• The outlook for growth remains positive. Downside risks include security challenges arising from religious conflict in some states and slower global growth.

  • As economic growth is largely driven by capital-intensive sectors, it has not translated into sufficient job creation and poverty remains high. As a result, Nigeria has a low Human Development Index (HDI). The country has made some progress towards attainment of the Millennium Development Goals (MDGs), albeit slowly and unevenly.

  • There is a high need to diversify the Nigerian economy into the non-oil sector. This would help expand the sources of growth and make it broad based, both socially and geographically. Further development of agriculture, manufacturing and services could broaden growth, create employment and reduce poverty.

Overview

The Nigerian economy slowed down from 7.4% growth in 2011 to 6.6% in 2012. The non-oil sector continues to drive the economy, with average growth of about 8.0%, compared to -0.35% for the oil and gas sector. Agriculture and the oil and gas sectors continue to dominate economic activities and Nigeria. The fiscal consolidation stance of the government has helped to contain the fiscal deficit below 3.0% of gross domestic product (GDP). This, coupled with the tight monetary policy stance of the Central Bank of Nigeria (CBN), helped to keep inflation at around 12.0% in 2012. The outlook for growth remains positive. Short- and mid-term downside risks include security challenges arising from religious conflict in some states, costs associated with flooding, slower global economic growth (particularly in the United States and China) and the sovereign debt crisis in the euro area.

The economic growth has not translated into job creation or poverty alleviation. Unemployment increased from 21% in 2010 to 24% in 2011 because the sectors driving the economic growth are not high job-creating sectors (the oil and gas sector, for example, is a capital intensive “enclave” with very little employment-generating potential). The major policy issue is employment generation, particularly among the youth, and inclusive growth.

The economic growth was not accompanied by a structural change of the Nigerian economy. The economy lacks diversification and agricultural production lacks modernisation. To address this, the government is encouraging the diversification of the Nigerian economy away from the oil and gas sector. It is addressing the infrastructure deficit in the country and the development of the agricultural sector through modernisation and the establishment of staple-crop processing zones, with the value chain model to provide linkages to the manufacturing sector.

Figure 1: Real GDP growth 2013 (West)

Table 1: Macroeconomic indicators

 2011201220132014
Real GDP growth7.46.66.77.3
Real GDP per capita growth4.94.14.24.8
CPI inflation10.9129.79.5
Budget balance % GDP-0.13.74.45.7
Current account % GDP3.210.411.814.6

Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

 20072011
Agriculture, forestry & fishing--
Agriculture, hunting, forestry, fishing32.730.9
Construction1.31.2
Electricity, gas and water0.20.2
Electricity, water and sanitation--
Extractions--
Finance, insurance and social solidarity--
Finance, real estate and business services6.16.2
General government services--
Gross domestic product at basic prices / factor cost100100
Manufacturing2.51.9
Mining36.640.9
Other services1.21.1
Public Administration & Personal Services--
Public Administration, Education, Health & Social Work, Community, Social & Personal Services0.80.7
Public administration, education, health & social work, community, social & personal services--
Social services--
Transport, storage and communication3.52.3
Transportation, communication & information--
Wholesale and retail trade, hotels and restaurants15.114.6
Wholesale, retail trade and real estate ownership--

Nigeria is a resource-rich country, with about 34 different minerals, including gold, iron ore, coal and limestone. It has about 37.2 billion barrels of proven oil reserves, 187 trillion cubic feet of proven natural gas1 and produces about 2.3 million barrels of oil per day. It also has about 70 million hectares of farmland. The structure of the Nigerian economy is oriented toward the production of two primary products: agricultural products and crude oil.

After robust economic growth over the past decade – averaging about 7.5% growth – the Nigerian economy slowed down in 2012. Economic growth for 2012 is estimated at 6.6% (Table 1). The non-oil sector continues to drive the economy, with average growth of about 8.0% in 2012, compared to -0.35% for the oil and gas sector (Graph 1). High consumer demand is the main force driving non-oil sector growth. The oil and gas sector accounts for about 15.0% of GDP, 79.0% of federal government revenue and 71.0% of export revenue, while agriculture accounts for 30.9% of GDP and employs about 70.0% of the labour force.

Factors that contributed to the slow growth in 2012 include: the effects of the partial removal of fuel price subsidies, periodic fuel scarcity, an increase in electricity tariffs, security challenges, weather variations and external shocks resulting from the slowdown of the global economy. Flooding in several parts of the country and the security challenges led to a decline in agricultural output. However, the impact was not as severe as expected because of the variations in gestation and harvesting periods for crops across regions. The decline in agricultural output contributed to slower growth in wholesale and retail trade.

Nigeria rebased its GDP calculation from 1990 to 2009. This is forecast to increase total GDP by about 40%, which would put Nigeria’s GDP just behind South Africa’s.

The lack of transparency and accountability in the oil and gas industry has fuelled a strong perception of corruption and mismanagement of oil resources in Nigeria. To address this, Nigeria opted to join and was accepted as an Extractive Industry Transparency Initiative (EITI) candidate in 2007; it was validated as compliant in 2011. To introduce some fiscal prudence in the management of oil resources, the government established the Sovereign Wealth Fund (SWF) in 2010, with strengthened oversight responsibilities. The SWF is currently operating alongside the Excess Crude Account, where excess oil revenues over the benchmark oil price are domiciled. Also, the government has submitted the Petroleum Industry Bill (PIB) to the National Assembly for consideration. The PIB addresses the issue of transparency in the sector.

In early January 2012, an attempt by the government to totally remove the fuel subsidy led to an eight-day national strike to protest the impact of the removal on the cost of living, particularly for the poor, in the face of perceived corruption in the oil and gas industry. The cost of the strike was estimated at about 0.5% of GDP.

The robust economic growth has not translated into employment generation. Unemployment increased from 21% in 2010 to 24% in 2011. This is because the sectors driving the economic growth are not high job-creating sectors. Furthermore, the oil industry is a capital intensive “enclave” that generates very little employment. Poverty remains widespread, with a headcount that declined marginally from 48% in 2003/04 to 46% in 2009/10.

During the first three quarters of 2012, Nigeria’s exports increased while its imports decreased, resulting in a 59% improvement in its trade balance relative to 2011. Foreign capital inflows into Nigeria increased by 77%, with portfolio flows accounting for 76% and foreign direct investment (FDI) 24%. The relatively more attractive interest rates drove the portfolio flows. As of 16 November 2012, foreign reserves amounted to USD 45.7 billion, equivalent to over six months of imports cover. Favourable crude oil prices and high foreign investment in government securities contributed to the high foreign reserves.

The outlook for growth remains positive, estimated at 6.7% and 7.3% for 2013 and 2014, respectively. However, there are a number of short- and mid-term downside risks. These include security challenges arising from religious conflict in some states and the continuing economic cost of flooding. Also, slower economic growth in the United States (which imports 40% of Nigeria’s oil) and in China, together with the sovereign debt crisis in the euro area, could depress fuel prices and cause reduced economic growth.

Macroeconomic Policy

Fiscal Policy

Fiscal management has aimed at ensuring macroeconomic stability. The fiscal policy stance is geared toward fiscal consolidation and inclusive growth, with the fiscal deficit set within the threshold of 3.0% of GDP after 2010. The medium-term fiscal strategy is to reorient spending from recurrent expenditure to capital expenditure. The share of recurrent expenditure in the total budget decreased from 74.4% in 2011 to 71.4% in 2012 and 68.7% in 2013, while the share of capital expenditure increased from 25.6% in 2011 to 28.6% in 2012 and 31.3% in 2013. The steady increase in the share of capital expenditure is expected to lead to an improvement in physical infrastructure and provide a firmer platform for future growth.  

As part of the fiscal consolidation, on 1 January 2012 the Nigerian government eliminated the subsidy on petrol because it was unsustainable and those for whom it was meant were not benefiting from it. In 2011, 30% of total government expenditure – or about 4.2% of Nigeria’s GDP – was on petrol subsidies. The total subsidy payments for 2012 and 2013 are estimated within the range of USD 5-6 billion. The removal of the fuel subsidy caused retail fuel price to increase from NGN 65 (USD 0.42) to NGN 141 (USD 0.92) per litre, triggering an eight-day national strike. The strike was called off after the fuel price was reduced to NGN 97 (USD0.63) per litre. The cost of the strike was estimated at about 0.5% of GDP. The government redirected the savings from the partial removal of the fuel subsidy into social safety net programmes and key infrastructure projects through a Subsidy Reinvestment and Empowerment Program (SURE-P).

The projected fiscal deficit for the 2012 budget was 2.85% – a reduction from the 2.96% of GDP in the 2011 budget. This is within the required 3.0% threshold laid out in the Fiscal Responsibility Act (FRA).

The government is investing in key sectors consistent with the objectives of its Transformation Agenda. Shares to the key sectors of the economy were as follows: security 19.9%, education 8.65%, health 6%, power 3.5%, agriculture and development 1.7% and public works 3.9%.

As of end-October 2012, 75% of the 2012 capital budget had been released. Furthermore, NGN 15 billion (USD 96 million) out of NGN 180 billion (USD 1.15 billion) was released every month before October 2012 for various projects and programmes under the SURE-P. Regarding power supply, there is a consistent level of 15 hours of electricity per day, facilitated by an additional 1 000 megawatts of electricity from the rehabilitation of existing power infrastructure. With respect to agriculture and transportation, 13 new private sector mills with a capacity of 240 000 metric tonnes have been established and the Abuja-Kaduna railway line is at 46% completion. Lastly, concerning job creation, the Community Services and Women and Youth Employment Programmes of the SURE-P (established in January/February 2012) are already up and running in 14 states, with a target of creating 370 000 jobs per year.

The 2013 budget continued to focus on fiscal consolidation and inclusive growth. The projected fiscal deficit was 2.17% of GDP, down from the 2.85% of GDP in the 2012 budget (well within the 3.0% threshold stipulated in the FRA). The government aims to continue to implement prudent fiscal policies and invest in key sectors of the economy.

External financial assistance to Nigeria is very small relative to the country’s own resources. Total official development assistance (ODA) commitments to Nigeria in 2010 were USD 703.2 million,2 whereas its 2010 GDP was close to USD 200 billion and its federal budget USD 26.6 billion.

As of 31 December 2012, the Total Debt Stock to GDP ratio was about 19%, with the domestic debt component representing 16% of GDP and the foreign component 3%. About 81% of the external debt is owed to multilaterals, 11% to bilaterals and 8% to the private sector, mostly through Eurobonds. The federal government owes about 64% of external debt and roughly 70% of domestic debt, with the states liable for the difference. About 62% of the federal government’s domestic debt stock is held in federal government bonds, 33% in Nigeria treasury bills and 5% in Nigeria treasury bonds. The breakdown of the domestic debt indicates that lenders prefer lending to the federal government, crowding out the private sector.

The authorities have been concerned about the rising debt stock, particularly its domestic component. Some of the strategies aimed at addressing the relatively high domestic debt stock are the provision of NGN 100 billion in the 2013 budget to redeem part of maturing domestic debt obligations (instead of refinancing) and the planned gradual reduction of net domestic borrowing to NCN 500 billion (1.34% of GDP) by the year 2015, as part of the overall fiscal consolidation.

Table 3: Public Finances (percentage of GDP)

 200920102011201220132014
Total revenue and grants18.12127.329.228.829.1
Tax revenue5.14.44.74.243.8
Oil revenue10.113.920.623.423.423.8
Grants------
Total expenditure and net lending (a)27.925.827.525.424.423.4
Current expenditure1716.92018.818.117.5
Excluding interest15.515.31817.116.716.2
Wages and salaries7.57.210.39.79.28.7
Interest1.51.721.71.51.3
Primary balance-8.4-3.11.95.45.97
Overall balance-9.8-4.8-0.13.74.45.7

Monetary Policy

Monetary policy has focused on an objective of single digit inflation, with monetary tightening since 2011. After a steady decline in inflation to 10.3% in December 2011, it jumped to 12.6% in January 2012 as a result of the partial removal of the fuel subsidy. Three measures were taken in January 2012 to reduce inflationary pressures: the Monetary Policy Rate (MPR) of the Central Bank was increased from 6.25% to 12.0%, the Cash Reserve Requirement (CRR) was increased from 1.0% to 8.0% and the Liquidity Ratio (LR) was increased from 25.0% to 30.0%. Growth in money supply has also been sluggish. These monetary policy measures have helped to contain inflation around 12.0% in 2012, with average core inflation at 13.87% and food inflation at 11.32%, compared to 10.8% and 10.3% respectively for 2011. The major drivers of inflation include prices of consumer goods, housing, water, electricity and transport.

The relatively high inflation has contributed to high interest rates. Banks in Nigeria raised their maximum lending rates from 22%-23% to 25%-27% in May 2012, attributing the move to high operating costs occasioned by decaying infrastructure. This put a credit squeeze on the private sector, particularly agriculture.

The high interest rates and the use of foreign reserves to support the domestic currency (naira) on the foreign exchange market have limited the volatility in the exchange rate and helped to maintain the value of the naira. The monthly average inter-bank exchange rate of the naira in relation to the US dollar appreciated from NGN 161.31 per USD in January 2012 to NGN 157.46 per USD in May 2012. It was maintained around NGN 157 per USD till December 2012 (despite some slight depreciations within the period).

The CBN aims to continue its monetary tightening policy to bring inflation down to single digits and spur lower interest rates.

Nigeria’s exports increased during the first three quarters of 2012 relative to the same period in 2011. The value of year-on-year exports increased 15.6% during the third quarter of 2012 due to a price rise in crude oil and goods such as live animals and animal products, plastic, rubber and associated items, prepared foodstuffs and beverages. The value of exports is estimated at 40.4% of GDP for 2012 (Table 4). On the other hand, Nigeria’s imports decreased during the period. The value of year-on-year imports decreased 42.2% due to a decline in the value of major imports such as mineral fuels, food and live animals.3 The value of imports is estimated at 22.4% of GDP for 2012. Consequently, the year-on-year trade balance increased 59.5% in the third quarter of 2012 and is estimated at 18.0% of GDP for 2012.

Foreign capital inflows into Nigeria during the third quarter of 2012 increased 77% over that of the second quarter to USD 6.07 billion. Portfolio flows accounted for 76% of the total inflows during the period because of the relatively more attractive interest rates, while FDI accounted for 24%.4 The dominance of portfolio investment in the aggregate foreign capital inflows suggests the need to put in place measures against capital reversal.

The current account surplus increased from USD 5.0 billion during the second quarter of 2012 to UDS 5.03 billion during the third quarter, representing 7.6% of GDP. It is estimated at 10.4% of GDP for 2012. 

Foreign reserves declined steadily from USD 43.3 billion during the first quarter of 2010 to USD 36.5 billion on 6 August 2012. Falling crude oil prices and the use of foreign reserves to support the naira on the foreign exchange market were behind the drop in foreign reserves. However, favourable crude oil prices and high foreign investment in government securities soon drove them back up.

Economic Cooperation, Regional Integration & Trade

Nigeria’s economy represents about 55% of West Africa’s GDP, and its population of some 167 million people makes up the largest market in Africa. There is huge potential for growth and economic diversification from regional integration, which Nigeria has yet to carry out. Nigeria’s exports to African countries amounted to roughly 11% of the total value of its exports, with exports to the Economic Community of West African States (ECOWAS) accounting for 3%. It imported 8% of the total value of its imports from African countries, with 1.3% coming from the ECOWAS.

The West African market provides a tremendous opportunity for Nigeria’s financial sector. Efforts are ongoing for a monetary union, although full integration is still a long way off. Member countries for the West African Monetary Zone (WAMZ) are facing major challenges in convergence criteria. These include persistent high inflation, escalating budget deficits in some countries, rising wage bills, increasing domestic interest payments, declining external reserves in months of import cover and high non-performing loans in the banking system. Nigeria should spearhead efforts to ensure monetary integration in the region.

There has been some progress in trade. An example is the adoption of the ECOWAS 5-band Common External Tariff in 2005, which reduced the Most Favoured Nation (MFN) import tariff from 12.0% to 11.5% and the number of import bans from 44 products to 22.

The Nigerian government has introduced various initiatives to encourage local manufacturing and promote exports, including the Free Trade/Export Processing Zones (1992) and the Export Expansion Grants Scheme (1986, 2005). However, a major challenge is that trade networks and infrastructure within West Africa are not well developed.

In the World Bank report Doing Business 2013, Nigeria is ranked 154 out of 183 countries on the criteria “trading across borders”, which is below the average ranking of 134 for sub-Saharan Africa. Long and cumbersome clearance processes and a high cost of exporting are the most serious barriers to trade. The government has established a task force to reform the Nigeria Customs Service and find ways of reducing costs and time for clearing imports at ports. Nigerian ports have witnessed increased activities due to the reforms in the sector.

Nigeria is also driving the negotiation of an Economic Partnership Agreement (EPA) between ECOWAS and the European Union (EU) to enhance trade between Nigeria and the EU. Substantive progress has been made in the negotiations. (The EU’s new Market Access Regulation (MAR) would exclude countries that have not ratified and implemented their agreement by 1 January 2014.)

Table 4: Current Account (percentage of GDP)

 2004200920102011201220132014
Trade balance18.514.413.212.51819.220.9
Exports of goods (f.o.b.)3931.933.337.440.439.539.8
Imports of goods (f.o.b.)20.517.520.12522.420.318.9
Services10.311.4-8.5-7-5.8-5.2-4.5
Factor income-10.3-5.7-7.3-6.2-5.2-4.9-4.2
Current transfers310.34.43.93.42.72.3
Current account balance21.530.41.83.210.411.814.6

Debt Policy

The debt policy, as articulated in the government’s Medium Term Public Debt Strategies, is to ensure that the national and state governments keep to prudent and sustainable borrowing and also use resources effectively. The strategic focus is to deepen the domestic bond market to support private sector development and provide low-cost funding for public projects. With regard to external borrowing, the policy is to borrow on non-concessional terms to support infrastructure development, particularly power, road transport and railway projects with self-paying capacity and job creation potential. The government also seeks to mobilise grants and concessional loans to support social sector projects aimed at poverty alleviation and achieving the Millennium Development Goals (MDGs). An External Borrowing Plan was reviewed and approved by the House of Representatives and the Senate before implementation. Furthermore, state governments are requested to seek the federal government’s approval for external borrowing and work with the Debt Management Office to show that the total external debt of the state is sustainable.

ODA decreased from USD 2.0 billion in 2010 to USD 1.8 billion in 2011. Total FDI in 2011 was USD 8.9 billion, representing 20% of the total FDI to Africa in 2011. However, these investments are mostly in the oil and gas sector. 

Figure 2: Stock of total external debt and debt service 2013

Economic & Political Governance

Private Sector

Nigeria’s business environment does not encourage investment and competitiveness in its industrial sector. Although the private sector is the main employer and the primary source of export earnings, there has been little improvement in the business climate over the past few years. The World Bank report Doing Business 2013 ranked Nigeria 131 out of 185 countries, compared to 133 out of 183 countries in the 2012 Report. The slight improvement is due to the improved ranking in the “ease of getting credit”. The security challenges in the country could further hamper private sector confidence. In terms of competitiveness, Nigeria has been on a declining path since 2008 and ranks well below most of its peers in the region. Major constraints to private sector growth and competitiveness include the poor state of infrastructure – particularly energy, transport and ports – a difficult business environment, limited access to credit, inadequate training and skills and weak economic governance.

While competition declined in Nigeria from 2008 to 2011, it seems to have started to recover in the 2012/13 financial year. Nigeria’s ranking declined from 94 out of 134 countries in the World Economic Forum’s 2008-2009 Global Competitiveness Report to 127 out of 139 countries in the 2010-2011 report and 115 out of 144 countries in the 2012-2013 report. The major factors that contributed to the recent improvement include a more stable macroeconomic environment, market size, labour market efficiency, financial market development and business sophistication.

Financial Sector

The CBN’s structural reforms to tackle the lingering effects of the global financial crisis have given Nigeria’s financial sector a sound footing over the past few years.

The non-performing loan ratios for the five big banks in Nigeria5 are below the 5.0% guideline of the CBN, compared to 9.37% at the end of August 2011.6 The Capital Adequacy Ratio (CAR) for the eight largest banks in Nigeria is projected at 21.1%, up from 17.2 % as of end-August 2011, compared with the 15.0% regulatory minimum for banks with international operations.7 Nigerian Banks are on course to deliver on average between 18.0% and 20.0% Return on Equity (ROE) for 2012.8

Banking credit to the private sector increased from 33.0% of GDP at end-December 2010 to 37.1% of GDP at end-December 2011 and 42% at end-August 2012. As Nigerian banks are expanding their operations in Africa, the authorities need to control the risks and assess the impact on the Nigerian economy.

Efforts are needed to strengthen financial intermediation and improve access to finance. In 2010, 46.3% of Nigeria's population was still excluded from the financial system.9 In 2011, less than 10.0% of small- and medium-sized enterprises (SMEs) had a loan or line of credit and only 5.0% of bank lending went to SMEs.10 Constraints to accessing credit or other financial services include the high cost of borrowing (an average interest rate of about 30%), the perceived high risk of SMEs, limited product offerings and lack of long-term financing.

Microfinance has been key in enhancing access to financial services for SMEs and low-income households. However, the industry faces some challenges, including operational inefficiencies, limited capacity and poor consumer protection. The new microfinance policy and regulatory and supervisory framework of the CBN addresses these challenges. Other measures the CBN has taken to reduce Nigeria’s financial exclusion rate include the following:

  • the review of the Primary Mortgage Banking Policy to make it more flexible;
  • the extension of the Agricultural Credit Guarantee Scheme Fund (ACGSF) to customers of microfinance banks;
  • the strengthening of the Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL);
  • the introduction of interest-free banking;
  • plans to establish a Micro, Small and Medium Enterprises Development Fund (MSMEDF).

Pension funds in Nigeria are worth about USD 15 billion, representing 7% of GDP. They are projected to grow at 30% over the next 10 years to top USD 100 billion (20% of GDP), becoming one of the largest investments in the economy.

After various reform programmes in the insurance industry and efforts to win the trust of Nigerians, the value of insurance contracts is expected to triple from about NGN 300 billion (USD 1.92 billion, or about 1% of GDP) currently to about NGN 1 trillion (USD 6.4 billion, or 3% of GDP) in 2017. Investors are expected to shift to insurance stocks from 2013 onwards, thereby helping improve the value of insurance companies.

A slowdown in economic activity resulted in some losses in the Nigeria Stock Exchange’s (NSE) All Share Index during the first half of 2012. However, a stronger economy in the second semester drove the NSE All Share Index to finish 35.4% up in 2012, making it the strongest performance since 2008. Despite this, the NSE faces liquidity and depth challenges.

Financial markets lack the depth and diversification to drive economic transformation and job creation, including infrastructure financing.

Public Sector Management, Institutions & Reform

Public Sector Financial Management (PFM) reforms picked up at the federal level after the 2003 presidential elections. Since then, legislation and regulation have been introduced to improve the transparency of the budget process, ensure efficient cash management and reform the procurement process. The legal framework for PFM has been strengthened, with the passage of fiscal and PFM Acts, such as the Fiscal Responsibility Act 2007, the Public Procurement Act 2007 and the Financial Reporting Council Act 2011. All this legislation complies with good international practices.

PFM reports indicate that there have been some positive developments in public finance management at both the federal and state levels. However, these improvements do not go far enough to significantly influence the overall quality of public finance management.

The 2010/2011 Public Expenditure and Financial Accountability (PEFA) assessment concluded that despite some progress there are significant weaknesses in the PFM systems of the country. For example, the national assembly has not concluded its hearings on the audit reports of the Office of Federal Auditor General (OFAG), even though OFAG has submitted audit reports up to the fiscal year 2010. Furthermore, the new Audit Act, which replaces the current 1956 Audit Act, is awaiting the approval of the National Assembly.  

The government must address major challenges to improve public financial management. It needs to coordinate PFM reforms by the ministries, departments and agencies and ensure proper scrutiny of external audit reports to guarantee their independence and effectiveness. It must also tackle audit and risk assessment, follow up on audit findings by internal and external auditors and the non-disclosure of annual financial statements and audit reports. Finally, it must reduce the complexity of the intergovernmental transfer system between federal, state and local governments.

Natural Resource Management & Environment

Nigeria is the largest oil producer in Africa and the tenth largest in the world, averaging about 2.3 million barrels per day, with 37.2 billion barrels of proven oil reserves. Despite these impressive oil resources, the contribution of Nigeria’s oil and gas sector to the national GDP in 2012 was only about 14%. This is the direct consequence of the importation of 80% of the goods and services needed for projects in the sector. Nevertheless, about 79% of federally collected revenue and 71% of total export revenue are from the oil and gas industry.

Even though Nigeria is the tenth largest oil producer in the world, it imports about 85% of its refined petroleum products due to the low capacity utilisation (around 30%) and frequent breakdowns of its refineries.

The Nigerian oil and gas industry lacks transparency, accountability and good governance. In light of this, the government initiated a process for Nigeria to comply with the principles of the Extractive Industry Transparency Initiative (EITI). Nigeria was declared EITI compliant in March 2011. Furthermore, to curb wastage and introduce fiscal prudence in the management of oil resources, the government established the Sovereign Wealth Fund (SWF), with strong institutional oversight responsibilities. Also, the government introduced the Petroleum Industry Bill (PIB) (currently under consideration by the national assembly), aimed at further enhancing transparency, accountability and good governance in the petroleum industry.

Nigeria’s economy is dependent on sectors that are either climate sensitive or contribute to climate change, such as agriculture, forestry, fisheries and oil and gas. Nigeria's environment is increasingly threatened by natural disasters, such as drought, desertification and floods, which have threatened the livelihoods of farmers and food security in recent years. Pollution from oil exploration activities and gas flaring in the Niger Delta remains a concern to the country, as is the heavy concentration of industries in locations that are highly vulnerable to climate change (e.g. Lagos). 

The government is addressing these issues through various climate change policies. These include the Nigeria Climate Change Policy and Response Strategy (approved by the Federal Executive Council on 13 September 2012) and the National Adaptation Strategy and Plan of Action for Climate Change in Nigeria (NASPA-CCN), currently being finalised. These will provide a guide for the integration of climate change adaptation into government policies, strategies and programmes. Nigeria has also prepared an investment plan to transition toward low-carbon development. Despite this, it still needs a coherent and strategic approach to addressing the challenge of climate change.

Political Context

Nigeria returned to democratic rule in 1999 after decades of military dictatorship. Since then it has witnessed successful changes of government through the electoral process. The 1999 election saw the current ruling party elected into office. It has since survived three consecutive elections, the results of which were all heavily contested by the opposition. In the 2011 elections, Dr. Goodluck Ebele Jonathan of the People’s Democratic Party (PDP) was elected president (as vice president he had served out the term of his predecessor who died in office). Allegations of unfair practices and rigged elections have trailed the electoral process since independence. Supreme court judgments have been necessary to validate presidential elections since the return to civil rule in 1999.

The current Nigerian political system is heavily influenced by ethnic, religious and class differences. Allegiance is more to interest groups than the party itself, undermining true democratic practice in the country. Divisive issues such as zoning of political appointments in the parties are a distinctive feature of the system. At both the federal and state levels, the dominance of the ruling party is very strong. Despite regular elections, the system is still carefully controlled and manipulated by the ruling class. Moreover, political parties are still deficient in internal democracy. Governance assessment by the Mo Ibrahim Foundation ranked Nigeria 43 out of 52 countries in 2011.

The adequacy of the Nigerian constitution in guaranteeing stable democratic culture and minimising the political wrangling that has characterised the country’s political environment has been questioned. The absence of a constitutional platform for alternative political views has been identified as a reason why some politicians, who feel they have been forced out of power, seek unconstitutional means to undermine the government.

Democratic institutions of governance such as the judiciary and the legislature are critical for ensuring a viable political system. Currently in Nigeria there are questions about the adequacy of both institutions in deepening the democratic process in the country. Opposition politicians are very sceptical of the judiciary in resolving election petitions. The perception in the population is that justice is not only always delayed, but judgments are always in favour of the rich and the politically powerful. Nigerians are questioning the usefulness of the legislature at all tiers of government in the development process. Ordinarily, the legislature is expected to lead the fight against executive arbitrariness and corruption, but in Nigeria public perception is that the legislature by its nature cannot be effective in this regard. When the integrity of the legislature is called into question, it undermines public confidence. This appears to be the case in Nigeria today.

Social Context & Human Development

Building Human Resources

Nigeria still ranks low in the United Nations’ Human Development Index (HDI), with a score of 0.471 in the 2013 UN Human Development Report (values are from 0 to 1).

The 2010 MDGs report (the latest available) suggests that overall Nigeria continues to progress toward attainment of the MDGs, albeit slowly and unevenly.

Nigeria’s MDG target for education is universal primary education and gender equality at primary and secondary levels. A major development in education is the implementation of Universal Basic Education Programme. As a result, primary school enrolment rose from 80% in 2004 to 89% in 2005. Completion rate, however, is only at 68%. The challenge then is that there are a lot of out-of-school children in Nigeria. According to the Ministry of Education, Nigeria has over 10 million out-of-school children, or 42% of the school-going population. Substantial additional efforts are required to reach the 100% goal by 2015.

With respect to health, significant progress has been made over the last decade, but the MDG targets will nevertheless be hard to attain. The infant mortality rate moderated to 75 per thousand live births in 2008 from 110 per thousand in 2007, and much higher in previous years. Maternal mortality (goal 5) was down to 545 per one hundred thousand births in 2008 from 800 per one hundred thousand live births, with striking regional geopolitical differentials. For example, the North East zone recorded a Maternal Mortality Ratio (MMR) of 1 545 per one hundred thousand, while the South West zone recorded an MMR as low as 165 per one hundred thousand. The government has recently launched the UN MDG Acceleration Framework (MAF) for MDG 5, offering a new and urgent way to rise to the challenge of accelerating progress with MMR. It draws attention to prioritised intervention, identifying and removing bottlenecks that impede the implementation of action plans.

The prevalence of HIV/AIDS in Nigeria declined from 5.8% in 2001 to 4.6% in 2008 and to 4.1% in 2010.11 However, there is a wide variation of prevalence in the country, with the highest concentration in the North Central zone (7.5%) and the lowest concentration in the North Western zone (2.1%). The trend signals a general reversal of the epidemic in Nigeria. The MDG report asserts that the target of “halting and beginning to reverse” the spread of HIV/AIDS is already met.

Key challenges affecting human development and progress towards the MDGs include limited institutional capacities. Data continues to pose a huge challenge in measuring not only overall progress but also specific goals. Intergovernmental co-ordination of efforts both vertical and horizontal is still weak, just as public sector investment continues to be fraught with leakages and declining efficiency and effectiveness. Private sector investment in MDGs and human development is generally low and unevenly spread across the country.

 

Poverty Reduction, Social Protection & Labour

Nigeria is a resource-rich country and a fast-growing economy. Despite the huge recent macro gains of over 7% per annum over the past decade, the country is also among the poorest nations in the world, with per capita GDP of USD 1414 (2011). The growth has neither generated employment nor translated into poverty reduction nor addressed inequality in Nigeria.

Nigeria’s prospects of halving poverty by 2015 seem weak. The proportion of people living below the national poverty line has worsened from 65.5% in 1996 to 69.0% in 2010. Poverty is higher in rural areas (73.2 %) than in urban areas (61.8%). Inequality, as measured by the Gini Coefficient, also rose from 0.429 in 2004 to 0.447 in 2010. Rates of poverty vary significantly between urban and rural citizens and among the geopolitical zones. A full 66% of the rural population lives below the poverty line of USD 1 per day.

Malnutrition is widespread. Rural areas and disadvantaged groups are particularly vulnerable to chronic food shortages and unbalanced nutrition. Nationally, 41% of Nigerian children are stunted, 9% wasted or thin and 23% underweight (National Health and Demographic Survey 2008). 

The 2011 unemployment rate was 24%, compared to 21% in 2010. The unemployment rate is highest for the 15 to 24 and 25 to 44 age groups (38% and 22 % respectively). An average of 1.8 million people have entered the labour market every year over the past five years. The National Bureau of Statistics (NBS) projects the number of new entrants will grow annually from 3 million in 2012 to about 8.5 million in 2015.12 

Unemployment, particularly youth unemployment, is an urgent policy priority. Several agencies and plans have been established to tackle poverty and unemployment. These include the National Directorate of Employment, the National Poverty Eradication programme, the Small and Medium Enterprises Development Agency, microcredit and entrepreneurship development plans and, more recently, the job creation committee.

The Agricultural Transformation Agenda (ATA) is a major tool for driving rural income growth, accelerating the achievement of food and nutritional security, generating employment and transforming the economy into a leading player in the global food market. On 14 May 2012, the president inaugurated the Agriculture Transformation Implementation Council (ATIC), with the mandate of driving the ATA. The target is to create about 3.5 million new jobs from rice, cassava, sorghum, cocoa and cotton value chains, with many more jobs from other future value chain activities. It is also anticipated that farmers and other rural entrepreneurs might earn over NGN 300 billion in additional income from value chain activities, helping to reduce poverty.

Social protection is a priority in Nigeria’s Vision 20:2020 plan. However, it is yet to have a comprehensive policy and budget support. Social protection policy has been on the agenda for some time. Several actors are involved in funding and ensuring social welfare, mainly civil society groups with programmes supporting orphans, widows, and people living with HIV/AIDS. In recent years the federal government has initiated three social protection initiatives: conditional cash transfers targeted at households with specific social characteristics, health fee waivers for pregnant women and children under five and community-based health insurance plans (redesigned in 2011).

Gender Equality

The disparities in gender are significant. The country is ranked 79 out of 86 in the OECD’s 2012 Social Institutions and Gender Index and 120 out of 135 countries in the World Economic Forum’s 2011 Global Gender Gap Index. Gender gaps are notable in access to education, as well as political representation. Although school participation has been improving at primary level, the proportion of girls enrolled is still lower than boys across all levels of education, with the ratio decreasing at tertiary levels. Despite the fact that the Gender Parity Index (GPI) for the five year period 2005/06 to 2009/10 favours boys, there is consistent progress toward gender parity: 0.87 in 2010, up from 0.83 in 2006.

Women’s representation in political decision making saw remarkable progress in 2009 but reversed in the 2011 elections. However, in the federal cabinet the president appointed 13 female members, constituting 31% of the 42 member entity. Women also constitute 11.8% of the 17 members of the supreme court. Across the country women constitute 30.0% of high-court judges. Nevertheless, the government recognises that much more remains to be done.

Thematic analysis: Structural transformation and natural resources

Nigeria is well-endowed with human capital and natural resources. It is the most populous country in Africa, with about 167 million inhabitants. It has a vibrant entrepreneurial streak and a highly-educated labour force.

Nigeria has enormous natural resources. It has about 34 different minerals across the country (including gold, iron ore, coal, tin, uranium, phosphates, and limestone), 37.2 billion barrels of proven oil reserves13 and 187 trillion cubic feet of proven natural gas. Also, there are opportunities for fertiliser and liquified gas production. With average production of about 2.3 million barrels of crude oil per day, Nigeria is the largest exporter of crude oil in Africa and tenth largest in the world. It has a vast land area of 923 768 km2, of which about 70 million hectares are farmland.  

The Nigerian economy is the largest in West Africa and the second largest in sub-Saharan Africa, predominantly oriented toward the production of agricultural products and crude oil. Agriculture accounts for about 30.9% of the GDP, 70.0% of employment but contributes only about 2.5% of export earnings. Crude oil and natural gas account for about 15.0% of GDP, 71.0% of export earnings and 79.0% of government revenue. 

Since 2000, Nigeria has witnessed significant progress in macroeconomic performance, with an average economic growth of 7.0%, driven by the non-oil sector. Despite the robust economic growth, Nigeria continues to face rising unemployment, a high incidence of poverty and a high degree of social deprivation. The unemployment rate rose from 19.7% in 2009 to 21.1% in 2010 and 23.9% in 2011; income distribution continues to be skewed, with a Gini coefficient of 0.44 in 2011; 63% of Nigerians live below the poverty line of USD 1 per day; 42% do not have access to safe drinking water and 69% do not have access to basic sanitation. Social and economic indicators show huge regional disparities in the country. In a nutshell, the overall economic improvements have not translated into improvements in the welfare of the average Nigerian.

Despite the country’s huge agricultural potential, less than 50% of the total farmland in Nigeria is cultivated, and agricultural productivity is low because of the lack of modernisation. Nigeria relies on the importation of food to meet its domestic demand, with the import bill for wheat, rice, sugar and fish estimated at NGN 1 trillion (USD 6.4 billion) per annum.

There is a lack of diversification of the Nigerian economy. The manufacturing base is low and has been dwindling. The share of the manufacturing sector in the GDP declined from 6% in 1985 to about 4% in 2011. The main drivers of economic growth do not require large amounts of labour and thus are not able to absorb the 1.8 million new entrants in the labour force every year.

Nigeria is among the leading exporters of crude oil in the world, but it imports about 85% of its refined petroleum product needs due to low capacity utilisation of its oil refineries (around 30%) and their frequent breakdowns.

The production of primary agricultural commodities and oil continue to dominate the Nigerian economy. Economic growth was not created through a structural change of the economy. Sources of economic growth need to be diversified to strengthen the economy.

The Nigerian economy therefore needs growth in order to reduce the financial burden of imports, create jobs to absorb the growing unemployment, grow incomes, reduce poverty and increase prosperity for all Nigerians.

Towards the Structural transformation of Nigeria

A. Macroeconomic Management: The Nigerian authorities have introduced macroeconomic reforms that have led to macroeconomic stability. These reforms need to be deepened, consolidated and sustained. Price and exchange rate stability, prudent public expenditure management, improved quality of public investment projects, enhanced budgeting, public financial management and procurement processes, prudent debt management practices and an enhanced domestic revenue base are all critical for macroeconomic stability.

B. Consolidating Democracy: The democratic dispensation that Nigeria has witnessed since 1999 needs to be consolidated, with leaders held to higher standards of accountability, a vibrant, proactive and critical press, social media and civil society and a well-organised and strong opposition. Good governance, anti-corruption measures and adherence to the rule of law are also vital.

C. Diversifying the Nigerian Economy: The Nigerian economy needs to be diversified to the non-oil sector. This will help expand the sources of growth and make it broad based, both socially and geographically. Micro-level reforms are needed to address binding constraints to sectoral growth, with a focus on improved technology, skills acquisition, high productivity and access to financing. The agricultural sector will continue to be important given its potential for reducing poverty and creating employment. It also offers the opportunity for linkages to support industrialisation, reduce food imports and enhance food security. Potential also exists in manufacturing, mining, tourism, and the entertainment and hospitality sectors.

D. Boosting Agricultural Production: This involves targeted interventions and reforms, including technological innovation, productivity improvement, infrastructure development in agricultural production zones, commercialisation and input supply and distribution systems. Specific interventions should include increasing the area of land under cultivation, increasing the use of improved seeds and fertilisers, enhanced cultural practices, mechanisation of agricultural production and the adoption of a value chain approach to boost agricultural production. These should be complemented with improvements in infrastructure, particularly road transport, energy, irrigation, storage and processing. Moreover, partnerships with private sector operators and farmers associations should be developed, and long-term financing should be provided at a reduced cost to small- and medium-sized enterprises in the agricultural sector. These measures are incorporated in the Agricultural Transformation Agenda of the current administration.

E. Fostering Industrial Development: Industrialisation is a key component of Nigeria’s economic diversification and structural transformation. It should be based on the country’s comparative advantage that it has with its human and physical capital and natural resources. The provision of industrial park clusters with selective and targeted incentives, is key in attaining this objective. A growth identification and facilitation study would help identify target sectors and the required steps for encouraging growth in them.

F. Addressing the Major Infrastructure Gap: The infrastructure deficit in Nigeria is a major bottleneck for the structural transformation of the Nigerian economy. This is particularly so in the electric power industry and road and rail transport. Increased public sector investment in infrastructure, improved project implementation and the leveraging of private investments to complement the efforts of the government through privatisation/concessioning and Public-Private-Partnerships (PPPs) are critical. This is a major priority for the current administration, and improvements have been observed in critical infrastructure development in the country. However, progress in PPPs has been slow.

G. Supportive Financing: Establishing a sound, deep and efficient financial sector to support the structural transformation is vital. This includes the pooling of funds and allocating them to the most productive sectors, improving the access to long-term financing by SMEs, adopting innovative financing arrangements to broaden the base of investors (e.g. Diaspora bonds), attracting more foreign direct investment, particularly in the non-primary sectors, and attracting foreign portfolio investment. Various initiatives by the Central Bank of Nigeria aim to address these issues, but much still needs to be done.

H. Improving the Business and Investment Climate: Nigeria continues to be ranked very low in the World Bank report Doing Business. This is because of unfavourable physical, institutional and regulatory environments for doing business in the country. The time it takes and the cost of starting and operating a business, plus trade regulations, taxation, and the state of infrastructure, are often cited as constraints to doing business. They need to be addressed. Various initiatives by the government to tackle these problems have slightly improved the business and investment climate. 

 

Notes

1. 2011 BP Statistical Energy Survey.

2. OECD Statistics.

3. National Bureau of Statistics, Foreign Trade Statistics: Third Quarter of 2012.

4. Central Bank of Nigeria, Economic Report – Third Quarter 2012.

5. The First Bank of Nigeria Plc, Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc.

6. Report by Renaissance Capital Limited.

7. Standard and Poor’s Rating Services Report of 24 October 2012.

8.  Report by the First Bank of Nigeria Capital Limited.

9. 2010 Enhancing Financial Innovation and Access (EFInA) Survey.

10. Financing Small and Medium Term Enterprises in Nigeria, April 2012.

11. National Agency for the Control of AIDS (NACA), (2012), “Country Progress Report: Federal Republic of Nigeria”.

12. National Bureau of Statistics, 2011 Annual Social-Economic Report.

13. 2011 BP Statistical Energy Survey.

Top