Robert Tashima, Regional Editor, Oxford Business Group
I’d now like to provide a snapshot of the Nigerian economy as OBG sees it, highlighting the opportunities and challenges for foreign investors.
We will start off with an overview to gain a sense of the current state of the market and then take a closer look at the country’s comparative advantages and the more significant challenges that must be tackled.
Finally, we will look at four key growth areas that will help propel the country’s economy forward in the years to come.
Providing a snapshot of an economy as vast and complex as Nigeria’s is never easy. It would be too simple to focus solely on negative indicators, and just as deceptive to focus only on positive trends.
Perhaps the best way to describe it would be to compare it to the English national football team. It has massive potential and some very strong playmakers, but consistently underachieves. It ekes out big wins in difficult situations but also loses some very easy games.
As Africa’s second most dynamic economy, Nigeria offers immense opportunities even though it has long had to grapple with chronic challenges such as corruption, inadequate transport infrastructure and electricity shortages.
Some of the numbers are particularly worrying. Inflation struck 14% last year; non-oil GDP was down by nearly a half percent over 2009; and the government’s reserves – notably, the Excess Crude Account – shrank, in spite of low budgetary benchmark figures. The energy sector has seen high prices and higher production but inefficiencies illustrate the immense need for end-to-end reform.
Yet despite these trends, the country has rumbled forward regardless, often at an impressive pace.
Most key indicators reflect relative robust growth, appropriate for such a large lower-middle-income country. GDP for 2011 is forecast at around 7%, down slightly from 2010 but still stronger than many of its continental neighbours, including South Africa. The country’s strong external position and low debt helped it ride out the worst of the lingering global crisis.
And while literacy and life expectancy rates are average, inflation is also due to drop four percentile points, and purchasing power is increasing amongst a greater segment of society.
Like the English team under Fabio Capello, the Nigerian economy has been through ups and downs. However, as in many emerging markets, progress is measured in increments and over the past decade, Nigeria has moved noticeably forward.
Nigerians have a reputation for gallows humour – what do you expect from a country whose energy utility was nicknamed Never Expect Power Again? Given that, I can expect some people to take issue with OBG’s assessment on the future of Nigeria but we see the country’s performance as based on five key factors.
Perhaps the most crucial advantage is the sheer size of the population, which gives the country an immense market and a huge pool of productive labour to tap into. While this can also cause complications, the country’s appeal for industries that target domestic consumers or demand a large workforce is unbeatable.
A second important contributor is the steady evolution of the country’s private sector. In spite of the corrosive effects of the informal market and the dominance of hydrocarbons, Nigeria has one of the most dynamic private sectors on the continent. The importance of this cannot be understated.
Thirdly, there is the government’s reform agenda. Now obviously a reform agenda is useless if it is not actually implemented, but if the government’s various planned projects are executed in a timely manner – as happened last month with the establishment of a sovereign wealth fund – it will go a long way in unlocking the country’s potential.
Obviously, Nigeria’s vast natural resources are also a massive advantage. Thanks to a peaceful period in the Delta, upstream production has inched upwards to four and five-year highs, and with activity increasing both offshore and onshore, the opportunities are becoming ever more abundant.
Regional integration is also a key pillar. ECOWAS has helped improve cross-border trade and although progress has not been as rapid as hoped, thanks to tariff convergence and customs harmonisation, Nigerian firms are able to access a broader market of an additional 150m people whose GDP is growing at an average of 5%.
So it is these five factors underpinning Nigeria’s long term potential, which as I’m sure everybody in here agrees, is vast – but! only if it is properly harnessed. However, there are a number of challenges that must be overcome for this to happen.
Among the most salient obstacles is that of governance, both in the public and private realms. The problem of corruption is a well-known one, and has plagued Nigeria since the era of the 10 percenters in the 1960s. Consisting of everything from tax evasion to bribery, this slows investment and reduces the appeal of the business environment. Initiatives are afoot to tackle these issues but more needs to be done.
In line with that is a history of underinvestment that has led to poor infrastructure, which also is a significant constraint on growth. The use of private generators, for example, is estimated to add up to 40% in operating expenses for large-scale companies, and hamstrings manufacturing firms.
There are more fundamental hurdles as well. The provision of basic services, such as health and education, is often insufficient, and undermines attempts to spur growth in regions outside of the major economic centres.
Political will is also required in larger amounts, if needed reforms are to be passed. Nigeria has a well-deserved reputation for diplomatic leadership abroad. But that same level of commitment and dedication must be applied to economic issues at home as well.
Finally, there is the well-known issue of security risk. Riots in the middle belt, sporadic attacks by Boko Haram, Delta kidnappings and urban crime all contribute to a disincentive for potential investors, constituting both a real problem as well as an equally important image problem.
While we’ve discussed the underlying factors that help define Nigeria’s growth, let’s turn to those specific sectors that will help drive the country’s economic performance in the coming years.
These select few growth areas have the ability to propel the country’s economy forward at an exponential rate, particularly if planned reforms are implemented accordingly. They offer not only immense opportunities for foreign capital and expertise, but also sizeable benefits for local firms looking to expand.
The first growth area comes as no surprise: natural resources.
Although hydrocarbons have suffered from slowing production in recent years, it is by no means a contracting industry. Enhanced recovery techniques are being increasingly used, while exploration and production activities are moving offshore.
Perhaps more interesting, however, is the activity onshore. The drive by the government to increase the role of local firms and labour in the industry is beginning to bear fruit, especially if the sale of Shell’s four blocks goes through smoothly.
Similarly, with the elections now successfully completed, the saga of both the PIB, the long-awaited reform for the energy sector, and the Gas Master Plan, can hopefully move towards a conclusion. In our view it is important that they ARE passed. Resolution of the PIB debate has dragged on far too long already.
The success of economic diversification, which is vital for Nigeria, also hinges on the maintenance of an efficient infrastructural network.
This starts with roads. At present more than a third of Nigeria’s 190,000km road network is unpaved, excluding many rural areas, and only 15% of those are considered to be in good condition. This provides huge opportunities, however, for the country has embarked on an ambitious development program, and increased the role of the private sector in maintenance.
Electricity is another sector that defines the boundaries of growth for an economy – underinvestment in power generation is crippling the economy to the tune of an estimated $130bn annually. The Power Sector Reform roadmap is slowly but surely changing this, by privatising elements of generation and grid management and boosting IPP capacity.
Another key growth area, which may sound controversial given the turbulence of recent years, is in the banking sector and capital markets.
While the banking crisis in 2009 still lingers, the resulting crackdown on reporting and governance standards has been of immense benefit for a sector that is in many ways a sleeping giant. The country has several of Africa’s largest and most dynamic banks, many of which have a regional presence yet have attracted little outside investment. Combine that with the establishment of AMCON, plus the potential for increasing lending in the energy sector to local firms, and things look promising.
The capital markets have been through an uncertain time as well recently, but for a lower-middle-income country, they are extremely well developed, with a vast array of players and instruments available and enthusiastic participation – which is unusual in an emerging market.
Finally, in what might be a surprise inclusion, we also see agriculture as a key sector that offers significant potential.
Nigeria’s size and diversity means that some areas of the economy have already moved well into the tertiary sector, with tech-heavy services for example. However, the primary sector, and agriculture in particular, still plays a sizeable role employing over 40% of the working population.
More importantly, given the fact that cultivated land is less than half of the 70m ha available, and irrigated land less than 1/10th of that, the sector offers an excellent opportunity for rapid expansion and the ability to spur growth in everything from consumption to credit in rural areas.
These sectors are far from blemish-free – and we argue that they are definitely in need of further reforms and are prone to backsliding. However, as in many emerging markets, progress is measured in increments and over the past decade, Nigeria has moved noticeably forward.
More importantly, following the last round of elections, the country has a unique opportunity to capitalise on its latent potential.
One way to do this is to increase foreign investment, which remains a key component in Nigeria’s future economic prosperity – not just for the capital that it brings in but also the know-how.
Promotion and information are part of this and we hope The Report: Nigeria 2011, as a comprehensive, authentic and accurate review of the country’s economy – will play its own part in getting the message of Nigerian potential across to a global audience.
Thank you for your time – and I hope you enjoy the rest of the event.