Nigeria is Africa’s largest economy, but the recent slump in oil prices has halved government revenues. The new Buhari government must now ensure the country’s economic roller coaster ride does not grind to a complete halt.


Despite civil strife in the northern part of the country, Nigeria still managed to conduct national elections in March that were hailed by international observers as peaceful and transparent. The new president, Muhammadu Buhari, an acclaimed anticorruption crusader and former military head of state, ran on a platform of strengthening Nigeria’s rule of law and nurturing the country’s surging business sector. With Buhari in the driver’s seat, is the African Express about to take off?

Nigeria is already Africa’s largest economy and biggest oil producer, as well as being the most populous nation on the continent. The country has enjoyed strong economic growth in the past few years. According to government figures, Nigeria achieved an average annual growth rate of 7% from 2007 to 2013. In 2014 it became the largest economy in Africa, displacing South Africa to second position, after rebasing its gross domestic product according to 2010 production patterns, which increased the number of industries measured from 33 to 46.

“Although growth has been strong, it has generally been jobless growth,” remarks Pat Utomi, a professor of political economy at the Lagos Business School, Pan-Atlantic University. The lack of sustainable economic growth has been attributed to Nigeria’s dependence on oil. The fall in global oil prices, a process which began in the middle of last year, led to a 53% decline in government revenues in the first quarter of 2015. This placed enormous pressure on the naira, as foreign reserves fell 13.5% to  $29.8 billion at the end of March following efforts by the central bank to defend the currency.

According to government figures, the fall in oil revenues caused the rate of growth to fall to 4% in the first quarter of this year, down from approximately 6% in the last quarter of 2014. “Nigeria is an oil economy, whose fortune is more closely related to oil prices than anything else,’’ says Jan Dehn, head of research at Ashmore Investment Management in London. “Only when the government learns to insulate the economy from the boom-bust cycle of oil prices will an environment emerge where the talents and abilities of Nigerians can be fully realized.’’

SETTING THE STAGE FOR GROWTH

Dehn says Buhari’s priority should be to reestablish macroeconomic equilibrium and to put in place a new system of managing Nigeria’s oil wealth for the good of all rather than a few. Part of that challenge, he adds, includes ensuring that Nigeria is not dropped from the J.P. Morgan Government Bond Index‒Emerging Markets. Inclusion in the index is a sign of a country’s acceptance to international investors, which should make it easier to attract foreign investment. However, J.P. Morgan is worried about foreign currency restrictions instituted by the Nigerian central bank that limit the amount of foreign currencies that investors can access to exit the local market, which could affect the liquidity of naira sovereign bonds. J.P. Morgan has until the end of this year to decide whether to retain or remove Nigeria from its emerging markets bond index.

Utomi says ensuring a macroeconomic balance will require stringent measures, including plugging the leakages in state revenue and strengthening the power of the economy to attract foreign direct investment. FDI into the country declined 40% in the first quarter on the back of uncertainties about March’s  general election outcome, says Abiola Rasaq, Lagos-based head of investor relations at United Bank for Africa. With the historic transition to power of Buhari, after incumbent Jonathan Goodluck became the first president in Nigerian history to lose an election, Rasaq believes that the democratic process in Nigeria is now stronger than ever. That should set the stage for the economy to flourish.

Although the oil sector has largely produced recursive growth in Nigeria, it provides a starting point for the new impetus needed to ignite the economy. “If reforms in the oil and gas sector are pursued in the right way, the sector can become a major source of FDI,’’ says Rasaq. The Petroleum Industry Bill, which proposes significant changes in tax regimes and funding structures in the oil and gas industries, including raising Nigeria’s earnings from gas by aligning domestic gas prices with international prices, has been stuck in the National Assembly for years. Disagreements between the government and international oil companies over funding arrangements, and between the northern region and Niger Delta over compensation for oil-producing communities, has stalled the bill. But with increased revenue challenges facing the government, Buhari will be under increasing pressure to push for its passage to pave the way for reforms, including the unbundling of state-run Nigerian National Petroleum. 

 GFmag.com Data Summary: Nigeria

Central Bank: Central Bank of Nigeria

International Reserves                 

$47.548 billion

Gross Domestic Product (GDP)

$573.652 billion

Real GDP Growth

2012
4.3%

2013
5.4%

2014
6.3%

GDP Per Capita—Current Prices

$2,298*

GDP—Composition By Sector*  

agriculture:
20.6%

industry:
25.6%

services:
53.8%

Inflation

2012
12.2%

2013
8.5%

2014*
8.1%

Public Debt (general government
gross debt as a % of GDP)

2012
10.4%

2013*
10.4%

2014*
10.5%

Government Bond Ratings
(foreign currency)

Standard & Poor’s
B+

Moody’s
Ba3

Moody’s Outlook
STA

FDI Inflows

2011
$8,915 million

2012
$1,543 million

2013
$1,237 million

* Estimates                                                                            
Source: GFMag.com Country Economic Reports