Non-oil sector to drive growth in Nigeria this year

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A new report from the IMF says growth in Nigeria will accelerate this year, but the economy still has a range of structural weaknesses, including rigid labour markets and insufficient power supply.

Nigeria’s GDP growth rate will rise to 7.3% this year, up from 6.4% in 2013, the IMF said in a statement from its Executive Board at the end of an Article IV consultation, issued on March 7. The comparatively robust rates are in line with previous years, which have ranged between 6.4% and 7.8% since 2009.

“Economic growth is expected to improve further in 2014, driven by agriculture, trade and services,” the IMF said. “Inflation should continue to decline, with lower food prices from higher rice and wheat production and supported by a tight monetary policy and a budget execution that maintains medium-term consolidation objectives.”

The increase in GDP will be driven by the continued good performance of the non-oil sector, which is projected to expand by 7.4% this year, while the oil and gas industry is expected to achieve 6.8% growth, up from a contraction of 1.8% in 2013, according to the IMF.

Moving forward, one factor that could affect growth rates, at least on paper, is the rebasing of GDP figures, set to come into effect this year. Nigeria has not carried out this exercise since 1990, and many observers believe it will result in a 40% jump in nominal GDP, with a concurrent drop in aggregate growth rates due to a higher base effect.

Improved fiscal balance

The Fund said the economy should be underpinned by continued fiscal prudence, warning against any loosening in the run-up to presidential and parliamentary elections early next year.

The IMF expects the budget deficit to fall to 2.9% of GDP from 4.7% in 2013, due in part to fiscal tightening, allowing the Excess Crude Account (ECA), which is used to cover shortfalls, to double from $3bn to $6.3bn. The ECA is an important buffer for Nigeria, and declined by $8bn last year.

Funds from the ECA will eventually be transferred to a sovereign wealth fund, the Nigeria Sovereign Investment Authority (NSIA), which was set up in 2012 with an initial seed capital of $1bn. The NSIA aims to allocate some of the country’s oil revenues to longer-term financial investments, including through managed fixed-income funds with international banks.

Continued challenges

Nigeria’s strong growth and decent macroeconomic fundamentals cannot entirely disguise its economic weaknesses. As the IMF has noted, serious structural reform is needed, including changes to the labour market and an overhaul of public services, particularly health care and education.

The Doing Business 2014 report from the World Bank ranked Nigeria 147 out of 189 countries, indicative of the difficult business climate. It performed particularly poorly on ease of registering property (185), paying taxes (170) and, damningly for a country with major export potential and a large market that appeals to foreign producers in a globalised economy, trading across borders (158).

The report also highlights the difficulty of getting electricity – Nigeria ranks 185 – a long-standing problem of under-capacity, with a large gap between supply and rapidly rising demand. Last year’s long-awaited privatisation of power generation and distribution assets and pledges by the government to boost electricity output through using coal should help increase supply and attract investment, but those will play out over the medium to long term.

Other challenges include Nigeria's occasional susceptibility to internal disputes, as highlighted by President Goodluck Jonathan’s recent suspension of central bank governor Lamido Sanusi over allegations of "misconduct" and "irregularities" at the bank, following statements by the governor questioning the propriety of hydrocarbon revenue management. The ousting of Sanusi, and the perception that Nigeria still has a problem with high-level corruption, led to a short-term drop in market confidence in the country – more than 20% of foreign bond holdings were sold off over the next ten days, while the naira hit an all-time low.

While Sanusi’s dismissal is not expected to have a longer-term impact on foreign investment, capital inflows into the country’s flagship hydrocarbon sector are likely to remain constrained in the immediate future, given the continued regulatory uncertainty. The hotly debated Petroleum Industry Bill – still awaiting final parliamentary approval after years of planning and debate – is intended to bring clarity, but a timeline for its passage is still not confirmed.

Ultimately, Nigeria’s economy is better isolated than many from global squalls, although it has seen ripple effects from increased shale production in the US and portfolio re-balancing by investors following the US Federal Reserve’s tapering of its quantitative easing (QE) programme. The drawdown by the Fed of the QE programme may likely further cool investor appetite for frontier market assets including Nigerian stocks and bonds in the months to come, although appetite from domestic investors for such products has remained high and should help sustain a strong performance in the country’s capital markets.

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