Is it Nigeria’s time at last?

The British Council in Nigeria calculates that the economy grew from just $36bn in 1999, when military rule ended, to $555bn in 2010 but adds that the figures ‘may even be an underestimate.

Even an assessment of Nigeria’s economic success throws up problems because of the size of the informal sector, the scale of corruption and, of course, different ways of calculating such figures. The British Council in Nigeria calculates that the economy grew from just $36bn in 1999, when military rule ended, to $555bn in 2010 but adds that the figures “may even be an underestimate, because they do not include the informal sector … which makes a substantial contribution to national wealth creation”.

Even the British Council figure for 2010 appears to be based on purchasing power parity (PPP) and so is more than double the IMF estimate of Nigerian GDP of $244bn. PPP-based GDP measures economic output according to what can be bought within the domestic market.

PricewaterhouseCoopers (PwC) forecasts that Nigeria will become the 13th biggest economy in the world by 2050. The PwC report states: “Nigeria could be the fastest-growing country in our sample due to its youthful and growing working population, but this does rely on using its oil wealth to develop a broader based economy with better infrastructure and institutions as regards rule of law and political governance and hence support long term productivity growth – the potential is there, but it remains to be realised in practice”.

Optimism over the future of the Nigeria economy is not mere wish fulfilment. There are concrete data to back it up. Firstly, GDP grew by 7.8% in 2010 and 7.7% in 2011, while the IMF estimates that growth of 6.9% was achieved in 2012. This is in line with the government target of average annual GDP growth of 7-8% up to 2020 as part of its Vision 2020 development strategy. The strong growth and improved economic stability prompted Standard & Poor’s to join Fitch’s in upgrading its long-term foreign and local currency sovereign credit rating from B+ to BB-.

Explaining the move, the agency stated : “External reserve buffers have been strengthening on the back of high oil prices and strong exports. The government has sustained reform momentum in several key areas, including cutting the fuel subsidy and reforming the power sector, and the authorities have restructured and strengthened the previously troubled banking sector. The stable outlook assumes that the government will continue to pursue its reforms and that there will be no worsening of political tensions and no significant return of insurgency in the Niger Delta.” Moody’s has also decided to include Nigeria in its ratings, with a Ba3 rating.

Confidence in the banking sector seems to be increasing, with the IMF stating: “Financial soundness indicators point to continued improvements in the health of the banking system. Non-performing loans have declined sharply following their purchase.” This refers to the purchase of $11bn in nonperforming loans by the Asset Management Corporation of Nigeria.

Bank revenue and profit levels are rising, and this is expected to be reflected in the African Business 2013 survey of the Top 100 African Banks.

International confidence in the Nigerian economy is clearly growing, as 70% of stock value on the Nigerian Stock Exchange (NSE) is now held by foreign investors. The NSE ended last year 34% higher than 12 months earlier, at 28,079 points, although this is still lower than in 2008 prior to the global economic crisis.

National foreign exchange reserves have grown to $42bn, while the naira even gained 1.8% on the US dollar during 2012, partly because of the Central Bank of Nigeria’s (CBN) decision to keep interest rates at 12% for most of the year.

CBN governor Lamido Sanusi said: “It’s clear the objectives we set for ourselves when we tightened have been largely achieved. We’ve stabilised the exchange rate and we’ve stopped inflation from spiking. The major concerns are around the external environment: what’s happening in America; what’s happening in Europe; and what will happen to commodity prices as a result.” Inflation has been brought under control but remained too high for comfort at 12.2% in 2012. As befits its position as Africa’s most populous nation, Nigeria is the biggest destination for foreign direct investment (FDI) on the continent. FDI stood at $8.9bn in 2011 and this figure should grow over the next few years, partly because JP Morgan has added Nigeria to its local currency government bond index.

Remaining challenges

Many of the main threats to the economy revolve around the oil sector, including the possibility of lower oil prices. Crude oil production averaged 2.25m barrels a day (b/d) last year and is expected to rise still further this year, mainly as a result of the improved security situation in the Niger Delta. The country has coped with lower oil production over the past five years because oil prices have risen but renewed global financial uncertainty and lower growth in Asia could drive prices lower and threaten the gains that have been made in the economy to date.

Other threats to the oil sector come from security and political instability, including continued unrest in the Niger Delta, growing religious violence, corruption and doubts over what will happen after President Goodluck Jonathan stands down at the next election. The government tried to remove all fuel subsidies in January 2012, with President Jonathan arguing that the country was unable “to continue to pump endless amount of money into the seemingly bottomless pit”.

However, a widespread general strike and street protests forced the government into a partial U-turn and the subsidies were reinstated at half their previous level. Even this step has saved the government at least $3bn a year but the reversal will have an impact on the goal of reducing the federal budget deficit from 3.5% of GDP in 2010 to 1.5% of GDP by 2015.

Finance minister Ngozi Okonjo-Iweala has identified sound fiscal management and corruption as the country’s two most important economic challenges.

The country has now risen to 143th out of the 183 countries in Transparency International’s Corruption Perceptions Index. There is a still a perception – with much to support it – that almost the only way for many people to make money is to tap into the country’s oil wealth, often through informal means. Although this report will consider the Nigerian economy on a sector-by-sector basis, it is important to note that no sector operates in isolation. The manufacturing sector, for instance, continues to be affected by power supply problems and so the outcome of power sector reforms will be keenly awaited by factory operators.

As ever, the government highlights the importance of economic diversification, but there are signs that progress is finally being made.

Non-oil sector growth has increased by 1% a year more than the economy as a whole over the past three years. Although the manufacturing and mining sectors are still relatively small, they account for a significant proportion of this growth. Even smaller industries have the potential to contribute much more to national economic life. Nigeria boasts a large music sector and the world’s third biggest film industry by the number of films released. It is from such industrious acorns that valuable creative industries can grow.