted to retain a far greater proportion of the proceeds from the area's lucrative oil reserves. In July 1999, Obasanjo sent the National Assembly a bill to create a Niger Delta Development Commission to formulate and implement a plan for dealing with the region, something he hoped would quell violence there. Amid much debate, the commission was finally launched in December 2000. In November 1999, he also sent two army battalions into the Niger Delta region to apprehend the Asawana Boys, an Ijaw group who had captured and killed police officers in Odi, Bayelsa State. The military destroyed most of the town; the government claimed that 43 had been killed, but a local NGO put the number of civilian deaths at 2,483. Obasanjo described the destruction as "avoidable" and "regrettable" and visited Odi in March 2001; he refused to condemn the army, apologise for the destruction, pay compensation or rebuild the town, although the Niger Delta Development Commission did the latter.

In 2000, Obasanjo banned the Oodua Peoples Congress (OPC), a Yoruba nationalist group involved in violence against other ethnicities, and ordered the arrest of its leaders. In September 2001, violence between indigenous Christians and northern Muslim traders in Plateau State resulted in around 500 deaths before the army moved in and regained control. Obasanjo then visited and urged reconciliation. In October 2001, Muslim demonstrators in Kano killed around 200 Igbo in response to Nigeria's support for the U.S. bombing of Afghanistan. Obasanjo then visited to urge reconciliation but was booed by residents. Also in October, soldiers had been sent to calm tensions between the Jukun and Tiv communities along the borders between Benue and Taraba states; a Tiv militia then captured and killed them in Zaki-Biam. Obasanjo ordered the army in, where they rounded up and killed as many as 250 to 300 local men. Obasanjo visited the area in 2002 and apologised for the excessive use of force.

In January 2002, Obasanjo ordered the mobile police to break-up the Bakassi Boys, a vigilante group active primarily in Abia and Anambra states which was responsible for an estimated two thousand killings. He had hesitated doing so before due to the popular support that the group had accrued through fighting criminal gangs, but felt able to move against them after their popularity waned. That same month, an ammunition dump at the Ijeka barracks near Lagos exploded, potentially resulting in as many as a thousand deaths. Obasanjo visited immediately. Violent unrest had also continued in Lagos, and in February 2002, troops were sent into the city to restore stability. In April 2002, Obasanjo proposed legislation that would allow for the proscription of ethnic-based groups if they were deemed to promote violence, but the National Executive rejected this as an overreach of presidential power.

Some public officials like the Speaker of the House of Representatives and President of the Senate were involved in conflicts with the President, who battled many impeachment attempts from both houses. Obasanjo managed to survive impeachment and was renominated.