The big picture: A dynamic population and wealth of resources translate into numerous opportunities

While growth prospects remain dim in the world’s advanced economies, Nigeria’s position as a key frontier market offers sharply different perspectives. The country has achieved consistently high growth over the past decade, including 7.4% in 2011 and 6.6% in 2012, according to the African Development Bank (AfDB). This expansion makes Nigeria one of the continent’s most consistent performers, with over twice South Africa’s average growth. Coupled with a drive to consolidate the state’s fiscal outlook while diversifying the economy away from its overreliance on oil, consistency has proven a draw for investors, although portfolio inflows still account for around two-thirds of foreign investment. While Nigeria’s inclusion in the “Next-11” economies by Goldman Sachs in 2005 is an indication that it is likely to drive global growth, and its ever-closer relations with BRICS countries (Brazil, Russia, India, China and South Africa) over the past decade is raising Nigeria’s investment profile, challenges remain.

The economy has grown five-fold from $46bn in 2000 to $259.5bn by 2012, according to the National Bureau of Statistics (NBS), making it West Africa’s largest economy, contributing 65% of regional GDP, and the world’s 36th largest. The rebasing of its formal GDP figures, which is due to be completed in 2014, will help it overtake South Africa as the continent’s largest economy potentially as soon as 2015 (see analysis).

Ensuring full implementation of the federal government’s economic diversification strategy in the run-up to the 2015 presidential and state governor elections will be key to accelerating and broadening growth.

GROWTH DRIVERS: Economic growth is projected to reach 7.2% in 2013 before slowing to 7% in 2014, according to the IMF. While real growth slowed moderately to 6.3% in 2012, the contributing factors were mostly one-offs, according to the IMF, and included an eight-day nationwide strike over fuel subsidy cuts in January 2012, floods in the fourth quarter of that year and sustained security challenges in northern states. With a contraction of around 1% in the oil and gas sector in 2012, the main driver of accelerating growth from 6.34% year-on-year (y-o-y) in the first quarter of 2012 to a spike of 6.99% in the fourth quarter was non-oil expansion, although it slipped from 8.8% y-o-y in 2011 to 7.8% in 2012. GDP growth returned to trend at 6.56% in the first quarter of 2013 and 6.18% in the second quarter, according to the NBS, with lower oil output from March and the impact of northern instability on overall domestic trade and output the main causes, according to independent investment advisory firm Financial Derivatives Company (FDC).

SECTOR STRENGTHS: Telecoms, construction, trading and agriculture, which together accounted for 69% of 2012 output, according to the NBS, sustained their expansion. Growth in agriculture accelerated from 3.97% y-o-y in 2012 to 4.14% in the first quarter of 2013, manufacturing rose from 7.55% to 8.41%, and building and construction grew from 12.58% to 15.66%, according to FDC data. Following a decade of explosive growth, increased competition in the telecoms market is dampening growth somewhat, although the sector retained a healthy rise of 24.53% y-o-y in the first quarter of 2013, down from 32% in 2012. According to the NBS, non-oil businesses catering to Nigeria’s emerging middle class will continue to drive growth, with non-oil GDP expected to expand some 8.5% in 2013, according to the Nigerian Economic Summit Group (NESG). Meanwhile, ongoing efforts to reform the power sector and boost the nation’s broadband penetration are also likely to have a multiplier effect on the economy.

DEVELOPMENT & GROWTH: The robust growth has had mixed results in terms of its impact on broader social development indicators. GDP per capita has risen nearly five-fold from $390 in 2000 to $1630 in 2012 and is expected to reach $1828 by 2015, according to IMF projections, and hit $2500 according to more bullish Renaissance Capital forecasts. However, inequality of wealth distribution is extreme with a Gini coefficient (with 100 as the most unequal society) rising from 42.9 in 2004 to 49 in 2013, although it is still lower than South Africa’s rate of 63. Nigeria’s human development has shown only slight declines in its poverty rate (defined as those living on less than $1.25 a day) from 64.2% of the population in 2004 to 62.6% in 2010. With one in five Africans in Nigeria – which had a population of 168.8m in 2012 according to the UN Population Fund – the country is both the largest potential consumer market and the site of the greatest income disparity. Only 4.5% of Nigerians earn more than N70,000 ($441) a month, according to a 2012 survey by the donor-funded organisation Enhancing Financial Innovation & Access, while more than half the adult population earns less than the N18,000 ($113) monthly minimum wage.

CONSUMER MARKET: The AfDB estimated the Nigerian middle class at around 23% of the population in 2011, which includes those with disposable incomes in the range of $2 to $20 daily. Unemployment grew from 13.4% in 2004 to 23.9% in 2012, according to NBS data. The two-track structure of the economy is reflected in more affluent areas such as Federal Capital Territory (FCT), Lagos and Rivers states, which boast similar expenditure profiles as countries with GDP per capita of over $10,000, according to stockbroker CSL.

Demographics are also spurring non-oil growth, with Nigeria’s population expected to expand to 239m in 2025 and 440m by 2050, which would make it the third-most-populous country after China and India based on UN forecasts. Surveys conducted by the NBS reveal higher spending on housing and consumer goods in Nigeria compared to sub-Saharan markets with comparable per-capita income levels, reflecting the market’s attraction for non-oil investors.

2020 GOALS: Vision 20:2020, launched in 2009 and steered by the National Planning Commission (NPC), aims for Nigeria to become one of the world’s 20 largest economies over the next decade, laying out a host of targets and strategies to expand activity in key areas and strengthen spending on social sectors. To reach the projected $900bn GDP by 2020, Nigeria will have to nearly double its growth to at least 13.5% annually, which bullish observers like PwC expect in the longer term, when Nigeria’s GDP is forecast to top $4trn by 2050.

The planned diversification away from oil is crucial to creating the employment necessary for Nigeria to realise its demographic dividend. At present, oil accounts for 75% of government revenues and 95% of export earnings. This concentration can be risky. At the end of October 2013 Ngozi Okonjo-Iweala, coordinating minister for the economy and minister of finance, said theft of crude and output interruptions in the Niger River delta could result in proceeds from oil falling as much as $12bn below budget estimates in 2013.

The 2020 roadmap requires N32trn ($201.6bn) for infrastructure and social and economic development, of which the private sector is expected to invest N13trn ($81.9bn), more than the federal government’s N10trn ($63bn) share or the states’ N9trn ($56.7bn).

HEAVYWEIGHT: The hydrocarbons sector employs less than 500,000 Nigerians, but accounts for around 14% of GDP in 2013, with oil production averaging roughly 2.2m-2.5m barrels per day (bpd) over the past decade. Although NESG estimates oil sector growth could reach 5%, spurred by 2% annual increases in oil output, this is contingent on demand. While Nigeria remains the world’s 12th-largest oil producer and Africa’s biggest exporter in 2012, according to BP figures, lower oil imports from the US pose a challenge to its prospects.

As the structure of the oil industry evolves, the government is forging ahead with investments to channel the country’s vast untapped natural gas reserves to fund a gas-to-power drive that should unlock investment in job-intensive sectors (see Energy chapter).

TRANSFORMATION: The government’s Transformation Agenda, a medium-term strategy running to 2015, focuses on lifting key infrastructure constraints on private sector-led growth, job creation and fiscal consolidation. The government expects multiplier effects from addressing the most pressing structural constraints. The key is to rehabilitate the dysfunctional power sector by privatising generation and distribution assets and enforcing domestic supply obligations for natural gas production, thereby expanding power supply from around 4400 MW in 2012 to 16,000 MW by 2015 and ultimately 35,000 MW by 2020 (see Utilities chapter). Major steps have been taken to this end: In October 2013, 15 privatised assets of the Power Holding Company of Nigeria, including five electricity generation companies and 10 electricity distribution companies, were handed to their new owners.

The infrastructure master plan aims to upgrade transport links through the rehabilitation of the country’s rail lines as well as upgrades of its roads, airports and seaports. Ranked 135th of 148 countries for its infrastructure by the World Economic Forum’s “Global Competitiveness Report 2013-14”, Nigeria requires some $14.2bn in annual infrastructure investment to achieve its aims, according to the World Bank, more than double the current expenditure of $5.9bn.

The cluster approach used in the plan focuses on developing viable supply chains in sectors from industry and agriculture to entertainment, real estate and non-oil minerals. Under the agenda, manufacturing’s share of GDP is expected to rise from roughly 4% in 2012 to 10% by 2020, while improving yields and processing in the agricultural sector – which accounted for roughly 40% of GDP and employed 60% of adults in 2012, according to the FDC – should counteract the $11bn spent in annual food imports and boost exports of cocoa, palm and rubber (see Agriculture chapter).

INDUSTRIAL REVOLUTION: In 2013 the Federal Ministry of Trade and Investment (FMTI) published its Nigeria Industrial Revolution Plan, focusing on developing small and medium-sized enterprise (SME) industrial zones across the country and encouraging supply-chain linkages with larger firms. In the agricultural sector, for instance, the FMTI estimates farmers consumed 90% of their own cassava production while around 45% of tomatoes grown were wasted in 2011 due to inefficient transport links to market. As a result, the administration is taking a comprehensive approach to change the agricultural sector from largely subsistence farming to mechanised production, with initiatives ranging from easing infrastructure bottlenecks to subsidising inputs and supporting more lending with mechanisms such as Nigerian Incentive-based Risk Sharing System For Agricultural Lending (see Agriculture chapter).

GROWTH POTENTIAL: By achieving a relatively easy doubling or tripling of yields, the ministry wants to expand the use of key staples such as cassava in its budding agro-industry sector, as well as expand import-substitution (and exports in the longer term) of key crops such as rice, cassava, sorghum, oil palm, cocoa and cotton. The goal is to create 3.5m new agriculture jobs and raise food production to 20m tonnes by 2015. “Agriculture is a key sector with potential,” Reginald Ihejiahi, Fidelity Bank’s CEO and managing director, told OBG. “With the help of our SME financing, a new generation of entrepreneurs is joining the agricultural industry, focusing on value chains.” By 2012 the ministry claimed to have reached some 41% of its 20m-tonne production target, while bank lending to the sector doubled to 3.73% of all loans in the two years to year-end 2012.

PRUDENT MANAGEMENT: With private investment key to these policies, conservative management at the independent Central Bank of Nigeria (CBN) has ensured broad macroeconomic stability in the aftermath of the 2009 banking crisis. Having hiked its benchmark monetary policy rate six times from 6.25% in December 2010 to 12% in December 2011, the CBN raised banks’ cash reserve requirements from 8% to 12% and reduced their allowable open foreign exchange (forex) positions in July 2012. Although political pressure on the regulator to cut rates has grown with falling inflation, the bank has increasingly targeted currency stability as a means of supporting investment inflows.

FOREX: The bank has in the past used its wholesale Dutch auction system and special forex sales to intervene in the market. The CBN recently suspended the wholesale system replacing it with the retail Dutch auction system in a move to increase transparency in the forex market, as banks will have to disclose details of all transactions. Yet as the value of imports declined in 2012 due to the clampdown on a spate of fraudulent subsidy claims by fuel importers, pressure for the CBN to intervene has eased; it sold $3.89bn in forex in the first quarter of 2013, 35% lower than the $6bn auctioned a year earlier, according to Deutsche Bank.

While the naira has remained relatively stable at around N156.19:$1 in 2012 (a 0.82% rise on the average N158:$1 rate in 2011), it came under moderate pressure from March 2013 onwards as oil prices started to slump. The naira’s rate would drift down to N177:$1 should oil slip to below $90 per barrel, according to FDC calculations. Renaissance Capital projects a more modest depreciation to N160:$1 by year-end 2013.

RECOVERY: Yet the CBN is expected to maintain its flexible exchange rate targeting policies, as according to the IMF’s Article IV consultation in 2013, “there is no urgent need for a change”. Indeed, Nigeria has rebuilt its foreign currency reserves since the last financial crisis. Prudent macroeconomic management, a current account surplus of some $20.6bn in 2012, up from $8.8bn in 2011, and high portfolio inflows sustained a recovery in the CBN’s reserves from $32.6bn at yearend 2011 to $44bn by year-end 2012 and $48.41bn by June 2013, covering roughly 11 months of imports.

Despite most inflation in Nigeria being imported – a result of the relatively modest amount of domestic consumption satisfied by local production – the economy’s strong reliance on imports and devastating floods in 2012 prompted supply-side inflation to heat up, along with rises in electricity and fuel prices, and higher import tariffs on wheat and rice from January 2012, which accelerated inflation in the first half of the year. While annual inflation rose from 10.3% in 2011 to 12.3% in 2012, according to IMF figures, the high base effect caused y-o-y inflation to drop temporarily to single digits in the first half of 2013. Headline inflation fell to 8.4% y-o-y in June 2013 (and 8.9% y-o-y for the first half of 2013), driven by a drop to 5.4% y-o-y in core inflation and 9.7% y-o-y food inflation, according to NBS figures. The IMF projects inflation for the 2013 fiscal year to drop below 10%, while the CBN expects full-year inflation as low as 6%, despite an increase in sugar and rice import tariffs in January 2013. However, the CBN remains cognizant of political pressures to increase fiscal spending in the run-up to the 2015 elections. “Central bank governors all over the world know that election cycles are very difficult for monetary policy,” said Lamido Sanusi, the governor of the CBN, while speaking at the National Risk Management Conference in Lagos in June 2013. “If there is increased spending, what is likely going to happen will be higher interest rates.”

FISCAL BALANCE: Higher spending is already evident in the 2013 budget. The N4.98trn ($31.4bn) spending plan, a 6.2% increase on the 2012 budget, sits firmly within the administration’s fiscal consolidation drive and expansion in capital spending (see analysis). Based on economic growth forecasts of 6.3%, a N160:$1 exchange rate, oil production of 2.53m bpd and a relatively high benchmark oil price of $79 per barrel, up from $72 in 2012 and the $75 proposed by the Federal Ministry of Finance (FMF), the budget focuses on infrastructure, security, human development and food security.

The key drivers of the budget’s N1.62trn ($10.2bn) capital spending include N168.2bn ($1.06bn) for public works, such as funding for the second Niger Bridge, N84.2bn ($530.4m) for water resources, N81.4bn ($512.8m) for agriculture and N74.2bn ($467.4m) for power. The education budget, at 9% of spending, accounts for the largest share of non-defence expenditure, and combined with police and defence spending, the three total N1.09trn ($6.9bn). Spending on health care programmes, such as the Save One Million Lives campaign against polio, child HIV, malaria and malnutrition, is budgeted to reach N279bn ($1.75bn).

REINVESTMENTS: The Subsidy Reinvestment and Empowerment Programme (SURE-P), launched in 2012 to reinvest savings from the partial fuel subsidy removal in capital projects and support for less affluent Nigerians, receives N273.5bn ($1.7bn) under the 2013 budget, in addition to unspent funds from 2012. “Because the SURE-P funds are earmarked to specific projects, any unspent funds are simply rolled over to the next year while the project keeps going,” Supo Olusi, special assistant to the coordinating minister for economy and minister of finance, told OBG.

Under SURE-P the government is supporting community service programmes aimed at creating 10,000 jobs per state – with 200,000 enrolled by mid-2013 – and a project to enhance the employment prospects of up to 100,000 new graduates. The YouWin! programme to support entrepreneurship has created some 15,000 new jobs as of June 2013.

DEBT: With a budget deficit of 2.17% of GDP and a debt-to-GDP ratio of 35% as of August 2013, Nigeria sits within the confines of the 2007 Fiscal Responsibility Act, which sets caps of 3% and 40%, respectively. Following restructuring of its Paris Club debt in 2005 (with $18bn forgiven and $12bn paid off) and windfall oil profits since then, Nigeria has a relatively healthy debt position.

The administration is pursuing fiscal consolidation by rebalancing debt towards offshore and using multilateral development bank support for risk guarantees on key infrastructure projects. With a total external debt position of 3% of GDP in early 2013 and ample forex reserves of 16% of GDP, Nigeria retains a strong external net credit position, according to Deutsche Bank, although it intends to expand sovereign forex borrowing to 40% of the total by 2016-18, up from 14% currently. Nigeria’s debt burden stood at N6.1trn ($38.4bn) in naira debt and $6.7bn in offshore debt by April 2013, according to the Debt Management Office.

Despite spikes in emerging markets bond markets from June 2013 as a result of potential changes in US Treasury policy, Nigeria returned to the Eurobond market in July for the first time since its debut $500m Eurobond in January 2011, raising a total $1bn at 5.375% (in five-year bonds) and 6.625% (for the 10-year bonds) for its power and gas pipeline projects, mainly from US-based investors. The four-fold oversubscription of the bond is encouraging for plans of raising an additional $2bn-3bn in the coming years. Meanwhile, the FMF began retiring maturing domestic bonds for the first time in February 2013, starting with N75bn ($472.5m), and aims to reduce domestic borrowing from a peak of N1.1trn ($6.93bn) in 2010 to N500bn ($3.15bn) in 2014. The fiscal and economic outlooks remain tied to oil, however, with the IMF citing potential falls in oil prices and the “slow progress in building consensus around key fiscal reforms” as the two key downside risks in its March 2013 Article IV consultation.

TAX TAKE: Although oil revenues fluctuate depending on price volatility and uneven output, the Federal Inland Revenue Service (FIRS) has worked to grow its non-oil tax receipts, which expanded 20% in the five years to 2012. Nigeria’s tax base remains very narrow, despite promising growth in key states like Lagos – the FMF estimated in May 2013 that its tax-to-GDP rate stood at roughly 7%, compared to nearly 15% for neighbouring economies like Ghana. While the FIRS lowered personal income tax from 25% to 24% in 2013, leaving corporate income tax unchanged at 30%, it has also sought to strengthen its tax collection processes.

Tax evasion has been a consistent challenge: the FDC estimated in March 2013 that Nigeria had lost some N90bn ($567m) to the grey market in automobiles alone since 2009, for instance. The new tax policy launched in April 2012 aims to improve collection by establishing a Debt Enforcement and Special Prosecution Unit within the FIRS and more tax offices to crack down on tax evasion, while the government is set to launch a fully automated tax system in 2014.

The policy has started to bear fruit: government revenues reached a total of N5trn ($31.5bn) in 2012, while the FIRS expects to raise between N5.72trn ($36.03bn) and N6trn ($37.8bn) in 2013. The 2013 budget banks on a 20.9% y-o-y increase in oil revenues to N2.35trn ($14.85bn) and 8.1% growth in non-oil revenues to N1.74trn ($10.9bn). But while tax collection from formal businesses is improving, Nigeria’s vast informal sector (estimated to account for around 40% of GDP by the UN) constrains the government’s narrow tax base.

With 17.25m SMEs employing 32m people, according to the FMTI, the administration’s focus is increasingly shifting to facilitating access to finance for these smaller firms and encouraging their formalisation and tax reporting. In January 2013 the state governor estimated only 3m of Lagos’s 8m taxable individuals filed tax returns. “The Lagos Internal Revenue Service (LIRS) has been running tax education campaigns that involve traditional leaders, clergymen and community figures to encourage tax compliance within the informal sector,” Tunde Fowler, executive chairman of LIRS, told OBG. “This is a major undertaking as there was no formal tax system in Nigeria until 1999.”

Some state governments have forged ahead in other ways to grow their internally generated revenue (IGR) – the fact that only states with over 35% IGR are allowed to raise bonds domestically has proved an impetus. Lagos State has outsourced its tax collection to a private body, which is paid 10% of collected taxes, and grew its tax revenue from N7bn ($44.1m) in 2007 to N20bn ($126m) in early 2013, according to the state, with IGR contributing 75% of all receipts. Other states like Bayelsa and Rivers intend to follow suit.

TRADE POLICY: Traditionally an unprocessed commodity exporter, with oil representing 95% of export earnings in 2011, according to the IMF, Nigeria is working to formulate a coherent trade and investment policy to support its Transformation Agenda. Exports have recovered from their dip in 2009, when their value fell 32.4% to $56.79bn, according to CBN data. Supported by high international oil prices, exports reached $96.03bn in 2012. While the US has traditionally been the largest export market for Nigerian crude, higher domestic production in North America has curbed trade. Although the US was still Nigeria’s biggest market in 2012, India overtook the US in early 2013 for the first time, according to the Indian Embassy in Nigeria.

“A key longer-term concern is the impact of greater US oil and gas production on demand for Nigerian oil and the impact on the balance of payments,” Ousmane Dore, the resident representative of the AfDB, told OBG. China is the seventh-largest destination for Nigerian exports, but these more than doubled in 2012 alone, from N392.58bn ($2.47bn) to N933.31bn ($5.87bn), according to CBN data. While BRICS countries have increasingly imported Nigerian crude, the terms of trade remain unbalanced, with Nigeria importing large quantities of manufactured goods and machinery, as well as refined petroleum. The country’s trade balance improved with a N16.82trn ($105.97) trade surplus in 2012, up 76.17% y-o-y, according to the NBS, primarily driven by high international oil prices that averaged $112 a barrel in 2012. Oil receipts accounted for some 69.2% of export increases (accounting for 96.8% of total exports), according to the FDC, which drove a 15.7% y-o-y rise in exports to N22.45trn ($141.4bn) in 2012, according to the NBS. “While trade with traditional partners like the EU and US has been relatively stable, trade with BRICS members like India and Brazil has been growing significantly,” Dore told OBG.

IMPORTS: Although Nigeria’s imports rose rapidly from $34.65bn in 2009 to $67.09bn in 2011, driven particularly by high refined fuel imports exaggerated by subsidy abuse, this growth was reversed in 2012 with tighter controls of the subsidy scheme. Imports dropped some 17.1% to $58.3bn in that year, according to CBN data. This is due in some part to a push by the government to encourage local production and reduce import demand. The administration has sustained increases in import duties on staple foods like wheat, rice and sugar. From July 2012 an additional 15% levy on wheat imports and a 65% levy on wheat flour were imposed, while import duties on brown and polished rice were raised from 5% and 30%, respectively, to 110% each from January 2013. Finally, the duties on raw and refined sugar were increased from 10% to 60% and 30% to 80%, respectively, in the same period. The new tariffs, coupled with lower fuel imports following investigations into fuel subsidy scams, dampened imports by 42.86% to N5.6trn ($35.28bn) in 2012.

Despite imports from China growing 32.7% in 2011 to N1.46trn ($9.19bn) and dropping in 2012 to N1.21trn ($7.6bn), it remains the largest exporter to the Nigerian market – bilateral trade grew six-fold to $13bn in the seven years to 2012, according to data from FMTI (some import estimates for China are even higher due to informal sector activity). By 2012 Nigeria imported some 18% of its goods from China compared to just 10% from the US, according to figures from the FDC. The value of imports has recovered from its 2009 nadir of $22.14bn to $35.43bn in 2012, according to NBS data, but remains below its 2008 peak of $41.75bn.

Although the pressure on the current account from stable oil output and growing imports should be contained in 2013, with Deutsche Bank forecasting a current account surplus of 5.5% of GDP for the year as a whole, imports of machinery and equipment should accelerate under the Transformation Agenda in the coming years. The FMTI has expanded its roadshows and links to BRICS countries, and is also targeting other countries in developing blocs and forums.

INFLOWS: Nigeria has benefitted from rising inflows of both foreign investment and remittances from its roughly 17m-strong diaspora. Buoyed by Nigeria’s improving sovereign rating outlook from the three major agencies and key investment banks like JP Morgan and Barclays, foreign portfolio investment has flowed into naira fixed income and, increasingly, equities. Standard & Poor’s raised Nigeria’s rating one notch to “BB-” with a stable outlook in November 2012 and affirmed this rating in October 2013. Fitch gave the country same rating, while Moody’s rated Nigeria for the first time in November 2012 at “Ba3” (stable) – three ranks below investment grade.

Nigeria received the largest share of foreign direct investment (FDI) into sub-Saharan Africa in 2012, with $7.03bn. While corrections in the financial markets in June 2013 revealed the short-term volatility of such investments, the growing stock of inward FDI has supported Nigeria’s balance of payments. In line with this, the government has been looking to create a mix of both hard and soft infrastructure conducive to sustained growth in capital inflows.

FREE TRADE ZONES: A central plank of the government’s investment policy is the promotion of free trade zones (FTZ). With some 25 licensed free zones, of which nine were operating and six were under construction in 2012, the Nigeria Export Processing Zones Authority (NEPZA) estimates the zones have attracted N1.6trn ($10.08bn) in total investment since their inception in 2004, although much of this has targeted the Onne FTZ near Port Harcourt. The FMTI estimates that investment in FTZs accounts for some 60% of inward FDI since 2003. NEPZA expects to attract another $15bn in investments once all 25 zones are functional by 2018. The largest effort is the development of the Lekki FTZ, a government-to-government deal between China and the Lagos State government.

“Striking the balance between the benefits for investors and those for Nigeria is key. We are currently calibrating the tax incentives both by industry and by tenor,” Adeyemo Thompson, the deputy managing director of Lekki FTZ, told OBG. “A key benefit of FTZs is the ability to channel job-creating FDI to Nigeria without raising pressure on the country’s forex reserves.”

REMITTANCES: The fifth-largest recipient of remittances worldwide in 2012 after India, China, the Philippines and Mexico, Nigeria received some $21.89bn in such forex in 2012, accounting for 67% of inflows to sub-Saharan Africa, 8.4% of 2012 GDP and roughly half of the CBN’s foreign currency reserves, according to the World Bank. This represents the second-largest foreign currency inflow after proceeds from oil sales.

Despite a dip in 2008, remittances grew from $14.5bn in 2005 to $19.2bn in 2009 and $20.61bn in 2010, led by growth in transfers from US- and UK-based Nigerians in particular, according to the World Bank. Although such figures may underestimate the total value of inflows given the prevalence of informal money transfer schemes, the upward trend in formal figures has encouraged the FMF to seek ways to channel such inflows towards investment. With some 80% of these funds are used for consumption rather than investment, remittances play a key role in covering shortfalls. Over the past two years the FMF has planned to issue a Eurobond marketed to Nigeria’s diaspora, rumoured at over $100m, in a bid to channel more of these inflows towards productive purposes, particularly infrastructure development. The government was reportedly seeking potential advisors in September 2013.

PUBLIC-PRIVATE: Conscious of its fiscal constraints, the federal government’s Transformation Agenda is powered by public expenditure expected to catalyse significant private investment, especially in infrastructure and key sectors like agriculture. Despite a history of mitigated success in privatisation efforts over the past decade, such as Nigeria Telecommunications or Transcorp, the government has improved the transparency of new sales, as exemplified by the unbundled Power Holding Company of Nigeria’s power generation and distribution assets (see Utilities chapter).

With the NPC estimating Nigeria requires approximately N460trn ($2.9trn) in infrastructure investment by 2044, the government expects public-private partnerships (PPPs) under its National Integrated Infrastructure Master Plan to play the largest role. In line with the national PPP strategy launched in 2012, which complements the regulatory Infrastructure Concession Regulatory Commission Act of 2005, the Bureau of Public Enterprises (BPE) has the power to concession infrastructure to private investors.

“We are reviewing reform bills for the transport, postal and federal housing sectors, as well as broader anti-trust reforms,” Benjamin Ezra Dikki, the director-general of the BPE, told OBG. “Just as in telecoms and power, we are seeking to clearly delineate regulator from operations, and within this, specialised regulators.” Having steered the successful privatisation of power assets and the concessioning of Nigeria’s 24 ports, the BPE has moved away from requiring the FMF to extend sovereign guarantees for infrastructure projects.

PARTNERSHIPS: Although such guarantees had been provided for the Lekki-Epe Expressway concession and the Bi-Courtney concession, the government has sought World Bank support in extending partial risk guarantees for power off-take agreements signed by the electricity bulk trader for the Murtala Mohammed Airport 2 domestic terminal in Lagos, as well as for certain gas supply agreements. “We wish to reduce any undue dependence on sovereign guarantees for infrastructure projects,” Dikki told OBG. “Partnering with Nigerian firms should be sufficient to mitigate any risk.”

In April 2011 the Nigerian Ports Authority and Lagos State granted a 20-year build-operate-transfer deal for the development of a 2.5m-twenty-foot-equivalent-unit greenfield port in Lekki, due for completion in 2016, to a consortium of Singapore-based Tolaram and the Philippines’ International Container Terminal Service.

The BPE has also forged ahead with the privatisation of the Abuja Securities and Commodities Exchange in June 2013 and the ongoing commercialisation of the Federal Housing Authority, meant to attract greater private investment to affordable housing development.

Meanwhile, the federal government has sought to expedite delayed PPP projects, such as the Lagos-Ibadan Expressway, by revoking Bi-Courtney’s concession and awarding construction work to Julius Berger and RCC in July 2013. With both state-level and federal governments eager to attract private funding for infrastructure, the number of projects has multiplied with several different types of structures.

“The specific PPP model varies project by project: in some the government will take on the design and building phases, while in others the private sector partner assumes that role in addition to maintenance and operation,” Ayo Gbeleyi, director-general of Lagos State’s PPP Office, told OBG. “There is no one-size-fits-all solution.”

BUSINESS CLIMATE: With Nigeria’s ranking in the World Bank’s “Ease of Doing Business” report dropping from 138th position in 2013 to 147th out of 189 economies in 2014 – far behind Ghana’s 67th position and South Africa’s 41st – the administration aims to achieve significant improvements by 2015.

The country maintained its ranking for registering property (185th) and resolving insolvencies (107th). However, Nigeria’s standing continued to drop in terms of the ease of starting a business (122nd, down from 114th), getting electricity (185th, down from 184th), paying taxes (170th down from 167th) and getting credit (13th, down from 11th). Improvements were made in cross-border trade (158th up from 159th) and enforcing contracts (136th up from 138th).

Consulting the private sector in 2012, the FMTI identified six key areas for further improvement, ranging from access to finance, infrastructure and governance to labour skills and innovation. Although the World Bank found Nigeria’s total tax rate on businesses stood at only 33.8%, far lower than the sub-Saharan average of 53.3%, firms in Nigeria had to make 47 tax payments a year to local, state and federal governments, compared to only 12 in OECD countries.

Part of the administration’s drive is clearly to reduce the potential for fraud or bureaucratic intervention, establishing more services online. For instance, the Customs service launched its single trade window in early 2013 to expedite procedures and reduce the scope for undue interference. In mid-2012 the Corporate Affairs Commission, under FMTI, announced that it would expedite company registration within a day of receiving proper applications. The administration has also sought to accelerate investment procedures by establishing a strong FMTI, under which the Nigerian Investment Promotion Council (NIPC) falls, for instance. To improve coordination of investment procedures across states, the NIPC is supporting state governors in establishing state-level investment promotion and coordination centres with the aim of replicating the national one-stop investment centre (see analysis).

COORDINATING VISIONS: While the federal government has laid out a clear vision for infrastructure and social development, Nigeria’s federal 1999 constitution, which devolves many powers to state governors in particular, means coordination between the three tiers of government is key to the programme’s success. Funding for the three tiers of authority is transferred through the Federal Allocation Account (FAA) once a month and supplemented by transfers from the Excess Crude Account to bridge any budget shortfalls – the revenue-sharing formula is set according to factors that include population and landmass. The 10 oil-producing states of the Niger Delta receive an additional transfer of 13% of total oil revenue through the oil-derivation fund.

The most affluent state under this scheme is Rivers, whose N438bn ($2.76bn) budget in 2012 was funded by N261bn ($1.64bn) from the FAA and N165bn ($1.04bn) from oil derivations. With approximately 46% of fiscal spending devolved to sub-national governments and significant responsibility for service delivery and permitting at the local levels, Nigeria’s 36 states offer stark contrasts in terms of business climate as well as infrastructure development. The FCT, like Washington, DC, receives funding in the same way as ministries.

LOCAL VARIATIONS: While states are responsible for levying stamp duties, personal income, road and capital gains taxes, for instance, local administrations collect a range of fees and award licences from businesses. Conclusions from the World Bank’s “Subnational Doing Business” survey reflect the wide variations in investment climates and approaches between various state governments. It is easiest to start a business in FCT, for instance, with five procedures taking 22 days and costing 58.5% of per-capita income, whereas the poorest-performer, Ogun State, required 40 days and 10 procedures, costing 90.9% of per-capita income, according to the World Bank. The cost of registering property varies from 6.6% of the property’s value (in Gombe State) to 33.6% of the value (in Ondo). Similar divergences persist in handling construction permits and enforcing contracts. While a virtuous circle has emerged for states with higher IGR, which are thus able to raise funds through naira-denominated bond issues (only available to states with over 35% IGR), this is limited to 15 state issuers of bonds. The federal government has sought to encourage best practice following World Bank findings that if all states adopted models already in place in the best-performing states, Nigeria’s ranking in the “Doing Business” survey could improve to the 72nd position.

DEVELOPMENT FINANCE: The FMF plans to reform its five development finance institutions (DFIs) to support lending to key under-banked sectors (see Banking chapter). Jointly owned by the CBN and the FMF, the DFIs have had varying levels of success in controlling their non-performing loans (NPL). The Bank of Industry (BOI), tasked with lending to SMEs and accounting for 56% of the five DFIs’ combined asset base, manages the manufacturing, power, aviation and SME guarantee funds, has succeeded in lowering its NPL ratio from 70% to 15% by the first half of 2013. Other DFIs, however, have struggled to improve their performance. In June 2013 the FMF announced its intention to triple the BOI’s capital to N750bn ($4.72bn) to support lending to SMEs. The government is also planning wider-ranging reforms by establishing an umbrella DFI able to raise funding independently on domestic and international markets. “We are looking to create an omnibus DFI that will be able to access long-term financing externally to lengthen the tenor of loans domestically beyond the current seven-year ceiling,” Dikki told OBG. By obtaining cheaper, longer-tenor funding, the new structure would facilitate access to long-term funding for SMEs and firms working on infrastructure projects.

The FMF is also working with the World Bank to restructure the Federal Mortgage Bank of Nigeria into a mortgage refinancing institution to support a more dynamic housing credit market. In July 2013 an 18-month timeframe was set to implement the reform, with feasibility studies expected by the end of the year. While the role of DFIs is expected to grow significantly to support the government’s Transformation Agenda, the FMF will need to adequately ring-fence their activities to avoid crowding out private investment. The authorities expect commercial banks to follow DFIs in lending to previously unbanked segments of the economy.

OUTLOOK: The reforms being enacted – establishing a gas-to-power value chain, expanding the industrial base and leveraging agricultural potential to reduce imports – have been applauded by investors and development partners. Sustaining the pace of reform in the run-up to elections in 2015, will be crucial to ensuring the sustainability of the transformation. “One of the main questions surrounding the next two years is not so much whether fiscal consolidation will take a back seat, but rather whether implementation of critical structural reforms that have launched may be delayed,” Dore said. As the pool of increasingly diverse investors expands to a broader range of non-oil sectors,the priority will be investment in social and economic infrastructure, while supporting national reconciliation.