Nigeria is Africa’s biggest oil exporter and, with a population of 193m, the region’s biggest economy and largest consumer base. While the government is reliant on oil and gas for its revenue, the economy itself is more diversified, with manufacturing, banking and insurance, retail, and agriculture all major contributors. However, each of these sectors could grow faster and create more opportunities if structural problems were overcome, among them, the country’s electricity shortage, corruption and bureaucratic bottlenecks.
Government efforts at positive change are under way, although these are often made more difficult by the boom-and-bust nature of oil prices. Oil accounted for 56.2% of government income at N4.1trn ($13.3bn) in 2017, according to the Central Bank of Nigeria (CBN); lower oil prices thus significantly impact revenues. A wave of optimism was generated when President Muhammadu Buhari won the election in 2015, but the slump in oil prices after mid-2014 created constraints.
The World Bank’s “Doing Business” report ranks Nigeria as below average by regional standards, even after it jumped 24 spots to 145th in 2018. Nigerian executives were nonetheless feeling optimistic about economic prospects in 2018, with 85% of respondents in OBG’s Business Barometer: Nigeria CEO Survey, published in September 2018, reporting that they have positive or very positive expectations for local business conditions over the coming 12 months. As the country heads into its next general election, scheduled to be held in February 2019, the Buhari administration can point to significant successes, such as new railroad lines and highways, as well as major progress in the fight against corruption. “Blatant corruption has been Agriculture is the single largest economic activity, accounting for 25.1% of GDP as of 2017 reduced,” Niyi Yusuf, managing director of professional services firm Accenture Nigeria, told OBG. However, an absence of landmark moments could mean that these improvements do not resonate widely with voters. “The wheel of justice is rolling slowly and as a result there has been a lack of clear consequences,” Yusuf added.
Back to Growth
According to figures from the National Bureau of Statistics, Nigeria’s GDP at current prices reached N113.7trn ($367.6bn) in 2017. The real annual growth rate in 2017 was 0.8%, compared to a contraction of 1.6% in 2016, when the economy suffered its first contraction in two and a half decades. Despite the recession, and what has been characterised as a fragile recovery from it, growth in 2017 was still sufficient to make Nigeria the largest economy in sub-Saharan Africa once again, with South Africa second largest at $349bn. Oil contributed 8.68% in 2017, compared with 8.35% in 2016.
Agriculture was the biggest single activity, providing 25.1% of GDP in 2017. Staple crops include cassava, rice, maize and sorghum, but Nigeria is still dependent on imports to meet demand. The country has been trying to boost both output as well as processing and storage facilities to reduce its food import bill, which amounts to $22bn a year, according to Audu Ogbeh, minister of agriculture and rural development. The second-largest contribution to GDP by any one economic sector was trade, which generated 16.86%. Other important fields are manufacturing at 9.18%; the extraction of crude petroleum and natural gas at 8.68%; telecommunications and information services at 8.66%; and real estate at 6.85%.
One sector that shows a largely untapped potential for growth is sports. Kunle Soname, chairman of betting website Bet9ja, told OBG that, “Developing the sports industry in Nigeria requires substantial investments in infrastructure, football pitches for training and talent development, and proper stadiums.” An increase in investment in the sports industry could provide a concomitant boost to a sector that is closely related to it, that of gaming. “The single most important challenge to developing our gaming industry is the lack of data. While we do know how many operators we license for which activities, there has been no market research done on the sector’s opportunities and dynamics,” Seun A Anibaba, CEO of the Lagos State Lotteries Board, told OBG.
Nigeria is in some ways a natural choice for investment in industry and manufacturing because it is the seventh-most populous country in the world, meaning it enjoys an abundance of potential customers as well as affordable labour. It hosts a variety of globally recognised goods producers, chiefly in consumer staples. Nestlé, PZ Cussons and Guinness Nigeria, whose brewery in Lagos was the first facility to produce the famous beer outside Ireland and the UK, are some established actors in the economy. The manufacturing sector has long been inhibited, however, by the general difficulty of doing business in the country, as well as the scarcity of electricity. Per capita consumption of electricity was higher than only eight other countries in 2014, the most recent year for which global data is available from the World Bank. The power shortage creates a significant obstacle to new investment in manufacturing, and the inability to meet demand for power with a steady supply has cost the country N71trn ($229.5bn) in lost GDP so far this century, according to government estimates.
Power counts as one of many areas in which Nigeria welcomes foreign investment, but few outsiders have chosen to invest in any electricity project using the national transmission grid on purely commercial terms. Foreign capital in the sector has largely been paired with or limited to development finance initiatives, small-scale projects and off-grid alternatives in which power producers serve a small area and are not exposed to the national system.
Foreign investment in Nigeria has fallen significantly in recent years, primarily on the back of lower international oil prices, but also because the country has been considering a major overhaul to its petroleum laws, leaving upstream producers to wait for clarity on the legal regime before making final investment decisions on their exploration blocks. Total foreign direct investment (FDI) declined every year from 2011 to 2015, when the oil-price rout was well under way, and offshore exploration was halted by energy companies. It fell by 4.9% from N1.12trn ($3.6bn) in 2016 to N1.07trn ($3.5bn) in 2017, according to the CBN.
Agriculture is one of the most promising sectors in terms of attracting FDI. “There is an increased appetite from the EU market for organic crops, which Nigerian agri-businesses could tap into if farms start to aggregate, farmers get the education they need and the proper certification upgrades are enacted,” Baraka Ekpo, CEO of Sarepta, a Nigerian company that partners with foreign investors, said to OBG.
Nigeria’s main economic blueprint is the Economic Recovery and Growth Plan (ERGP), which was launched in 2017 and includes up to 60 policy interventions that seek to remove major obstacles to growth. Another important initiative is the Power Sector Recovery Programme (PSRP), also introduced in the spring of 2017. These policy interventions and other programmes are overseen by key state economic actors, including the Ministry of Finance, whose Debt Management Office is currently managing an overhaul of the public debt strategy to emphasise international borrowing in dollars, and the CBN, which oversees monetary policy and regulates banks.
Nigeria’s currency, the naira, has dropped in value in recent years, in large part as a result of the decrease in global oil prices. The CBN’s defence of the currency led to widespread criticism from both domestic and foreign investors. That pressure has eased thanks to what has become a blended currency system in which multiple exchange rates are maintained for different types of investors, some of which are determined by market forces. While some see this system as overly complex, it will likely stay in place for now (see analysis).
Though growth has returned in 2018, this recovery has been moderate. The pace of expansion in the second quarter of 2018 was 1.5%, slower than the 1.95% rate in the first quarter of the year. This, however, could be more of a reflection of weakness in the oil sector than strength outside it, as it contracted by 3.95% in the second quarter of 2018, a year-on-year decrease of 7.48%. The agriculture sector, meanwhile, contracted by 1.81% in the second quarter of 2018.
An IMF report published in July 2018 noted the outlook for 2018 remains challenging, as private sector lending remains low and foreign exchange inflows tend to be short term. After first quarter earnings showed the oil sector leading the way, Nigeria’s business community was concerned about the other areas of the economy. The non-oil sector’s fragility is problematic in light of the government’s push for economic diversification, as strong industrial development is a necessary driver of agricultural entrepreneurship.
Despite those concerns, the dashboard of key economic indicators showed positive developments as well. Following on from a peak of 18.55% in the fourth quarter of 2016, inflation continued to fall steadily through the first half of 2018, although it began to rise in August. Crude oil production was at 1.7m barrels a day as of September 2018, according to OPEC figures, while foreign reserves were over $43bn in the month of October, according to the CBN.
The 2018 budget was approved by President Buhari in May, and was valued at N9.1trn ($29.4bn). The original proposal was submitted by the president to the National Assembly, the country’s bicameral legislature, in November of 2017, with proposed spending of N8.6tn ($27.8bn). Lawmakers added N500bn ($1.6bn) to the plan and sent it back for approval in May 2018. They also raised average oil price per barrel that Nigeria could expect to realise from exports from $45 to $51. Of the total, N2.2trn ($7.1bn) is earmarked for debt servicing, and N530.4bn ($1.7bn) for transfers to state governments. The fiscal deficit was estimated to be N1.95trn ($6.3bn), or 1.7% of total GDP. Nigeria’s Fiscal Responsibility Act mandates that the budget deficit should not exceed 3% of GDP. Deficits are usually addressed through bond issues or drawdowns from the Excess Crude Account (ECA), a savings mechanism for oil income above budgeted expectations.
Nigeria’s federal government has three primary revenue sources. The first is its share of the Federation Account, which amounts to 48.5% of three streams: oil and gas; Customs and excise taxes; and corporate income tax. Another is its share of value-added tax (VAT) receipts. Lastly, the government has independent revenue streams from sources such as government agencies and parastatals; the sale of state assets through the privatisation programme of the Bureau of Public Enterprises; and proceeds from the ECA, when applicable. Oil remains the most important source of revenue. There are three main sources of oil revenue, starting with income from the government’s own equity stakes in projects, which are held by the Nigerian National Petroleum Corporation (NNPC), the state’s oil company. Oil producers also pay taxes and fees, including a petroleum profits tax of 85%. The third type of oil revenue is royalties, which are paid at various rates depending on the type and value of crude produced, but about 20% is the overall average rate. Once collected, the NNPC deducts its capital and operating costs before remitting the remainder to the federation account. Of that total, 13% is paid to the states in the Niger Delta, where oil is produced and some local communities are impacted. Nigeria’s reliance on oil income is intensified by its lack of other exports, but also reflects the struggle to collect taxes. Tax revenue amounts to about 6% of GDP, which is among the world’s lowest figures outside low- or no-tax jurisdictions. The state’s goal is to boost the ratio to 15% by 2020. Nigeria is often compared with South Africa, whose tax receipts reach about 28% of GDP, and Ghana, where the figure is 15%. Nigeria’s VAT generates the equivalent of 0.9% of GDP, less than the 3.8% regional average among the 15 members of ECOWAS. This is in large part because the VAT rate is 5%, compared with a regional average of 16.8%. The IMF estimates that boosting the rate by 1% would increase revenues by the equivalent of 0.4% of GDP.
Tax is also a problem at the state level, as what is referred to as internally generated revenue is low in most states. Lagos State has had the most success, and in 2017 collected more than 30 other states combined. It was one of only two whose tax receipts were bigger than the federal transfer payments, on which most states are reliant, with the other being neighbouring Ogun State. Lagos’ average monthly collections reached N34bn ($109.9m) in early 2018, compared with N30bn ($97m) in 2017 and N24bn ($77.6m) in 2016. The state’s target for its monthly take is N50bn ($161.7m). Five other states derived at least 30% of total revenue from state taxes: Rivers, Edo, Kwara, Enugu and Kano. One of the federal government’s main challenges is to reduce its operating costs, so that more can be spent on infrastructure and other projects with economic multiplier effects. This is made more difficult as a result of widely held expectations that fuel and power be provided at a subsidised price, particularly as domestic refining capacity has dwindled to near zero, due to refineries being in poor repair and producing a small fraction of intended output (see Energy chapter). Nigeria spends between N1trn ($3.2bn) and N1.4trn ($4.5bn) annually importing consumer fuels, which are then sold below cost. The price tag for this subsidy is inflated further due to the likelihood that some of what is imported is subsequently smuggled across the border into neighbouring countries.
Emmanuel Ibe Kachikwu, minister of petroleum resources, has said this could account for up to 40% of imports. In 2017 the authorities had some success in stemming fuel smuggling, in turn lowering petrol consumption from 50m litres per day to 28m. However, records show that consumption ballooned to 60m litres per day in the first quarter of 2018, suggesting that smuggling is once more on the rise. Removing subsidies would provoke controversy because they are popular among poorer segments of the population. With about 150m people, the vast majority of the population, living on $2 per day or less, a hike in prices for consumer staples would be difficult to weather.
One area in which President Buhari’s anti-corruption campaign can claim progress is in the recovery of illicit gains stashed overseas, although these efforts began before he took office. Much of this has come from accounts containing funds illegally expatriated by General Sani Abacha, who ruled Nigeria from 1993 to 1998. The government has worked with the Swiss government to facilitate the return of $1.07bn held in accounts there, while another $227m came from Liechtenstein.
The Buhari government has also worked to eliminate “ghost workers” from the federal payroll. The term describes workers who do not exist, but for whom identities have been created and entered into the system by people who then collect the salary payments. The government successfully cut spending on salaries by N82bn ($265.1mn) in 2016, thanks to its Integrated Personnel Payroll Information System. However, wages remain the biggest portion of federal expenditure, accounting for 71% of recurrent non-debt expenditure in 2018, and amounting to around N2.46trn ($8bn).
Sovereign Wealth Funds
The ECA was established in 2003 to help insulate the country from swings in oil revenue, and as of September 2018 it had a balance of $2.3bn. It is funded with any surplus that comes as a result of extra oil revenue when prices are higher than was anticipated in the budget.
Both the states and the federal government can request disbursements from the ECA, which are then shared by the three levels of government. The federal government in Abuja receives 52.7%, the 36 state governments collectively receive 26.7% and local governments are allocated 20.6%. The concept has been a controversial one, with state governors often claiming that the money should be disbursed for spending on developmental priorities rather than saved for later. As of March 2018, legislation was being prepared to clarify its legality, which has recently been called into question in some quarters.
In May 2011 the government created the Nigeria Sovereign Investment Authority (NSIA), a sovereign wealth fund, and transferred $1bn to it from the ECA as start-up capital. Since then the NSIA has received another $250m that originated as a dividend payment from the Nigeria Liquefied Natural Gas Company, the public-private joint venture that exports gas. As of the end of 2017 the fund’s three assets under management had reached N420.9bn ($1.4bn).
One of the three funds, the Infrastructure Fund, receives 40% of capital, and is spent seeking returns of at least 6% annually from infrastructure projects that help develop the economy. It has invested in building a second bridge over the Niger River, for example. In 2017 the NSIA, in partnership with GarantCo, established the private company InfraCredit, which helps infrastructure developers access credit by guaranteeing their debt issuances against default.
The second NSIA fund, the Future Generations Fund, also receives 40% of total capital, and is mandated to create a diversified portfolio of assets that will bring in returns of at least 5% for the country’s post-oil future. The Stabilisation Fund, which receives the remaining 20% of NSIA capital, invests in fixed-income securities such as US Treasury bills, and targets a 1% annual return. Its priority is to hold liquid assets that can be sold quickly in case budget support is required.
The Infrastructure Fund is managed by in-house investment specialists and the Stabilisation Fund by Goldman Sachs, Credit Suisse and UBS. The Future Generations Fund is deployed through 24 asset managers spread throughout the US, Europe, Asia and Africa.
Nigeria was a beneficiary of the 2005 debt forgiveness round initiated by the Paris Club, which reduced the country’s external debt, which stood at $30bn, by some $18bn. Nigeria was subsequently among the many poorer developing countries that were not exposed to the toxic assets that sparked the global financial crisis of 2007-08.
Exposure to these assets caused many impacted countries and their banks to retreat from global debt markets, and those with no exposure were encouraged by global investors to step into the void and issue their own dollar-denominated debt, in the form of eurobonds. Nigeria, Ghana, Kenya, Senegal, Zambia and other nations have all sold eurobonds, many of which are now set to mature after 10 years. Instead of regular repayment schedules, however, they are often structured with a bullet payment being made upon maturity, or with several payments staggered over the latter half of the duration.
Nigeria has sold seven eurobonds worth a total of $8.3bn since the crisis, with the first repayments due to be made in January 2021. According to the Debt Management Office, the total outstanding external government and sub-sovereign debt is $22.1bn, while total naira-denominated debt is $51.1bn, making a total of $73.2bn. According to calculations from global ratings agency Standard & Poor’s, the current debt-to-GDP ratio of 18.2% will average 27% over the years to 2021, meaning that Nigeria will remain relatively in line with the debt-to-GDP ratio of many of its peers. The eurobonds provide working capital and, for this reason, time before repayment becomes a pressing concern.
Going forward, the official policy will be to borrow in dollars rather than in naira where possible. There are several reasons for this. One is that issuing a steady stream of naira-denominated bonds has had the effect of reducing the inclination of banks to lend money to the private sector. This is due to the fact that lenders perceive there to be less risk in holding government bonds (see Banking chapter).
Another reason is that the cost of borrowing is lower in dollars than it is in naira, and maturities are longer. Eurobond interest rates were below 8%, and naira-denominated ones typically offer a rate of around 15%. At the end of 2017 Nigeria was selling 91-day Treasury bills with an interest rate of 13.5% as well as one-year treasuries at 18.5%. “The benefits of that switch are a reduction in overall interest payments and a lengthening of maturities,” Catherine Patillo, assistant director of fiscal affairs at the IMF, told local media.
The government’s policy priorities are broadly outlined in the ERGP, which aims to hike GDP growth to a rate of 7% through interventions in five main areas: macroeconomic stability; food security; energy sector infrastructure; transportation infrastructure; and boosting industrialisation through small and medium-sized enterprises.
Policy approaches have been fairly consistent under successive governments. The previous administration introduced a plan called the Transformation Agenda that was roughly equivalent to the ERGP, while the current power sector plan, the PSRP, is a successor to the Roadmap for Power Sector Reform put in place by the former administration of President Goodluck Jonathan. Under both the current and previous administrations, the government has used tariffs and non-tariff barriers to block imports, with the aim of creating jobs as well as dampening demand for foreign currency, which was so intense that it was pushing the value of the naira below the CBN’s target range.
Similarly, the plan for the power sector has been broadly consistent since it was established more than a decade ago during the administration of President Olusegun Obasanjo. Despite this continuity, however, electricity tariffs have not been allowed to rise to levels that would be sufficient to attract desired quantities of investment. For both foreign and domestic investors who are interested in direct investment, the country’s privatisation programme has been a consistent element of the policy mix since the implementation of the Privatisation Act of 1999, which is administered by the Bureau of Public Enterprises (BPE).
Areas in which privatisation has taken place in recent years have included much of the country’s power generation and telecommunications assets, factories and transportation infrastructure. The BPE has also commissioned operating rights and management contracts for assets such as the Transmission Company of Nigeria, which manages the national power grid. From 2000 to 2015 the BPE oversaw the privatisation or concessioning of 143 federal entities, raising N1.3trn ($4.2bn) in the process. It considered 66% of these assets to be performing well in private hands, as was outlined in the country’s February 2017 bond prospectus. An area of notable policy evolution in the power sector is the approach to off-grid power.
While previous iterations of the power sector master plan have broadly focused on boosting the capacity of the national grid, the PSRP has added a particular emphasis on small-scale, off-grid solutions for remote areas or specific users. Under President Buhari, the Rural Electrification Agency has focused on identifying ideal sites for mini-grids, as well as on attracting investment in these projects. One of the main policy issues unresolved as of October 2018 is the long-awaited legislation reforming the petroleum industry, including a regulatory overhaul that would see the NNPC relinquish its regulatory powers.
A Petroleum Industry Bill was proposed in the late 2000s, but early in the Buhari administration a single bill to overhaul all aspects of the sector was deemed too difficult to pass. The reforms were broken into several bills to be passed into law, but this has yet to take place (see Energy chapter).
Major reforms are expected to be enacted following the general election in February 2019. For the state’s revenue targets, oil prices will be the paramount factor. Another key area is the ability to keep all of the country’s pipelines and associated infrastructure operational. The sector suffers from frequent attacks from militant groups, which have on numerous occasions shut down production entirely.
The upcoming election cycle will to a large degree constitute a referendum on President Buhari and his anti-corruption campaign. Whatever the result, the winner will be expected to once again consider major policy questions, notably including the issues of subsidies, oil sector laws and how to boost tax receipts.
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