The Nigerian economy may rise from the ashes by 2030

The Nigerian economy may rise from the ashes by 2030

By 

Zuhumnan Dapel and Ishmael Ogboru

Nigeria is 60 years old. It has so far been through a three-year devastating civil war, two economic recessions (and now in its third), leadership crisis in form of power switches in six military coups, and many other besetting challenges. 

In this opinion piece, we provide a concise account of how these challenges – relating to the economy – have evolved and we argue that Nigeria will one day rise like a Phoenix from the ashes!

There is no question, the Nigerian economy – the largest in Sub-Saharan Africa and bigger in size than 31 other economies on the continent, combined – was healthier than 10 years later. Two major forces led to this: the 2014 bust in world oil price and the foreign exchange policy regimes pursuit from 2015.

 

However, by 2030, the economy may emerge the best it has been since the return to democratic rule in 1999. Two forces are expected to drive this rebound: the ongoing unprecedented infrastructure investments and the coming on stream of Dangote Refinery. 

What are the forces that shaped the Nigerian economy in the last decade and, what are the forces that may shape its outcome in this latest decade? 

Our expectations are not chiselled in granite. Unforeseen events may shift the course of the economy. 

But before shedding light, these are the facts on how the economy has evolved in recent decades.

The value of the local currency has depreciated nearly 200 per cent in the parallel market against the US dollar since 2015. In response, the inflation rate has soared into double digits. After peaking in 2014, net inflows of foreign direct investments plummeted by 76 per cent (it declined from 8.43 billion in 2011 to roughly 2 billion dollars in 2018, the lowest in 13 years.) And, in tandem, the average living standards – measured in terms of GDP per capita – declined by 7 per cent, with the unemployment rate hitting its highest level in almost 50 years: roughly 23% as of 2019, which is equivalent to roughly 21 million people losing their jobs. And all this occurred before the COVID-19 pandemic hit. The IMF and the World Bank are predicting grimmer prospects in the early years of this new decade. The IMF has projected an average per capita growth rate of about zero in 2019–24. 

Why and how did the Nigerian economy go off the rails after experiencing two growth miracles since its independence in 1960? 

In the first episode, the economy grew roughly 14 per cent per year between 1969 and 1980. This period coincided with the end of a three-year civil war and a boom in the world oil market. In the second episode, between 2000 and 2007, the economy grew an average of 8 per cent a year following the end of military juntas and transition to democratically elected governments. This was a period when Nigeria’s fiscal position was strengthened, and external reserves rose steadily from barely nothing in 1999 to about $51 billion as of 2007. 

Meanwhile, external debt of about $18 billion in 2005 and an overall debt stock of $30 billion – was written down (forgiven) by the Paris Club under a discounted buyback. Also, the government instituted aggressive banking sector reforms that boosted the flow of investment capital to the private sector. 

These developments were accompanied by welfare gains: roughly 13 million Nigerians were lifted out of poverty by 2004 as the level of income inequality in the country fell. And, after remaining flat for more than a decade, the life expectancy at birth rose by more than five. 

The Nigerian economy from 2010: why and how it went off the rails

In the last decade, Nigeria has had two heads of state from the country’s two major political parties. Each dealt with the country’s economic challenges differently during the half-decade they were in power.

Between 2010 and 2014, the GDP per capita grew an average of 3.6 per cent per year but later slipped into a steep downturn: it was shrinking by an average of 1.6 per cent every year between 2015 and 2018. The decade’s average growth was about 0.5 per cent. This implies that the economic gains recorded throughout the first half of the decade were almost completely eroded as the decade proceeded. This was fueled by two major forces. 

Force 1: The 2015 collapse in world oil prices. Nigeria’s finances have always been susceptible to the vagaries of oil prices because over 70 per cent of the country’s revenue is from crude oil exports. Thus, the currency depreciation, declining reserves and mounting inflation we witnessed as the decade progressed. 

Had the price of oil not collapsed, estimates show that Nigeria would have been, on an average, roughly $1 billion (per month) richer in oil revenue than it is. 

Force 2: Unintended flaws in economic policy, in particular, the foreign exchange policy response to the oil price crash. 

In its effort to defend the local currency and clamp down on the black market in foreign exchange, the Central Bank of Nigeria rationed the supply of dollars, restricting access to many importers. This policy move did not pay off and the currency further depreciated. As a result, factories that could not obtain dollars to import raw materials and capital goods shut down and eliminated tens of thousands of jobs. By mid-2016, the economy had fallen into a recession. This prompted a different approach to managing the exchange rate. 

This time around, after it failed to lean against the wind of popular opinion, the Central Bank allowed the local currency, the naira to float. This was a huge policy error that opened the currency to speculative attacks, resulting in the further depreciation of the value of the Naira of over 200 per cent. We show evidence of this using the two charts below:

That sparked unprecedented price increases, with the inflation rate rising to more than 30 per cent. The combination of depreciation and inflation was considered a major contributor to the 2016 recession, the first contraction in 25 years. 

Had government and the Central Bank rushed to the IMF and World Bank for emergency loans to help replenish the depleted external reserves—exacerbated by the 2015 presidential election—the recession would have been averted, or the extent of its economic damage lessened. 

What may shape the 2030 economy 

Despite the current economic situation, we argue that the Nigerian economy may emerge, by the end of this decade in the best shape since the return to democracy in 1999. Our claim is based on two grounds:

 

First, the unprecedented infrastructure investments that are expected to come to fruition by 2030. There are three ongoing multi-billion-dollar infrastructure investments in railroads, energy or power generation, and seaports. These projects, IF completed, will free the economy, thus making Nigeria a bastion of economic freedom.  

 

A study by Dozie (Dalhousie University), Roland (Harvard University) and Tite (MIT) found that colonial railroads in Nigeria raised the level of economic prosperity (but mainly in the northern part of) the country with limited pre-rail access to ports for exports and that these effects, despite the railroads no longer being fully operational, persist to date. If the impact of a non-longer-functional rail system endures to date, imagine the extent of the benefits that the current rail projects, if completed, will release.

 

At this juncture, it’s important to consider a caveat on the benefits of the railroads and poverty in the country: the period coinciding with the end of functioning railway service in the country overlapped with the period when the gap in poverty between the poor north and the relatively more prosperous south opened after 1980. A Center for Global Development study on poverty mobility in Nigeria shows that much of the poverty in the country is chronic and that 75% of this is in the north. It, therefore, makes sense to conclude that the railroads to some extent benefited the welfare of the northern residents. We can infer that the north-south poverty divide gap may start to shrink with the resurgence of a functioning rail system in the country.

 

If done right, such public investments in infrastructure can help boost more inclusive growth and create more economic opportunities. The return on infrastructure investment cannot be overemphasised. In addition to boosting public capital stock in the long run, according to estimates, each $100 billion in public infrastructure spending could generate roughly one million jobs. And that each $100 spent on infrastructure raises private-sector output by an average of $17 in the long run.

 

The railroad which includes the $12bn coastal railway connecting cities in the oil-producing region will create up to 200,000 local jobs during construction and about 30,000 permanent posts once the line becomes operational. One of the rail projects links Nigeria’s two commercial capitals: Lagos in the south near the Atlantic Ocean and Kano in the distant north, the region with a comparative advantage in producing food items. This will potentially lower inter-state trade costs: allowing buyers to purchase goods from the cheapest locations, and producers to sell more of what they are best at producing, as has been the case in India, according to a study. 

Another game-changing infrastructure project is the construction of the Trans-Nigerian (and subsequently Trans-Sahara) Gas Pipeline. This is another multi-billion-dollar project, otherwise known as AKK (Ajaokuta-Kaduna-Kano pipeline) crisscrossing the length and breadth of the country while transporting natural gas. Not only will this narrow Nigeria’s energy gap by over three gigawatts of electricity – about 25 per cent of the current supply – to the national grid, but it will also boost domestic natural gas utilisation by unlocking and supplying more than 2 billion cubic feet of gas to the domestic market. In the future, it will facilitate exports to African countries and Europe, thus, diversifying Nigeria’s income source and earning more foreign exchange. 

The gas project will aid the take-off and the operation of two other major industries in the country: (i) the biggest steel mill, known as the Ajaokuta Steel plant, which in turn is expected to provide half a million jobs, directly and indirectly; and (ii) revive and boost the local textile industry which has the potential to generate three million additional jobs. 

The third major infrastructure project is the building of seaports. If completed, this project will remove the port-related bottlenecks that are currently hurting Nigerian businesses. For instance, it is claimed that last year alone, “delayed shipment of 50,000 tons of cashew nuts valued at $300 million is threatening future outputs as the traders' cry of being cash-strapped.” 

The final reason for our optimism about the prospect for the Nigerian economy is the construction of the world’s biggest oil refinery, which is being built by Dangote Ltd and scheduled to start operating in the early part of this decade. The refinery has the potential to raise Nigeria’s external reserves by replacing imports of refined petroleum products that cost about $7 - $10 billion annually, roughly 80 per cent of domestic demand. 

The increase in foreign exchange reserves will then be used to shield and stabilise the value of the local currency, serving as a buffer against future shocks in world oil prices and import-driven inflation. Eventually, the growth in reserves will make available more foreign exchange for the financing of additional infrastructure projects and the importation of capital goods for the manufacturing sector.

 On the prospects of the Dangote refinery in contributing towards the economic success of Nigeria. Findings from two recent studies, one by Ibrahim Alley and one by one of the authors (Dapel) of this article, on the impact of oil price on the Dollar-Naira exchange rate supports the claim that cutting Nigeria’s petrol import bills, driven by Dangote refinery, will improve the value of the Naira.

 

Notwithstanding our hopefulness about the future of the Nigerian economy, we are not numbed to the economic impact of the COVID-led pandemic. There is no question, Nigeria is not immune to the economic crisis. It has been affected through one major channel: declining oil prices, which could cause the country to lose up to $3.6 billion per month in oil revenue. However, these infrastructure projects are not substantially being financed by oil proceeds. They are mainly being bankrolled by external loans. Therefore, the odds that the pandemic may affect the progress and the timely completion of the projects are thin.

We are not hanging our entire optimistic forecast on a group of infrastructure projects. The coming to fruition of these projects and indeed the nation’s economic recovery must be complemented by the government getting a grip on the country’s current security challenges and general improvement in governance in areas of external reserves management, central banking, etc.

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