Take out oil from Nigeria’s third quarter (Q3) GDP numbers and the economy is in pretty bad shape and growing at par with the United States economy which grew 2 percent in Q3.
How 2 percent growth in the US, which is deemed inappropriate by Wall Street economists, is fast becoming the norm in Nigeria since its exit from recession is worrying.
It is worrying because it is an anomaly for a developing economy to be expanding at a similar rate with the world’s most developed economy.
The reason is that a developed economy has first-grade infrastructure which means it is operating at full capacity in terms of economic output and has limited scope for growth.
For a developing economy, with a gaping infrastructure deficit that holds back economic activity, there is usually ample room for growth in the range of 6 to 10 percent.
Nigeria, being a developing economy and needing some $100 billion in annual infrastructure investment for the next 30 years to measure up with the type of first-grade infrastructure the US boasts, should therefore be growing at above 6 percent.
The third quarter GDP numbers expose how far away Nigeria is from the growth required to lift millions of its people from poverty.
Two things stand out from the third quarter report that drain any optimism for future growth of the economy and improved welfare of its citizens.
First is that the economy is still leaning on the oil sector to grow. That’s after the sector grew 6.49 percent in the third quarter compared to last year on the back of increased production volumes.
Oil production averaged 2.04 million barrels per day (mbpd), 5.0 percent higher than the revised production of 2.02 mbpd in the second quarter. Sadly, that growth is largely one-off and asks valid questions over what the driver of growth will be in 2020.
The production recovery is supported by the gradual ramp-up in Egina oil field which means the waning base effect is likely to cap scope for significantly greater growth acceleration from current levels.
Also, with the Organisation of Petroleum Exporting Countries (OPEC) mulling production caps for Nigeria and Iraq by 2020, it becomes a tougher task for the oil sector to drive even the tepid growth we have seen in the last few quarters.
“If Nigeria, an OPEC member, was pressured to comply with the cartel’s production quotas, the consequent decline in output could wipe one percentage point off GDP growth, almost halving it,” says John Ashbourne, senior emerging markets economist at Capital Economics.
If the oil sector is not able to drive growth, , attention rightly shifts to the non-oil sector and expectations for growth.
This leads to the second low point that implies growth in the range of 6 percent is wishful thinking at best.
The non-oil sector managed growth of 1.85 percent in the third quarter, thanks to the agriculture, telecommunication and manufacturing sectors.
Telecommunication was the best performer of the lot at 12.16 percent while agriculture grew 2.28 percent and manufacturing managed 1.1 percent.
Growth in all three sectors doesn’t sufficiently prove it can be sustained. Not when consumer purchasing power will come under increasing pressure from the hike in Value Added Tax (VAT) to rising inflation on the back of the country’s land border closure.
That, coupled with a potential increase in electricity tariffs and petrol prices next year, would not only lead to reduced consumer demand but would also push the cost of operation for businesses higher.
When economic activity is low, manufacturing takes a hit, which is why the sector has contracted for the better part of 2016 till date. Telecommunications also suffers as weaker consumer purchasing power leads to lower voice and data revenues.
For agriculture, if the N200 billion of credit disbursed under the Anchor Borrowers’ Scheme has yielded below 3 percent growth in the sector, then the sector has more challenges than the government will readily admit.
Two questions come to mind here. Where will growth come from next year? And if it will be incredibly difficult to get 3 percent growth at the current pace, what would it take to get 6 percent?
To grow at 6 percent, economists polled by BusinessDay said Nigeria will need to open up various sectors to increased private sector participation.
“Take the transportation sector, it can contribute much more to economic growth if, say, only the airports are concessioned to the private sector,” said Wale Okunronboye, head of investment research at pension fund manager, Sigma Pensions.
Pension funds like Okunrinboye’s are actively seeking investment opportunities in the economy after they were restricted by the CBN from purchasing high-yielding OMO bills.
“The current Q3 numbers don’t show where growth will come from next year and that’s why the government must start thinking ahead of how to attract sufficient investment,” Okunrinboye said.
For strong growth, the other analysts polled said more investment was needed.
However, with a surge in oil revenue-driven investment unlikely, other investments, besides short-term portfolio flows, continue to be hampered by the difficult operating environment and uncertainties in the foreign exchange market.
To break out of this trap, Nigeria will need to show it is a serious investment destination by, for example, enacting legislative-driven reforms to attract capital to infrastructure.
“In the short term, the government needs to abandon its protectionist trade policies and tightly managed currency regime,” Ashbourne said.
This would encourage investment and allow for more competition, according to Ashbourne.
“In the longer term, the government needs to diversify its revenue sources, formalise the non-oil economy and break up large uncompetitive companies that have near-monopolistic powers,” Asbourne said.
Asbourne also thinks the government should stop subsidising petrol, which is an expensive policy with few benefits.
The urgency with which the government tackles these issues will mean much for Nigerians who have been growing poorer since 2016, with economic growth failing to match population growth rate of 3 percent.
Amaka Anku, Africa head for the Eurasia Group consultancy, said the reason Nigerians have been getting poorer for some time now is largely because “we have had an uncompetitive and largely unproductive economy [with] poor infrastructure, poor human capital and education and poor welfare”.
“It would be great to see longstanding [infrastructure] projects completed, such as the [Lagos-Kano] railway that has been in the works since the early 2000s,” Anku was quoted as saying in a Financial Times special report.
LOLADE AKINMURELE
