In line with its performance in recent years, the Nigerian economy is expected to grow strongly in 2014, with expansion continuing to be driven by high oil prices and robust domestic demand. But the country may need to push forward reforms to encourage broad-based development, alleviate poverty and nurture a trend towards diversification.
The IMF forecasts 7.4% GDP growth in 2014, up from an estimated 6.2% this year, despite the effects of instability in the north of the country and oil theft, which act as a drag on the broader economy. The IMF’s projections were made as part of its latest World Economic Outlook (WEO), which noted that sub-Saharan Africa had continued to record growth in 2012 and 2013, thanks to rising domestic consumption.
Lower external demand, sliding commodity prices and a reversal of capital flows contributed to a somewhat less upbeat regional outlook than had been the case when the previous WEO was published in April, but Nigeria has managed to maintain momentum, partly thanks to its healthy long-term fundamentals: a large domestic market of 160m people, and crude oil exports, which earned the country $42bn in the first half of the year and $93bn in 2012, according to the US Energy Information Administration.
The IMF noted that financial conditions in Nigeria have now stabilised, following a weakening in the naira. The local currency hit a 20-month low in September as investors sold off local assets.
The depreciation was in part due to speculation that the US Federal Reserve would end its quantitative easing (QE) programme, reversing the flow of capital to emerging markets, and contributing to currency devaluations across the globe. While the QE policy remains in place for now, the announcement on October 16 that the US government had agreed a temporary resolution to its deadlock over fiscal and health care policy may further strengthen the trend of investors moving back to developed markets.
This in turn could intensify competition for investment in emerging markets, putting pressure on Nigeria to enhance its appeal to investors with reforms that could benefit businesses and poorer Nigerians alike.
The IMF urged countries in the region to pursue structural reform – a policy it advocates worldwide – and invest in infrastructure and social services to help secure long-term growth and share the proceeds of economic success. In April the IMF’s senior resident representative in Nigeria said that the fund was “having a difficult time understanding” why the country’s high level of growth was not translating into lower rates of poverty; despite average growth of 7.2% a year between 2004 and 2010, the proportion of Nigerians living in poverty fell only slightly, from 64.2% to 62.6%.
Moving beyond the energy sector
Unemployment and poverty have long been a challenge for the country, particularly given that the bulk of its export revenues come from the hydrocarbons sector, where labour needs are fairly modest. As a result, the government has been looking to not only improve diversification to reduce its exposure to commodity price volatility, but also spur growth in labour-intensive segments such as manufacturing and construction, and ensure a broader base of activity – something that will be aided in part by the privatisation of the power utility and by the push to overhaul output in the agricultural sector.
The IMF has also called for Nigeria to do more to support small and medium-sized enterprises, which often lack access to financing, according to Chinedu Onyia, managing director of Parsifal Partners, a local management consulting firm. “High street banking remains out of reach for many Nigerian businesses. That said, what would be more helpful is investment banking finance, whether in the form of private equity, venture capital or microfinance, all of which can be structured in a form that is suitable for the client and industry,” he told OBG.
Nigeria has a fairly strong investment proposition already, based on its large population, substantial natural resources and strategic position. While foreign investment has in absolute terms long been focused on the oil sector, portfolios are becoming increasingly diversified, moving towards power, agriculture and mining, areas of the economy that have demonstrated a comparative advantage in emerging markets vis-à-vis the West.