Economy Still Floating on Oil


Economic News

22 Jul 2010
Text size +-
Nigeria's economy is riding out the international financial crisis fairly well, registering solid growth and managing to avoid some of the international toxic debt market. Nevertheless, domestic problems are slowing the government's programme for diversification away from hydrocarbons.

Though the global recession has touched Nigeria, pushing down revenue from its main foreign currency earner, oil, and slowing the inflow of overseas capital, growth in the country's economy remains strong, according to recently released figures from the Central Bank.

Nigeria's GDP rose by 6.3% in the first quarter of the year, said the report, issued in mid-June, bettering the performance of the same three months in 2008, which saw a 5.8% rise. Improved output from the agriculture sector helped push up the expansion, the bank said, with primary production representing 35.8% of GDP and contributing 2.2 percentage points of the overall growth rate.

Less encouraging was the sharp fall in foreign capital inflow, which plunged 46.9% in the January to March period, totaling $5.72bn compared to the $10.78bn of the preceding quarter, a result attributed to lower energy prices. Earnings from the energy sector accounted for just over 22% of GDP in the quarter, coming in at $4.25bn, well down on the $9.87bn and $10.69bn of the preceding quarter and corresponding period of 2008, respectively.

Such is the importance of Nigeria's oil output to the global economy that disruptions to production, such as those resulting from the sabotage of a pipeline in the Niger Delta supplying Shell's Bonny terminal in late June or partial shutdowns of refineries for maintenance, can cause a spike in international prices.

Politically motivated attacks against Nigeria's oil infrastructure can not only reduce output and thus revenue, but can also harm investor confidence. On June 25, President Umaru Yar'Adua's government offered an amnesty to the rebel militants from the Movement for the Emancipation of the Niger Delta (MEND) that has been carrying out the attacks but the group has so far rejected the overtures.

However, while posing a threat to investor confidence MEND's campaign has by no means undermined overseas faith in the potential of the Nigerian economy, which received a boost in late June with the visit of Russian President Dmitry Medvedev, who led a 400-person delegation to Nigeria as part of a four-nation trip to Africa.

The results of the visit were not long coming, with Russian energy major Gazprom signing a $2.5bn deal with the state-owned Nigerian National Petroleum Corporation on June 24 to form a joint venture called Nigaz. The new company will focus on exploration, production and transportation of natural gas, in particular for the export market and the building of power generation facilities in Nigeria.

This latter function could solve one of the main problems holding back the Nigerian economy, the shortage of electricity. Difficulties of both generation and distribution have been restricting industrial growth, hindering other sectors of the economy and pushing up expenses as companies have to resort to using private generators to maintain power.

According to Steven Dimitriyev, the World Bank's senior private sector specialist, the cost to a typical Nigerian firm of unreliable electricity supplies is equivalent to 10% of sales annually.

"The electricity crisis is the most important infrastructure bottleneck in Nigeria today. It is the main driver of Nigeria's high indirect cost," he told a conference in Abuja in mid-May.

The government has given a commitment that generation capacity will be lifted to 6000 MW by the end of the year, almost trebling output, though it will take far longer than this to resolve problems relating to distribution in some rural and remote regions.

Better placed is Nigeria's banking sector, which has benefitted from a period of consolidation, seeing the numbers of domestic lenders reduced, thus strengthening balance sheets and improving capital adequacy levels to almost 19%.

However, there is still room from improvement, according to Onno Ruhl, the World Bank's country manager for Nigeria.

There was a need for the financial sector to improve its provision of credit to the private sector, while controlling risk through improved supervision, he told a conference in Lagos in early June.

The banking sector was otherwise in a good position, thanks to the level of non-performing loans having been reduced to 7.7% and its minimal involvement in the international debt market, Ruhl said.

"Nigerian banks have virtually no exposure to subprime credit derivatives or other toxic debt," he said.

Though the financial sector is basically sound, Ruhl said it was also vital to expand the base of the country's economy, saying that an unstable oil price is the main transmission mechanism for a crisis in the country.

To achieve this, the government will need to increase spending on infrastructure and improve electricity supplies as two basic requirements. While one of Africa's largest economies, and one of the richest in terms of natural resources, Nigeria still has some work to do before it goes from "one of" to "the".

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In Nigeria

Nigeria targets agro-processing as a future growth driver

As Nigeria looks to restructure its economy to be more diversified and sustainable, agro-processing is emerging as a key tool to improve agricultural value added while also bolstering the sector’s...


Nigeria targets agro-processing as a future growth driver

As Nigeria looks to restructure its economy to be more diversified and sustainable, agro-processing is emerging as a key tool to improve agricultural value added while also bolstering the sector’s...