RaboResearch - Economic Research

Country Report Nigeria

Country Report


Nigeria flag

Despite good economic growth performances in recent years, Nigeria’s low social development profile persists in fostering an environment prone to insurgency and unrest. Reforms have gained some momentum, but continue to be stifled by political conflicts and by poor governance practices.  Infrastructural deficits constrain economic growth below potential.

Strengths and weaknesses


Generous natural endowments

Nigeria is well endowed with oil and gas resources, but also with a friendly environment for agriculture. The generous hydrocarbon endowments have enabled Nigeria to sustain robust growth, develop a strong balance of payments and external position and keep the public debt low.


Poor governance reinforces a destitute and unstable social environment

Weak institutions, corruption and poor governance prevent wealth from trickling down to the population, causing large socio- economic disparities, namely high levels of unemployment (youth unemployment above 50%), poverty and inequality. Parts of the population are further troubled by security threats from insurgent violence mainly caused by the North-South religious divide.

Narrow based economy

Gas (LNG) and petroleum  together make up for 90% of export revenues and more than 70% of federal government revenues, rendering Nigeria highly vulnerable to volatile oil markets and susceptible to the shale extraction revolution in the US, its main export partner.

Poor infrastructure

The country’s poor infrastructure, especially in energy supply and transportation, impairs economic development constraining growth below its potential.

Key developments

1. Sustained economic growth reinforcing strong BOP and external balance 

Growth in 2012 was disappointing, as the protests caused by the elimination of some fuel subsidies and the floods in the last quarter affected output. Prospects for the coming years are robust at around 7%, driven by growth of the non-oil sector, while consumption (public and private) is expected to have a leading role (private consumption growth forecasted at roughly 10% yoy). However, the growth rate is not high enough to contain the high unemployment and increase the standards of living.

Figure 1: Robust economic growth
 Figure 1: Robust economic growthSource: EIU
Figure 2: Strong balance of payments
Figure 2: Strong balance of paymentsSource: EIU

Infrastructural deficits and low productivity,  especially in agriculture where potential yield gains from using better practices and technology are significant,  constrain growth  below potential. Related investments and reforms could boost growth, while the possibility of the intensifying violence spreading southward poses significant downside risk. The current account is characterized by consistent surpluses based on revenues from the export of hydrocarbons. These revenues have also kept fiscal deficits low (2.5% of GDP in 2012). Unlike in the past, public debt (17% in 2012) and  foreign debt (USD 13bn or 5% of GDP) were moderate. The government has managed to build up FX reserves to a comfortable level of nearly 7 months import cover, or roughly USD 46bn. This represents a welcome reversal of the 2008-2011 drain on FX reserves (34% drop) and provides some mitigation against the volatility of oil markets and of “hot money”.  Some caution is in place as balance of payments data is subject to significant revisions.

2. Energy reforms gaining momentum, but not enough due to a stiff political system

Nigeria is in dire need of reforms to tackle the infrastructural deficits and to stimulate private investments. This is especially the case in the energy sector where mismanagement of existing refineries (20% of capacity used) rendered the world’s 12th largest oil producer dependent on fuel imports. Vested interests are keeping almost 20 companies licensed to start refineries, waiting. However, some progress has been made in the energy sector. Subsidy cuts increased fuel retail prices significantly and audits were introduced to avoid unfair claims. The fuel subsidies had facilitated widespread fraud practices as local trading companies report ‘ghost’ imports and obtain unjustified funds. Furthermore, the electricity sector has been overhauled and privatization started in April 2013, when majority stakes in 15 companies were pledged to preferred investors. Unfortunately,  frictions in the political landscape, especially the conflict between the executive and the legislative caused by the North-South religious divide, hinder significant progress and only allow for a piecemeal reform approach. This has kept the Petroleum Industrial Bill in limbo for 4 years now. The resulting uncertainty has caused stagnation in the hydrocarbon sector, where companies’ profits are already affected by increasing oil bunkering (costing around 10% of production) since the government gears its security forces towards the increasing insurgency in the north.

3. Increasing interrelatedness with international financial markets

Rent-seeking investors drifting away from low yields in the industrialized countries seem to have discovered the Nigerian financial markets. Portfolio inflows picked up (more than doubled from USD 5bn in 2011 to USD 12bn in 2012) resulting in a 60% foreign stake in local portfolio investments. Several debuts reinforced the trend. In October 2012, Nigerian securities were included in the JP Morgan GBI-EM Index (0.72% weight). In January 2013, the International Finance Corporation announced plans to issue local bonds, the first issue by a non-resident. In April 2013, the first exclusively Nigerian exchange traded fund made its debut on the NYSE- Arca securities exchange. Despite forecasted moderation of flows, these developments represent a vote of confidence in the Nigerian markets, but also increases Nigeria’s susceptibility to market sentiment and capital flight.

4. Boko Haram insurgency in the North intensifies

Despite attempts to reach an amnesty agreement such as in the Delta in the beginning of 2013, increased military efforts in the North caused the Boko Haram insurgency to take new proportions. Recent clashes with the military caused hundreds of deaths and urged the president to enact a state of emergency in three states. While this development currently only undermines the president’s authority, an escalation to other regions could cause a civil war and serious disruption of economic activity. However, this remains a high impact, low probability scenario for now.

Factsheet of Nigeria
National facts of NigeriaSource: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank, World Economic Forum.

Background information

Nigeria is the second biggest economy of Sub Saharan Africa and its largest oil exporter. Unfortunately its oil dependence has eroded its export base. However, the non-oil sector has shown brisk growth in recent years, though below potential. Agriculture has particular potential because Nigeria has the endowment to become self-sufficient with respect to food (all imported crops can be grown locally; Nigeria used to be leading palm oil producer). The sector is also very important because it generates 30% of the GDP and covers 70% of current employment. Nigeria has a bad reputation with respect to external and public leverage and payment morale, because in the late 1990’s it had an enormous debt which culminated in debt restructuring and write-offs. Nigeria’s economic performance showed resilience to the financial crisis in 2008, but the financial sector was hit hard and the financial markets collapsed. The measures taken by the Central Bank of Nigeria (CBN), including a restructuring of the sector and the creation of a bad bank, have helped restore confidence in the sector and in its capability. The Nigerian political scene has been dominated by the People’s Democratic Party since the removal of military rule in 1999. Goodluck Jonathan was re-elected in 2011, breaching the unwritten power-sharing agreement within the PDP to alternate candidates from north (Islamic) and the south (Christian) of the country. Internal conflicts are amplifying as he seems to be preparing his presidency candidacy for 2015. Four opposition parties recently joined forces in the All progress Congress who can challenge PDP’s position in 2015 (together they managed to secure 39.8% of the polls in 2011).

Economic indicators of Nigeria
Economic indicators of NigeriaSource: EIU, IMF. Remarks: Omissions and errors have led to significant revisions of the Balance of Payments indicators in the past. Though the magnitude of revisions has diminished (estimated at 1.3% in 2011), some caution is appropriate with respect to this data.
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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