Nigerian growth is back on track, but can it diversify beyond hydrocarbons?

Although the Nigerian economy has continued to achieve positive growth as it recovers from the negative impacts of the oil price shock and the 2016 recession, more remains to be done to achieve economic diversification.

According to the country’s National Bureau of Statistics, the economy grew by 0.8% in 2017, compared to a contraction of 1.6% in 2016, driven primarily by a recovery in international oil prices, and increased domestic output of the commodity.

These improved economic fortunes have brought with them a number of positive developments. Inflation stabilised at around 13% in mid-2018, down from a high of 18.7% in January 2017. Furthermore, foreign currency reserves rose from $29bn in May 2015 to $48bn in May 2018.

What’s more, investor confidence appears robust, with 85% of respondents taking part in our second Oxford Business Group Business Barometer: Nigeria CEO Survey saying that they have positive or very positive expectations of local business conditions in the coming 12 months. In our inaugural survey conducted in 2017, 84% said their expectations were positive or very positive. This testifies to a certain level of stability and optimism among the country’s business community.

Economic recovery still vulnerable to oil price shocks

However, Nigeria still has some way to go before it is able to fully celebrate its recovery, as growth in the first quarter of 2018 – despite remaining positive – slowed from 2.11% in the final quarter of 2017 to 1.95%.

The very structure of Nigeria’s economy continues to see heavy dependence on receipts generated from its hydrocarbons industry, which accounts for around two-thirds of government revenue, leaving it susceptible to fluctuations in commodity prices.

Respondents to our survey remain particularly wary of the implications a renewed decline in oil prices could have, with 82% citing a rise in oil prices as the top external event that could impact the Nigerian economy in the short to medium term.

Despite attempts to diversify the nation’s revenue base, the non-oil sector grew by a mere 0.8% in the first quarter of 2018, compared to the oil sector’s 14.8%. In May the country unveiled a record budget of N9.12trn ($25.2bn) for 2018 in a bid to stimulate growth and bring the economy back onto surer footing.

But transforming the structure of Africa’s economic powerhouse and most populous nation will be no easy task.

While the country represents key advantages – including its strategic location, abundant natural resources and vast youth population – it still faces a number of challenges that the current administration has strived to address since 2015, such as security, especially related to the northern Islamist insurgency. Among our 124 survey participants, 31% view corruption as the biggest challenge to doing business in Nigeria, alongside access to capital (31%), exacerbated by the capital controls imposed during the recession period.

Insufficient lending hampers diversification and job creation

Another barrier to growth is access to credit, which 90% of respondents characterise as difficult or very difficult. This issue is particularly acute for micro, small and medium-sized enterprises (MSMEs), which make up around 60% of the economy and are particularly dominant in sectors vital to the country’s plans for economic diversification, such as agriculture.

Despite efforts to address this challenge – such as the creation of the Development Bank of Nigeria (DBN) by the government in 2017 to facilitate lending to small-scale enterprises via local commercial banks and microfinance institutions – in the meantime access remains difficult.

According to the DBN, only an estimated 5% of Nigeria’s 37m MSMEs are able to access credit from the traditional financial system, even though they contribute more than 50% to GDP. Easing credit to entrepreneurs is therefore crucial to unlocking the country’s economic fortunes.

This goes without saying: better access is likely to have positive implications in terms of job creation, especially among the youth. In response to one of our survey questions on the skills in greatest need in Nigeria, 49% cite leadership, followed by research and development (16%), and computer technology (11%).

Nigeria’s return to positive growth in 2017 is certainly reassuring for both the domestic and international business community, and puts the economy on a surer footing. According to the IMF, GDP in 2018 is expected to grow by 2%, which lines up more or less with our findings: some 69% of participants forecast GDP growth for the next 12 months would range between 1% and 3%.

That said, it is no secret that most of this growth is likely to continue to be driven by oil – the country’s most exported commodity to date – and subject to potential price fluctuations in the short term, while medium- to long-term plans to provide for a more diverse economy firm up.