Africa Diary
Africa Diary

Nigeria's Economy on The Right Track

Construction and infrastructure projects are perfect avenues for making use of the country’s large population, it is by no means the only industry which stands to benefit from the sheer size of potential labour and customers on offer.

Nigeria, an African economic powerhouse, has the capacity to move beyond its erratic growth over the coming decades if it is able to leverage the number of key advantages at its disposal. In the last decade, Nigeria has seen its GDP fluctuate in tandem with the volatility in oil prices – most notably during the commodity slump of 2015, highlighting the state’s reliance on raw hydrocarbons to drive growth. Cognisant of its worst recession in 25 years, the government introduced the Economic Recovery and Growth Plan (2017-2020) – the ERGP – as a medium-term developmental initiative focused on ‘restoring growth, investing in people, and building a globally competitive economy.’ In addressing long-term growth, the EGRP prioritises macroeconomic stability and economic diversification. One of the key strengths of the plan lies in the inherent recognition that the state’s tax-base, and its subsequent inability to commit to large-scale public spending which a nation would typically resort to in such a case, are not only constraints over the short-to-medium term, but are critical to long-term development. As such, the EGRP’s approach to promoting long-term development aims to not only build a stronger engine for growth, but a framework capable of supporting it over the long haul.

In 2017, the IMF estimated Nigeria’s economy to have reached $376.28 billion, allowing the West African state to reclaim its seat as the continent’s largest economy. However, in terms of real GDP per capita, the state performs a lot less favourably, jumping from the largest economy to the 16th wealthiest. Herein lays one of Nigeria’s largest obstacles, as well as a potential driver of economic growth: its population. As the largest population in Africa, and seventh-largest globally, the state has a large base of human capital primed for industries requiring an abundance of labour. Diversification, as such, prioritises a stronger focus on industries which rely on labour-intensive inputs or large consumer markets; agriculture, manufacturing, services (including retail and wholesale trade), construction, and real estate are among the industries highlighted by the ERGP as they have a history of contributing significantly to Nigeria’s GDP (and, therefore, demonstrate that the state has the capacity to develop them).

Navigating a Paradox

Nigeria’s government debt, as a percentage of its GDP, is currently above 15 percent — which is low on a global scale. However, with a tax base heavily reliant on volatile oil prices (which itself only accounts for 10 percent of the state’s GDP), it is unlikely that the state can afford to undertake expansionary fiscal projects until the tax-base has been widened. At the same, diversification of the economy will rely on a number of government led projects, particularly in order to absorb the abundance in excess labour available to it. If you cannot grow without spending, and cannot spend without growing, then what does one do? Simply put, either one opts not to grow or not to spend. The ERGP aims to navigate this conundrum in a commendable way. Construction and other large-scale infrastructure development projects are among the initiatives identified through the ERGP as foundations for economic diversification and growth; not only are these kind of projects able to provide employment, but will concurrently assist in developing the state’s underdeveloped and overburdened network of utilities and transport capabilities — a key prerequisite for other industries, such as retail and manufacturing.

In achieving this monumental task, and in recognition of the significant costs which it cannot finance, the state has approached the African Development Bank (AfDB) for assistance in obtaining the funds required. At an estimated $3.0 trillion out to 2044, the AfDB will not be lending Nigeria the money it needs — instead, both the government of Nigeria and the AfDB have opted to lobby the private sector for assistance. As such, the AfDB is not only helping design bankable projects to be undertaken through public-private-partnerships (PPPs) but is also exposing these projects to a whole new set of potential investors. Via the route of AfDB assistance (and not AfDB or World Bank reliance), the risks to investors are lowered while the government of Nigeria simultaneously avoids spending money it may not have. In this manner, the ERGP overcomes the problem of inducing growth and development in the absence of significant government led spending. These kinds of undertakings, if successfully implemented, will achieve both the expansion of the tax base while simultaneously expanding economic growth away from its dependence on oil, thereby increasing the resilience of the economy to external shocks, especially in the oil and gas sector.

Nation-Based Growth

The nation’s economic growth will be driven by the nation itself — that is to say, the Nigerian people. The supply of natural wealth is finite, but — in a practical sense — the supply of people is not. Although construction and infrastructure projects are perfect avenues for making use of the country’s large population, it is by no means the only industry which stands to benefit from the sheer size of potential labour and customers on offer. With an estimated population nearing 200 million, and which is set to exceed 300 million by 2040 by some accounts, the potential for retail expansion is significant. At present, according to data from the UN, Nigeria has the 29th smallest household Spending-to-GDP ratio out of the 123 countries with readily available data. With 39 percent of its GDP derived from household spending, Nigeria underperforms richer nations with smaller populations — of the 30 nations with higher GDPs,1 24 states have higher household spending as a component of its GDP.2 This indicates the great potential of economic growth presented to Nigeria were it to improve household spending, which would also have the added benefit of improving living standards.

Of course, such an expansion in household spending will be accompanied by an expansion in the state’s retail and services sector. In fact, a number of large players have begun stepping into Nigeria in order to take advantage of the considerable potential on offer: big brands such as SABMiller (now a part of ABinBev), Guinness, Coca-Cola, Unilever, Toyota, MTN, Airtel, Shoprite, GlaxoSmithKline, Etisalat, and others have all entered the market with considerable success. Such brands, however, also look at Nigeria’s local population as an advantage since Nigeria’s geographic location provides access to regional markets beyond Naija, such as Ghana and Cote d’Ivoire to Nigeria’s west, which can provide additional markets for businesses located in Nigeria. Additionally, Nigeria’s access to major maritime shipping lanes in the Atlantic provides the potential for expansion of markets further abroad, such as in Southern Africa, North America, Western Europe, and South America — all of which are regions with which Nigeria already conducts trade. Nigeria’s ports are currently experiencing stable year-on-year growth in terms of tonnage throughput, with the Nigerian Maritime Administration and Safety Agency projecting growth to remain stable over the next 10 years.

Barring another oil shock, Nigeria’s economy is anticipated to grow steadily. Plans to diversify the economy are necessary to strengthen and make the economy more resilient and it can be achieved if the government ardently and effectively implements the ERGP. Its largest asset, its population, is vital for driving the country’s economic growth and, therefore, investing in their people through jobs creation, improved educational attainment, and skills initiatives is necessary for driving economic growth from the ground up. In leveraging its geographic location with regards to maritime trade, Nigeria is set to benefit from the development of its ports in order to effectively improve its maritime freight industry — another sector with the potential to significantly contribute to the country’s economic growth and lessen its dependence on oil.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.