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Nigeria’s economy presents considerable opportunities with its population of 179m, which is young and growing rapidly at 2.7% per year. Real GDP growth has averaged 7.7% over the last 15 years and a large planned investment programme of USD1trn up to 2030 presents opportunities for involvement from the private sector. A number of non-oil sectors are large and have the potential to grow strongly. Services account for 38% of GDP, agriculture for 20% and manufacturing for 10%, mainly of food, textiles and clothes. Additionally, the political environment may be improving. The election of the new president, Muhammadu Buhari, in March brought a new party to power after 16 years under the People’s Democratic Party, marking the first time in Nigeria’s history that an incumbent president has been removed from power democratically. Optimism runs high that Mr Buhari can improve the transparency and efficiency of the government. Additionally, the risk from an insurgency in the north of the country is receding as the army has recaptured most of the lost territory.

Nigeria Real GDP Growth





Sources: IMF and QNB Economics forecasts

Nonetheless, real GDP growth has slowed to an expected 4.0% in 2015 as the economy faces a number of challenges. First, lower oil prices have negatively impacted economic performance. Nigeria is dependent on oil for 90% of export revenue and 85% of government revenue. Low oil prices and falling production means that oil revenue has almost halved in 2015. Oil production has been falling since 2011 due to weak investment and instability in oil producing regions. The exchange rate has been devalued by 21% over the last year as falling export revenue has led to a current account deficit and concerns about the economy have driven capital flight. International reserves have fallen from over 6 months of import cover at the beginning of 2014 to around 4 months, just above the IMF’s recommended level of 3 months for a pegged exchange rate. A weaker currency and supply-side bottlenecks have led to high inflation (9.4% in September), pressuring the central bank to keep interest rates high (last increased to 13.0% in November 2014) and further dragging on growth.

Second, under-investment has led to inadequate basic infrastructure and the build-up of supply bottlenecks. Total investment averaged 17% of GDP over the last 15 years, which compares with 28% in emerging markets as a whole and 20% in the rest of Sub-Saharan Africa. Nigeria produces less electricity than Qatar, despite its larger population. Power is expensive and large areas of the country can go without electricity. Ports are congested, railways inadequate, all domestic fuel is transported by road and only 20% of roads are paved. Nigeria’s infrastructure gap is estimated to lower growth by at least 2% per year. The World Bank believes that Nigeria needs USD30bn-USD50bn of infrastructure investment per year, around three times current levels.

Funding infrastructure investment is a challenge for the government as lower oil prices have constrained spending power. Therefore, as a priority, the new president is restructuring the oil and gas sector. Mr Buhari has appointed a new head of Nigeria’s national oil company (NNPC), who has streamlined the management and is now conducting a forensic audit of the whole company. A more efficient and transparent NNPC could reap enormous rewards. For example, the energy sector is in dire need of gas to feed power stations, but oil and gas companies are estimated to flare around USD1bn of gas each year due to a lack of infrastructure and regulations that keep gas prices low. Additionally, Nigeria has the potential to almost double oil production from around 2m barrels/day currently. Increased involvement of the private sector could also increase funding for infrastructure projects. The World Bank is assisting Nigeria with developing the capacity and regulations for Public and Private Partnerships for investment in infrastructure.

If these initiatives prove successful and involvement from the private sector and foreign investors increases, then this could transform the outlook for Nigeria. Crucial to this is progress on the political and security front. Mr Buhari has the potential to deregulate the economy and facilitate a greater role for the private sector, which could lead to significantly higher growth. Mr Buhari should soon form his cabinet, which will lend greater clarity on economic and fiscal policy, boosting confidence and investment and supporting a gradual recovery back towards the high growth rates of the past.

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