Four years on from the first annual contraction in economic activity in over three decades, the odds are high, that Nigeria’s economy will experience another full-year decline after going into a technical recession in Q3 2020.
Across the 2016 recession and ongoing 2020 episode, Nigeria’s economy faced exogenous shocks, a sharp drop in oil prices (which induced recessionary conditions across all major oil exporters) in the former, and the COVID-19 outbreak which has pushed the world economy into a recession. Following the discovery of proven vaccine therapies, expert commentary, and analyst prognosis, hinged on the assumption that a successful roll-out of COVID-19 vaccination programs across countries, is for a V-shaped economic recovery.
For Nigeria, this rebound will be towards an economic growth number between 2-3 percent which implies little change in individual fortunes as real GDP growth roughly matches population growth. Though the recent #ENDSARS protests could be naively presented as frustration over excessive police brutality, those protests were essentially about anger over the inability of political leadership and governance to deliver seismic improvements in the socio-economic welfare of the average Nigerian.
Alongside growing concerns over the spate of insecurity, the time for the Muhammadu Buhari administration to act decisively is now. Restoring optimism over Nigeria’s economic prospects requires pushing growth back towards either the mid-to-high single-digit levels observed in the era between 2000 and 2010 or uncharted waters of double-digit expansions. This article looks to set out broad ideas on how to revamp Nigeria’s economic growth engine.
A trip down memory lane
Looking back at history, following the return to democratic rule in 1999, Nigeria’s economy expanded at the fastest pace of growth since 1980, with an average growth of 8.4% during the Obasanjo administration (1999-2007) which decelerated to 6% under the Yaradua/Jonathan era (2007-2015) before a drop-off to 2-3% under the Buhari administration (2016-date). Growth over the democratic era (average: +6%) is a significant uplift from the lost decade during the 1990s and the volatile 1980s period under military rule when Nigeria tried to reform in response to the collapse in oil prices.
Figure 1: Economic Growth 1981-2020e
Source: NBS, Authors calculation
So what factors account for the marked improvement between the post-1999 era and the prior two decades? Looking at sector data for a start, economic growth in post-1999 period revolved around the traction in the non-oil sector which effectively boiled down to rapid expansion across three sub-components: services, trade, and agriculture. The key pillar of uplift in Services GDP was telecommunications GDP which went from 0.1% of the economy in 2000 to 10.9% in 2019. To situate this properly, Nigeria’s telecommunications sector is now larger than the oil sector from effectively ground zero in 2000 and the gains here entirely reflect the outcome of the decision in 2001 to liberalize the sector by giving ground to private capital.
The move raised the number of active lines in Nigeria from a little over 100k lines in 2000 to 208million lines at the end of October 2020. The lesson here is that Nigeria’s government in 2001 stopped trying to waste meagre resources in a feeble attempt at investing in telecommunications, under an inefficient monopoly (NITEL), and allowed private capital (foreign and local) to sort out the sector.
For trade GDP, the underlying drivers of the expansion were more fortuitous and less deliberate as thanks to a strong run in oil prices, starting in 2003, Nigeria’s external accounts underwent a sizable transformation with the re-emergence of a large current accounts surplus which visibly boosted FX reserves.
Alongside, a relatively weaker exchange rate in REER terms, the improvement in FX reserves allowed for a more liberal approach to trade policy, with the relaxation of many hitherto restrictions on imports. Accordingly, trade GDP expanded from 11-12% of GDP in the 1990s to 15-16%. On the agriculture pillar of the growth uplift, where an expansion was observed in the area under cultivation, my thesis is that better farm input sourcing and demand from a resurgent manufacturing sector helped drive improvements.
Noteworthy is that contribution from the oil sector was minimal (bar 2000 and 2002) reflecting static oil production despite much higher oil prices, including an unmatched era of USD100/bbl. between 2010 and 2014. The lack of progress on expanding oil production is a testament to the lack of political will towards reforming oil policy to drive higher private investment. In summary, reforms which boosted private investment in telecommunications, less restrictive trade policies occasioned by improvement in FX receipts, and possibly better farm input sourcing underpinned the strong growth in the Obasanjo years and well into the Yar’adua/Jonathan era.
Figure 2: Decomposition by Sector
However, despite the strong growth over the Obasanjo era, many Nigerians struggled to connect with this reality, and debates over growing income inequality and poverty rates dominate public discourse. Looking at more structural data on growth drivers uncover some clues as to why. In elementary economics, there are four factors of production: labour, land, capital, and entrepreneurship. To simplify things, economists often distill these factors into two: labour and capital. Looking at the data, Nigeria’s economy is dominated by capital intensive sectors which account for over two-thirds of output which implies that more of the national income is captured by owners of capital despite our high population.
As consumption expenditure dominates aggregate spending, the mismatch between GDP by income and GDP by expenditure naturally cascades into high unemployment rates, stark income inequality (as owners of capital get more share of income), naturally low aggregative savings, and low tax collection. In short, our GDP comes from sectors with a great need of our least abundant resource (capital) but with less use of our most abundant resource (labour). Growth can never be inclusive under these settings.
Figure 3: Decomposition of GDP by Income
So what changed for the Buhari government?
For a start after over ten years of running at double-digit growth, Nigeria’s voice-driven telecom revolution appears to have its peak and maturation has set in with teledensity above 100%. Most people who need a phone already have one! This means that the marginal contribution of telecommunications GDP to overall growth would be minimal. Secondly, the collapse in oil prices over the 2014-16 era has resulted in a return to trade-restrictive policies (aka import demand management) that characterized the 1980s and 1990s and which worked to limit growth in trade GDP (20% of the economy) pushing the sector into recession.
Lastly, while agriculture GDP remains in growth, a myriad of factors: insecurity, input supply chain issues, and the perennial issues of weak irrigation, logistic, and storage infrastructure bottlenecks continue to repress growth. Throw in the odd shocks to oil production from militant attacks in 2016 and OPEC induced shutdowns in 2020 and a perfect storm of forces have imposed a deceleration in growth. The journey to sub-par growth began with the deliberate or otherwise lukewarm appetite by succeeding governments since 2007 to embrace greater liberalization of the Nigerian economy. As such growth has naturally become less resilient.
In response to the initial oil price shock, the Buhari government announced moves to stimulate aggregate demand via increased government spending. However, this approach while theoretically appealing evades the points uncovered by the long history of reform: each crisis is an opportunity to grow the private sector not expand the public one. In any case, the Nigerian government is simply too small to move much as, despite successive records in nominal budgets, government spending in real terms is lower than at the start of the last decade.
Figure 4: Government Spending (% of Real GDP)
Attempts to spend our way out of the crisis naturally implies more borrowings given the limited ability of the Nigerian state to mobilise tax revenues, which will only constrain the fiscal space for future governments. Our low tax revenues are a function of the structure of the economy, which as we saw earlier places a clear emphasis on capital-intensive sectors vs. labor-intensive sectors which ensures high labour unemployment and limited income taxes. The bulwark of tax revenues in most countries is personal income taxes vs. corporation taxes. Given this backdrop any tax mobilization drives will merely entail marginal improvements, seismic growth will remain elusive.
The sojourn through Nigeria’s economic history reveals few insights as to what is required to move growth up several gears.
Firstly, growth is unlocked when capital (private or public) and management expertise is deployed towards expanding the capacity of a sector to deliver more goods and services to either Nigerians or the rest of the world. Given the perennial limited resource constraints facing Nigeria’s government due to a low tax base, a function of underlying economic structure (little to do about tax evasion or avoidance), the big growth outcomes (read telecoms) occurred when government gave up its strategy of investing puny amounts in a sector and allowed private capital (foreign and/or local) and their focus for making money to do the heavy lifting. With adequate regulation as in the telecoms case, the gains can astronomical and focal sectors quickly become net positive for tax and employment as the telecommunications sector is now a large contributor to tax receipts and employer of labour.
Secondly, Nigeria’s most abundant resource is low-skilled labour which as was the case with China (and unlike India which had a higher share of educated citizens) is more suited for industrialization vs. a services dominated economy. However, Nigeria’s present economic structure is dominated by capital intensive sectors with limited requirements for low-skilled labour.
A progression to a services-led economy will lead to the exclusion of a large segment of society which has long-term implications for social unrest. Accordingly, the policy can and should look to re-focus economic activities towards the absorption of the large mass of low-skilled labour to place economic growth on a more sustainable footing. This path obviously runs through agriculture and manufacturing. This does not mean taking the eye off services, as a friend would say, you can run and chew gum at the same time. It just means we know where the strategic imperative lies.
Thirdly, Nigeria’s external sector is highly vulnerable to oil price shocks which propagate themselves across the economy in reduced consumption and trading activity and inflation. Solving this problem entails ensuring food independence across selected tubers and grains, to a large extent, and given Nigeria’s oil resources, energy independence to a lesser extent.
To use the language of differential calculus, these two are necessary conditions, a sufficient condition for sustainably sorting external sector vulnerabilities requires not just food and energy independence but significant ramp-up in non-oil manufacturing exports to which potential exists. While scope exists for increased service exports given Nigeria’s financial and growing technology sector, boosting non-manufacturing exports requires over the near term a focused industrial policy targeting competitive key agro-allied and low-valued manufacturing products.
Given the last item, a key goal of economic policy should be towards raising the competitiveness of Nigeria’s non-oil exports which will require significant investment in infrastructure (power and transport) to lower production costs, improved security within Nigeria’s borders, lower capital costs, and let’s say an ‘appropriately aligned’ real exchange rate that seeks to exploit the geographic realities of being surrounded by CFA franc currencies
Four Big Economic Reform Ideas: Go big or go home
- Privatization & Liberalization of Nigeria’s logistics sector (rail, road, ports, airports & post): if the 2000s are to be characterized by reforms of telecommunications and the 2010s as the era of power sector reforms, then the natural progression is to decisively address big bang reforms to Nigeria’s logistics and transportation sector. Policy focus must be daring and ambitious with a drive to ensure to the extent the permissible frictionless movement of goods and services between the various parts of Nigeria using the most efficient means possible.
- Private financed Infrastructure delivery and management but public ownership: The FGN is clearly at the limits of fiscal abilities and realistically, increasing fiscal support for infrastructure delivery will translate to unsustainable public debt levels. Rather than pushing leverage to unsustainable levels for projects where there is a weak political will to impose cost-reflective tolls, the FGN should simply package these projects into dedicated private infrastructure funds which retain public ownership but provide long-term concession arrangements. Target the big Nigerian infrastructure projects: rail, ports, key arterial roads, and bridges.
- A food-centric industrial and trade policy: As noted earlier, fixing Nigeria’s external account vulnerabilities entails ensuring food independence. Addressing this entails a more targeted attempt at raising aggregate output and yields on key food crops (grain, tuber), animal products (milk, meat, poultry, fish) interspersed with selected cash crops (such as cashew for example) to provide the right blend. Alongside, work on infrastructure, the policy should focus on driving large scale commercial investing alongside well-designed community out-grower programs for target commodities. Gains from here are crucial towards driving down food prices.
Given the downward outlook for oil prices (due to the secular shift called climate change), the outlook for Nigeria’s oil sector is bleak. As such Nigeria will need to find a credible solution to the external account imbalance problem that dogged growth between the 1980s – 1990s and since 2016. Given our population size and high youth population, Nigeria needs a new plan for growth. As in the early 2000s, this requires another big push towards cultivating private capital into underserved sectors to move the wheel of growth onto a new plane.
The subtext for this piece is drawn from a book of a similar title by Ben Bernanke which chronicles the logic behind his decision at the peak of the global financial crisis to act ignoring the armchair idealists. Seizing the urgency of the times requires the adoption of bold reforms that will attract and inject private capital with the promise of efficient management into dormant sectors of the economy with government taking the backseat of regulation.
The era of the dogma of waiting for the government to find money to sort out the economy is over. While a shift towards decentralization is politically appealing, the perceived economic gains are likely to be illusionary. To move the economic needle, emphasis must be on greater private sector involvement in the management of large parts of the economy (most sectors outside of basic education, primary healthcare, and defence). The big policy reforms required are a mix of privatization, liberalization, and commercialization of large sectors of the economy.
“There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better, for worse, as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried.” – Ralph Waldo Emerson (Self Reliance)
Written by Wale Okunrinboye
What banks can do to improve Real Sector Lending in 2021
To navigate the nation’s economy from oil, banks will have to pay more attention to real sector lending in 2021.
The beginning of the financial year for Nigerian Banks has become a comparison of which bank closed with the largest balance sheet for the previous year; a simulation of which one of the tier-1 banks would outdo the others in the $1billion dollars profit pursuit, and which bank would pay the most dividends to its shareholders.
Every so often, financial analysts employ the use of important indices to decipher areas where these financial institutions need to shore up their numbers and employ their resources to align with the fiscal and monetary policies of the government. These Analysts are usually ignored. Consequently, is the poor policy implementation of the CBN and an ever-widening chasm between the fortunes of Nigerian banks and the economy in which they operate.
A major area where most analysts have faulted Nigerian banks in recent times is in lending – lending to the real sector of the economy.
The expectation and the reality
On July 3rd 2019, in a letter to all banks, the CBN through its Director of Banking Supervision announced “REGULATORY MEASURES TO IMPROVE LENDING TO THE REAL SECTOR OF THE NIGERIAN ECONOMY”. A laudable directive that was to see banks maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, and stiff sanctions of additional CRR of 50% of the lending shortfall will be levied against unyielding banks.
This regulation fuelled the expectation of substantial gains in the real sector given the relative availability of funds. Banks jostled and made a show of dishing out these loans, but as records of CRR debits for LDR failure began to hit the news, it became apparent that most banks were still stuck in their reality of doing business in Nigeria.
The reality being that Nigerian Banks have managed to stay amongst the most profitable banks in Sub-Saharan Africa while largely ignoring the real sector. A review of the earnings of 10 top Nigerian Banks between 2009 and 2019 showed that a sizable portion of their profit growth came from non-client driven activities, even as income from core banking activities of these banks shrank from accounting for 85% of their profits in 2009 to 65% of their increasing profit in 2019.
Perhaps this goes a long way to explain the 2020 H1 profits posted by these banks amid a pandemic and looming recession.
A case of once-beaten?
In fairness, Nigerian banks already got their fingers burnt in the real sector oven once before, and the existence of AMCON is a constant reminder of this fact. The Banks’ attempts to adhere to the new regulation most likely contributed to a rise in the industry’s NPL in H1 2020 notwithstanding CBN’s best intentions with the loan restructuring freedom banks were given to protect themselves from the crippling effect of the pandemic. There doesn’t seem to be a way out for Nigerian banks.
Navigating the waters of necessity
With all the modernization around the banking process, banking at its root has remained unchanged over the centuries. It still entails receiving from areas of surplus to fix deficits. The real sector of the Nigerian economy has been in severe deficit as the nation directed its attention, and finances, to the oil sector which has been the sustenance of a potentially diverse economy like ours for far too long.
If Nigerian banks are to navigate the nation’s economy from oil before the rest of the world completes the move, then they will have to pay more attention to real sector lending in 2021. This can be done through the following:
- Understanding the necessity
Real Sector lending should no longer be viewed by banks through the lens of meeting regulatory requirements only, their importance to the Banks’ balance sheet should be understood. In the near future, it is unlikely that banks will be unable to earn as much from derivatives as uncertainty caused by the pandemic continues to cause spectacular swings in some markets coupled with a wider acceptance of crypto over fiat which may shrink some markets.
Also, further ignoring the real sector market by commercial banks inadvertently means that Fintechs and their MFBs continue to ramp up the profits in these markets, and may someday be big enough to compete favorably with the commercial banks. Mergers and acquisitions will hasten this process.
- Having an action plan
As an action plan, real sector lending (not just the creation of risk assets) should be incorporated into the KPIs of relevant members of staff. Also, the banks should actively pursue sectors of the economy where they have comparative advantage by virtue of their expertise, customer base, technological advantage and/or branch network.
- Using segmentation
Too much emphasis has been placed on “value chain” making banks feel the need to play in all aspects of a business. They practically provide funds for all aspects of the same business- from manufacturing to distributorship. Whilst an argument could be made on the need for synergy and the relative ease of monitoring value chain businesses, this type of concentration of funds puts banks at higher risk of loss when a part of the value chain defaults. However, focusing on a segment of a business could have its own benefits in limiting exposure.
- Revisiting VC, PPP and Loan syndication
Perhaps the next big business will not be a conventional textile mill nor will it be distributorship of FMCGs. Nigerian banks need to have a foothold in the businesses of the future by adopting VC models of investments and fundraising for these business ideas. Public-private partnership and Loan syndication should not also be limited to development of social amenities but to funding businesses in the real sector.
The real sector lending drive of the CBN has shown promise since inception, increasing the level of industry gross credit by N829b in its first few months between May and Sept 2019. The introduction of the GSI by the CBN from August 2020 is also a step in the right direction to protect banks from an increased default rate of personal loans.
Nonetheless, these policies will not upturn the Nigerian economy if Nigerian banks continue to treat real sector lending as an occupational hazard rather than the occupation itself.
A critical analysis of the N1.163 trillion Lagos State 2021 budget
To fund the 2021 budget, Lagos State says more companies will remit taxes in 2021.
Lagos State thrives as the economic backbone of Nigeria and with its GDP rivaling African nations, it is no surprise that what happens in Lagos, affects Nigeria in its entirety.
Following the impact of the COVID-19 pandemic, Lagos State had quite naturally reduced its expectations for the year 2020. From a proposed budget of N1.169 trillion, the State reviewed it downwards by 21% to N920.5 billion – out of which it was still able to attain an overall performance of 86%.
Total revenue alone was 93% of projections and this is despite the pandemic, the additional costs of the #EndSARS protests, as well as the other disruptions that followed. As the Lagos State Commissioner for Economic Planning & Budget, Sam Egube puts it, ‘excuses build bridges to nowhere.’
That said, a 2021 budget of N1.163 trillion is nothing short of audacious, particularly considering the revisions made to last year’s projections. Signed into law by the Governor on 31st December 2020, it was prepared to first prioritize the completion of all on-going projects in the State and then to meet a series of objectives from employment creation, increased investment in human capital development, i.e. education and healthcare, deployment of functional technology in public services, amongst others.
While the budget succinctly themed, “Rekindled Hope” and the many proclamations of the T.H.E.M.E.S agenda are remarkable, revealing a desire to reach for more, there is ardent need to interrogate the sources that make up the budget, what they are projected to be used for, and the possible limitations between the lines.
Funding the budget and the debt quagmire
The total budget of N1.163 trillion is expected to be funded from a total revenue estimate of N971.028 billion, made up of Total Internally Generated Revenue (TIGR) of N723.817 billion, capital receipts at N71.811 billion, and federal transfers at N175.400 billion.
While the figures for Federal transfers and receipts are said to have been conservative, the breakdown assumes that a key part of the budget is expected to come from the State’s Internally Generated Revenue (IGR).
During the official budget speech, the Commissioner of the Lagos State Ministry of Economic Planning and Budget had explained that Lagos State Internal Revenue Service (LIRS) performance is expected to increase by 30% in 2021. On one hand, systems such as simpler collection systems are being tightened to boost revenue; on the other, more companies will remit taxes with many tax holidays from 2020 taken care of in the past year.
They also expect to harness the huge revenue-generating opportunities in the State particularly in the real estate and transportation sectors while also leveraging data to uncover available opportunities. Following the 21% revision of the past year, particularly with many of the same challenges still at the fore, the assumptions for the projected revenue can really only be proven by their delivery.
The deficit of N192.494 billion is projected to be funded by a combination of both internal and external loans. Now, while borrowings of N192.5 billion compared to projected IGR of N723.8 billion is relatively fair as the State is projecting to internally generate almost 4 times of its proposed borrowings, the underlying debt challenge of the nation should naturally still cause a few raised eyebrows for the additional debt – even though it is projected to be used in its totality to fund capital projects. The ongoing instability in the FX market, as well as the increasing debt burden this will pose, are some of the main points of consideration with the budget deficit financing.
Speaking at the “Facts-Behind-The-Figures Media Roundtable,” Commissioner for the Lagos State Ministry of Economic Planning and Budget, Sam Egbe explained that most of the loans taken will be in Naira in order to protect the State from FX risks as much as possible. The Commissioner of Finance, Dr. Rabiu Olowo, had also explained that the loans to be taken are well within fiscal sustainability levels.
He explained that “We cannot depend on our own internally generated revenue or the federal transfer that we get from the federal government if we want the kind of development that Lagos needs at this time. For this, there are two main benchmarks that we follow. We have the federal debt management office benchmark of 30% debt to revenue, and of course the World Bank benchmark which is 40%. We closed the year 2020 at 19.8% and for the year 2021. While we project about 22% debt to revenue ratio, we are still within both benchmarks.”
The deficit financing of N192.5 billion is proposed to be raised through local capital market bonds of N100 billion, external loans of about N55 billion, and internal loans of about 37.5 billion.
Priority sectorial allocation
The total expenditure for the year 2021 is broken down into capital and recurrent expenditure at N702.9335 billion and N460.587 billion respectively, a ratio of 60:40. While there could be arguments as to the sustainability of the allocations given the infrastructural gap in the State, there are a few extra-budgetary strategies for funding projects that the government put in place to bridge the gaps.
Some of them include Private Sector Infrastructural partnerships, bespoke financing terms, and structured (also PPP) critical infrastructure as used for the blue and red rail as well as the metro broadband fibre ring. The argument is that the State can deliver more than can be captured in the budget.
The allocation breakdown for the total N1.163 billion based on the Classification of Functions of Government (COFOG) also reveals an upward increase in Economic affairs (consisting of Agriculture, Commerce, Tourism, Art & Culture, Energy and Mineral Resources, Transportation, Infrastructure and Waterfront) from 26.55% of the budget in 2020 allocation to 29.35% at N341.4 billion in 2021.
This implies that opportunities could exist in these areas for Lagosians and international investors willing to produce the value the State requires to meet its objectives. While the sectorial allocation isn’t bereft of limitations as indeed it really cannot solve all the problems at the same time, major considerations should be around its successful implementation and the government’s continued transparency to Lagosians in economic happenings.
The Nigerian insurance sector; repositioning for efficiency
For the industry to thrive, the regulators may also need to deepen micro insurers’ activities in the Nigerian economy.
The Nigerian Insurance sector is critical to propelling income equality and reducing the poverty level of any society, but the industry’s performance has continued to drag amid many factors, such as; low underwriting capacity of players, lack of trust by consumers, poverty and the inadequacy of distribution infrastructure.
These factors have jointly contributed to the abysmal level of insurance penetration – the proportion of insurance business to the gross domestic product over the years.
The Nigerian Insurance sector remains largely underdeveloped with Insurance penetration still at c.0.5% to GDP. The sector which contracted by 18.67% y/y in the Q3 GDP report released by the National Bureau of Statistics (NBS) is set for a deep recession in 2020.
The covid-19 pandemic effect has increased health, travel, and business disruption claims. These claims, coupled with underwriters’ inability to write risks in Q2 and the tapered household income should amplify the sector’s expected recession.
In a bid to rid the sector of these known drags, the National Insurance Commission (NAICOM), the primary regulator in the industry launched its recapitalization exercise in May 2019. The plan’s proponents intend to improve the industry’s minimum paid-up capital in each business segment, thereby solving premium flight issues that have continued to plague the industry.
Following the lingering impact of coronavirus, the deadline was adjusted from June 2020 to December 2020 to implement Phase I of the project while the deadline for the second phase’s performance was moved to September 2021. Some players have called for an extension of the regulator’s deadline given the impact of Covid-19 on their businesses.
However, most of the industry’s bellwethers have entirely shored-up their minimum paid-up capital to the required level. In our view, firms that are yet to meet the required capital threshold may likely lose out on the opportunities available on the supply side of the market.
Furthermore, for the industry to thrive, the regulators may also need to deepen micro insurers’ activities in the Nigerian economy.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.