(By Thomas Hansen)
“Nigeria’s economy has achieved consistently high growth of about 6 percent a year over the last decade, largely driven by a fast-growing non-oil sector. In fact, non-oil sector has quietly grown at a rate of up to 8 percent a year in spite of the much-publicized woes of the oil industry and a myriad of political, operational and infrastructural challenges. Paradoxically, slow oil sector growth has entailed a gradual diversification of the economy, albeit one that is consumer-based and remains vulnerable to volatility in global oil prices.“
LAGOS — At the first glance, Nigeria does not appear particularly alluring to international investors. The country’s important oil industry is in the doldrums with crude production stagnating at around 2 million barrels per day. Oil investment is held back by the failure to pass a key reform bill. Pervasive theft of crude oil is nibbling away at onshore oil pipelines as well as export figures. Previously a major crude oil exporter to the US, Nigeria’s share of US oil imports has dropped 11 to 5 percent in the last year.
The political outlook is scarcely any better. Nigeria’s government is fighting a vicious Islamist insurgency in the country’s remote and sparsely populated northeast that has the potential to trigger further attacks in other parts of the country. The ruling People’s Democratic Party (PDP) has been tearing itself apart over the intent of incumbent President Goodluck Jonathan, a southerner from the Niger delta, to run for another term in the 2015 elections, a move fiercely resisted by northern politicians.
Business goes on in Lagos
Nigeria’s economy has achieved consistently high growth of about 6 percent a year over the last decade, largely driven by a fast-growing non-oil sector. In fact, non-oil sector has quietly grown at a rate of up to 8 percent a year in spite of the much-publicized woes of the oil industry and a myriad of political, operational and infrastructural challenges. Paradoxically, slow oil sector growth has entailed a gradual diversification of the economy, albeit one that is consumer-based and remains vulnerable to volatility in global oil prices.
Nigeria is the top foreign direct investment (FDI) destination in sub-Saharan Africa with about $20 billion of FDI over the last three years. The impact is visible: the skyline of commercial capital Lagos is changing rapidly as international high-end hotel chains such as Intercontinental and Radisson Blu have moved into the market. Retail and fast-moving consumer goods are also attracting the attention of international investors. The pharmaceutical sector is well-established as well, though international drug companies are grappling counterfeiting issues in the country.
Nigeria’s rapidly growing population of some 170 million consumers and its potential for continued growth attract blue-chip companies keen to gain a foothold in sub-Saharan Africa. On the other hand, some FDI is driven by an ample supply of cheap dollars from the US Federal Reserve’s monetary policy, potentially creating speculative bubbles and worsening economic volatility.
Despite a failure to pass key reforms – chief among them the Petroleum Industry Bill, which has stalled for years – some things are moving in the right direction. Nigeria has privatized the infrastructure and assets of parastatal power company Power Holding Company of Nigeria, splitting the company up in regional distribution and generating companies and placing the national power grid on a management contract. The privatization process took longer than expected and experienced some hiccups along the way – Power Minister Barth Nnaji resigned in August 2012 amid allegations of conflict of interest.
The fact that power privatization did happen is significant. Nigeria’s notoriously erratic power supply has been a brake on economic growth. Although it will likely take years for the power supply to improve, private investors are better placed to access the funding and technical expertise required to make it happen. An estimated $5 billion a year in financing is required.
Additional infrastructure upgrades can further Nigeria’s growth. Much of the country’s road network needs improvement, but a credible model for public-private partnerships has not yet emerged and toll-roads would be politically contentious. Atedo Peterside, one of the drivers of power privatization, has publicly hinted that Nigeria’s railways may be next. Improved infrastructure – be it roads or rails – would have a positive spillover effect: a considerable part of northern Nigeria’s agricultural output is wasted before it reaches market in the south or further afield.
Pitfalls still remain
In spite of the growth potential, companies new to Nigeria face plenty of pitfalls. Nigeria’s security environment – while manageable outside the northeast – is highly dynamic and diverse. Companies must be cautious about deploying personnel to remote and unfamiliar parts of the country. Even seasoned businessmen with extensive experience elsewhere in Africa are sometimes caught off guard by Nigeria’s business environment. More often than not, the surprises stem from a careless choice of local business partners. Political risk is also not completely out of the picture – while licenses and contracts may generally appear stable, local companies with a high political profile may be more likely to come under pressure in the future.
There are macro-level risks as well. A further drop in oil production or oil prices could trigger a downturn in Nigeria’s domestic consumption and hamper non-oil growth. The country’s fiscal and monetary policies that have so far supported growth are also likely to come under increasing pressure in 2014. Central Bank governor Lamido Sanusi has been committed to keeping inflation steady and maintaining the Nigerian naira in a tight exchange rate band with the US dollar, thereby creating a stable environment for investors. However, Sanusi’s term expires in 2014 and his successor is likely to come under pressure to pursue less independent policies.
Moreover, there will be pressure on government to spend more in the lead-up to the 2015 presidential and general elections. As in most other countries, government spending tends to increase in election years, and with heightened political tensions in Nigeria the campaign is likely to be even more expensive than in 2011. The result may be a fiscal squeeze as government revenues are already under pressure due to disappointing oil output.
(Source: RiskMap, Forbes)
“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”