After 20 years of waiting, Nigeria finally rebased its economy in April 2014, evaluating for the first time the impact of runaway growth in telecommunications, technology, media and consumer goods. Gross domestic product leaped by 89% overnight, confirming what many analysts had suspected for years — that its economy is the largest on the continent, eclipsing South Africa.
The rebasing was a high point in a year of mixed fortunes for Nigeria, whose rapid growth and oil wealth has at times obscured huge structural deficiencies and socio-economic issues that remain unresolved, leading to political and economic insecurity that could threaten its long term progress.
With elections approaching, the opportunities for further reform have passed as the country enters its usual period of pre-poll stasis. “I think probably in the next month or two attention is going to have completely turned to the elections so pushing through big reforms seems very unlikely,” says Shilan Shah, Africa economist at Capital Economics in London.
The country’s election cycle began very early — the now deposed governor of the central bank, Sanusi Lamido Sanusi, warned last October that political focus had already shifted to electioneering. The polls are scheduled for February 2015 and a split in the governing party, the PDP, which has won every presidential election since 1999, has made the election more tightly contested than ever.
Far reaching changes have been pushed through — notably the liberalisation of the power sector, which has facilitated billions of inward investment and offered hope of improvement in the perennial shortage of electricity, which large and small corporates routinely report to be the biggest block on growth. A large scale push to modernise the moribund agribusiness sector, including financing and subsidy reforms, has also been viewed broadly as a success.
Other key reforms have fallen by the wayside, notably the Petroleum Industry Bill (PIB), legislation that sets out the new terms of engagement for the energy sector and has been trapped in the machinery of government since December 2008. At last year’s annual meetings of the World Bank and International Monetary Fund, finance minister Ngozi Okongo-Iweala insisted to Emerging Markets that the bill would pass in this parliament. Barring a sudden last minute surge, that now seems unlikely.
Although the rebasing of Nigeria’s GDP reduced the hydrocarbon sector’s proportional contribution to the economy, the country is still effectively dependent on oil exports. It uses its Excess Crude Account to stabilise the naira and minimise imported inflation as well as to back up its vast social subsidy programmes for food and fuel.
“While it is a much smaller part of GDP as a sector, the key macro balances are still reliant on oil revenues for how they look and how they’re supported. So you’re still looking at 70%-80% of fiscal revenues associated with oil; you’re still looking at 85%-90% of exports being oil,” says David Faulkner, an economist at HSBC in Johannesburg.
“The PIB remains key and it’s really a major frustration that it hasn’t passed. We’ve continued to see the oil and gas sector detract from growth. It’s weighing [on the economy] from a growth perspective and it’s also undermining from a macro stability angle.”
PIB PAIN
The PIB is supposed to increase transparency in the hydrocarbon sector, deregulate the downstream industry and change the environment for investing in natural gas, which is currently a tiny fraction of the overall industry. Until it is passed there remains considerable uncertainty around the sector and international oil companies have been selling down their assets in the country. That uncertainty is likely to continue into the medium term.
“I guess it’s difficult to see what’s going to change from this government to the next one that will enable the reform of the oil sector to actually go ahead,” Capital Economics’ Shah says. “It does look like it’s a sticking point. You’ve got these large vested interests, which are preventing these reforms from going through. It’s very difficult to see how it’s actually going to go ahead.”
Although the failure to push through the PIB has stood out as a symbol of Nigeria’s tangled political system, other big reforms have made it through.
Around 40% of the cost of doing business in Nigeria is related to power, a result of decades of inefficiency, governance failings and underinvestment in the state owned generation and distribution networks. The government estimates that $14bn a year needs to be invested to bring supply in line with demand. A first auction of 15 public companies in 2010 raised $2.5bn. A second phase, with 80% stakes in 10 more companies being sold to the private sector, is underway.
General Electric has been a big investor and companies from the US, Canada and South Korea have backed private power businesses.
“It’s pretty remarkable that you’ve seen Nigeria achieve this scale of sustained rapid growth and rise in nominal GDP at the same time as you’ve had such a constrained energy and power sector,” Faulkner says. “The upside potential for the economy, should that kind of strain be relieved, is significant and would allow the economy to grow at very significant rates going forward.”
Led by the charismatic agriculture minister, Akinwumi Adesina, the moribund agribusiness sector has begun to turn around as well. While oil dominates the country’s accounts, agriculture — mostly at the small scale — is Nigeria’s biggest single employer and improvements in the viability and profitability of the sector could have a big impact on job creation and development indicators.
The sector’s neglect has also contributed to Nigeria’s balance of payments problems and to its inflation. In 2011, the country imported $11bn of agricultural produce, including $4bn worth of wheat and $3bn of rice.
A multi-faceted plan to revive the sector included demolishing a corrupt fertiliser subsidy system, under which 90% of money never reached the end user, and the industrialisation of indigenous grains such as cassava to replace imported wheat. Banks have been given guarantees for lending to agribusiness and over three years increased the proportion of their loan books relating to agriculture from less than 1% to 5%. By 2013, the total food import bill had fallen by $5bn, reducing the strain of subsidies on the government budget and the country’s vulnerability to price fluctuations on the global food markets.
SANUSI SUSPENSION
Other advances have been tempered by political factors. The much heralded reform of the banking sector that followed a bail-out by the central bank in 2009 gave investors confidence that the financial system, previously dogged by corruption and systemic weaknesses, could be brought up to international standards. The architect of that clear-out, the central bank governor Sanusi, was suspended in February 2014 after publicly raising his suspicions about the misappropriation of fuel subsidy funds. His dismissal by the president caused an immediate slump in the naira and investors voiced fears that the independence of the bank could be undermined.
Even the leap in GDP, which brought the promise of Nigeria finding its way on to more investment indices and Nigerian assets into more global portfolios, has its downsides. Faulkner says that while the rebasing of the economy has given Nigeria a positive story, it has also undermined several important macroeconomic indicators. “The reductions in some of those key GDP ratios, such as revenue to GDP, capital expenditure to GDP, those kinds of things, are a little bit disconcerting. Total tax revenues are only 12%-13% of total GDP now.”
In the short term, some of those indicators may slip further. Elections in Nigeria are characterised by fiscal slippage as the federal government tempts citizens with pre-election giveaways, increasing wages and pushing through capital expenditure. At a state level, spending can also jump. This kind of policy loosening can stoke inflationary pressures.
Tension typically rises across the country in the pre-election period, as various non-state actors jockey for power and influence. This time around, though, the government faces a high profile, organised and effective enemy in the Islamist group Boko Haram, which has been threatening civilians in the north for a decade but has now emerged to strike at soft targets in the capital, Abuja, and threaten economic infrastructure.
The kidnapping of more than 200 schoolgirls in Borno State in April was part of an escalating pattern of violence in the northeast of the country, where a state of emergency has been in place since May 2013.
The finance ministry has warned that disruptions to business in the northeast, where Boko Haram has its bases of operation, will shave 0.5% off growth this year. The problems in the north could exacerbate the negative economic consequences of Nigeria’s election cycle.
“Every time Nigeria has an election inflation goes up but I think this time it’s a little bit worse because it’s married with the Boko Haram conflict,” says Anna Rosenberg, associate practice leader for sub-Saharan Africa at Frontier Strategy Group in London. “Now it’s harvesting season and most agricultural production is taking place in the north and in the centre. The Boko Haram crisis is increasing prices for foodstuffs across the country.”
Migration from the northern states to the south is also on the rise, straining infrastructure and driving up prices for basic goods in urban centres. This flow of people speaks to a more persistent problem which will dog successive Nigerian governments— the huge economic inequalities between north and south that created the conditions for Boko Haram’s rise.
“That’s the big problem here: the violence has escalated because of the huge poverty,” Rosenberg says. “The south is doing so well and 70% are living beneath the poverty line in the north. I think it started as economic grievances and now it’s mingled with political interests as well, and the government needs to address that.”