How Nigeria can escape low-growth trap – FT - BUSINESSDAY
Muhammadu Buhari’s re-election as president of Nigeria is likely to lead to a period of policy continuity in Africa’s most populous state but he could choose to promote massive inward investment into his country, shake up the energy sector and improve education standards to avoid a further economic melt down.
Mr Buhari, who comfortably beat his chief rival, the more pro-business Atiku Abubakar, by 56 per cent to 41 per cent in last month’s vote (albeit on a derisory 36 per cent turnout) has pledged to focus on fighting corruption, improving national security and diversifying the economy in his second four-year term.
While laudable, these issues are the ones Mr Buhari campaigned on before his first victory in 2015. Yet many believe more is needed. Assailed by a fall in oil prices, Nigeria’s key export (as well as, in many observers’ opinion, domestic policy errors), the country is heading for its fourth straight year of declining gross domestic product per capita this year.
The IMF forecasts that the squeeze on real output per head will continue until at least 2023, as shown in the first chart, a painful prospect for a country with GDP per capita of just $2,700.
To avoid this fate, the fund last year called for a package of structural reforms to bolster capital spending, improve the business environment and increase electricity production in what is projected to be the third most populous country in the world by 2050.
Fresh analysis by Renaissance Capital, an emerging markets-focused investment bank, echoes the view that sharp increases in investment and electricity consumption are essential to drive stronger long-term growth — but that improving education is the third leg of a trio of priorities that Mr Buhari should seek to address.
“Diversification from oil dependency is inevitable given how little oil Nigeria exports per capita [$0.30 per day per person], but is impossible given three structural constraints,” said Charles Robertson, chief economist at RenCap.
“To diversify into manufacturing, or, we think, high productivity services, adult literacy in any language needs to rise from 60 per cent in 2015 to 70 per cent, we hope in 2024, and ideally 80 per cent.
“Electricity consumption needs to treble from 139 kWh per person in 2015 to at least 300-500 kWh or preferably 500-1,000 kWh. Investment needs to double from 13 per cent of GDP in 2017 to at least 25 per cent.”
RenCap’s analysis from across the developing world suggests few countries have managed to industrialise while adult literacy remains below 70 per cent.
Nigeria had reached 60 per cent by 2015, according to the UN. Based on a (potentially optimistic) assumption that 90 per cent of those now reaching adulthood attended primary school and are literate, Mr Robertson estimated that Nigeria would reach the 70 per cent threshold by 2024, and would thus struggle before then to diversify its economy beyond oil, which accounts for more than 90 per cent of export revenues and leaves Nigeria at the mercy of external factors outside its control.
In reality, some southern states such as Lagos and Abia have already reached 70 per cent literacy, suggesting they could potentially industrialise.
Nevertheless Mr Robertson called for an adult literacy campaign, both to accelerate progress towards the 70 per cent mark nationally (given a 20-year lag between improving primary schools and reaping any meaningful rewards from a more educated workforce), and to stem any further splintering of a country already riven by regional divides, given how far the north of the country lags behind in adult literacy.
“It would stop the gap widening between north and south Nigeria which under current policies will happen,” he said.
“There is a legacy issue for a northern guy [Mr Buhari hails from Katsina state on the border with Niger] who can help to ensure the divides don’t widen.”
An existing scheme under which many graduates volunteer to work for the government for a year in return for free university education could form the basis for an adult literacy campaign, Mr Robertson argued.
Likewise, RenCap’s analysis suggests few countries industrialise without having adequate energy to power factories and computers. It puts the threshold at around 300kWh per person.
Nigeria’s installed electricity capacity is already above this, at around 420kWh a head, or 13GW, according to the Association of Power Generators.
Unfortunately, the system can only deliver around 3.7GW to 4GW, or very briefly 5GW on a good day, Mr Robertson said.
Consequently it is said that Nigeria, a country whose population may this year pass 200m, distributes and consumes about as much electricity as Edinburgh, a city of 500,000.
The problem appears to stem from a bungled privatisation in 2013, when electricity tariffs were kept at subsidised levels, rather than being raised.
“As a result, the electricity price is too low, and the more electricity the distribution companies supply, the more money they lose,” Mr Robertson said. Hence a significant tariff rise would be needed to rebalance the system and increase production.
The final pillar is higher investment.
The second chart shows what can potentially be achieved. Until 2010, Nigeria enjoyed faster economic growth than Ethiopia, a large African peer that also fails to tick RenCap’s adult literacy and electricity consumption boxes.
But since then Ethiopia has dramatically raised its level of investment as a share of GDP, and it has powered ahead of Nigeria in terms of economic growth, and is expected by the IMF to continue doing so.
Admittedly this was easier for Ethiopia to achieve, in that stringent state controls meant the state could take deposits from the state-owned banks and lend the proceeds at sub-inflation interest rates Nigeria cannot follow this route without becoming far more authoritarian.
However, it would appear to have scope to increase sharply government revenues, which were a desultory 6 per cent of GDP in 2017, comfortably lower than both the level in 2007 and any other major African economy, as the third chart shows.
This could be achieved either via higher taxes (perhaps by bringing some of the informal economy into the formal system) or by cutting fuel subsidies, which eat up $12bn a year.
Any additional government revenues could be marked for investment, although whether Nigeria’s bureaucracy could spend the money as effectively as that of Ethiopia, given the latter’s legacy of central planning and communism, remains to be seen.
Nigeria could also seek more foreign direct investment from private companies, as peers such as Ghana, Zambia and Tanzania have done.
Mr Robertson feared, however, that Nigeria risked deterring foreign investors following recent demands for $20bn in back taxes from oil companies Shell, Chevron, Exxon Mobil, Eni, Total and Equinor, on top of a fine and demand for back taxes from MTN, the South African telecoms group.
The obvious retort to Mr Robertson’s proposed policies is that a package of electricity and fuel price rises and higher taxes, as well as letting the currency fall to its fair value, which he also proposes, would be “an ugly combination at the best of times”, as he readily concedes.
His view, though, is that second-term presidents can afford to take more risks, given they cannot stand for re-election, and that Mr Buhari might focus more on his long-term legacy.
Moreover, with Mr Abubakar receiving only 11m votes in a country with an adult population of around 100m, this “suggests you haven’t got an established strong opposition on the ground that would stand in the way of this”.
Without action, he feared Nigeria’s borrowing costs could start to spiral higher, given that while debt to GDP was a modest 22 per cent as of 2017, the government debt to revenue ratio was a punchy 3.5.
“Government revenues cannot continue to be as low as this, with the gap filled by borrowing,” he said. “That is one thing they will need to do something about in the next four years, if they are not rescued by a doubling of the oil price.”
John Ashbourne, senior emerging markets economist at Capital Economics, agreed that the paucity of government revenues was the biggest problem.
“The revenue service is just not collecting enough money from the non-oil economy. Government spending is 8 per cent of GDP, incredibly low by world standards. That leaves it powerless,” he said. “It’s worse than almost anywhere else, other than a few inland African countries.
Nigeria needs to bring more of the economy into the formal sector, but it would be a painful process for a lot of people.” In the absence of this, Mr Ashbourne said he “would be a little bit worried about the amount of dollar debt the government has taken on in recent years”.
More broadly, he agreed with Mr Robertson’s view that improvements in education, electricity consumption and investment were “very important prerequisites if what you want is the transformation of the economy rather than just more rapid growth”.
In the long term, he believed such structural change was essential in order to diversify an economy largely reliant on oil, agriculture and a smattering of manufacturing.
However, in the very short term, Mr Ashbourne said the biggest concern was the currency, with many businesses unable to access dollars at the official rate of 306 naira, rather than the black market rate, currently around 360.
“It’s inflexible, it’s difficult to do business and get hold of currency, and if anything the central bank is moving to tighten the restrictions,” said Mr Ashbourne, citing a decision this month to add the textiles industry to the lengthy list of sectors that are no longer allowed to buy foreign currency from authorised forex dealers in order to pay overseas suppliers, pushing them into the more expensive black market.
Moreover, he does not believe that the import substitution plan that lies behind the moves to starve many industries of foreign currency is working anyway with, for instance, rice imports continuing to rise despite the government’s attempts to reduce them, while the two-tier currency system also feeds corruption.
Mr Ashbourne instead called for the naira’s fixed dollar peg to be eased, allowing the currency to converge with the black market rate “so it acts as a bit of a shock absorber for the economy”.
Higher interest rates, while “painful”, are also necessary to bring inflation, currently 11.4 per cent, under control. Unlike Mr Robertson, though, he saw little chance of Mr Buhari changing tack or taking more risks in his second term.
“I think that the policies that have been advanced in his first term would be what he wants to do [in his second],” he said.