The past few years have been difficult for Africa’s largest economy, with a fall in oil prices from more than $100 per barrel in 2014 to roughly $50 per barrel at the start of 2017 having damaging consequences for Nigeria. The fall in revenues from the country’s largest export-earner led to a slowdown in investment throughout the economy, a ballooning of federal government debt, a rise in non-performing loans in the private sector and high inflation.
The pressures put Nigeria on the verge of a currency crisis, with foreign reserves dropping and the black market exchange rate dramatically rising. These factors contributed to the economy contracting 1.5% in 2016, compared to growth of 2.8% in 2015. This marked the country’s first recession in 25 years.
The government, which was voted into office in 2015, has made a number of moves – in conjunction with the Central Bank of Nigeria (CBN) – to stoke a recovery, with some success. Key changes – including a managed float of the naira and a push to loosen capital controls and restrictions in certain sectors – have yielded fruit. Broader efforts have also been taken to accelerate growth in the coming years, with a focus on import substitution, industrialisation, diversification and export orientation. The measures come under the aegis of the Economic Recovery and Growth Plan (ERGP), a medium-term strategy stretching from 2017 to 2020.
Gdp & Growth
Nigeria’s GDP stood at $405.1bn in 2016, according to the World Bank. Several factors contributed to the economy’s 1.5% contraction that year. The oil segment provides nearly 50% of government revenues and the sustained low price environment, combined with a drop in production due to disruptions – with output falling from an average of 2.13m barrels per day (bpd) in 2015 to 1.83m in 2016 – had noticeable effects. While Nigeria was exempted from the Organisation of the Petroleum Exporting Countries’ production cuts, and has since seen a slow rise in output, the impact in 2016 included a contraction of 13.7% in the oil sector, which translated into major headwinds for the economy as a whole. The National Bureau of Statistics (NBS) also cites lower domestic consumption due to inflation, vandalism and other disruptions to oil pipelines and production, heightened energy insecurity and monetary concerns – most notably a weak currency and reduced foreign reserves.
Outside of oil, the real estate sector, which declined by 6.9% in 2016, was the biggest drag on growth in 2016. The manufacturing (-4.3%), construction (-6%) and trade (-0.2%) sectors also weighed heavily on growth, given their relatively large roles in the economy. However, agriculture expanded by 4.1% compared to 3.7% growth in the previous year, rising to a total contribution of 24% of GDP. Industry and services, by contrast, fell by 8.5% and 0.8%, respectively. The largest component of the agricultural sector, crop production – which has benefitted from government efforts to improve import substitution and food security – accounted for 88% of the sector during the fourth quarter of 2016, and its growth of 4.3% outpaced the sector as a whole.
Exiting Recession
Although still likely to fall short of the targets Nigeria needs to hit to reduce poverty and improve development indicators, 2017 looks brighter. The IMF forecasts that the country will escape recession in 2017, with growth of 0.8%, though the government is targeting 2.2% growth. “We are somewhat optimistic because 2017 started well and the outlook points to the rest of the year seeing a slight economic upturn and slight relief in the economy,” Nella Hengstler, commercial counsellor at the Austrian Embassy, told OBG. “Some sectors outside of oil and gas are receiving more attention, but it remains to be seen whether all of the agriculture and solar projects will happen.”
The economy exited the recession in the second quarter of 2017 when it grew by 0.6% in real terms, according to the NBS. The recovery was driven by the performance of four economic activities: oil, agriculture, manufacturing and trade. Oil production averaged 1.84m bpd, 0.15m barrels higher than the daily average production recorded in the first quarter of the year.
Government Strategies
In response to the 2016 recession, the government launched the ERGP in March 2017. It identifies five priority areas: stabilising the macroeconomic environment; achieving agricultural and food security; improving transport infrastructure; ensuring energy sufficiency; and driving industrialisation through the growth of small and medium-sized enterprises (SMEs). The plan includes taking a holistic approach to fiscal, monetary and trade policies, diversifying government revenues away from dependency on oil, cutting costs and privatising government assets.
The ERGP is designed to align with previously announced programmes. For example, its strategies follow many of the objectives outlined in the Vision 2020 plan, which aims to make Nigeria one of the 20 largest global economies, with a minimum GDP of $900bn and annual per capita income of $4000. In early 2017 the IMF’s Article IV Consultation document praised the government’s efforts, stating that the “ERGP appropriately focuses on private sector-led economic diversification, with the government delivering on targeted infrastructure, strengthening the business environment and promoting employment opportunities.”
The ERGP’s broad objectives are widely acknowledged as central to fostering sustainable economic growth and reducing structural weaknesses, such as unemployment and exposure to commodity volatility. The plan will support agricultural modernisation and growth, a more expansive and reliable transport network, and increased energy security, as well as encouraging industrialisation (see analysis).
Budget
President Muhammadu Buhari sent his proposed 2017 budget to the National Assembly in December 2016. At N7.3trn ($25.8bn) it represented a 20% increase over the 2016 budget, which itself was 27% higher than the 2015 budget. Of the N4.94trn ($17.5bn) in projected government revenues, the largest share – N1.99trn ($7bn) or 40.2% – stems from the petroleum sector. Tax revenue remains a weak spot, as is the case in many markets in Africa. The government is currently able to collect taxes equivalent to only around 6% of GDP, which is the lowest rate on the continent. According to media reports, fewer than 300 people pay income tax on incomes of over $64,000 per year. “The informal sector is a largely untapped area in terms of revenue generation, and several initiatives are being taken to increase tax collection,” Ayodele Subair, chairman of the Lagos State Internal Revenue Service, told OBG.
The largest government outlay is dedicated to recurrent expenditures, such as salaries, pensions and ministry operations. These expenditures account for N2.9trn ($10.2bn) or 39.7% of all spending. Capital expenditure comes in at N2.24trn ($7.9bn) or 30.7% of outlay, compared to N1.8trn ($6.4bn) in the 2016 budget.
The largest recipient of capital will be the Ministry of Power, Works and Housing, which is set to receive N529bn ($1.9bn), or nearly a quarter of capital expenditures. Others allocated sizeable capital expenditures include the Ministry of Transportation (N262bn, $925.9m) and the Ministry of Defence (N140bn, $494.8m). Debt servicing is expected to consume N1.66trn ($5.9bn), or 22.7% of the budget (see analysis).
In May 2017 lawmakers passed the N7.44trn ($26.3bn) budget plan, which was bigger than the N7.3trn ($25.8bn) draft spending plan submitted by President Buhari in December 2016. “Over the last 12 months we have seen a significant increase in the level of tax awareness, both by individuals and organisations,” Babatunde Fowler, chairman of the Federal Inland Revenue Service, told OBG.
Inflation
Following a jump from 9.6% in January 2016 to 11.4% in February 2016, inflation crept higher for the remainder of that year. The increase was an outgrowth of the factors that affected the economy at large, namely low oil prices, persistent dollar shortages and rising pressure on the naira. This trend continued up to January 2017, when year-on-year (y-o-y) inflation peaked at 18.7%, its highest level in over a decade. The inflation rate ticked lower in the months that followed, falling to 17.7% in February and 17.2% in March, a trend that has continued through the summer months, with June’s rate clocking in at 16.1%.
The decline in inflation in 2017 is a result of a more stable naira and greater supply of foreign currency in the economy. In the first quarter of 2017 the government sold over $4bn on the forward currency market, providing much-needed foreign currency to settle import debts and other transactions that are contributing to headline inflation. At the same time, it issued a series of naira-denominated debt on the local market, with the intention of financing just over half of its 2017 budget deficit on the local market. These moves to increase the supply of dollars and demand for naira are helping to put downward pressure on inflation, and better manage debt-servicing costs. However, this is also complicating efforts to boost intermediation (see Banking chapter), with government debt – often at a risk-free rate of 15% – crowding out the private sector and stoking a rise in lending rates. The government is also tackling the structural problems that led to high inflation. One major factor is the persistent trade imbalance, which the government hopes to reduce, by targeted import substitution of things like building materials and agricultural commodities, and by broader diversification of the economy. “Inflation is largely imported,” Vlassis Liakouris, managing director at ARM Capital Partners, told OBG. “When a country imports almost everything and the currency devalues it drives inflation higher. Economic diversification will protect the country from imported inflation.”
Msmes
While micro, small and medium-sized enterprises (MSMEs) contribute nearly half of Nigeria’s GDP (48.5%), they make up only 5% of the loan portfolio among traditional banks. In an effort to address this discrepancy, Kemi Adeosun, the minister of finance, announced in March 2017 that a licence had been approved for the Development Bank of Nigeria (DBN). First proposed in 2014 under former President Goodluck Jonathan, the DBN will provide financing to those segments of the economy not being served by the banking sector or by other developmental institutions.
With funding from the World Bank, the German Development Bank, the African Development Bank and the French Development Bank, the proposed DBN would have access to $1.3bn in development funds. It will operate chiefly as a wholesale bank, lending directly to microfinance banks and institutions, which would in turn lend directly to MSMEs. The goal of the project is to lower the cost of borrowing for MSMEs by increasing the amount of capital available to them while lengthening the duration of the loans. SMEs also play a key role in Nigeria’s labour market, especially in the agricultural sector. “The attitude now is to promote smallholder farming as a means of creating jobs,” Niyi Yusuf, managing director for Nigeria at Accenture, told OBG. “Every farmer supports four or five family members. The strategy to support the smallholders will continue because the government would like to use agriculture as a means to improve food sufficiency and keep people employed. Therefore, it will take some time before we move into large-scale, industrial farming.”
Unemployment
Nigeria’s population is the seventh largest in the world and is growing at an average rate of 2.7% a year. It is also young, with 70% of people under the age of 30. This presents a complicated picture for the government. Official unemployment – which topped 14% in the last quarter of 2016, up from 10% in the first quarter – will continue to pose a challenge as more young people enter the workforce, although this does not take into account the large informal economy and high estimates of underemployment. Limited labour-intensive activities (see Industry chapter) and an educational curriculum with little applicability to the job market (see Education chapter) – including a limited number of technical and vocational institutions – have exacerbated this. This has resulted in a huge bottleneck for entry into the labour market. Local media reported in 2016 that the Federal Inland Revenue Service, the national tax agency, had received 700,000 applications for 500 positions and a push by the national police force to fill 10,000 vacancies saw over 1m people apply. According to the Nigerian Economic Summit Group (NESG), some 3m people enter the labour market every year. According to Olusegun Omisakin, head of research at the NESG, a broader approach to supporting youth entrepreneurship is crucial to addressing the problems. “Targeted youth programmes aimed at supporting entrepreneurs through capacity building and seed funding must be expanded to cover different regions of the country with measurable outcomes,” he said. “In addition, Nigeria needs a national skills development framework to address the skills deficit and support the country’s economic growth.”
Trade
Nigeria’s overall trade balance deteriorated to a deficit of N290.1bn ($1bn) in 2016 from a surplus N2.9trn ($10.2bn) in 2015, which itself was a decline from an N8.9trn ($31.5bn) surplus the previous year. Total trade during 2016 increased by 7%, from N16.3trn ($57.6bn) to N17.3trn ($61.1bn), as a 31% rise in imports far outpaced the 11% decline in export value. Despite price and supply challenges, crude oil exports – which accounted for 82% of the country’s total exports – grew by 2.8% in 2016, while non-oil exports fell by some 45%.
Europe was the top destination for Nigerian exports, accounting for N3.07trn ($10.8bn), or 36% of the total. Among European countries, Spain was the largest purchaser of Nigeria’s goods and services for the first time in recent years. At N2.53trn ($8.9bn), Asia was the second-largest export destination. The majority of this (61%) headed to India, which was also the single-largest purchaser of Nigerian goods and services, accounting for 18% of total export revenue.
Turning to imports, Europe again took top spot, supplying Nigeria with N4.1trn ($14.5bn), or 46.7%, of total imports. Asia again held second place, exporting N3.16trn ($11.2bn), or 35.8% of the total, of goods and services to Nigeria. Overall, China was the single-largest exporter to Nigeria, accounting for N1.73trn ($6.1bn), or 19.7% of the total import bill.
In the second quarter of 2017 trade recorded significant growth compared to the same period in previous year. Reaching N5.7trn ($20.1bn), total trade grew by 37% y-o-y and 7.7% quarter-on-quarter. Trade balance stood at a surplus of N506.5bn ($1.8bn) during the quarter, compared to a N572.1bn ($2bn) trade deficit in the same period of 2016. Exports reached N3.1trn ($11bn), an increase of 3.2% over the first quarter of 2017 and 73.48% over the same period in 2016.
Investment
Investment suffered in 2016, falling by 47% from $9.6bn in 2015 to $5.1bn in 2016. Portfolio investment was the hardest hit, declining by 70% to $1.8bn for the year. Foreign direct investment (FDI) fell by 28% to $1bn. Other investment, which includes trade credits, loans and other smaller forms of investment, grew by 3.5% to $2.3bn. At $932.2m, telecoms was the top industry for foreign investment, capturing 18.2% of the total in 2016. Investment in the oil and gas sector, the second-largest recipient of FDI, however, saw the most growth, climbing 23.2% in 2016 to $720.2m, representing 14.1% of foreign investment.
Diversification
Diversification in Nigeria has long been a priority, but concrete gains have been modest at best. However, the recession is lending diversification a new sense of urgency. “This crisis creates tremendous opportunities. For instance, there is a lot of interest and activity around agriculture,” Liakouris told OBG. “All of a sudden imported goods became very expensive so now people are taking more interest in diversifying the economy.” Agriculture is one of the most prominent focal points for diversification (see Agriculture chapter). Given its large contributions to GDP and employment, as well as the impact it has on rural development, agriculture has been a priority for successive governments, but it received a much-needed boost in 2011 with the rollout of the Agricultural Transformation Agenda (ATA). The ATA launched programmes to boost local consumption of domestic crops such as cassava, and spur investment in value addition and smallholder production, through loan guarantees and subsidies.
This has continued under the current administration, which has exempted major industrial agricultural producers from capital controls and rolled out new import substitution policies. Palm oil is one example of this. Jumoke Okeowo, equity analyst at FBNQ uest, told OBG, “Nigeria is still very much import dependent on palm oil. We don’t supply enough for domestic consumption, so local producers are encouraged to increase production. In terms of pricing, the CBN’s policy to ban the availability of FX to palm oil importers forces importers to go to the parallel market, so the imports are more expensive. As a result, local producers have been benefitting from favourable pricing.”
Backwards integration is also a focus. Yusuf told OBG, “We will have big players in selected crops. We will have it in sugar. All of the sugar refineries need to do backward integration and they are now investing in sugarcane plantations. It’s going to also happen in rice and palm oil. It will happen in certain crops, but it still will not be pervasive in all crops.”
Industrialisation
Spurring growth in the labour-intensive industrial sector has proved more challenging (see Industry chapter). Nigeria is far from the only major African market hoping to boost industrial activity – nearby Ghana, for example, has recently rolled out an initiative to build a factory in every district of the country – but it does offer significant potential, thanks to its 189m-population and supply of potential inputs, from minerals to crops. However, the unreliable power supply makes significant investment in manufacturing facilities risky (see Utilities chapter), while outside investments in capital and technology are necessary to update machinery and production sites. “Moving the manufacturing industry from where it is now to the point at which it can compete in the global market will take time,” Olajire Abati, research analyst at the NESG, told OBG. “We need FDI that will bring the expertise and technology that will jumpstart that process.”
Infrastructure
Ultimately, Nigeria needs to address the structural impediments to unleash the full potential of the private sector. By some estimates the country faces a $300bn infrastructure gap, equivalent to nearly 25% of its GDP. Substandard infrastructure acts as a barrier to significantly lowering inflation. Tolu Osinibi, executive director at FCMB Capital Markets, told OBG, “Poor infrastructure will always have an impact on cost: the costs of moving food, selling produce, building houses, power – it all adds up. Someone has to pay for it.” The inability to quickly and efficiently move goods about the country coupled with the high cost of power, especially in terms of production losses due to unreliable supply, is eventually captured in the final price of goods, putting the brakes on inflation reduction.
To address this problem, the government has ratcheted up capital spending to 30% of budgetary outlays, from around 10% under previous governments. According to the ERGP, infrastructural spending will be concentrated in energy and transport.
The government’s perhaps single most urgent priority is to restore crude oil production to 2.2m bpd in the short term and increase this to 2.5m bpd by 2025. In addition, the government has prioritised refining capacity, envisioning Nigeria’s conversion to a net exporter of refined petroleum products by 2020. On the consumption side, to support growth and industrialisation the government foresees a doubling of operational generation capacity to 10,000 MW by 2020. “With the decline in oil revenues, states have sought to increase tax collection as a means to improve their internally generated revenues,” Fowler, told OBG.
In transport, the ERGP, supported by the 2017 budget, promises major upgrades to roads, railways and ports by 2020, but the documents are less specific about actual projects. To achieve these goals Adeosun has stated her intention to actively pursue public-private partnerships to attract the capital and technology necessary to magnify the federal government’s efforts.
Anti-Corruption Efforts
In 1999, when Nigeria’s former President Olusegun Obasanjo was sworn in, he noted that corruption was “the greatest single bane of our society”. Estimates of the amount of money that had been illegally channelled outside of the country since independence ranged between $380bn and $440bn. In the nearly two decades since, Nigeria has continued to work to reduce incidences of waste and capital flight, with mixed results. The Economic and Financial Crimes Commission (EFCC) was launched in 2003, with the body exposing a range of incidents of graft and bribery. At one point 31 of Nigeria’s 36 state governors were under investigation, as was the chief of the then-ruling People’s Democratic Party. As of July 2013 the EFCC declared that it had uncovered over $9bn in stolen assets and secured 400 convictions.
However, there is still a lot of work to be done. A March 2015 audit of the national oil company, the Nigerian National Petroleum Corporation, found that as much as $16bn of oil revenues had been mishandled.
President Buhari’s administration has moved aggressively to tackle fraud. In late 2015 the former national security advisor was arrested for stealing up to $2bn via fake arms contracts, part of a larger volume of unaccounted defence spending which vice-president Yemi Osinbajo has said totals around $15bn. A Senate investigation the following year found that the “rather incoherent and largely fragmented state of the procurement process” of a government programme designed to support redevelopment efforts in the north-east of the country “points to a vague and corrupt scheme”. In early 2017 a newly established whistleblower line led to the discovery of $43m in cash in a Lagos apartment.
Transparency International ranked Nigeria 136th out of 176 countries in its 2016 Corruption Perceptions Index. Regionally, this leaves it well behind South Africa, which is ranked 64th, and Ghana, in 70th place, although ahead of Cameroon and Kenya (both ranked 145th).
Outlook
While growth began to pick up in the first half of 2017, Nigeria still has much work to do. “Even if the country manages 0.5-1% growth in 2017 it doesn’t put it on a recovery pathway,” Liakouris told OBG. “We need to see at least 7-9% GDP growth for several years to say that the country is back on a growth trajectory. Especially so, if we were to witness a trickle-down effect that would pull a significant number of households out of extreme poverty.” However, there is the sentiment that the economy has turned a corner and has begun to see a silver lining – OBG’s recently published Business Barometer: Nigeria CEO Survey found that 84% of respondents had either positive or very positive expectations for local business in the next 12 months. “The situation we have been in over the past two years has actually been beneficial in some sense because it is forcing us to focus inside,” Osinibi told OBG. Devaluation of the naira, rising inflation, the drop in oil revenues, the slowdown in oil production, and the broader softening of growth, trade and investment have all created a greater sense of urgency for structural reforms.
However, that does not mean the country’s efforts at diversification are guaranteed. “The worst thing that could happen to Nigeria is for the oil price to rise to $80 or $100, because then the government’s efforts to diversify the economy may not receive as much attention,” Hengstler said. The presidential election scheduled for 2019 may also slow reforms. Damilola Akinbami, head of research at Financial Derivatives Company, warned, “This is the last full year that the government and the CBN will be able to do whatever they want, because by 2018 everyone that has any political intention will be on the campaign trail.”
Yet despite the challenges the country currently faces in achieving major reform, optimism abounds. Marcel Okeke, chief economist at Zenith Bank, told OBG, “Whatever challenges the Nigerian economy is going through now, it is just a passing phase. Because we went into a recession and are now coming out of it, I think that we have learned our lesson. Nigeria is a market that serious business people cannot ignore.”
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