Nigeria’s economic growth engine: The courage to act
The sojourn through Nigeria’s economic history reveals few insights as to what is required to move growth up several gears.
Four years on from the first annual contraction in economic activity in over three decades, the odds are high, that Nigeria’s economy will experience another full-year decline after going into a technical recession in Q3 2020.
Across the 2016 recession and ongoing 2020 episode, Nigeria’s economy faced exogenous shocks, a sharp drop in oil prices (which induced recessionary conditions across all major oil exporters) in the former, and the COVID-19 outbreak which has pushed the world economy into a recession. Following the discovery of proven vaccine therapies, expert commentary, and analyst prognosis, hinged on the assumption that a successful roll-out of COVID-19 vaccination programs across countries, is for a V-shaped economic recovery.
For Nigeria, this rebound will be towards an economic growth number between 2-3 percent which implies little change in individual fortunes as real GDP growth roughly matches population growth. Though the recent #ENDSARS protests could be naively presented as frustration over excessive police brutality, those protests were essentially about anger over the inability of political leadership and governance to deliver seismic improvements in the socio-economic welfare of the average Nigerian.
Alongside growing concerns over the spate of insecurity, the time for the Muhammadu Buhari administration to act decisively is now. Restoring optimism over Nigeria’s economic prospects requires pushing growth back towards either the mid-to-high single-digit levels observed in the era between 2000 and 2010 or uncharted waters of double-digit expansions. This article looks to set out broad ideas on how to revamp Nigeria’s economic growth engine.
A trip down memory lane
Looking back at history, following the return to democratic rule in 1999, Nigeria’s economy expanded at the fastest pace of growth since 1980, with an average growth of 8.4% during the Obasanjo administration (1999-2007) which decelerated to 6% under the Yaradua/Jonathan era (2007-2015) before a drop-off to 2-3% under the Buhari administration (2016-date). Growth over the democratic era (average: +6%) is a significant uplift from the lost decade during the 1990s and the volatile 1980s period under military rule when Nigeria tried to reform in response to the collapse in oil prices.
So what factors account for the marked improvement between the post-1999 era and the prior two decades? Looking at sector data for a start, economic growth in post-1999 period revolved around the traction in the non-oil sector which effectively boiled down to rapid expansion across three sub-components: services, trade, and agriculture. The key pillar of uplift in Services GDP was telecommunications GDP which went from 0.1% of the economy in 2000 to 10.9% in 2019. To situate this properly, Nigeria’s telecommunications sector is now larger than the oil sector from effectively ground zero in 2000 and the gains here entirely reflect the outcome of the decision in 2001 to liberalize the sector by giving ground to private capital.
The move raised the number of active lines in Nigeria from a little over 100k lines in 2000 to 208million lines at the end of October 2020. The lesson here is that Nigeria’s government in 2001 stopped trying to waste meagre resources in a feeble attempt at investing in telecommunications, under an inefficient monopoly (NITEL), and allowed private capital (foreign and local) to sort out the sector.
For trade GDP, the underlying drivers of the expansion were more fortuitous and less deliberate as thanks to a strong run in oil prices, starting in 2003, Nigeria’s external accounts underwent a sizable transformation with the re-emergence of a large current accounts surplus which visibly boosted FX reserves.
Alongside, a relatively weaker exchange rate in REER terms, the improvement in FX reserves allowed for a more liberal approach to trade policy, with the relaxation of many hitherto restrictions on imports. Accordingly, trade GDP expanded from 11-12% of GDP in the 1990s to 15-16%. On the agriculture pillar of the growth uplift, where an expansion was observed in the area under cultivation, my thesis is that better farm input sourcing and demand from a resurgent manufacturing sector helped drive improvements.
Noteworthy is that contribution from the oil sector was minimal (bar 2000 and 2002) reflecting static oil production despite much higher oil prices, including an unmatched era of USD100/bbl. between 2010 and 2014. The lack of progress on expanding oil production is a testament to the lack of political will towards reforming oil policy to drive higher private investment. In summary, reforms which boosted private investment in telecommunications, less restrictive trade policies occasioned by improvement in FX receipts, and possibly better farm input sourcing underpinned the strong growth in the Obasanjo years and well into the Yar’adua/Jonathan era.
However, despite the strong growth over the Obasanjo era, many Nigerians struggled to connect with this reality, and debates over growing income inequality and poverty rates dominate public discourse. Looking at more structural data on growth drivers uncover some clues as to why. In elementary economics, there are four factors of production: labour, land, capital, and entrepreneurship. To simplify things, economists often distill these factors into two: labour and capital. Looking at the data, Nigeria’s economy is dominated by capital intensive sectors which account for over two-thirds of output which implies that more of the national income is captured by owners of capital despite our high population.
As consumption expenditure dominates aggregate spending, the mismatch between GDP by income and GDP by expenditure naturally cascades into high unemployment rates, stark income inequality (as owners of capital get more share of income), naturally low aggregative savings, and low tax collection. In short, our GDP comes from sectors with a great need of our least abundant resource (capital) but with less use of our most abundant resource (labour). Growth can never be inclusive under these settings.
So what changed for the Buhari government?
For a start after over ten years of running at double-digit growth, Nigeria’s voice-driven telecom revolution appears to have its peak and maturation has set in with teledensity above 100%. Most people who need a phone already have one! This means that the marginal contribution of telecommunications GDP to overall growth would be minimal. Secondly, the collapse in oil prices over the 2014-16 era has resulted in a return to trade-restrictive policies (aka import demand management) that characterized the 1980s and 1990s and which worked to limit growth in trade GDP (20% of the economy) pushing the sector into recession.
Lastly, while agriculture GDP remains in growth, a myriad of factors: insecurity, input supply chain issues, and the perennial issues of weak irrigation, logistic, and storage infrastructure bottlenecks continue to repress growth. Throw in the odd shocks to oil production from militant attacks in 2016 and OPEC induced shutdowns in 2020 and a perfect storm of forces have imposed a deceleration in growth. The journey to sub-par growth began with the deliberate or otherwise lukewarm appetite by succeeding governments since 2007 to embrace greater liberalization of the Nigerian economy. As such growth has naturally become less resilient.
In response to the initial oil price shock, the Buhari government announced moves to stimulate aggregate demand via increased government spending. However, this approach while theoretically appealing evades the points uncovered by the long history of reform: each crisis is an opportunity to grow the private sector not expand the public one. In any case, the Nigerian government is simply too small to move much as, despite successive records in nominal budgets, government spending in real terms is lower than at the start of the last decade.
Attempts to spend our way out of the crisis naturally implies more borrowings given the limited ability of the Nigerian state to mobilise tax revenues, which will only constrain the fiscal space for future governments. Our low tax revenues are a function of the structure of the economy, which as we saw earlier places a clear emphasis on capital-intensive sectors vs. labor-intensive sectors which ensures high labour unemployment and limited income taxes. The bulwark of tax revenues in most countries is personal income taxes vs. corporation taxes. Given this backdrop any tax mobilization drives will merely entail marginal improvements, seismic growth will remain elusive.
Source: Nairametrics.com
