Nigeria charts uncertain economic path

While Nigeria’s economy rebounded in 2021, with growth at 3.4%, the outcome of plans for post-pandemic recovery and investing in growth on the back of high oil prices remain uncertain.


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Nigeria’s oil windfall sparked by Russia’s invasion of Ukraine should give the economy a much-needed boost as it recovers from the pandemic. 

Crude prices have reached eight-year highs during the first quarter of 2022, with the average monthly price rising from $74 in December 2021 to $97 in February 2022, touching $116 a barrel during March as the war intensified.

But the gains of this windfall are being undermined by several factors. One is below par oil production levels that, at about 1.2m barrels per day, are well below Nigeria’s OPEC quota of 1.8m barrels per day (bpd).

Another is President Muhammadu Buhari’s failure to end a fuel subsidy that is costing Nigeria up to $7bn a year. The president pledged early on in his rule to end the subsidy but his plans have met considerable opposition from trade unions and consumers as the move will almost double pump prices – not a good move in the year before an election.

Not only is the cost of keeping it unsustainable, but removing it will have three main advantages – it will reduce the incentive to smuggle fuel to neighbouring countries where prices are higher, increase revenue for the three main tiers of government and improve accountability and good governance, says Bismarck Rewane, CEO of Lagos-based Financial Derivatives Company (FDC).

The launch of the 650,000 bpd Dangote Refinery this year may offer Buhari a way out. Providing local refining capacity at scale for Nigeria’s locally produced oil will reduce fuel prices and end regular bouts of scarcity that lead to the current dependency on fuel imports.

The refinery could save Nigeria as much as $9bn annually in import costs and conserve scarce foreign exchange, according to finance minister Zainab Ahmed. Further benefits will be accrued from exporting any surplus after local demand has been met.

Forex problems

The size of Nigeria’s import bill and economic hardships in recent years have led to a forex shortage that has had severe implications for this largely import-dependent economy. Interventions by the Central Bank of Nigeria (CBN) to manage the currency have been widely criticised. The rate has continued its downward spiral, losing more than 250% against the US dollar over 10 years, according to FDC.

The CBN has devalued the currency three times since March 2020 as a result of lower oil income, putting pressure on the country’s reserves. The bank has resisted calls by the International Monetary Fund and the World Bank for a merger of the multiple rates although the boost to forex reserves in the current environment of high oil prices may ease its burden. 

Nigeria’s rising debt is another area of concern. Eurobond yields have been rising as the perception of risk in emerging markets also increases, with higher interest rates in developed markets expected in the wake of the Russia-Ukraine war also pushing up debt repayment rates.

Nigeria’s external debt rose from $10.71bn in 2015 to $37.95bn in September 2021, according to the Debt Management Office. More than half of this is domestic debt. In 2021, the National Assembly approved a raft of loan requests from the president.

The latest – a $5.8bn loan in December 2021 – followed others amounting to about $14bn earlier in the year. Both the IMF and African Development Bank have expressed concerns about the country’s debt profile, saying high debt service payments pose a major fiscal risk.

Buhari has defended his big appetite for debt on the basis that it is needed to invest in infrastructure and development, although there are concerns about the high recurrent costs of running the government itself in an economy characterised by low productivity.

New taxes in the pipeline

The government is doubling down on tax collection and seeking taxes from new sources to help in bolstering its revenues. Years of neglect, tax waivers and turning a blind eye to the super wealthy show in the statistics – at around 6% Nigeria has one of the lowest tax-to-GDP ratios in the world. 

Post Covid-19 there are already reports of increasingly aggressive tax collection methods and harassment of companies as officials are pushed to meet revenue targets.

New taxes are in the pipeline following the passing of the wide-ranging Finance Act in December 2021, including plans to tax digital non-resident companies that sell products to Nigerian customers at 6% of turnover. The act contains amendments to legislation covering capital gains, company income tax, VAT and personal income tax.

Headline inflation, although down on some of the highs experienced in 2021, was still high at 18% in March – well above the CBN’s ceiling of 9%. Economists predict that it is likely to remain stubbornly high, particularly as food prices start to rise again in the wake of the war in Ukraine, which, with Russia, accounts for 29% of the world’s wheat supplies.   

High fuel prices will also drive inflation in Nigeria, as elsewhere. Already air fares have risen by as much as 100% on the back of fuel price hikes with, for example, a ticket between Lagos and Abuja selling for up to N100,000 ($240) in mid-March. 

Recovery from Covid

Nigeria is still recovering from the impact of Covid-19. The country returned to recession in 2020 after the virus caused widespread shutdowns and supply chain disruptions that aimed to curb the spread of the virus. 

This came after a three-year recovery from a previous recession precipitated by low oil prices from 2014. Oil prices in the early days of the pandemic reached record lows, even straying into negative territory for a while as demand plummeted in the wake of global lockdowns.

Growth of 2.2% in 2019 was reversed and the economy contracted by 1.8% in 2020. However, the rebound in 2021 was impressive with growth at 3.4% – the highest since 2014 and higher than the CBN’s earlier forecast of 3.1%. This was led by growth mostly in the non-oil economy, led by agriculture and services. 

Telecoms has been a strong growth engine for Nigeria, but although it remained resilient throughout the pandemic as a result of the increase in usage of online channels during lockdowns, growth fell from nearly 16% in 2020 to single digits in 2021. 

A primary cause was the government’s ban on new SIM cards in order to audit mobile operators for compliance with registration rules, thereby preventing people from obtaining new phone lines. Although the ban was reversed in April 2021, the Nigerian Communications Commission says the number of subscribers declined by more than 12m in the first quarter of 2021.

In 2021, the government shut down Twitter for seven months, which cost the economy $26bn, according to the Lagos Chamber of Commerce and Industry.

Success stories

Fintech has been a big success story for Nigeria, and for Africa. In 2021, 62% of an estimated $4bn in new investment into Africa was directed to fintech, according to investment research company Briter Bridges.

According to data gathered by Intelligence by Techpoint, Nigerian fintech startups raised almost $800m in 2021, 120% more than what they raised in the previous three years combined ($360.7m). 

Companies in this sector represent some of the fastest-growing firms anywhere, including the likes of Paystack and Flutterwave who join one of the largest established players in the space – Interswitch – as market leaders.

Fintechs, alongside tech startups in health, education, logistics and other sectors, are helping to improve efficiencies in the market and address longstanding dysfunction. 

The consumer sector continues to be a key attraction. With a population of over 200m, even 10% of the addressable market is higher than the population of many other African countries. The non-oil sector continues to drive growth, particularly in agriculture, construction, ICT, real estate, food, tobacco and beverages as well as cement.

Despite a perception of rising economic and security risks, investor interest in Nigeria remains strong. The Nigerian Investment Promotion Commission says proposals worth $23bn were announced in 2021 – 39% higher than the $17bn for 2020. 

The concern is that many of the plans for post-pandemic recovery and investing in growth on the back of high oil prices may be derailed, or at least delayed, by the build-up to the 2023 election. As Rewane pointed out recently, “Fiscal policies are going to be clouded by political considerations.”

Consumer sector remains resilient despite challenges

The consumer sector in Nigeria has proved to be one of the most resilient over periods of economic turbulence, with most industry investors staying the distance during tough times. 

The Covid-19 pandemic has been no exception. Despite the hit to the economy as a result of global lockdowns, investment is still flowing into the sector. Last year, for example, Coca-Cola announced a five-year $1.7bn investment as it celebrated 70 years in the country. 

Earlier this year, US personal care company Kimberly Clark recently opened an $80m plant in Ikorodu in Lagos. Unilever, which saw losses in 2019 and 2020, experienced a jump in sales of 35% in 2021 over the previous year.

The pandemic came on top of a perfect storm that hit consumers hard, with the sector buffeted by spiralling inflation, scarcity of foreign exchange as well as shortages of basic foods due to border closures with Nigeria’s neighbours and insecurity in agricultural areas. 

Covid-19 exacerbated those hardships but there were also rays of light. The Sundry Foods Group, headquartered in Port Harcourt, has 21 Market Square supermarkets across the country and owns the Kilimanjaro chain of fast-food restaurants. Its CEO, Ebele Enunwa, says the pandemic, while having many negative impacts on peoples’ lives, had also been good for business. 

“We sell basic and essential commodities and so regardless of what is happening in the economy, demand for our products remains strong. And we were considered an ‘essential’ business since we were a key source for food and other essential commodities and so we were not directly affected by the numerous lockdowns instituted by governments in Nigeria. 

“We were therefore allowed to trade for the entire period, and we experienced significant increase in demand as a result too.”

In contrast with many other countries, the lockdowns in Nigeria were not applied uniformally, as different states had the authority to implement them as they deemed necessary. But the national ban on international travel was good for shopping malls as well-heeled Nigerians, unable to travel abroad, were forced to do so at home. 

As a result, the Western-style malls enjoyed increased patronage over much of the past year and more, says Derrick Roper, CEO of Novare Equity Partners, which develops malls in Africa. 

“Because of Covid-19 we have seen people travelling less and shopping more in the malls. Some of the shops saw turnover double and we have seen occupancy in the malls increase in 2021 – it is the highest it’s ever been. And rentals arrears are also down,” he says. 

Ade Sun-Basorun, CEO of another local food retail chain, FoodCo, says that in addition to food, resilient brands during the pandemic included electronics, health and beauty products and furniture. 

He says there is still huge opportunity in the formal retail sector in Nigeria, given that it represents less than 10% of the overall retail market in the country and is much lower than in countries such as Kenya and South Africa. 

“This reflects an unmet need that creates opportunity even within the current cycle,” he says. “We see semi-formal retail going more formal, particularly as the youth is now driving a shift to a more modern retail experience.”

The withdrawal from the market of South Africa’s Shoprite has not created a vacuum, given that the 25 stores were disposed of in a franchise agreement with local company, Ketron Investment Ltd. Sundry’s Marketsquare has moved into a centre in Ikeja as the anchor tenant where Shoprite used to be, for example. 

Says Enunwa, “Formal retail is largely underdeveloped and so there is lots of headroom for growth which we are exploiting. 

“Our strategy is to put as many stores as close as we can to the consumer and to offer them the products that they want at the lowest prices possible. Our focus is largely on the customer, not on the competition.”

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