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.

STEPPING UP INVESTMENT

Dehn, Ashmore: Nigeria is an oil economy, whose fortune is more closely related to oil prices than anything else.

Nigeria also needs to step up the drive to attract investment into infrastructure. From power to transportation, investment is needed to boost local production capacity. In the past 16 years, Nigeria has spent more than $20 billion on building power plants, but that expenditure “was fraught with . . . corruption,’’ says Utomi. Part of the money was allegedly diverted from the projects, and despite investment, power generation has actually fallen. In mid-May, power generation dropped to 1,300mw, compared with 1,500mw generating capacity in 2000.

Given the dire fiscal position of the government, Rasaq says, no one expects it to be able to fund the country’s infrastructural deficit. However, he does anticipate that the government will open up the infrastructure sector and allow private participation and FDI to drive development of the country. But for this to occur, Rasaq says, the rule of law and the judicial system need to be strengthened so that investors are assured that they are protected. He adds that part of the envisaged judicial reforms have to do with the time it takes to resolve commercial litigations. “People need to be sure they are not going to go to court forever when they have an issue.’’ Utomi, author of a book entitled Why Nations Are Poor, says the government needs to clearly demonstrate where it wants the economy to go in order to shore up investor confidence. “Where national strategy is clear and institutions are strong, the typical strategy adopted by firms is one involving long-term investments, because they can predict where things are going.”

BEYOND OIL

Nigeria’s new government realizes it must seek alternative sources of growth beyond oil. However, one consoling factor is that in the past 10 years, GDP growth has been largely driven by the non-oil sector. In the first quarter of this year when the oil sector declined by approximately 8%, it was growth in the non-oil sector of approximately 6% that helped the economy achieve modest overall growth of 4%. “We [Nigeria] seriously need to look beyond oil,’’ says Rasaq.

Citing the example of Kenya, the East African nation that derives most of its foreign exchange earnings from tea, coffee and flour, Rasaq says the first thing Nigeria needs to do is to select four or five key sectors to focus on. In agriculture, for example, he says Nigeria could choose to focus on cocoa (of which it is the fourth-largest producer in the world), cassava and rice. “The agricultural sector can come to Nigeria’s rescue in place of oil,” he asserts.

Utomi, Pan-Atlantic University: Although growth has been strong, it has generally been jobless growth.

The banking and telecom sectors are also likely to play an increasingly significant role. After the recapitalization exercise in 2006, when banks were forced by the central bank to raise their minimum capital base from two billion naira ($10 million) to 25 billion naira, 25 banking groups emerged, made up of 75 banks, while 14 others failed the recapitalization exercise. Having fortified their capital base, Nigerian banks now have more financial capacity to fund transactions.

Agriculture accounts for approximately 5% of banks’ loan books, up from less than 1% before the reforms were instituted. When the government sold power assets in 2013, only 30% of the sale was financed through equity contributions by investors; the balance was funded through debt and largely Nigerian banks because international banks were not forthcoming, notes Rasaq. “Nigerian banks provided support,” he adds, “because they felt that [agriculture] was a critical sector that had strong integration with other sectors.”  Banks’ performance is also aided in part by growth in the telecoms sector. In 2000, Nigeria’s teledensity was 0.4 lines for 100 inhabitants—Mongolia and Afghanistan were the only two countries with teledensity worse than Nigeria’s, according to Ernest Ndukwe, a former CEO from the Nigerian Communications Commission, which regulates the telecoms industry.

At that time Nigeria had 400,000 fixed lines and 25,000 analog mobile lines. But by April 2015, the county had 145.5 million fixed and mobile lines and a teledensity of 103.9% as a result of liberalization of the telecoms sector in 2001 and a subsequent inflow of investments, which resulted in the introduction of four major telecommunications networks—MTN, Airtel, Globacom and Etisalat. “This [the growth in telecoms] has strong linkages to the economic sector because it drives trade, financial services activities and overall economic activity,’’ says Rasaq. It has also enabled the development of alternative banking channels such as online banking and mobile banking, he adds.

The agricultural sector can come to Nigeria’s rescue in place of oil.


~ Abiola Rasaq, United Bank for Africa

RETAIL RISING

Nigerian retail outlets such as Shoprite Holdings and SPAR’s Park ’n’ Shop have carved a niche for themselves in the Nigerian distribution chain, especially in the agricultural sector. They can obtain goods from farmers and suppliers of manufactured goods at much lower prices than traditional, local markets. “The fact that they are proving successful shows that they are adding value to the distribution chain in Nigeria,’’ says Utomi. “They have organizational skills and provide a more comfortable environment for the emerging middle classes to shop, and they offer products of higher quality too.’’

Nigeria’s agricultural sector suffers from a lack of storage facilities, which can lead to financial losses, especially during harvest periods. Farmers are sometimes forced to cut back on their financial outlays. But now with the intervention from distribution chains, this is fast changing.

The retail outlets provide price guarantee assurances to farmers, and that, in turn, provides a level of price assurance and predictability. “The retail outlets can even run their own private commodities markets like commodity exchanges,” Utomi says.