• Friday, March 29, 2024
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Nigeria’s growth problem laid bare by US GDP expanding faster

Nigeria Economic outlook 2020

It’s a sign of economic trouble when the economy of an emerging or frontier market economy, assumed to have plenty of room to expand, is moving at a slower pace compared to a developed market, adjudged to have peaked and already operating near capacity.

That’s the scenario playing out in Nigeria, Africa’s largest economy, where growth has been sluggish since an exit from recession in 2017.

The economy grew 2 percent in the first quarter of 2019, according to official data. That’s lower than the United State’s first quarter GDP of 3.1 percent. It was no different in 2018, when the US expanded 2.9 percent compared to Nigeria’s 1.9 percent.

Expanding at a lower rate than the US makes Nigeria unattractive to foreign direct investors who will feel they are not well compensated for the risk they are taking by investing in an emerging market.

Read More: Industry Earnings Yield rises as GDP per capita declines in Nigeria

It’s no wonder Nigeria has struggled to attract foreign direct investment. In 2018, Ghana- a country of some 20 million people attracted more capital than Nigeria, according to data by the United Nations Conference on Trade and Development (UNCTAD).

Egypt, the highest recipient of foreign direct investment, attracted more than double of what Nigeria got, a big turnaround from when the North African country used to get less than a third of FDI that flocked to Nigeria. While Egypt is forecast to grow 5.9 percent in 2019, Nigeria will probably expand 2.3 percent, according to the International Monetary Fund (IMF).

“For a big investor, there’s little motivation to take so much risk to invest in Nigeria when the return doesn’t promise to be higher than what is obtainable in a country like the United States,” said Egie Akpata, a director at investment banking firm, Union Capital Markets.

“Big investors probably feel they are better off staying away from Nigeria and investing in other emerging economies with better economic indicators and stronger growth prospects,” Akpata, who was a former assistant Vice President in the Global Markets Division of Deutsche Bank AG in New York, told BusinessDay.

The mid to long term uncertainty of the Naira exchange rate also contributes to dampening investor appetite for Nigerian assets, according to Akpata.

In an ideal scenario, Nigeria should post higher growth rates than a country like the US, given that it is more difficult for a developed economy that already boasts first class infrastructure to grow faster than a third world country with third world infrastructure. It’s typical of emerging markets to see sustained years of growth in the range of 6- 10 percent as they play catch-up to developed economies.

Take China, which is the biggest emerging market. Beijing expanded 6.4 percent in the first quarter and when the economy slowed to 6.2 percent in the second quarter it was the lowest rate in 27 years. This means the economy never expanded below 6 percent in the last three decades.

The last time Nigeria expanded by as much as 6 percent was in 2014, five years ago.
After that time, when the economy has not contracted it has mustered growth of around 2 percent. As a result, Nigeria’s GDP per capita has declined every year since 2016.

It means the economy hasn’t grown fast enough to create new opportunities for a fast rising population growing at the rate of 2.6 percent annually.

What Nigeria can do to achieve robust and inclusive growth has been well documented from market reforms in the power and oil&gas sector to tapping private capital to boost infrastructural development.

“If nothing is done to open up the economy to private investment, Nigeria will struggle to grow at the right pace and unemployment will continue to rise,” said Ayo Teriba, an economist and CEO of consulting firm, Economic Associates.

Moody’s Investor service last month said Nigeria was trapped in a low growth cycle and that the government’s revenue weakness was scuttling efforts to deliver a strong economy that can grow at least 6 percent annually.

 

LOLADE AKINMURELE