Nigeria’s economy continued to see strong growth in 2013, receiving a major fillip with the completion of the long-awaited privatisation of the power sector, along with a set of heavily oversubscribed bond issues. But calls for greater reform also increased, as it is apparent that many Nigerians and smaller local companies are still struggling to tap into the country’s overall growth.
One of the most important events of the year – one that could provide a significant boost to the country’s future performance – was the privatisation of electricity generation and distribution, with the assets formally handed over to private investors by the government on November 1. Electricity has long been the Achilles heel of Nigeria’s economy, with the country generating one-tenth the power of South Africa, a country that has one-third the population. The transfer was a milestone in one of the world’s biggest-ever privatisation initiatives, which is intended to attract investment to the power generation sector, improve efficiency and boost supply, which lags well behind rapidly growing demand.
The process had been on the table for more than a decade, and saw several false starts, but eventually resulted in the break-up of the state-owned Power Holding Company of Nigeria, which was replaced with six power generation companies and 11 distribution companies.
The asset divestiture was not entirely smooth, with some payments delayed and the sale of two companies held up, and it will be some time before the full impact of the transfer of ownership is felt, not least due to the substantial investments that need to be made, but it nonetheless marks a remarkable step forward for the economy.
Despite government investments in the sector over the past two decades, power supply remains insufficient, and many firms rely on expensive diesel generators that can add up to 30% in operating costs. Electricity generation capacity – for a population of 170m – dropped to 3782 MW in October 2013, having peaked at around 4518 MW in December 2012, according to a report by the Presidential Task Force on Power, which calculated that peak demand stands at around 12,800 MW – a figure that is likely to be a conservative estimate.
As well as privatisation, greater diversification of energy sources began to pick up pace in 2013. In August, the government inked a $3.7bn memorandum of understanding with a Nigerian-Chinese consortium, HTG-Pacific Energy, for the development of a 1000- to 1200-MW coal plant in Enugu state. In the long-term, Nigeria could generate up to 30% of its energy requirements from coal, according to President Goodluck Jonathan.
In addition to their more tangible impact, the reforms in the power sector provide a strong indication that Nigeria may be willing to push ahead with economic liberalisation to support long-term economic growth.
In October the IMF encouraged countries in the region to accelerate structural reform, as well as to invest in infrastructure to enhance growth prospects and ensure that more people enjoyed the benefits of economic expansion.
The Fund is bullish about Nigeria’s prospects in 2014, forecasting 7.4% growth following a rate of 6.2% in 2013. Continued strong performance is based on robust domestic demand, as well as exports of crude oil, which generated revenues of $42bn in the first half of 2013 and $93bn in 2012, according to the US Energy Information Administration.
However, rising tides have not lifted all ships. In April the IMF’s resident representative in Nigeria noted that poverty rates have remained high. Despite average growth of 7.2% a year between 2004 and 2010, the proportion of Nigerians living in poverty fell only slightly, from 64.2% to 62.6%. Unemployment also remains a concern, particularly in rural areas in the north of the country.
Access to financing
The Fund has encouraged Nigeria to improve access to financing for micro, small and medium-sized enterprises (MSMEs), which have found it difficult to obtain credit, despite average annual loan growth estimated at 20-30%. High interest rates are one factor behind this: in January 2014 the central bank voted to keep its key rate at 12%, although commercial rates tend to be higher; collateral requirements and lengthy procedures also have an impact. Banks have pledged to extend more credit to MSMEs, including by lowering rates to such companies, but progress will also depend on lenders being more convinced that smaller firms have projects worth financing.
The government has also moved to tap strong demand for emerging-market assets, issuing two blocks of dollar-denominated bonds worth $500m each in the summer. The offer was four times oversubscribed: a block with 10-year maturity attracted bids of $2.26bn, while the five-year instrument saw bids of $1.77bn. Initial yields were set at 6.375% and 5.125%, respectively – a respectable rate for an emerging market with some serious economic challenges. Another bond issue worth N544.06bn ($3.41bn) took place in November. The government will allocate the money raised for infrastructure development, including in the power sector.
Over the medium term, Nigeria will be under growing pressure to reduce its fiscal deficit, which is expected to come in at 1.85% of GDP in 2013 and 1.9% in 2014, according to official figures. Despite ongoing diversification efforts, much will continue to depend on the health of the oil sector, which is sensitive both to international price fluctuations and domestic security. The government aims to increase oil output to 3m barrels per day (bpd) by 2020, from 2.26m bpd in the third quarter of 2013.
Although the long-awaited Petroleum Industry Bill, which is intended to dramatically overhaul the country’s hydrocarbons code, is still pending, locally owned companies are playing an ever more important role in production; they currently contribute around 10% of oil output. Some have questioned whether smaller domestic firms have the capacity to expand and increase production significantly, and for the foreseeable future, international oil companies are likely to dominate the upstream segments of the market, but increasingly local operators are tackling onshore blocks.