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If so big why so small?

Lagos economy

Reactions have continued to trail last week’s release of IMF’s 2019 Article IV visitation report which tracks Nigeria’s key financial and economic development over the preceding year. A Bloomberg reaction this week laments that “Nigeria is cornering the market in extreme poverty.” Whereas the population living on less than $1.90 a day has continued to fall in the largest population centers of the world including China and India, it has continued to rise in Nigeria with a smaller population. This disproportionality in poverty outcome has worsened since 2014 as population and economic growth seem to have parted ways in both direction and rate of increase.   Looking at the dismal statistics from the massive dip in FDI to increasing perception of corruption by TI, Bloomberg therefore constituted poverty as a time bomb that only growth can defuse in the coming days. Urgent as the imperative of growth has become, it however noted that Nigeria is unfortunately, “going nowhere fast.”


Bloomberg’s conclusion is just valid and amply supported by the IMF’s release. But it needs be said that IMF did not say anything new. Not a few economic observers have reached the same conclusion over the past 4 years. The slow growth that has followed the narrow escape the economy seems to have made from the 2016 recession is well rehearsed. It needs not be reemphasized that this economy has witnessed several bouts of recession in its post-independence history.   In the first recession ending in 1981-Q3, post recession growth jumped to 3.43. The second recession ending in 1986-Q4 saw a 10% growth. When the third recession ended in 1991, the economy registered an 8% growth. But the growth following the most recent recession of 2016 is insignificant at just 0.5%. Why this sluggish growth persists has been the crux of much policy debate. But what is not in doubt is that policy management has not been at its best.


Nigeria’s real GDP growth has grossly underperformed its peers — be it middle income countries or sub-Saharan Africa. Real per capita GDP growth has performed worse on two measures: in comparison to peer countries and also in comparison to its own real GDP growth. Our real per capita GDP growth is the worse in our history as an independent nation, reaching a negative 4% in 2016.   This robs off on the misery index (referring to the sum of unemployment rate, the growth rate, inflation rate minus the growth rate) and of course, every other development indicator. GDP surely does not adequately capture everything that makes life worth living, but it is still the most powerful economic indicator with a very strong correlation to others. Low per capita income translates to poverty which complicates every other indicator. Little wonder then that Bloomberg sees an impending social implosion triggered by poverty.


Following from the low level of growth is worsening social and development indicators — economic performance is simply below what is necessary to improve development outcomes.   For every development indicator except access to electricity, Nigeria underperforms its peer average. One wonders what the electricity situation must be in those countries that are worse than Nigeria if we are in utter darkness for 7 to 8 of the 12 months of the year!


Development indicators are mere symptoms of a more pernicious problem to be found in the macroeconomic system. Nigeria does not only underperform other countries on development outcomes. The country’s financial underpinnings (financial depth) has been   gradually hollowed out over the years. Considering the macroeconomic pillars of growth, liquidity and stability, it becomes evident that the system has become captive to both inertia and paralysis.


Over the past decade all measures of growth has systematically displayed marked deceleration leading up to the recession of 2016.   On liquidity, we observe that except for bonds, all indicators of liquidity tightened relative to the GDP over the time frame under consideration. The economy was manifestly more liquid a decade ago than presently and this holds for both domestic and external measures of liquidity. We surmise from this that the financial system is now shallower than a decade ago.


If we disaggregate liquidity into its various components comprising money, bonds, equity and reserves, we can see that relative to the size of our GDP, each aggregate pales in comparison to peer economies. For instance, Indonesia’s money stock as a percentage of GDP is 40% relative to Nigeria’s 20%. South Africa’s is more than triple Nigeria’s at 73%. Egypt is 78% and Malaysia is 130% and China’s money stock is 208% of its GDP.   For bonds, Nigeria’s bond holding as a percentage of its GDP is paltry 13% compared to South Africa’s 35%. Indonesia and Egypt come at 24 and 69%, respectively. Our equity stock as a percentage of our GDP is a trifle 7%. South Africa’s is a whopping 322%. Malaysia is 121%. Indonesia is 46%. Our overall reserve in 2017 is mere 6% of our GDP. South Africa’s is 14%.


Put together, Nigeria’s domestic financial depth — that is, the sum of money stock, bonds, and equity as a fraction of the GDP — makes up a meagre 40% of the GDP. South Africa’s is 431%; China is 339%; Indonesia is 110%; Egypt is 177%; Malaysia is 307%. If we add reserve to the above, we get an indication of overall financial depth. Again, Nigeria is the least of comparator countries at just 49%.   South Africa’s is 445% and other countries follow at the same margin as in the domestic case.


What this implies is that the Nigerian economy, despite taking the position of the largest economy in Africa by GDP, is dwarfed by other countries in the size of the key financial determinants of growth. In fact, our financial situation is shallow rather than deep.   The macroeconomic policies of recent regulatory regimes have left more to be desired in their approach to these realities. Time was when a CBN governor was aggressively bullish to engineer capital accumulation and deepen the financial system. Obviously, the banking consolidation of over a decade now was a strategic effort to power the economy. Any macroeconomic regime that fails to anticipate the integral connection between macroeconomic dynamics and the development of the real sector in a developing as well as the necessity of bullish macroeconomic policies to pursue liquidity accretion and financial deepening, simply misses the point.   From all indications, our economic size is hopelessly betrayed by our monetary and financial instruments at moment.

  • To be continued….

Bongo Adi


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