How can the Nigerian economy grow?

Although, it has been overshadowed by the baffling spate of xenophobic attacks in the country, but earlier this week, the National Bureau of Statistics (NBS) released data on Nigeria’s Gross Domestic Product (GDP).

As has become the norm in recent years, the numbers are pretty grim. Nigeria’s economy grew by 1.9% year-on-year (y/y) in Q2’19 and 2.0% y/y overall in the first half of the year. This is in line with what we have seen recently (2017: 1.0%, 2018: 1.9%) but it is important that these numbers do not get normalised.

How can the Nigerian economy grow?

To provide some context, the Nigerian economy grew by 8.7% on average each year between 2001 and 2010. Even during the economic stagnation of the 1990s military era, economic growth averaged 2.7%.

Looking at our African peers provides additional context. The most relevant comparison countries are Egypt, Ghana, Kenya, and South Africa. The economic growth rates for those countries in 2018: 5.3%, 5.6%, 6.0%, and 0.8%. Only South Africa is playing in the same field as Nigeria. The giants of Africa are dragging down the continent.

Finally, we can look at how GDP per capita has evolved in Nigeria compared to peer countries. Let’s look at how GDP per capita in purchasing power parity (PPP) terms has grown in each country since the start of this decade.

GDP per capita (PPP) is 43% and 25% higher in Ghana and Kenya compared to 2010 but has only grown by 2% and 1% in Nigeria and South Africa since then.

It is clear from the numbers above that Nigeria needs to break the current growth cycle for us to ever achieve meaningful economic development.

Today, we explore how exactly Nigeria can grow by looking at the potential of the major sectors of the economy.

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The downturn in Nigeria’s manufacturing sector is particularly puzzling at a time when the country is seeking new levers of economic growth.

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All eggs in the agriculture basket

 Agriculture has been the centrepiece of recent government policy in Nigeria and is the lynchpin of the diversification mantra.

The government has clear strategies in the sector, from the Agriculture Transformation Agenda (2011 – 2015) to the Agriculture Promotion Policy (2016 – 2020). The latter has four thrusts: food security, import substitution, job creation, and economic diversification, and we can trace these to policies enacted by different governmental institutions, such as the milk foreign exchange restriction.

Despite all this, agriculture in Nigeria has not done that well. The sector has grown by 4% on average since 2010 and barely 2% in 2018.

 Are all our eggs in an unproductive basket?

 On the surface, agriculture looks primed to propel economic development in Nigeria. Nearly half of all Nigerian workers are employed in agriculture-related activities, and we have lots of examples from abroad of how a thriving agriculture sector can lift millions of people out of poverty, particularly in rural areas.

That said, the agriculture sector employs so many Nigerians because it is unproductive. As an example, the yield on a staple like cereal is 1,444 kg per hectare in Nigeria, but 3,810 kg per hectare in South Africa and 7,114 kg per hectare in Egypt.

So how can we boost agriculture in Nigeria?

Nigerian agriculture has to become a lot more productive for us to reap the development potential of agriculture. This is not going to happen anytime soon because the productivity challenges in agriculture are structural.

Of these, access to credit has been aggressively targeted by the Federal Government, through initiatives like the Anchor Borrower’s Program. However, progress will be minimal if these moves are made in isolation.

To see why, imagine a farmer that now has access to credit. She will only take out a loan if she believes it would eventually help boost sales. But if she cannot sell her produce in markets more than 20 km from her farm (due to high transport costs), she cannot export because her produce does not meet international standards, and cannot afford storage space, she is doomed to be a smallholder farmer.

Thus, the scale of the agriculture challenges requires a coordinated macroeconomic effort, and although progress has been made, it has fallen way short of targets. For example, the Economic Recovery & Growth Plan (2017 – 2020), the flagship economic agenda of this administration, promises to “encourage crop specialisation at the State level” and “implement a national agricultural quality assurance programme” amongst others. Both would be super useful but will probably not happen for a while.

Don’t forget oil & gas

 Another popular—but derided—sector in Nigeria is oil & gas. It may be hard to believe but the industry—gas, in particular—can play a key role in accelerating Nigeria’s economic development.
Nigeria has the 9th largest gas reserves in the world but is only the 14th most prolific exporter of natural gas. Worse, we flare nearly 10% of gas produced in the country.

A thriving gas industry would prop government revenues, help stabilise the naira, revive international confidence in Nigeria, facilitate knowledge spillovers, and help regional development in areas where the industry is active. Of course, our experience with oil suggests that the opposite is like to happen in Nigeria, but it could be a different story if we stopped seeing oil & gas as a golden goose and started seeing it as a technology to power broader development.

How about the ugly duckling in the Nigerian economy?

Interestingly, the manufacturing sector in Nigeria does not get as much policy attention. The most important is the National Industrial Revolution Plan (NIRP) released in 2014, but very few little has been done on this. For example, Special Economic Zones (SEZ) are a big part of the industrialisation drive and yet the only successful SEZs are oil & gas zones.

This negligence has cost the sector. In a ten-year stretch from 2005 to 2014, Nigeria’s manufacturing industry grew by over 12% on average each year. Since 2015, the sector has shrunk every year except 2018.

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The services sector is by far the most heterogeneous sector of the economy, so it makes more sense to look at the major individual elements.

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How do you create millions of jobs in a short space of time?

The downturn in Nigeria’s manufacturing sector is particularly puzzling at a time when the country is seeking new levers of economic growth. Structural transformation of the economy by shifting from low-productivity sectors like agriculture to high-productivity sectors like manufacturing has been the single most powerful took for poverty alleviation and economic growth in the last fifty years.

China is the gold standard but there are many other examples. For example, South Korea evolved into a dominant manufacturing and exporting nation within a few decades, graduating from automobiles in the 1980s to semiconductors in the 1990s.

Alas, it looks like Nigeria will forsake this tried and trusted growth path, particularly as the lack of policy interest is not even the biggest problem. “Bring your own infrastructure” may be a cliché now, but it is true and exacerbates the cost of manufacturing in Nigeria. This is a shame as manufacturing has shown its capacity to produce jobs en masse and help regions develop.

The brightest lights: Services

 Services is the largest sector of the economy, accounting for just under 60% of all output. The services sector grew by 1.9% in Q2’19, following “growth” of -0.7% in 2017 and 1.9% in 2018. This state of affairs is particularly jarring as Nigeria’s services sector was previously the star; it averaged 8% annual growth from 2010 to 2014, and even more in the 2000s.

The services sector is by far the most heterogeneous sector of the economy, so it makes more sense to look at the major individual elements.

 Finance is key

 Popular opinion is that Nigerian banks are big—they are some of the largest in the country and many also have significant footprints in other African countries. This perception is not entirely accurate. Nigeria’s banking assets are only the fourth highest in Africa and are equivalent to just over half of Moroccan banking assets.

Nigeria’s financial sector as a whole is underperforming its potential, given the benefits large financial hubs can provide. Only about 2 in 5 Nigerian adults are banked, and the picture is even worse for insurance (market penetration is less than 1%) and pensions, even though these are traditionally big financial industries.

Whilst financial activity on its own cannot spur sustainable long-term development, thriving financial markets (and access to financial services) can have uniquely transformative effects on the performance of the real economy. Mobile money may not lift Nigerians out of poverty, but it provides a profitable channel for sensible policies to do so.

Again, how likely is it that Nigeria will leverage this, perhaps in a similar way to peers like Ghana and Kenya? Regulators have been a bit passive so far, but technology can play a crucial role here. At the moment, Nigerians with low incomes or in the informal sector are usually excluded from financial markets, but newer financial technology can change that and unlock the potential of financial services in Nigeria.

But technology is the key

ICT accounts for 12% of Nigeria’s GDP. Most of this is accounted for by telecoms, which alone is equivalent to 9% of the entire Nigerian economy. After a few fallow years (the sector contracted by 1% in 2017), the ICT sector grew by 10% in 2018 and 9% in Q2’19.

Given Nigeria’s youth population (120 million under the age of 24—62% of the population), and the fact that unemployment is more prevalent among younger (30% vs national average of 23%) and more skilled workers (30% vs national average of 23%), ICT is an obvious area that Nigeria should leverage for economic growth.

In conclusion

Nigeria is expected to have up to 400 million people by 2050. The country needs to grow by four or five times its current growth rate for citizens to enjoy materially better living standards over time.

This type of explosive growth does not happen overnight and it is hard to see how Nigerians can achieve it given the growth dynamics of recent years. However, we have shown that there are several areas in the economy that tease this type of growth once we get our act right.

Stears Business