Nigeria 2015: analysis of election issues and future prospects

Is Nigeria an emerging economic giant?

Optimists about Nigeria’s longer-term economic prospects tend to focus on its favourable demographics and the emergence of fast-growing industries such as telecommunications and media. However, deep structural challenges remain, such as the economy’s dependence on oil, high poverty levels and the nation’s poor infrastructure. The extent to which Nigeria’s economic potential is fulfilled depends significantly on how successfully Nigeria is able to tackle these structural impediments.

Member of the MINT club

Ever since the success of the acronym ‘BRICS’ – created at the beginning of the 2000s to describe the large fast-growing economies of Brazil, Russia, India, China and South Africa – economists and investment managers have been attempting to come up with another collection of emerging economies containing large populations with bright prospects that can be combined to form a catchy acronym or phrase. The most recent of these to gain significant traction is the ‘MINT’ countries (Mexico, Indonesia, Nigeria and Turkey).⁹⁸ Jim O’Neill, the Goldman Sachs economist who coined the term BRICs, has been prominent in drawing attention to the MINT’s.⁹⁹

Mr O’Neill believes that Nigeria “could be one of the top 15” largest economies in the world by 2050.¹⁰⁰ Others also see massive potential in the Nigerian economy in forthcoming decades. In its 2011 report The World in 2050, PwC, the consultancy, projected Nigeria to become the 13^th largest economy by 2050.¹⁰¹ More recently, McKinsey, another consultancy, in its July 2014 report Nigeria’s renewal: Delivering inclusive growth in Africa's largest economy estimated that Nigeria could potentially achieve growth of 7% per year up to 2030, which would make it a top-20 economy, bigger than the Netherlands.¹⁰² Nigeria was the world’s 23^rd largest economy in 2013.¹⁰³

Current economic situation uncertain

Nigeria is Africa’s largest economy and has experienced fast growth over the past 15 years. A large proportion of the population has not seen the benefits of this growth, with high rates of poverty, particularly in rural areas. Recently revised data show the economy to be larger and more diversified than previously thought, with fast-growing industries such as manufacturing and telecommunications driving growth. Nevertheless, the oil and gas sector remains crucially important, accounting for almost 95% of exports and up to 75% of government revenue. The steep fall in the oil price since mid-2014 has therefore hurt the economy, with the local currency depreciating meaning that imports are more expensive, the government has to cut its expenditure and growth forecasts have been lowered.¹⁰⁴

The need to become less dependent on the oil sector

Recent developments only serve to highlight the need for the Nigerian economy to become less beholden to oil. Indeed the government’s 2015 budget plan makes clear the need to become a non-oil economy, a goal reiterated by President Jonathan recently.¹⁰⁵ This will require better management of the public finances, a broadening of the tax base and more inclusive growth.

Fast-growing sectors such as telecommunications and media will be part of this diversification and the population’s embrace of entrepreneurialism, together with the projected rapid growth in the working-age population, create opportunities for strong growth.

In its report, McKinsey argues that there is potential for rapid growth in the non-oil sector over the next 15 years.¹⁰⁶ It believes potential growth in manufacturing, retail and wholesale trade, and infrastructure sectors will outpace that of agriculture and oil, creating a more diverse economy. This is based on assumptions that Nigeria takes advantage of its potential by increasing the productivity of the workforce, and that government is effective in addressing some of the economy’s key structural barriers to growth such as weak infrastructure, high levels of corruption, poor education levels and an unproductive agricultural sector.

The government’s long-term strategy for structural reforms is reflected in its 2020 Vision and Transformation Agenda plans. These are aimed at boosting the country’s productivity and competitiveness and making growth more inclusive by diversifying the economy away from oil.¹⁰⁷

Oil and gas sector

While the need to become less dependent on oil is clear, the oil and gas sector will remain an important part of the economy. Oil reserves are the second largest in Africa at an estimated 37 billion barrels and revenues from production will continue to provide much-needed revenue to government.¹⁰⁸

As such, improving the performance of a sector that has been struggling in recent years is an important component of delivering a stronger economy.

Reducing disruptions to supply form a key part of this agenda. Between 100,000-500,000 barrels of oil per day (up to 20-25% of potential production) are lost due to ageing infrastructure, poor maintenance and theft from pipelines. An estimated $11 billion in revenues was lost due to oil theft from 2009 to 2011.¹⁰⁹

For these reasons, oil production in recent years has fallen short of what was expected, leading to budget shortfalls. The need for investment in the sector, which generally comes from international oil companies is therefore clear.

However, security risks in the form of pipeline vandalism, as well as activities of militants in the Niger Delta region, have dampened the appetite to invest. Uncertainty with regard to the regulatory climate is another factor behind the absence of investment and exploration activities.

The Petroleum Industry Bill was initially proposed in 2008 in order to improve transparency in the state-run oil company and introduce new fiscal terms to govern the sector. The bill has still not been passed and this uncertainty has deterred international oil companies from investment projects.

With the right reforms, McKinsey estimates that production could increase from 2.4 million barrels per day to more than 3 million in 2030, helping to provide an additional $35 billion a year to GDP by 2030.¹¹⁰

Young population expanding rapidly presents opportunity for growth

With a population of around 177 million, Nigeria is already Africa’s most populous country. Rapid growth is expecting to continue with the UN projecting the population to climb to 440 million in 2050 (this would be 10% above the projected US population of 400 million).¹¹¹ Demographics are also favourable with the working-age population (those aged 15-64) projected to rise from 85 million in 2010 to 260 million in 2050.

This could help boost growth in a number of ways.¹¹² A rising population boosts demand for goods and services in the economy creating more businesses, expanding existing ones and creating the potential for economies of scale to develop (thereby lowering production costs). The rise in the working-age population also provides a larger potential pool of workers for businesses. The sheer size of the country and the large number of potential new customers also makes it attractive to foreign investors. Population growth is also likely to lead to greater urbanisation, which is closely associated with economic development and improved standards of living.¹¹³ Large urban areas have been shown to boost innovation and allow firms to service larger numbers of people more cheaply.

High poverty levels and poor education skills present barriers

Poverty

Strong population and economic growth over the past 15 years has not translated into lower poverty levels, which have remained high and stagnant since the 1980s. The World Bank estimates that 62% of the population in 2010 lived on less than $1.25 a day, the same as in 2004 and 1992.¹¹⁴ Poverty rates are higher in rural areas than urban areas and much higher in remote areas of the north than in the relatively prosperous coastal cities such as Lagos. Common factors behind poverty across the nation include the lack of an overall social protection safety net and poor infrastructure (discuused in more detail below).¹¹⁵

The higher levels of rural poverty are often associated with low productivity in the agriculture sector, which as the dominant employer, has suffered from underinvestment and failed to move beyond a subsistence level. Nigerian farms yield less than comparable countries and small farmholders generally lack knowledge of farming best practice, meaning productivity in the sector is poor. In addition, a growing population has also reduced plot sizes and a poor infrastructure limits the ability to sell crops to market.

The government launched its Agricultural Transformation Action Plan in 2011, a series of market-oriented reforms designed to: boost the efficiency of the sector; make it more profitable; and move it up the value chain of agricultural products.¹¹⁶

Urbanisation has not raised income levels as quickly as it has in other fast-growing developing nations. A huge number of Nigerians work informally, mostly in very small enterprises. Such informal small companies are unlikely to have access to capital, innovate and expand. Profits are also less likely to remain in the business, reducing the chances for expansion. A lack of formal employees on contracts in large businesses also reduces productivity, as workers are less likely to be given training and acquire new skills. A survey of businesses found that 63% of new jobs created in the first three quarters of 2014 were in the informal sector.¹¹⁷ Urban areas also suffer from a relatively high cost of living resulting from a limited housing stock (especially in Lagos), high transport costs and high food prices (due to poor productivity in the agricultural sector).

Education levels

Skill levels of the workforce in Nigeria are generally seen as poor, with plenty of room for improvement. The World Economic Forum’s Global Competitiveness Index ranks Nigeria as 124 out of 144 countries in terms of higher education and training.¹¹⁸ More fundamentally, 35 million adults cannot read or write and UNESCO found that 10 million children aged between 6 and 17 are not in school.¹¹⁹ Boko Haram’s targeting of schools in the north of the country presents substantial additional barriers to expanding educational attainment there. These shortfalls in human capital restrict economic productivity and therefore wages.

With a rising young population, the labour market will need to be able to absorb millions of new entrants in the decades to come. Therefore in order to maximize both the country’s growth potential and reduce poverty rates it is crucial that education levels of the current and future workforce are raised.

Poor business environment and infrastructure hinders growth prospects

Potential for stronger private sector

Nigeria is a strongly entrepreneurial society, with the 2013 Global Entrepreneurial Monitor reporting that 40% of those of working age were involved in setting up their own business in the past three-and-a-half years, the highest proportion of the 70 countries surveyed. In addition, 81% of those aged 18-64 agree that most people in Nigeria consider starting a business a desirable career choice – ninth highest of the 65 countries in the survey (the UK figure was 54%).¹²⁰ This suggests the country is well placed to build a strong and successful private sector that can take advantage of new technologies and to exploit expanding markets both at home and abroad.

The vast commercial area centred around Lagos in the south-west already contributes an important share of the country’s economic activity, but has the potential to become more productive and take advantage of its location on the coast that is favourable for trade, tourism and industry.¹²¹

Poor business environment

To be able to fully capitalise on these positive foundations, the country’s current poor business environment needs to improve.

At present, weaknesses in business regulations are holding back the private sector. These include poor regulations in tax administration, the enforcement of contracts and difficulties in starting a business. Measures of international competitiveness reveal the extent of the problem. The World Bank’s Doing Business rankings put Nigeria 170^th out of 189 countries for “ease of doing business” in 2014, just above Zimbabwe (171^st) but below Cameroon (158^th), Ghana (70^th) and South Africa (43^rd).¹²² Nigeria does especially poorly in terms of businesses getting electricity (ranking 187^th out of 189 countries), registering property (185^th) and paying taxes (179^th). Businesses, particularly smaller ones, have difficulty getting access to finance and those that can agree loans face very high rates of interest.¹²³

The World Economic Forum in its Global Competitiveness Report, ranked Nigeria 127^th out of 144 countries in 2014/15, below Cameroon (116^th), Ghana (111^th), and South Africa (56^th).¹²⁴ Nigeria does particularly poorly on the quality of public institutions (132nd) and infrastructure (134^th).

Corruption, as well as the perception of corruption, hinders growth in Nigeria by creating additional costs (in the form of bribes) for firms, distorts the market, leads to the misuse of public funds and deters foreign investment. Transparency International ranks Nigeria as equal 136^th out of 175 countries in its Corruptions Perceptions Index of public institutions in 2014, below Ghana (61^st), South Africa (67^th) and the Ivory Coast (115^th).¹²⁵

Political and security instability presents an additional problem for businesses, particularly for businesses operating in conflict areas of the country. The threat of violence and terrorism may lead to companies investing in security, creating an additional cost to doing business. These concerns make the country less attractive to foreign investors. Political instability also creates uncertainty, with some fears over the potential impact of the Presidential election

Weak infrastructure

Nigeria’s poor infrastructure is a major obstacle to growth and will continue to be so unless significant investment is made. The World Economic Forum in its Global Competitiveness Report ranked Nigeria 134^th out of 144 countries for its overall infrastructure in 2014/15.¹²⁶ The quality of the transport network is weak, with severe congestion in city centres like Lagos, unpaved roads in many areas and high rates of road accidents. The rail network is patchy with limited coverage. There is no deep-water port (though two are being built) and Lagos’s ports are beset with congestion.¹²⁷ This makes it difficult for businesses to maintain reliable supply chains and raises their transportation costs.¹²⁸

Electricity supply is poor and extremely unreliable. Demand far exceeds supply, meaning there are frequent power cuts. Lack of maintenance leads to loss of power in transit of up to 30%, and power stations only generate about 4GW of electricity, one tenth that of the capacity in South Africa.¹²⁹ Most businesses buy their own generators, adding to production costs. The World Bank’s Doing Business report ranks Nigeria as the third worst in the world in providing business with electricity, only above Bangladesh and Madagascar.¹³⁰ The government in 2013 privatised the generation and distribution of power (it retained transmission) in the hope of improving efficiency in the sector.¹³¹

The government also introduced a 30-year National Integrated Infrastructure Master Plan (NIIMP) in 2013 to try and address the weakness in the nation’s infrastructure. It aims to accelerate and coordinate projects and raise the stock of Nigeria’s infrastructure from 20-25% of GDP to 70% by 2043.¹³² Funding will be provided, almost equally in the first five years, by the public and private sectors. The plan estimates that Nigeria requires over $3 trillion to deliver the quality of infrastructure desired in the plan.¹³³ Given the cutbacks in the government’s budget as a result of falling oil revenues, it remains to be seen how much funding the plan will actually receive.

Conclusion

In order for the optimistic scenarios of Nigeria’s economy to be achieved, a large number of significant barriers to growth need to be overcome. These include a poor business environment, high poverty, corruption, poor infrastructure (especially electricity supply), low skill levels of workers, security concerns and over-dependence on the oil sector for government revenues and exports.

As numerous and significant as these challenges are, rapid population growth, good demographics, an entrepreneurial culture, ample natural resources, favourable geographic location and fast-growing non-oil sectors present a real opportunity for Nigeria to improve the living standards of its vast population and, as some anticipate, become one of the world’s largest 15 economies by 2050.

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