April 30, 2012
The second largest economy on the African continent has big plans for the period up until 2020. Within the next eight years Nigeria aims to propel itself into the club of the world’s 20 largest economies. Furthermore, the rating agency Fitch recently compared Nigeria with countries such as Indonesia, Azerbaijan and Russia which have become investment-grade countries in the space of eight years.
Whether such ideas prove to be more pipedreams or realistic forecasts hinges not only on the future oil price but also on how successful the Nigerian government is in implementing reforms.
Step by step, the current growth rates are bringing Nigeria closer to its goal. After recording growth of 7.4% last year the Nigerian economy is set to expand by about 7% in real terms once again this year. The main growth drivers remain agriculture, wholesaling and the retail sector. Although the oil industry has little direct influence on Nigerian growth, its indirect influence must not be underestimated. Oil and gas exports constitute about 90% of all Nigeria’s exports and generate 77% of all government revenues. A projected oil price of around USD 115 per barrel for this year should, however, also have a positive impact on Nigerian growth.
Oil stabilisation fund growing too slowly
With nearly all the deposits in the oil stabilisation fund used up at the end of 2010, the current balance is still only a paltry USD 3.6 bn. Since Nigeria remains highly dependent on oil and gas prices, it is important for this cushion to be bulked up further to enable the country to ride out any renewed oil price shock. The planned transfer of the deposits into a new sovereign wealth fund will probably take place in May at the earliest.
The fact that foreign exchange reserves are growing only minimally despite buoyant oil revenues continues to raise the question of whether the naira might be overvalued. The latest change in the exchange rate band from NGN 150/USD to NGN 155/USD occurred last November. The fluctuation band of +/- 3% was retained, with the naira set to trade at the lower end of the band until the end of the year.
Prominent finance minister steering a consolidation course
The appointment of the internationally renowned economist Ngozi Okonjo-Iweala as Nigerian finance minister was well received. Since taking up her post in spring last year she has espoused strict fiscal consolidation. Instead of completely abolishing the petrol subsidy she only managed to halve the subsidies at the start of the year because of nationwide protests and strikes, but her general government deficit target of 3% of GDP for this year remains within reach. The low debt of around 18% of GDP casts Nigeria in a positive light especially against the backdrop of the European debt crisis. The imminent revision of the GDP statistics, with the base year to be changed from 1990 to 2008, could result in a significant rise in GDP – as was the case in Ghana in 2010. This would result in a further reduction in the debt and deficit ratios.
Banking sector crisis banished
The banking crisis that hit the financial centre of West Africa hard in 2009 has been largely ridden out. Five of the eight banks that were bailed out in 2009 with capital injections and liquidity support from the central bank have signed merger agreements or recapitalisation arrangements with other banks or financial service providers. The other three banks were nationalised and are now operated by the AMCON “bad bank” established in July 2010. AMCON also made a decisive contribution to cleaning up bank balance sheets by purchasing USD 20 bn of non-performing loans. Following a 6-month phase of contraction the Nigerian banking sector has been registering positive credit growth again since last July, which is providing the private sector with additional growth impetus.
Top spot among Africa’s oil producers
With output of some 2.4 million barrels per day, Nigeria remains one of the world’s top 15 oil producers. The “Petroleum Industry Bill”, which was first presented to parliament in 2008 and sought to increase transparency and accountability in the oil and gas sector, is currently being revised once again and will therefore not be able to come into effect until H2 at the earliest. The international oil majors will thus have to continue operating in an uncertain environment in the oil and gas sector, which will probably delay investment decision-making. In addition, sabotage and oil theft continue to reduce output.
Far-reaching reforms are also planned for the agricultural sector, which still generates nearly half of GDP. The primary objective is to abandon subsistence farming and make the transition to modern agricultural methods. The main focus of reform is therefore on boosting productivity by creating value chains that extend from fertilisers to food processing and by improving irrigation and optimising transport networks.
Middle class driving growth
Nigeria’s per-capita income of about USD 1600 makes it a low-income country. Nevertheless, the African Development Bank estimates that 10% of the Nigerian population now belong to the middle class. With a total population of 160 million people, this means that there is a potential market for consumer goods comprising some 16 million citizens. Moreover, the recent tripling of the minimum wage is also boosting purchasing power across a broad spectrum of the population, which should benefit the telecommunications and retail sectors. For example, the share of mobile phone users in the population climbed to 58% in February, and has thus more than doubled since 2007.
However, it remains to be seen if and when it will be possible to tap the enormous economic potential of Nigeria as a commodities producer with a large consumer market. There is still quite some way to go for Nigeria to climb the rankings of the world’s biggest economies from 40th to 20th place by 2020, and this will require the implementation of a good deal of reforms.
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