Nigeria: An African opportunity with giant potential

NIGERIA has many of the ingredients for a boom time. Massive oil reserves, an economy growing at an enviable rate, a reform agenda and promise of extensive infrastructure investment, and an expanding middle class displaying an appetite for imported goods all suggest a dynamic and attractive business environment. But politics, corruption and security issues all mar the happy picture of a country going through a considerable upturn.

“You have to be very careful about saying it’s a place for great investment. It is a place with great opportunity and tremendous potential, but it’s also a place with specific and unusual challenges,” according to Walter White, head of emerging markets at law firm McGuireWoods.

We now know more about the Nigerian economy. And it’s impressive. A major project by the country’s National Bureau of Statistics to rebase the GDP calculations came to fruition in April, revealing the economy is the biggest in Africa at $509bn (£307bn) for 2013, 89% bigger than first thought. Some observers quickly pointed out that – considering its huge population – the country is under-performing but it nevertheless now outstrips the continent’s former top dog, South Africa.

Annual growth has been ticking over at above 6% since 2009. Last year it was 6.2% while the IMF expects national output to expand by 7.3% in 2014. Inflation has improved too, down to 8% from 12% at the start of 2012. But there are other signs of optimism. Out of a population estimated to be about 170 million, some 23% are described as middle class. GDP per capita was $378 in 2000, according to the World Bank, and $1,555 in 2012 (those figures may now be recalculated too). Apart from blips following the financial crisis, and at the end of 2011, consumer spending has been on an upward curve. Disposable incomes have also climbed.

And yet there are troubling signs in the country. Despite reserves said to be among the largest in the world, oil production has been falling, last year reaching its lowest point for four years. There is political instability too.

Goodluck Jonathan, the president, suspended the head of the country’s central bank over claims of billions in missing oil revenues, the latest incident to add to Nigeria’s reputation for corruption. Transparency International ranks Nigeria 144 out of 177 countries. That said, president Jonathan has appointed reformers to his government. These include the highly respected Ngozi Okonjo-Iweala, a former candidate for the presidency of the World Bank, who is minister for finance and has become an outspoken advocate of transparency and reform. Her arrival has boosted confidence in the government. But when good news emerges in Nigeria, anxieties are never far away.

Trouble ahead
Nigeria hit the news earlier this year when its president clashed with Lamido Sanusi, the head of its central bank. Sanusi claimed that as much as $20bn of oil revenues was missing (his first claim put the figure at more than $40bn). The ministry of finance disagreed, suggesting it was more like $10bn. For his pains, Sanusi was suspended in February, vowing not to be cowed and leaving observers with the distinct impression that something was seriously wrong. The Economist reported that investors were “spooked” and had moved $2bn of the $9bn of foreign cash invested in Nigerian bonds, with expectations that more was bound to go.

According to Shilan Shah, an analyst with Capital Economics: “If you consider what happened to the central bank governor, this appears to be politically motivated. So there are concerns over the independence of the central bank.” Shah believes political risks and the potential for instability are “perennial” in Nigeria, and an unwelcome adjunct to the country’s potential.
But even as Sanusi complained about oil, it was clear the sector had been suffering. Production has been at a four-year low due to theft and technical difficulties, proving that abundant reserves do not always translate into healthy production. The outcome is that, despite robust growth, Nigeria’s economy is afflicted by an oil sector drag, says Shah.

The authorities are well aware of the problem. An oil industry bill, opening up the sector to more transparency and hence greater efficiency, has been making its way through Nigeria’s parliament but has found itself slowed by lobbying from vested interests – some insist from external as well as internal interest groups.

Governance and leadership therefore loom large in the minds of investors considering Nigeria. According to Elizabeth Donnelly, assistant head of the Africa Programme at Chatham House: “The stumbling block is always government-level implementation.”

That said, Nigeria is changing in some areas. With great ambition, detailed in a plan to become a top 20 economy by 2020, the state has set about overhauling its infrastructure. It should. Nigerian officials openly admit that infrastructure requires huge investment in transport and power, offering opportunities for exporters. The country is said to need another 100,000km of roads (of the current 200,000km, reportedly only 40,000 are surfaced) while the country’s travellers are struggling with just 3,500km of rail lines, compared to 28,500km in Brazil.

In terms of power, Nigeria currently has capacity for generating 9,000MW and is ambitiously aiming to build that to 20,000MW. In a bid to accelerate improvement, and reduce the frequent power cuts, the government has divested itself of all generation and distribution assets, leaving the private sector to manage development. “This is the most progressive time in Nigeria, but we are still a few years off from seeing significant change to power,” according to Yvonne Mhango, an economist and co-author of the book The Fastest Billion: The Story of Africa’s Economic Revolution.

Nigeria is also said to be in need of 17 million new homes. A mortgage fund backed by $300m from the World Bank has been agreed to help kickstart construction. Increased levels of credit and vast numbers of new homes will inevitably drive demand for consumer goods. Nigeria and its manufacturing sector are poorly equipped to meet the demand, especially for electronics and white goods, which means much of it will need to be imported. South African retailers such as Shoprite and Woolworths have been expanding their outlets across Nigeria and sub-Saharan Africa. Mhango says: “Despite the challenges, the momentum seems to be in one direction and that’s forward.”

But Nigeria’s future is not necessarily in oil. Finance minister Ngozi Okonjo-Iweala wrote in the Financial Times in March that the country’s “future lies not in oil and gas but in non-oil sectors such as agriculture, housing, creative arts and services…” In short, Nigerians have been shopping their way to economic growth. Retail, grouped with wholesale, is one of the three biggest sectors in the economy. The other two, telecoms and agriculture, both expanding on domestic demand, underline the significance of consumer spending, which has grown 9% in the past three years alone.

Portside
Even though the temptation to engage with Nigeria is great, many warn about its corruption issues. The country has developed some of the most sophisticated port facilities in the region, but moving goods into the country presents significant challenges.

Customs can be problematic and classification rules can offer corrupt officials the leverage needed to slow down the passage of goods. One example is the ambiguity of some electronic products, especially those using GPS technology that could be easily reclassified as strategic or military. “It’s fair to say customs importation is a specialised services and there are challenges at customs all over the world,” says McGuireWoods’ Walter White. “It makes a difference what you are trying to import and there are issues of classification – there are ways officials can slow down the process of getting [goods] into the country. That can be an extortion tactic.”

White says goods are most vulnerable at the point of entry and when they enter into the distribution network on their way to end customers. This risk can be mitigated by arranging to have responsibility switched to the local buyer the moment goods arrive portside. “It is important for people who deal with Nigeria to be attuned to the exposure, because it’s important they have the compliance-side operations in their logistics systems to make sure their goods end up where they want them to be,” White says.

Election fever
If things are to change, it will require political will. This is difficult in a country as big and as diverse as Nigeria. Much of the economic development is in the southwest around Lagos, while the northeast is terrorised by the Islamic extremists of Boko Haram.

There has been evidence of change with the appointment of Okonjo-Iweala, but there are those who see a backlash under way against the reformists. A clear direction may not be apparent until after the presidential election that is to be held next February.

However, there is pressure for change. The country is entrepreneurial (online trade is booming), and its business sector is driving a need for stable and predictable government. Elizabeth Donnelly says: “What you are seeing is a demand from Nigerian private sector actors, a demand for better governance performance, for better service delivery to create a better business environment. Without transparency and without available information about their own market, they can’t grow.”

Being named as part of the MINT group of economies (along with Mexico, Indonesia and Turkey) has given cause for reflection.

“Decision makers in Nigeria know that both being counted as part of the MINTs and the rebasing of GDP are nice. But, institutionally, it remains challenged and the place runs off the talent and drive of individuals over the long-term performance of its institutions,” Donnelly concludes. ?

Key facts: Nigeria
Population: 168.8 million
GDP: $262.6bn (£156.4bn)
Economy: The Nigerian economy is now the largest in sub-Saharan Africa as of April 2014. With its large reserves of natural resources, Nigeria has the potential to build a highly prosperous economy. The Nigerian government has worked hard to transform the economy through structural reforms that have been aided by high oil prices. These reforms have had a positive effect on macroeconomic outcomes including strong GDP growth and weaker inflation. The Nigerian economy proved its resilience after the global financial crisis with an estimated real GDP figure of 8.1% in 2010 – a large increase from 2009’s figure of 7.0%
Market strengths: English is widely spoken and accepted as the business language; the time zone is GMT+1, but same time zone as UK in summer; more than £1bn worth of UK investment in Nigeria with leading investors such as Shell, Unilever, Cadbury, Guinness, Standard Chartered, Blue Circle and British Airways resident in the country; there are strong cultural and historic ties between Nigeria and the UK; the Nigerian economy is growing at a rate of more than 7% per annum as at 2011, according to IMF projections; investment incentives in form of Free Trade Zones, and tax holidays; there is significant availability of professional services support from lawyers, accountants and consultants already well established in Lagos to help foreign investors.
Key opportunities: Some of the main opportunities within this sector include providing technical assistance to local contractors and organisations; setting up in-country manufacturing plants that supply the needs of the domestic market; offering training or training tools; participating in supply chain opportunities within high-value construction and infrastructure projects; project managing large-scale infrastructure projects; introducing innovative construction practices
Source: UK Trade & Investment  

One response to “Nigeria: An African opportunity with giant potential”

1. Nigeria indeed has tremendous potential. Yes, we have challenges but we are rising above them.

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