May 20, 2013
Analysts are raving about Nigeria as it emerges as one of the most promising economies in the world. From Goldman Sachs to the International Monetary Fund (IMF), the West African country appears to be the investor darling.
Encouraged by the fundamentals, Nigeria’s minister of Economy and Finance Dr. Ngozi Okonjo-Iweala recently predicted the country will become the world’s eighth largest economy in the not-too-distant future.
If the current growth trajectory continues, the West Africa country is set to surpass South Africa as the continent’s largest economy within five years.
Nigeria is expected to rebase its gross domestic product this year, and this accounting change will propel the economy forward. The country’s USD 260 billion economy is on track to overtake South Africa as the largest in sub-Saharan Africa by 2020, according to Moody’s Ratings Agency.
But some analysts are predicting an even more accelerated development.
“If Nigeria’s GDP is upwardly revised by the same magnitude as Ghana’s was in 2010, 60%, then we can expect Nigeria’s economy to surpass the size of the sedately growing South African economy, as soon as 2014.”
While the Nigerian economy is full of potential, a number of impediments exist that could change investor sentiment.
Here are some key hurdles:
1. Flat production
The International Energy Agency expects Nigeria’s production rise from 2.48 million barrels per day today to 2.66 million bpd by 2018.
This is disappointing given the country’s oil reserves of 37.2 billion barrels. The country’s output is suffering due to sectarian violence and sabotage by criminal gangs.
“Crucially, in 2013 Islamic extremists have stepped up attacks in the northern region of the country and carried out kidnappings of foreign workers in and around the capital, with oil industry staff increasingly targeted,” the IEA noted.
Moody’s estimates that over a quarter of the country’s oil production is lost to oil thieves.
“Oil spill liabilities, chronic bunkering and damage to onshore and shallow water infrastructure have prompted Shell, ENI and Petrobras to divest their onshore operations, largely to Nigerian companies,” said the IEA.
2. Delays in petroleum industry bill
A wide-ranging oil industry bill to overhaul the legal framework to reform the oil industry has been in the works since 2008.
But despite repeated attempts and numerous iterations, the bill remains stuck in parliament.
“The government and the oil industry have very different views on pre-tax economics of Nigerian oil projects and the effect of the PIB on these,” said the IMF.
“A process should be initiated to bridge these technical gaps, including through detailed independent cost audit of existing projects, technical review of industry’s development plans and projected costs by independent experts, and expert advice on appropriate required rates of return for IOCs investments in Nigeria.
3. Power sector
The government says it is getting a handle on chronic power blackouts by bringing 1,000 megawatt of new capacity on line in 2012 and a similar number this year.
But it’s not enough as the country’s rising population and economic are making huge demands on the utilities sector.
“The economic impact of protracted power shortages have been substantial: enterprise surveys show that 83% of businesses identified the lack of power as the biggest obstacle to doing business; over 60% of businesses own backup generators, while the cost of self-generation is very high (estimated at USD 0.40 per kWh); and formal sector firms lost about 10% of their revenue because of power outages,” the IMF said.
The government has made some moves in improving the situation and a privatization plan is under way.
4. Rampant corruption
Nigeria has a chronic corruption problem. The country is ranked 139th by Transparency International out of 176 countries and is placed much lower than economies of similar size. Around 63% of people surveyed by the organization said they had paid a bribe in 2010, while 73% felt corruption had increased during the period 2007-10.
“The government recently pardoned a key ally of president Goodluck Jonathan who was convicted of stealing millions of dollars. Ex-Bayelsa state governor Diepreye Alamieyeseigha was pardoned because he had been ‘remorseful’, presidential adviser Doyin Okupe said,” noted TI in a report, highlighting the rampant corruption in the country.
5. Violence and insurgency rising
Moody’s says its sees elevated risks stemming from the confluence of a violent nationwide Islamist insurgency and increased militant and criminal activity in the Niger delta.
Nigerian forces have launched a new offensive against Boko Haram, the Islamic fundamentalist group, while a state of emergency was recently declared in the northeast.
AON, the global insurer, recently ranked Nigeria as one of the country’s most likely prone to terrorism, insurrection or rebellion.
6. Lack of support for SMEs
Development of small-to-medium enterprises is crucial to bring Nigerians out of poverty. More than 24% of the country’s population is unemployed while 60% live below the poverty line.
“A key bottleneck is the low access to credit and other financial services by SMEs. The authorities are encouraged to undertake reforms of the financial infrastructure, including by improving credit reporting systems and strengthening enforcement of lenders’ rights over collateral, complemented with prudent use of specialized credit promotion schemes in the interim,” said the IMF.
Nigeria has all the ingredients to emerge as the next China or India: strong resource foundation, large population, access to markets, but some of the challenges are significant enough to cut short Nigeria’s growth.
“With oil money and Nigeria really has got all the makings of being a really prosperous, dynamic society,” said Professor Paul Collier, director of the Centre for the Study of African Economies. “And then, you look at the achievements, it is one of the poorest countries in the world. That means millions of Nigerians have had to live under stressful conditions.”