Forging ahead: Efforts to become one of the world’s 20 largest economies continue

Although depressed growth in developed economies has added a level of uncertainty to Nigeria’s macroeconomic outlook, it has also contributed to its attractiveness. As one of the fastest-growing economies in the world, according to the Federal Ministry of Finance (FMF), the country is certainly appealing to foreign investors in large part due to its vast potential. In 2005 US investment bank Goldman Sachs included Nigeria, with a GDP of $247.1bn in 2011 (approximately 65% of West Africa’s economy), as one of the “Next 11” economies that would drive global growth in the coming decades. Russian-based investment bank Renaissance Capital expects Nigeria’s GDP to reach $460bn by 2016 once bottlenecks hindering power production and transmission are eased. It also forecasts that the country will overtake South Africa as the largest economy on the continent by 2020.

Despite important structural bottlenecks, the country’s growth prospects are clear: demand from a large population of 162m (one in five Africans), which is expected to grow to some 433m by 2050, according to the UN, has the potential to insulate Nigeria from external shocks, while significant natural resource endowments could be leveraged for industrialisation and the move to higher value-added production.

BY THE NUMBERS: Economic growth has averaged 6.7% since 2006, relatively uninterrupted by the global financial crisis, while an emerging middle class is beginning to fuel growth in domestic consumption: per capita income has almost quadrupled since 2001, from $357 to $1541 in 2011, according to the FMF. Yet aggregate figures, skewed by high-growth sectors that do not contribute significantly to job creation, obscure what many Nigerians call “jobless growth”: rising inequality, poverty and unemployment in the midst of persistently high inflation. Public spending has also historically crowded out the flow of credit to the private sector. While the country’s macroeconomic outlook remains uncertain in light of international oil price fluctuations, on which Nigeria depends for about 95% of its foreign currency earnings and between 70% and 80% of government revenues, according to figures from the FMF and IMF, respectively, the federal government has embarked on a series of structural reforms – from fiscal consolidation to infrastructure development – that are likely to lay the foundations for future growth if successfully implemented.

Annual GDP growth dropped marginally from 7.87% in 2010 to 7.69% in 2011, according to the National Bureau of Statistics (NBS), in large part due to a slowdown in growth in the third quarter of 2011 to 7.4% year-on-year (y-o-y), down from 7.72% the previous quarter. This coincided with a flare up of violence linked to Boko Haram, a militant group based in the north.

While the economy rebounded to 7.68% growth in the final quarter, a number of downside risks have damped expectations for 2012.

The macroeconomic environment remains stable despite an over-reliance on oil and gas exports, with ratings agencies such as Fitch and Standards & Poor’s maintaining stable assessments of “BB-” and “B+”, respectively. While political tensions thin, fiscal buffers and still-weak political institutions and governance constrain the prospects for above 8% growth, according to the ratings agencies, growth of 6% plus in coming years will prove attractive to investors. As the pool of global investors with an appetite for high-risk, high-return markets increases in line with anaemic growth in the West, Nigeria is likely to sustain its renewed appeal for foreign direct investment (FDI).

IN DECLINE: Despite being the world’s 10th-largest oil producer and the fourth-largest oil exporter, subdued international oil prices and oil theft have hindered the sector’s performance in recent years. A more fundamental reticence on the part of oil majors to invest in the face of regulatory uncertainty has also constrained growth since 2009. Oil producing companies have reverted to operating expenditure to maintain existing levels of production as they wait for the Petroleum Industry Bill (PIB), a comprehensive reform bill expected to be passed by the end of 2012. This cautious investment stance caused the oil sector to contract by 2.2% in 2011, according to the IMF, followed by a meagre annualised growth of 0.24% in the first half of 2012, data from the NBS showed.

Relative stagnation in new exploration spending as well as strong growth in non-oil sectors caused hydrocarbons’ share of GDP to drop from 40% in 2000 to 14.71% in the first quarter of 2012.

DIVERSIFYING GROWTH: Though oil and gas remain the major foreign currency earner, non-oil sectors have become strong economic growth drivers in recent years. The telecommunications sector has seen rapid expansion since it was liberalised in the early 2000s, while modern wholesale and retail trade as well as the construction, property and hospitality sectors have also grown significantly, and have compensated for the slowdown in the traditionally dominant oil sector.

Telecommunications, which accounts for some 5.71% of GDP, grew 34.76% in 2011, while the other sectors maintained the same double-digit growth of the past five years. On the whole, the non-oil sector expanded by 8.3% in 2011, having sustained 8.9% average annual growth since 2006. After a two-year sanitising process in financial services, including the rescue of nine banks and a drawn-out slump in equity markets, banks consolidated their final losses in 2011 and were set to return to profitability in 2012. While investment banks like Renaissance Capital forecast annual growth of about 7% until 2016, significant downside risks, both domestic and external, remain.

DOWNSIDE RISKS: A slowdown in non-oil growth to 7.52% in the first half of 2012 – linked to the impact of renewed violence in the north on agriculture and trade as well as lower disposable income levels due to energy and food price inflation – coupled with the slow growth in the oil and gas sector have led to downgrades of forecasts for economic expansion in 2012. The FMF cut its 2012 African growth forecast in May, reducing projected growth to 6.9%. This is in line with revised IMF forecasts of 6% to 7%, lower than the 7.2% that was expected in the 2012 budget.

While annualised growth recovered to 6.38% in the second quarter of 2012, from 6.17% the quarter before, downgrades in the EU, which accounted for 36.6% of total trade in 2011, linked to the euro crisis and a slowdown in the US market, the single largest importer of Nigerian crude, will expose the economy to significant tailwinds. Moreover, falling demand in key oil importing nations like the US and China has resulted in a drop in oil prices to $80-90, which affected oil revenue.

Domestic challenges have also exerted downward pressure on growth. Renewed oil bunkering activities in the Delta region, which saw oil production drop to 1.8m barrels per day (bpd) in May 2012, have affected growth in the oil sector, though production levels were back up, to 2.7m bpd as of August, according to the Nigerian National Petroleum Corporation.

IMPACT BY SECTOR: Unrest in the northern states, where agricultural accounts for some 40% of GDP, has forced many farmers off their land and disrupted growth in agricultural output, which fell from 5.74% in the final quarter of 2011 to 4.15% at the start of 2012 and 4.08% in the second quarter of 2012. “Displacement of farmers in the north caused a slump in agricultural output in the first half of 2012, while many southerners involved in trading in the north have returned south, dampening overall economic growth,” said Gloria Joseph-Raji, a World Bank economist. With the planting season taking place in the second half of the year, sustained instability could have an even more serious impact on output, while a repeat of the 2011 drought in the Sahel may also dampen the outlook.

Meanwhile, eight-day protests surrounding the partial lifting of the fuel subsidy in January 2012 cost the economy some N207.41bn ($1.33bn) in economic activity, according to the NBS. The security concerns and higher domestic energy prices have affected wholesale and retail trade, a dynamic sector in recent years that accounts for some 23% of GDP, causing a slowdown in growth from 11.4% in the fourth quarter of 2011 to 8.35% at the start of 2012. The northern states typically account for some 30% of turnover for larger fast-moving-consumer-goods (FMCG) producers like PZ Cussons. “We have seen a significant slowdown in consumer spending in general and mostly in the northern states,” Thabo Mabe, the CEO of Unilever Nigeria, told OBG. “The increase of violent attacks has left shelves empty of every day need products, as it has been increasingly difficult to distribute product across markets in the north.”

SUSTAINING FOREIGN INTEREST: Although a number of domestic factors remain uncertain, foreign investment inflows surged significantly in 2011, despite the challenges in the investment environment. Amid a fledgling growth in developed markets and a cooling down of growth in the emerging BRIC economies, Nigeria’s high relative growth rate, fairly stable macroeconomic environment, and low debt and fiscal imbalance levels have proved attractive.

Despite poor infrastructure and the high risks related to corruption, foreign interest has grown significantly since 2001, when FDI stood at just $1.14bn. Nigeria succeeded in attracting a total of $8.7bn in FDI in 2011, 21% of all FDI into Africa, up from $6.1bn in 2010. New investors have emerged in the oil and gas sector, despite the delay in the passing of the PIB. Catering to the needs of a growing mass public and fledgling middle class has also attracted a growing share of the FDI take, while investments by relatively new partners like China, India and Brazil have mirrored the gradual redirecting of external trade (see analysis).

The Nigerian Investment Promotion Commission (NIPC) now estimates that China’s cumulated investment of around $6bn between 2003 and 2011 accounts for about a quarter of total FDI to the country. The bulk of these foreign investments were committed by state oil companies China National Offshore Oil Corporation and Sinopec, telecoms giant Huawei and construction company China Civil and Engineering Construction Company (CCECC), but a growing share of investment is being steered to small-scale manufacturing and agro-processing. China’s share of FDI is expected to increase in coming years following its successful $15bn acquisition of Canada’s Nexen, which is conducting deep-water offshore operations. Foreign oil independents have also been seizing on oil majors’ retrenchment as an opportunity to expand their footprint in the Nigerian market. These include Heritage Oil’s $850m acquisition of the majority stake in a block from Total and Shell.

BROADENING HORIZONS: Investment has broadened beyond its traditionally narrow interest in oil and gas, particularly in 2011, with deals in industry, agro-processing, retail and telecommunications driving non-oil FDI. Breweries and FMCG producers, the mainstay of Nigeria’s industrial base, have sustained investments to keep pace with growing consumer demand. Procter & Gamble opened its new $200m factory near Ibadan in 2012, while Nestlé opened a new N12bn ($76.8m) plant in early 2011 and is on track to invest a further N42bn ($28.8m) by 2013. Brewers have also been expanding, with Guinness announcing plans to invest N55bn ($352m) and SABM iller, a recent entrant to the market, opening a N15bn ($96m) factory in Onitsha in early 2012. Infrastructure and supplier industries are also expected to see investment flow.

Development of the Lekki Free Trade Zone (FTZ) in Lagos, backed by the Chinese government and Lagos State, is under way, while construction of a deep-sea port has been concessioned to investors based in Singapore and the Philippines. Successive delegations of Turkish, Brazilian and Indian investors have shown interest in supporting industries, from construction to iron and steel production. Regarding the energy and agricultural sectors, important investments are set to take place in the near future. The US’s General Electric signed a $10bn memorandum of understanding (MoU) in March 2012 to build new power plants, while Germany’s Siemens announced plans to invest N175bn ($1.12bn) in 10,000 MW of new generating capacity. New entrants in agriculture are also expected to join Singapore-based agricultural commodity firm Olam, a long-standing investor in the sector.

POTENTIAL REFORMS: The 1995 NIPC Act frames investment promotion policy, providing for full foreign ownership in all sectors, except for hydrocarbons and industries related to national security, as well as full dividends repatriation. Following a period of relatively weak institutional backing, the NIPC was transferred from the presidency to the newly established Ministry of Trade and Investment (MTI) in 2011 to improve the effectiveness of its incentives, which consist mainly of a five-year tax holiday for businesses under its “pioneer status”. In 2012 the commission forwarded proposals for revisions of its incentive structure, which included longer tax holidays and improved immigration support to the Federal Executive Council, though this is unlikely to be approved before 2013.

Meanwhile, investments in the country’s special economic zones (SEZs), including Onne FTZ in Port Harcourt, the Tinapa FTZ in Calabar and the Lekki FTZ are subject to special tax treatment under a 1992 law exempting firms from all taxes and import duties. The MTI has been steering reforms in soft infrastructure to attract investment, reducing business registration times to 24 hours by 2013 for instance (see analysis). New double-taxation treaties are also targeted at encouraging FDI: for example, Nigeria’s signing of such a tax treaty with Mauritius in August 2012 has been a key driver of FDI flows into Africa.

CONTROLLING INFLATION: A persistent challenge to growth is inflation, which averaged some 11% in 2011, increasing to 12.6% y-o-y from January 2012 on the back of the partial subsidy cut. While fuel prices increased by 49% in January, electricity tariffs were raised by 40% in June. Concurrently, growth in broad money supply slowed in the first half of 2012, expanding at an annualised 2.7% compared to 2011 growth of 10.77% y-o-y. Inflation went up from 12.7% in May to 12.9% y-o-y in June, while core inflation reached 15.2%, mainly driven by price increases in food, housing, water, electricity and other fuels.

Nigeria has long been susceptible to food price inflation: importing some $10bn a year worth of food, the country ranks fourth out of 80 countries on the Nomura Food Vulnerability Index. New tariffs of 35% on imported agricultural commodities, such as wheat and cassava, will cause food prices to go up. FMCG producers have started budgeting 15% wage increases for 2012, higher than the recent 12% annual average, indicating an acceleration of inflationary expectations. The Central Bank of Nigeria (CBN) has forecast inflation of about 12% y-o-y and significantly higher core inflation for the second half of 2012.

BALANCING ACT: In light of slowing growth and rising inflationary pressures, the CBN has had to maintain a careful balancing act when it comes to setting monetary policy. Following a rescue of the country’s banking sector in 2011, the CBN moved to significantly tighten interest rates, while adopting a policy of exchange rate targeting. The country’s benchmark monetary policy rate (MPR) was raised from 6.25% at the start of 2011 to 12% by October, a rate maintained since then in the face of rising government capital expenditure and inflationary pressure. Lowering the MPR in the face of weakening global growth could lead to downward pressure on currency and foreign currency reserves, while raising it would further restrict the real economy’s access to credit and lead to a deterioration of banks’ loan books.

While keeping the MPR steady, the CBN increased banks’ credit reserve requirements from 8% to 12% in July 2012 in a bid to soak up excess liquidity, leading to increases in commercial interest rates. Yet at its present level, the MPR has kept prime lending rates at above 20% with the Nigerian Inter-Bank Offer Rate rising from 14.63% in December 2011 to a peak of 18% in August 2012. While net aggregate domestic credit grew 49.76% until June 2012, credit to state and local governments far outstripped that to the private sector, which only grew by 6.4% on an annualised basis. With growth in domestic credit dominated by the three tiers of government, concerns persist over the lack of financial intermediation to the real economy.

STRENGTHENING POLICYMAKING: Statutorily independent from political powers, the CBN’s key mandate is to preserve price stability. Instead of pursuing a specific inflation rate, the CBN launched a policy of exchange rate targeting during 2011, aiming to maintain a band of +/- 3% of N155 to the dollar. The goal is to preserve macroeconomic stability for importers and exporters, while minimising currency risk for foreign direct and portfolio investors.

The weekly Wholesale Dutch Auction System (WDAS) was reintroduced by the central bank in 2009 and is the official market for foreign currency transactions. While rates at the WDAS have been maintained at approximately N157 in the second quarter of 2012 thanks to open market operations by the central bank, the inter-bank exchange rate has edged up from N158.8 to N161.2 during the three months to July, while the bureau de change rate has moved down from N160 to N163 over the same period. This reflects increased speculative pressure on the currency in light of falling oil prices in the second quarter of 2012, while allegations of attacks on the CBN’s independence have rattled markets. Proposals have emerged in 2012 for the reconstitution of the central bank’s board to provide for political oversight of its operations, although it remained unclear in mid-2012 whether or not they would be successfully enacted.

While growth remained buoyant throughout the global financial crisis in large part due to the government’s counter-cyclical policies, Nigeria has used up a significant part of the buffers it reserves for stabilisation during times of oil revenue shortfalls. The value of its Excess Crude Account (ECA) declined from $20.44bn in 2009 to $4bn at the close of 2011, while the CBN’s foreign currency reserves dropped from $42.41bn to $32.64bn during the same period, although reserve levels have stabilised since then and reached more than $37bn by July 2012. The priority for both the CBN and FMF in 2012 is to rebuild reserves as a buffer against shortfalls in oil revenue or speculative attacks on the naira (see analysis).

FEDERAL ACCOUNT: As a federal republic, fiscal policy is spread over three government tiers – federal, state and local – with roughly 26% of funding devolved to the 36 states and 20% to the 774 local governments. The Federal Capital Territory (FCT) has a similar status to Washington, DC and receives funding in the same way as ministries. Transfers under the Federal Account Allocations (FAA) take place once a month, while funding for shortfalls in budgeted expenditure can be drawn exclusively by the three tiers directly from the ECA on an ad-hoc basis. FAA payments are calculated following a revenue-sharing formula that takes account of factors such as population and landmass.

The nine oil-producing states of the Niger Delta receive an additional 13% of oil revenue and are allocated annual budgets of up to N300bn ($1.92bn). These funds are channelled through the oil derivation fund established in 1999, under the Revenue Mobilisation, Allocation and Fiscal Commission of the FMF. The vast majority of states do not raise sufficient internally generated revenue (IGR) – essentially state taxes – to effectively supplement FAA transfers. Some states such as Lagos and Rivers, however, have increased their IGR sufficiently to tap into naira-denominated bond markets (see analysis).

While the Debt Management Office’s (DMO) Medium-Term Public Debt Strategy, responsible for insuring the sustainability of federal and state borrowing levels, provides guidelines for borrowing, the DMO has been working with states to build a comprehensive picture of government debt, including bank loans. The split in revenue and responsibilities has led to an imbalance, particularly among local governments, which are tasked with the provision of many basic public services such as community health centres and schools but receive the lowest share of funding.

NEW REVIEW PROCESS: The debates over the legality of federal allocation transfers to the new Nigerian Sovereign Investment Authority has also spurred on requests for further fiscal decentralisation, but the process was still in its early stages as of mid-2012. “Public hearings have begun on constitutional review and it seems the majority of Nigerians are in favour of more fiscal decentralisation,” said Victor Oboh, an economist at the UN Development Programme. “Local governments, which are closest to the people, receive the lowest share of federal allocations.”

Low levels of budget disbursement as well as extensive leakages due to corruption have historically plagued federal-level fiscal spending. Slow budget implementation has also kept total budget disbursement at below 50% for the past five years. One reason has been the slow budget approval process by the National Assembly, which only enacted the 2012 budget in April after adding some N400bn ($2.46bn) in spending to the original N4.3trn ($27.52bn) budget proposed, creating a four-month delay in 2012 fiscal spending. Long tendering processes and poor coordination between ministries are also to blame.

The FMF and the presidency have been seeking to improve implementation by setting key performance indicators for individual ministries. They also aim to propose the 2013 budget to the National Assembly by October 2012 in an effort to enact it by the start of 2013. “Regular retreats have been instituted for the government’s economic management teams, setting key performance indicators for each ministry to improve budget implementation and coordination among the various ministries and agencies,” Supo Olusi, the special assistant to the coordinating minister for economy and the minister of finance, told OBG.

CONSOLIDATED SPENDING: Fiscal policymaking is framed by a vision to transform Nigeria into one of the top 20 economies by 2020, with a GDP of $900bn. To achieve this goal, the country must sustain annual growth rates of about 13.5% over the next decade and steer some N32trn ($204.8bn) in spending on infrastructure and on social and economic development – of which N10trn ($64bn) is expected to come from the federal government, N9trn ($57.6bn) from states and N13trn ($83.2bn) from the private sector. To sustain such economic expansion, the government will need to address structural bottlenecks such as inadequate power and transport infrastructure and will also have to facilitate access to finance.

Although non-binding, the vision has given rise to more detailed medium-term policy frameworks such as the Goodluck Jonathan administration’s “Transformation Agenda”, which focuses on three key points: job creation, private sector-led growth through the provision of key pieces of missing infrastructure and fiscal consolidation. The federal government’s budgets have been dominated by recurrent expenditure, much of it earmarked for wages and subsidies: the agenda aims to reduce the share of recurrent expenditure from 75% of the budget in 2011 to 68% by 2015 through successive cuts of 2% per year.

DEFICIT FUNDING: The 2012 budget has already successfully cut recurrent spending by three percentage points to 71.47% of the N4.75trn ($30.4bn) total, a 6% rise on 2011 spending of N4.48tn ($28.67bn). Based on forecast oil prices of $72 a barrel and average production of 2.48m bpd, the fiscal deficit is likely to reach 2.85% of GDP, or N744.44bn ($4.76bn), below the 3% ceiling that was set by the 2007 Fiscal Responsibility Act. Oil prices would need to average $110 a barrel for the budget to be balanced. With a combined (domestic and external) debt-to-GDP ratio of 19.2% in 2011, according to the FMF, the government has faced no challenges in funding its deficits, although it aims to rebalance its debt profile towards external sources, which currently account for only 2.4% of GDP, to reduce its exposure to domestic sovereign rates that exceeded 16.5% in July 2012. The FMF has ample room for manoeuvre given the 30% debt-to-GDP ceiling it set itself in 2011. The trend towards higher capital expenditure is expected to be maintained, with the FMF’s first proposals of N4.93trn ($31.55bn) for the 2013 budget in August further curbing recurrent expenditure to 68.66%. The fiscal deficit is expected to narrow to 2.17% of GDP on the back of higher forecast oil production of 2.57m bpd and an average oil price of $75 a barrel.

TAX TAKE EXPANSION: Although the government has proved capable of funding its budget deficits, it has also achieved some success in raising its tax take, if not yet the tax base itself. “A new national tax policy was launched in April 2012 to improve the tax administration,” Olusi said. “A dedicated unit – the Debt Enforcement and Special Prosecution Unit – has been set up within the Federal Internal Revenue Service to collect overdue taxes and prosecute tax evaders, while additional regional tax offices have also been set up. These measures have already started yielding results.” Total government revenue rose 22.2% y-o-y at the start of 2012 to N2.43trn ($15.55bn) – N1.6trn ($10.24bn) in oil receipts and N838.58bn ($5.37bn) from non-oil – and was on track to reach N5.09trn ($32.58bn) for the year as a whole on the back of strong increases in receipts from oil tax, corporate tax, value-added tax as well as Customs revenues.

However, while the focus is on enforcing existing tax payments by formal enterprises, significant challenges remain to expanding the tax base given the size of the informal economy and the poor compliance among small and medium-sized enterprises (SMEs). The MTI estimates that over 31m workers were employed by largely informal SMEs in 2011, contributing 46.54% of GDP. Some state governments have improved their tax collection systems: Rivers and Bayelsa, for example, seek to emulate Lagos, which outsourced its tax collection to a private company (to whom it pays 10% of collected tax) and increased tax receipts from N7bn ($44.8m) in 2007 to N15bn ($96m) at the start of 2012; its IGR now accounts for 75% of total revenues.

BUDGET ALLOCATIONS: The 2012 budget pursues the government’s liberalisation and privatisation agenda, curbing spending on subsidies, raising spending on infrastructure, and opening the door to the effective privatisation of power generation and distribution businesses. Spending in 2012 on fuel subsidies was cut to N888bn ($5.68bn) due to their partial lifting, although it emerged in early 2012 that half of this amount had already been disbursed to pay arrears in 2011 subsidies to oil marketers. While a revised budget to cover the additional $4bn required to fill this gap may be tabled, the presidency is focused on trying to reduce fraudulent transfers through a series of investigations and arraignments (see analysis). Meanwhile, a 40% rise in electricity prices in June has also reduced some of the drain on fiscal resources.

Security is main focus of the budget, receiving a record of close to a quarter of the funds, some N921bn ($5.89bn). This comes in addition to the $405m to be spent on an amnesty programme for some 26,000 former Niger Delta insurgents in 2012. Of the 28% that was allocated to capital spending, the budget earmarks significant amounts for investment in infrastructure, including N161.42bn ($1.03bn) for power and N180.8bn ($1.16bn) for public works. The Subsidy Reinvestment and Empowerment (SURE) programme received N180bn ($1.15bn), which will go towards reinvesting the savings from the partial fuel subsidy cut in social services schemes in areas such as maternal health care, work programmes and vocational training, as well as infrastructure development – mainly roads, bridges and railways. By mid-2012 the maternal health project, aimed at saving the lives of some 1m mothers, had already been implemented, as had a community employment scheme expected to generate some 370,000 jobs in public works, 10,000 for each of the 36 states and the FCT.

CURBING INEQUALITY: Socially inclusive growth is indeed a priority if the country is to be successful in its transformation agenda. “With some 1.8m Nigerians entering the labour market every year, the rate of job creation has been insufficient to curb unemployment, while under-employment is an even bigger problem,” Nwanze Okidegbe, the chief economic advisor to the president, told OBG. “This has become a top priority for this administration.” Unemployment rose from 14.1% in 2000 to 21.1% in 2010, and again to 23.9% in March 2012, while the youth unemployment rate has reached a record high of 37.7% in Africa. “Talent is perhaps the country’s biggest asset,” Niyi Yusuf, country managing director at Accenture, told OBG. “Nigerians are in fact well-educated and eager to continue learning. The country churns out about 300,000 graduates per year, this is unprecedented and far exceeds better performing countries on the continent.”

Though Nigeria has seen resilient economic growth in recent years, this has been driven by sectors with relatively low employee requirements, such as telecommunications, oil and gas, and wholesale trade. As a result, the benefits have not been felt by all Nigerians. Although domestic consumption of 59.5% of GDP in 2011 provides some cushion to external factors, the richest 20% account for 59% of the total. The poorest 60% consumed just 20%, according to an NBS report based on 2010 consumption data. The report also showed that income inequality actually increased from 0.429 in 2004 to 0.447 (Gini coefficient) in 2010.

With 60.9% of Nigerians (110m) living on less than $1 a day in 2010 (and 71% on less than $2 a day), up from 54.7% in 2004, Nigeria is unlikely to meet most of its Millennium Development Goals by 2015. Average life expectancy stands at 51 years, 2.5 years below the sub-Saharan African average, while literacy levels for over-15s is 61%. Rapid urbanisation in the past two decades, with the number of city-dwellers going up from 30% in 1991 to over 50% in 2011, has put added pressure on urban infrastructure and employment. Migrants continue to flock to Lagos in particular, the world’s sixth-fastest-growing city, where the population is expected to rise to 40m by 2040.

REMITTANCES: Remittance flows have played an important role in funding shortfalls in disposable income: roughly 80% of the total value of remittances is spent on immediate consumption, often for basic necessities and debt repayment, according to the World Bank. Although these inflows dropped slightly during the fourth quarter of 2008, they rebounded quickly as members of the diaspora often gave up some of their disposable income to maintain previous levels of remittances. Nigeria received remittances worth N1.17trn ($7.49bn) in 2011, roughly 7% of GDP, up from an average of $10bn over the three previous years, making it the world’s seventh-largest recipient of remittances and the largest in Africa, accounting for 60% of total remittance flows to sub-Saharan Africa.

Official numbers tracked by the CBN are thought to under-record total flows given the sizeable inflows of foreign currency through informal networks such as those operated by Hausa moneychangers. A challenge will be to channel more of these flows towards productive investments, with the federal government planning to issue a $600m diaspora eurobond in the first quarter of 2013 (see analysis). Reducing the cost of remitting funds from overseas, particularly for lower-value transactions through mobile banking, for example, will help to formalise remittance flows: the World Bank estimates that a 2-5% reduction in commission charges has the potential to increase formal transfers by between 50% and 70%.

In the short term, measures such as the SURE programme are expected to help generate public works and community jobs. The FMF is also promoting entrepreneurship and the formalisation of start-ups through initiatives like the Youth Enterprise with Innovations in Nigeria (YouWin), which is supporting 3600 young entrepreneurs over three years (beginning in April 2012), with equity grants of up to $70,000 each, training in small business management and mentoring from entrepreneurs from across the country.

EASING BOTTLENECKS: The Jonathan administration has pushed ahead with liberalisation plans in the energy and agriculture sectors to reduce structural bottlenecks that have historically hindered agricultural and industrial development. Top priority has been placed on developing the country’s agricultural sector, which accounts for over 40% of GDP, but has one of Africa’s lowest rates of productivity. In July 2011 Akinwunmi Adesina, a reformist, was appointed as the minister of agriculture and rural development. Following in the footsteps of Malawi, the federal government has embarked on a strategy of facilitating farmers’ access to inputs, from fertilisers to capital and protection of the domestic market, through new tariffs on agricultural commodity imports.

Agricultural lending accounted for just 1.4% of total bank credit in 2010, compared to over 10% in higher-performing agricultural producers like Brazil and Mali. The CBN established the Nigeria Incentive-based RiskSharing System for Agricultural Lending in 2010 as a risk-sharing scheme with commercial banks: the N200bn ($1.28bn) Commercial Agricultural Credit Scheme caps commercial interest rates to agriculture at 9%, with the CBN covering the interest spread and 30% of the value of each potential default. With the bulk of these funds disbursed to some 222 projects by mid-2012, commercial banks have focused on opportunities in the domestic value chain.

BOOSTING AGRICULTURAL CAPACITY: Another smaller-scale financing scheme, the Rural Finance Institution Building Programme, was recently launched as a joint effort between the central bank, the federal government and the state-owned Bank of Agriculture to build the capacity of micro-finance institutions and other cooperative associations. Its aim is to lend to the agricultural sector, extending funding to some 3.8m agricultural producers by 2020. These government schemes are limiting the risk of large agro-industrial producers as well as logistics operators in their dealings with smaller farms.

Meanwhile, the Ministry of Agriculture has launched a new subsidy system for fertilisers and seeds, with the state and federal governments covering 25% of the market cost each, relying on new systems to reduce the scope for fraud. Local producers, such as urea fertiliser manufacturer Notore, will benefit from the effort, as will agro-processing firms that are well positioned in the domestic value chain, including Zambeef, a key supplier to South African grocer ShopRite. The MTI has imposed new tariffs on certain agricultural imports from July 2012, including total import tariffs of 100% on wheat flour, 20% on wheat grain, 30% on brown rice and 50% on polished rice.

The government has also significantly expanded its investments in infrastructure to 7% of GDP, according to the central bank. While higher than the African average, the government cites research indicating the need to boost this to 12% of GDP over the medium term to address Nigeria’s infrastructure gaps, most notably in power and transport.

POWER GENERATION: The most significant impediment to growth remains power: Nigeria’s electricity generation capacity stands at around 4000 MW for latent demand estimated at between 30,000 MW and 40,000 MW, with inefficient transmission and distribution systems dating back to the 1970s that cause loss ratios of up to 40%. Progress in power sector reforms is afoot with the selection of private investors for power generation and distribution utilities expected by October 2012. The Federal Ministry of Power aims to attract $50bn in investment to upgrade and expand generation and transmission capacity.

The Bureau of Public Enterprises (BPE), the FMF department in charge of privatisation since 1993, has steered the privatisation process, while the FMF has established a bulk power trader under its direct control to manage the national grid. Domestic power prices, which had been among the lowest in Africa, were partially liberalised in June 2012, with a 40% rise in average electricity prices to further incentivise private investment. Foreign governments have supported the bidding process, with the US Export-Import Bank extending $1.5bn in lines of credit to involved American firms. While progress in the selection of investors has been slow, authorities were optimistic about the transparency and success of the process in the middle of 2012 and expect to reach 17,000 MW of capacity by 2014. A number of MoUs have already been signed with high-profile foreign investors such as General Electric and Siemens (see Energy chapter).

UPGRADING TRANSPORT: While Nigeria has recorded some successes in the concessioning of a few major infrastructure projects such as Lagos’ domestic airport Murtala Mohammed Airport 2 (MMA2) and the Lekki-Epe Expressway, the majority of projects in transport are government funded at the state or federal level. In addition, the federal government has created a list of priority projects, which include key roads, bridges, ports and rail lines, and has circulated the template to state authorities to follow in prioritising public infrastructure investments. In April 2011 the Nigerian Ports Authority and Lagos State awarded a 20-year build-operate-transfer (BOT) concession to the Philippines’ International Container Terminal Service and Singapore-based Tolaram for the development of the deep-sea Lekki Port, which will handle 2.5m 20-ft-equivalent units a year. This is due for completion by 2016. Other states have announced plans for public-private partnerships (PPPs): Rivers State intends to build a 500-bed hospital under BOT terms, while Delta State is looking to develop a greenfield deep-sea port.

Although concessions backed by the privatisation burea have succeeded in the past, some doubts remain over the institutional capacity of states to successfully manage PPPs, a concern that has been raised by the World Bank. Past PPPs in the construction of airports and expressways, for example, have benefitted from sovereign guarantees from the federal government, but the FMF is now opposed to excessive expansion of its contingent liabilities through too many project guarantees. The federal government has already been moving to retake control of the stalled Lagos-Ibadan expressway project from private concessionaire BiCourtney, the developer of MMA2.

Multilateral financing institutions have provided significant support, with the World Bank guaranteeing the credit-worthiness of the transmission operator as the sole power off-taker, while the African Development Bank has expressed willingness to provide guarantees for certain generation and distribution firms.

ROAD & RAIL: Authorities have opted to fund a number of important transport projects directly in an effort to reduce the excessively high logistics costs. Some upgrades have begun on the country’s dilapidated roughly 3500-km rail network, with China’s CCECC expected to complete work on the $800m Abuja-Kaduna line by 2013. The contractor was awarded the three-year construction of the $1.49bn Lagos-Ibadan line in July 2012. But with nearly all domestic transport conducted on Nigeria’s congested road network, roads and bridges remain a priority.

While federal-level motorways are being upgraded, such as the Abuja-Lokoja axis, progress in state-level roads remains unequal, with southern states investing significantly more. The Lagos-Benin City section of the East-West Highway running through the Delta is being rehabilitated and expanded, while a new motorway linking Onitsha to Owerri was finished in 2011. To the west, upgrades have begun on the road from Badagry, near Lagos, to the border with the Benin Republic and should help to improve links to Nigeria’s western neighbours from 2014.

OUTLOOK: While the country’s fiscal buffers have been greatly eroded over the past three years and significant downside risks weigh on macroeconomic prospects in light of depressed oil prices, the federal government is forging ahead with its liberalisation and privatisation strategy at the same time as it embarks on medium-term fiscal consolidation. A year on from its electoral victory, the Jonathan administration will have to prove its reforming credentials by awarding private concessions in the power sector and sustaining growth in its capital expenditures to address persisting transport infrastructure gaps.

While foreign investors have shown significant interest in the country’s high growth potential, such reforms will be key to sustaining FDI inflows. More structured fiscal management, with the establishment of new instruments like the sovereign wealth fund, will provide the government with additional buffers for future crises and offer a source of long-term investment. However, key to the political acceptability of future reforms will be the government’s ability to reinvest savings towards public goods, particularly infrastructure.