With a population of about 173 million people, Nigeria is the largest country in Africa and accounts for 47% of West Africa’s population. It is also the biggest oil exporter in Africa, with the largest natural gas reserves in the continent. Given these large reserves of human and natural resources, the country has significant potential to build a prosperous economy characterized by rapid economic growth that can significantly reduce poverty, inequality and improve standards of living of the population through better access to and quality of health care, education and infrastructure services.
Since 1999, Nigeria embarked on an ambitious reform agenda on several fronts. The most far reaching of those was to base the budget on a conservative reference price for oil, with an excess saved in a special, Excess Crude Account (ECA). Nigeria was among the first countries to adopt and implement the Extractive Industries Transparency Initiative (EITI) to improve governance in the oil sector. The NEITI Act was passed into law in 2007, and the country became EITI compliant in 2011. The power sector reform initiative was launched in 2005, recognizing that improving power sector performance is critical to address development challenges. The challenging process of implementing reforms was revitalized through a Roadmap developed in 2010, which clearly outlines the government’s strategy and actions for implementing comprehensive power sector reforms to expand supply, open the door to private investment and address some of the chronic sector issues hampering improvement of service delivery. The government has gradually implemented the Road Map over the past several years. To date, over 10 generation and distribution companies were successfully privatized in 2014 while the transmission company was placed under a management contract awarded to a reputable international company selected on a competitive basis.
During the past decade, Nigeria has registered strong economic growth averaging 6.5%. The government has maintained prudent fiscal policy management as witnessed by a declining fiscal deficit and low level of public sector debt. Monetary policy has been focused on stabilizing the Naira and thereby contributing to a decline in inflation to single digit in recent years.
The Nigerian economy continued to experience robust growth in 2014 largely driven by the non-oil sector while oil production declined. Real GDP is estimated to have grown by 6.1% owing to continued strong performance mainly in services, but also industry (apart from oil mining) and agriculture. The oil sector was in decline, albeit at a slower rate than in the previous year. Oil and gas GDP was estimated to have declined by 1.3%, relative to a decline of 13.1% in 2013. The decline in oil GDP was due to continued oil theft in the Niger Delta region of the country and the consequent disruptive effects, which induced major oil companies to shut down some of their pipelines at certain periods during the year.
The sharp decline in oil prices since the third quarter of 2014 has posed major challenges to the country’s external balance and public finances. Oil accounts for close to 90% of exports and roughly 75% of the country’s consolidated budgetary revenues. The terms of trade shock put strong downward pressure on the national currency, and can be associated with a recent 30% depreciation of the Naira and a decline in gross foreign reserves from $39 billion in July 2014 to just under $30 billion in March 2015. Similarly, oil revenues accruable to the Federation Account belonging to all tiers of government were 6% below budget towards the end of the 2014 fiscal year. The country’s fiscal reserves in the Excess Crude Account (ECA) had declined to $2.1 billion by December 2014, down from $4.1 billion in August 2014. Declines in budgetary revenues have created difficulties for the Federal and State budgets in late 2014 and early 2015. The federal government has cut planned capital spending in the order of 60%, and some States have not managed to finance fully wages and pensions. Despite these difficulties, the political commitment to a consolidated budget deficit of less than 2% of GDP remains.
Inflationary pressures have moderated in the last few years; with year-on-year inflation staying within the single digit bracket since January 2013. Both the core and food components have contributed to this decline. While headline inflation declined from 12.2% at end 2012 to 8.1% at end-2014, core inflation dropped from 13.7% to 6.2% within the same period while food inflation dropped from 10.2 to 9.2%. This trend in inflation is in line with the monetary authority’s goal of single digit inflation and has been helped by buoyant agricultural production of staple food crops. While the depreciation of the Naira has increased the pace of inflation temporarily, there are no other major sources of inflationary pressures in Nigeria at present.
Compared to 2010, poverty has declined over the last five years by about 2.3%. The share of people living below $1.25 PPP poverty line declined by an average 0.5% per year from 32.7% in 2010 to 30.4 in 2015. Growth has been an important driver of poverty reduction, yet at this rate of reduction, due to the rapid population growth close to 3%, the actual number of the poor may continue to increase. According to our estimates, their number would increase from about 61 in 2010 to 67 million by 2016.
National figures hide rather diverse regional patterns. The GDP numbers indicate that telecommunications, real estate, manufacturing, construction, entertainment increased their shares of GDP. Most of them are labor intensive sectors that have generated a significant amount of new jobs and contributed to poverty reduction. However, at present these gains were mainly concentrated in urban areas of South West regions. Based on recent projections that indicate a reduction of urban poverty of 4% between 2010 and 2013, we can expect the trend will continue over the next years provided that the growth of these new sectors offsets the negative effects of oil revenues decline.
The successful outcome of the Presidential and Governorship elections held respectively during March 28-29 and April 11 enhances Nigeria’s macroeconomic prospects, going forward. In spite of earlier measures to deal with emerging macroeconomic challenges, such as the depreciation of the exchange rate in response to lower oil prices, fears of possible conflict or instability surrounding the elections cast a cloud of uncertainty over prospects for higher investment and placed continued pressure on reserves. Given that these fears did not materialize, the balance of payments pressures are likely to subside in the near future. The Central Bank took an important measure in February that unified the official and market (interbank) exchange rate in the country. This will also have a positive effect on Federal and State budgetary revenues. Part of the sharp fall in revenues in late 2014 and early 2015 can be attributed to the fact that the Federation Account (Government) was compelled to sell its oil dollars at a suppressed official exchange rate of 155 Naira to the dollar. Nevertheless, much lower oil prices will continue to pose strong challenges for public finance at all levels of Government during the year, and will also represent a major constraint on the ability of the new Federal Government to launch some of its ambitious programs.
Nigeria’s population is made up of about 200 ethnic groups, 500 indigenous languages, and two major religions ― Islam and Christianity. The largest ethnic groups are the Hausa-Fulani in the North, the Igbo in the Southeast, and the Yoruba in the Southwest. The fragmentation of Nigeria’s geographical, ethnic and cultural identity lines is effectively balanced by the country’s federal structure and the strong emphasis of the federal government on representing six geopolitical zones and different ethnic and cultural identities. Though Nigeria’s socio-political environment is fairly stable, there are pockets of instability in some parts of the country.
The fifth consecutive national elections in March and April 2015 was largely successfully conducted, further consolidating democratic rule which began in 1999. The elections were more peaceful compared to the fourth elections held in 2011 signified substantial progress in electoral and democratic development, and were characterized by observers as freest and fairest in the country's election history. There were some pockets of violence during the governorship elections in some states; however, there have been calls from various stakeholders to resolve elections disputes through the country’s judiciary system for resolute actions. The successful general elections in 2015 is largely credited to INEC and the leadership of the Presidential candidates.
Internationally, Nigeria continues to be a leading player in the African Union, the New Partnership for Africa’s Development (NEPAD), and in the Economic Community of West African States (ECOWAS).
In the short term, Nigeria will need to solidify national unity and maintain / expand key public services in the face of less revenues. The country has received positive momentum from the elections, but still faces strong regional challenges, particularly in the Niger Delta and the North. Niger Delta militants have threatened a possible resumption of their disruptive activities under a Buhari presidency, and this will need to be defused. In the North East, Boko Haram remains a threat, and millions of displaced persons require assistance. There has been major destruction of infrastructure along with the loss of lives and impoverishment in this region. The new government will have a difficult time in the short term financing the major programs that it wants to roll out.
Accelerating the creation of productive jobs through private sector growth and improvements in education (skills) remains the major medium-term challenge. So far, the pace of job creation has been inadequate, leading to increasing frustration among underemployed Nigerian youth. In many parts of the North, basic primary and secondary education is still the exception rather than the rule. The growth agglomeration in Lagos State has been the major positive economic development in Nigeria, bringing millions out of poverty in recent years. Nigeria needs to ignite similar growth in other major cities, as well as increase productivity in rural areas.
Despite a strong economic track record, poverty is significant, and reducing it will require strong non-oil growth and a focus on human development. Constraints to growth, such as the investment climate; infrastructure, incentives and policies affecting agricultural productivity as well as quality, and relevance of tertiary education have been identified. In spite of successful initiatives in human development, Nigeria may not be on track for meeting most of the Millennium Development Goals (MDGs). Underpinning these challenges is the core issue of governance, in particular, at the state level. Fiscal decentralization provides 36 states and 774 local governments considerable policy autonomy, control of 50% of government revenues, and responsibility for delivery of public services. Capacity is weak in most states, and improving governance will be a long term process.
Last Updated: Apr 28, 2015