Nigeria in 2012 (2)

Nigeria’s economic fundamentals and outlook should ordinarily be considered excellent-large population, labour force and market; 7-8% GDP growth; strong oil markets; interest from foreign investors; a democracy that has lasted from 1999, the longest since independence; a consumerist society with strong inclination to purchase goods and services; entrepreneurial, resourceful people, reasonably educated and enlightened people who speak English. These advantages are however offset by corruption; and since the 2011 elections, by the post-election violence which forewarned of regional tensions; “Boko Haram” fundamentalist terrorism; the fuel subsidy crisis; some elements in the opposition who seem bent on the overthrow of the current government; and strong anti-reform lobby and vested interests opposed to privatisation and economic reforms. Given the “dangerous demographics” which I highlighted last week, and the shocking poverty data just released by NBS, the potential for social crisis is high! By NBS’ figures, absolute poverty (minimal requirements for minimal standards of food, clothing, healthcare and shelter) was 60.9% (99.28million people); relative poverty (by reference to living standards of the majority) was 69% (112.5million); and by the World Bank’s dollar per day measure, 61.2% (100.5million) were poor! Subjectively 93.9% of Nigerians considered themselves poor!!! NBS projects that relative, absolute and $/day poverty may have risen to 71.5%, 61.9% and 62.8% in 2011. Why doesn’t economic growth translate to lower poverty and greater employment in Nigeria? As I have argued several times, the answer lies in the structure of our GDP and governance! Around 75% of GDP (in Q3 2011, it was 76.2%) is made up by only three sectors-agriculture (43.64%), crude petroleum and natural gas (14.27%) and wholesale and retail trade (18.29%). Agriculture is sub-modern, largely subsistence, non-value adding, not sufficiently linked to agro-allied and manufacturing, and does not create jobs. The oil sector is dominated by crude export carried out by multinationals who simply pay governments share of revenue over to the treasury-for appropriation and spending by corrupt politicians and bureaucrats! The downstream refining, petrochemicals and allied sectors are undermined by a misguided petroleum subsidy and the industry value-chain remains undeveloped. Our traders import and sell foreign produced goods and most manufacturing raw materials are also imported. In effect, across sectors we add no value domestically, and whenever we consume, we create jobs offshore. Consequently GDP growth makes no impact on poverty and unemployment irrespective (by and large) of the growth rate. The large size of government (numerous federal MDAs, large recurrent spending, multiple and overlapping commissions and agencies; 36 states with inefficient bureaucracies and 774 local governments; and the relatively large expenditure devoted to maintaining the legislature at federal and state levels and a myriad of political appointees) means there is very little left for capital and social spending. Poverty and unemployment indices will not change iuntil we restructure both our economy and our politics! In terms of sectors, telecommunications remains the outstanding growth sector in Nigeria at over 35% in Q3 2011 (it remains a mystery that Nigerians refuse to apply the lessons of telecommunications to downstream petroleum and power), far ahead of wholesale and retail trade (11.84%), hotels and restaurants (11.81%), solid minerals (11.5%), and building and construction (10.72%). With the exception of the low value-adding (!) trading sector, all the other high-growth sectors are too small to matter! Manufacturing has shrunk to 3.51% of GDP, grows by 8.15% and utilises only 57-58% of its capacity! Upstream oil GDP growth has slowed in 2011 and was actually negative (-0.34%) in Q3 2011 due to the absence of clear industry structure and fiscal terms which the petroleum industry bill was supposed to provide. Until recently agricultural sector growth was a function of divine benevolence (rainfall) and not policy-hopefully the new minister is changing that. For now the sector grows at a low 5.82%. Finance and insurance has also contracted to a shocking 2.98% of GDP, with abysmal growth rate of 3.98%, due almost certainly to incessant policy changes, industry restructuring and effects of industry mistakes made between 2005 and 2009. The capital market remains well below its 2008 peak, and the likelihood is that recovery, both in financial and capital markets may yet be deferred at least to second half of 2012, or beyond! All indications are that 2012 will be an inflationary year, with multiple drivers-petrol prices, electricity tariffs, tariffs on some imported food commodities mid-year, wages, fiscal push, high interest rates and depending on oil sector developments, possibly higher exchange rates as well. While stressed European and developed country economies may lower global oil demand, geo-political issues in the middle-east (especially Iran versus Israel) may push prices in the opposite direction. However we expect Saudi-Arabia to attempt to bridge absence of Iranian oil in global supply and therefore mitigate a sustained rise in prices. We are likely to see gradual rise in electricity output from 2012 and greater investments in the sector. It is critical that government completes it power sector privatisation this year, having missed earlier deadlines. Consumer purchasing power will be lower, and business operating costs will be higher! Policy makers, managers and entrepreneurs have their work cut out in 2012-global risks; difficult reforms and fiscal stress; domestic inflation and challenging markets; concerns over security of assets and people; and rising operating expenses. We may take solace in the fact that peers all over the world may face similar challenges!