Nigeria–The African Express

Nigeria is Africa’s largest economy, but the recent slump in oil prices has halved government revenues. The new Buhari government must now ensure the country’s economic roller coaster ride does not grind to a complete halt.

Despite civil strife in the northern part of the country, Nigeria still managed to conduct national elections in March that were hailed by international observers as peaceful and transparent. The new president, Muhammadu Buhari, an acclaimed anticorruption crusader and former military head of state, ran on a platform of strengthening Nigeria’s rule of law and nurturing the country’s surging business sector. With Buhari in the driver’s seat, is the African Express about to take off?

Nigeria is already Africa’s largest economy and biggest oil producer, as well as being the most populous nation on the continent. The country has enjoyed strong economic growth in the past few years. According to government figures, Nigeria achieved an average annual growth rate of 7% from 2007 to 2013. In 2014 it became the largest economy in Africa, displacing South Africa to second position, after rebasing its gross domestic product according to 2010 production patterns, which increased the number of industries measured from 33 to 46.

“Although growth has been strong, it has generally been jobless growth,” remarks Pat Utomi, a professor of political economy at the Lagos Business School, Pan-Atlantic University. The lack of sustainable economic growth has been attributed to Nigeria’s dependence on oil. The fall in global oil prices, a process which began in the middle of last year, led to a 53% decline in government revenues in the first quarter of 2015. This placed enormous pressure on the naira, as foreign reserves fell 13.5% to $29.8 billion at the end of March following efforts by the central bank to defend the currency.

According to government figures, the fall in oil revenues caused the rate of growth to fall to 4% in the first quarter of this year, down from approximately 6% in the last quarter of 2014. “Nigeria is an oil economy, whose fortune is more closely related to oil prices than anything else,’’ says Jan Dehn, head of research at Ashmore Investment Management in London. “Only when the government learns to insulate the economy from the boom-bust cycle of oil prices will an environment emerge where the talents and abilities of Nigerians can be fully realized.’’


Dehn says Buhari’s priority should be to reestablish macroeconomic equilibrium and to put in place a new system of managing Nigeria’s oil wealth for the good of all rather than a few. Part of that challenge, he adds, includes ensuring that Nigeria is not dropped from the J.P. Morgan Government Bond IndexEmerging Markets. Inclusion in the index is a sign of a country’s acceptance to international investors, which should make it easier to attract foreign investment. However, J.P. Morgan is worried about foreign currency restrictions instituted by the Nigerian central bank that limit the amount of foreign currencies that investors can access to exit the local market, which could affect the liquidity of naira sovereign bonds. J.P. Morgan has until the end of this year to decide whether to retain or remove Nigeria from its emerging markets bond index.

Utomi says ensuring a macroeconomic balance will require stringent measures, including plugging the leakages in state revenue and strengthening the power of the economy to attract foreign direct investment. FDI into the country declined 40% in the first quarter on the back of uncertainties about March’s general election outcome, says Abiola Rasaq, Lagos-based head of investor relations at United Bank for Africa. With the historic transition to power of Buhari, after incumbent Jonathan Goodluck became the first president in Nigerian history to lose an election, Rasaq believes that the democratic process in Nigeria is now stronger than ever. That should set the stage for the economy to flourish.

Although the oil sector has largely produced recursive growth in Nigeria, it provides a starting point for the new impetus needed to ignite the economy. “If reforms in the oil and gas sector are pursued in the right way, the sector can become a major source of FDI,’’ says Rasaq. The Petroleum Industry Bill, which proposes significant changes in tax regimes and funding structures in the oil and gas industries, including raising Nigeria’s earnings from gas by aligning domestic gas prices with international prices, has been stuck in the National Assembly for years. Disagreements between the government and international oil companies over funding arrangements, and between the northern region and Niger Delta over compensation for oil-producing communities, has stalled the bill. But with increased revenue challenges facing the government, Buhari will be under increasing pressure to push for its passage to pave the way for reforms, including the unbundling of state-run Nigerian National Petroleum. Data Summary: Nigeria

Central Bank: Central Bank of Nigeria

International Reserves

$47.548 billion

Gross Domestic Product (GDP)

$573.652 billion

Real GDP Growth




GDP Per Capita—Current Prices


GDP—Composition By Sector*








Public Debt (general government
gross debt as a % of GDP)




Government Bond Ratings
(foreign currency)

Standard & Poor’s


Moody’s Outlook

FDI Inflows

$8,915 million

$1,543 million

$1,237 million

* Estimates
Source: Country Economic Reports


Nigeria also needs to step up the drive to attract investment into infrastructure. From power to transportation, investment is needed to boost local production capacity. In the past 16 years, Nigeria has spent more than $20 billion on building power plants, but that expenditure “was fraught with . . . corruption,’’ says Utomi. Part of the money was allegedly diverted from the projects, and despite investment, power generation has actually fallen. In mid-May, power generation dropped to 1,300mw, compared with 1,500mw generating capacity in 2000.

Given the dire fiscal position of the government, Rasaq says, no one expects it to be able to fund the country’s infrastructural deficit. However, he does anticipate that the government will open up the infrastructure sector and allow private participation and FDI to drive development of the country. But for this to occur, Rasaq says, the rule of law and the judicial system need to be strengthened so that investors are assured that they are protected. He adds that part of the envisaged judicial reforms have to do with the time it takes to resolve commercial litigations. “People need to be sure they are not going to go to court forever when they have an issue.’’ Utomi, author of a book entitled Why Nations Are Poor, says the government needs to clearly demonstrate where it wants the economy to go in order to shore up investor confidence. “Where national strategy is clear and institutions are strong, the typical strategy adopted by firms is one involving long-term investments, because they can predict where things are going.”


Nigeria’s new government realizes it must seek alternative sources of growth beyond oil. However, one consoling factor is that in the past 10 years, GDP growth has been largely driven by the non-oil sector. In the first quarter of this year when the oil sector declined by approximately 8%, it was growth in the non-oil sector of approximately 6% that helped the economy achieve modest overall growth of 4%. “We [Nigeria] seriously need to look beyond oil,’’ says Rasaq.

Citing the example of Kenya, the East African nation that derives most of its foreign exchange earnings from tea, coffee and flour, Rasaq says the first thing Nigeria needs to do is to select four or five key sectors to focus on. In agriculture, for example, he says Nigeria could choose to focus on cocoa (of which it is the fourth-largest producer in the world), cassava and rice. “The agricultural sector can come to Nigeria’s rescue in place of oil,” he asserts.

The banking and telecom sectors are also likely to play an increasingly significant role. After the recapitalization exercise in 2006, when banks were forced by the central bank to raise their minimum capital base from two billion naira ($10 million) to 25 billion naira, 25 banking groups emerged, made up of 75 banks, while 14 others failed the recapitalization exercise. Having fortified their capital base, Nigerian banks now have more financial capacity to fund transactions.

Agriculture accounts for approximately 5% of banks’ loan books, up from less than 1% before the reforms were instituted. When the government sold power assets in 2013, only 30% of the sale was financed through equity contributions by investors; the balance was funded through debt and largely Nigerian banks because international banks were not forthcoming, notes Rasaq. “Nigerian banks provided support,” he adds, “because they felt that [agriculture] was a critical sector that had strong integration with other sectors.” Banks’ performance is also aided in part by growth in the telecoms sector. In 2000, Nigeria’s teledensity was 0.4 lines for 100 inhabitants—Mongolia and Afghanistan were the only two countries with teledensity worse than Nigeria’s, according to Ernest Ndukwe, a former CEO from the Nigerian Communications Commission, which regulates the telecoms industry.

At that time Nigeria had 400,000 fixed lines and 25,000 analog mobile lines. But by April 2015, the county had 145.5 million fixed and mobile lines and a teledensity of 103.9% as a result of liberalization of the telecoms sector in 2001 and a subsequent inflow of investments, which resulted in the introduction of four major telecommunications networks—MTN, Airtel, Globacom and Etisalat. “This [the growth in telecoms] has strong linkages to the economic sector because it drives trade, financial services activities and overall economic activity,’’ says Rasaq. It has also enabled the development of alternative banking channels such as online banking and mobile banking, he adds.

The agricultural sector can come to Nigeria’s rescue in place of oil.

~ Abiola Rasaq, United Bank for Africa


Nigerian retail outlets such as Shoprite Holdings and SPAR’s Park ’n’ Shop have carved a niche for themselves in the Nigerian distribution chain, especially in the agricultural sector. They can obtain goods from farmers and suppliers of manufactured goods at much lower prices than traditional, local markets. “The fact that they are proving successful shows that they are adding value to the distribution chain in Nigeria,’’ says Utomi. “They have organizational skills and provide a more comfortable environment for the emerging middle classes to shop, and they offer products of higher quality too.’’

Nigeria’s agricultural sector suffers from a lack of storage facilities, which can lead to financial losses, especially during harvest periods. Farmers are sometimes forced to cut back on their financial outlays. But now with the intervention from distribution chains, this is fast changing.

The retail outlets provide price guarantee assurances to farmers, and that, in turn, provides a level of price assurance and predictability. “The retail outlets can even run their own private commodities markets like commodity exchanges,” Utomi says.