RaboResearch - Economic Research

Country Report Nigeria

Country Report


Nigeria flag

After a rebasing exercise, Nigeria became the largest economy of Africa. However, this does not reduce Nigeria’s large structural issues, and instability and violence could worsen ahead of elections in 2015. 

Strengths (+) and weaknesses (-)

(+) Generous natural endowments

Nigeria is well endowed with oil and gas resources, but also with a suitable climate and soil for agriculture. The generous hydrocarbon endowments have enabled Nigeria to sustain robust economic growth, to develop a strong external position and to keep 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 problems, namely high levels of unemployment (24%, youth unemployment is 56%), poverty and inequality.

(-) Narrow export base

Gas (LNG) and petroleum  together make up for 90% of export revenues and around 70% of federal government revenues, rendering Nigeria highly vulnerable to swings in hydrocarbon prices.

(-) Poor infrastructure

The country’s poor infrastructure, especially in energy supply and transportation, impairs economic development. 

Key developments

1. Bigger is not necessarily better

Thanks to a rebasing of its GDP, ranked by the nominal 2013 GDP, Nigeria became the largest economy in Africa, but that does not change its high risk profile. In early 2014, Nigeria’s National Bureau of Statistics rebased the country’s GDP for the first time in 24 years. Consequently, the 2013 GDP almost doubled to USD 516bn, as new sectors, such as telecommunications, are now more accurately represented in the GDP structure. The revision revealed some good news. For example, it revealed that the economy is more diversified than previously assumed (see figure 1), which makes it less susceptible to developments in one particular sector. But, it also resulted in bad news. For example, as a percentage of GDP, the revenue raising capacity of the government (budget revenue was 4.5% of GDP  in 2013) seems to be even poorer than previously thought. However, the rebasing does not make any difference to the structural problems Nigeria is dealing with, namely, a large infrastructure deficit, low human development (see factsheet), security threats, poor governance and a high degree of corruption and criminality. Looking forward, endemic corruption, widespread poverty and high unemployment are expected to remain huge problems. Actually, as the economy cannot absorb the fast growing workforce, Nigeria’s demographic dividend could become a liability, as disparities increase and might lead to social unrest. Hence, the high risk profile of the country is not poised to improve quickly.

Figure 1: Higher economic diversification
Figure 1: Higher economic diversificationSource: NBS
Figure 2: Shrinking trade surplus
Figure 2: Shrinking trade surplusSource: EIU

2. Fall in oil output could become problematic for the external and fiscal position

Lower investments in the energy sector due to policy uncertainty, as the adoption of important oil sector reforms has been postponed for 5 years now, and oil theft had a marked negative effect on oil output in 2013. Indeed, oil production fell to 1.9m b/d in June 2013, against a 2.1m b/d average in 2012, while theft was estimated at 10% of production. As oil exports represent the main source of foreign exchange income and public revenues, the lower output affected both the trade surplus, which fell by 8% to 9.25% of GDP in 2013, and the budget deficit, which increased by 21% to 1.59% of GDP in 2013, as oil revenues went down by 20%. Transfers from the ECA oil fund amounting USD 8bn or 1.5% of GDP, compensated for the fall. But, since the ECA buffers are almost depleted, the total size of the fund was only USD 3bn at the end of 2013, such a compensation is not possible in the future. Thus, if nothing is being done to address oil theft and policy uncertainty for the energy sector, Nigeria’s fiscal and external position could be threatened.

3. Political turbulence intensifies as 2015 elections are getting closer

Political instability has increased, as the presumed ambitions of incumbent President Goodluck Jonathan to remain in office have led to unprecedented dynamics in the political landscape. The ruling People’s Democratic Party (PDP) has dominated the political scene since the removal of military rule in 1999. In order to manage tensions related to Nigeria’s historic North- South divide, the party rotates presidential candidates between the two regions. Presumptions that Jonathan will again run for president in 2015 and break this unwritten rotation rule have led to unprecedented rifts within the PDP. Indeed, the party lost its majority in the House of Representatives between December 2013 and February 2014 due to mass defections. While this political fragmentation may be positive for democracy, it does not bode well for stability. Nigeria has a history of election related violence, and the fragmentation increases the risk of violence ahead of elections in February 2015. Moreover, as the president is focusing on consolidating his power, policy and macroeconomic stability are getting less priority. For example, in February 2014 the president suspended the central bank governor, who was accusing the government of oil fund embezzlement, even though such political interference unnerved investors and weakened one of the few independent Nigerian institutions. Looking forward, the February 2015 elections will shape the political environment in the coming years. Though the chances are slim, elections could have a destabilising effect, in which case the military could step in.

4. More Boko Haram terrorist attacks despite military offence, but not a threat to the state

The Boko Haram insurgency in the North caused the Nigerian government to declare a state of emergency in three states and deploy military troops to the region. However, attacks became only fiercer and more frequent afterwards. In 2014, the rebels killed more than 1500 people and expanded southwards to the capital, Abuja. The abduction of more than 200 schoolgirls on April 14 drew the attention and support of the international community. International interference might lead to more attacks against western targets, and, thus, affect the investor perception of Nigeria. The insurgency is also highlighting the state’s incapability to provide protection and is increasing regional rifts by economically isolating the North. However, Boko Haram is unlikely to become a direct threat to the Nigerian state. 

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

Background information

Nigeria is the largest economy and oil exporter in Sub Saharan Africa. The diversity of the country’s export base has been eroded by the generous hydrocarbon endowments, but brisk growth in the non-oil sector has helped the economy diversify in the past decade. Agriculture remains important as a large part of the population is employed in this sector. Furthermore, Nigeria has the natural endowments to become self-sufficient with respect to food. Unfortunately, authorities lack the incentive to stimulate the sector, given the dominance of the oil sector. The external balance enjoys the structural support of remittances (around 4% of GDP) from the Nigerian diaspora. High debt levels, debt restructuring and write-offs in the 1990’s gave Nigeria a bad reputation with respect to payment morale. The financial sector was hit hard by the financial crisis in 2008, but measures taken by the Central Bank of Nigeria (CBN), including a restructuring of the sector and the creation of a bad bank, have helped to restore confidence and performance in the sector. The Nigerian bank sector has a strong presence in the rest of Africa, with 44 subsidiaries in more than 21 countries, but cross- border contagion risks are low. Nigeria returned to civilian rule in 1999, after independence from the British in 1960 was followed by years of military rule. A federal government structure gives local politicians a high level of influence. Unfortunately, this has also contributed to endemic corruption and close ties with criminal networks (anecdotal evidence indicates local politicians themselves engage in criminal practices during electoral campaigns). The Nigerian society is characterized by a North-South divide along ethnic, religious and economic lines. These divisions have often led to tensions and are also reflected in politics. 

Economic indicators of Nigeria
Economic indicators of NigeriaSource: EIU
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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