Nigeria - Economy
Nigeria is - for the moment — a symbol of how fast and far low oil prices have dragged emerging markets down. Gasoline shortages occurred regularly as the country struggled to make prompt payments to importers. Despite pumping 1.8 million barrels of oil a day, Nigeria imports most of its fuel as its outdated refineries are often out of action. Nigeria was in talks with oil majors Chevron, France’s Total and Italy’s ENI to get help revamping the ailing refineries.
Following the lead of other oil-producing countries like Venezuela and Angola, on 20 June 2016 Nigeria removed the peg of its currency to the US dollar. This is the first time the west African country has floated its currency but the country decided that the move was necessary in response to a growing shortage of foreign exchange created by slumping oil prices. The naira was pegged to between 197 and 199 naira for one US dollar for the past 15 months. In early-morning trading, its value fell to 270 for one US dollar.
Cash-strapped state oil firm NNPC reported a $1.3 billion loss in 2015, forcing it to increase its direct gasoline imports to more than 70 percent of the country’s needs versus about half previously. Nigeria deployed police and soldiers to gasoline stations to maintain order.
By 2016 the Nigerian economy faced substantial challenges. Low oil prices, a lengthy period of policy uncertainty, and ongoing security concerns, have produced: a widening fiscal gap with salary arrears at state and local governments; a weaker external current account and the introduction of exchange restrictions as international reserves declined; lower financial sector resilience; and sharply slower growth. These shocks have compounded an already challenging development environment—inadequate infrastructure, high unemployment (9.9 percent) and a high poverty rate (above 50 percent in the northern states).
While the non-oil sector accounted for 90 percent of GDP, the oil sector played a central role in the economy. Lower oil prices significantly affected the fiscal and external accounts, decimating government revenues to just 7.8 percent of GDP and resulting in the doubling of the general government deficit to about 3.7 percent of GDP in 2015. Exports dropped about 40 percent in 2015, pushing the current account from a surplus of 0.2 percent of GDP to a deficit projected at 2.4 percent of GDP. With foreign portfolio inflows slowing significantly, reserves fell to $28.3 billion at end-2015.
Exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies. Coupled with fuel shortages in the first half of the year and lower investor confidence, growth slowed sharply from 6.3 percent in 2014 to an estimated 2.7 percent in 2015, weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty. Inflation increased to 9.6 percent in January (up from 7.9 percent in December, 2014), above the CBN’s medium-term target range of 6–9 percent.
The recovery in economic activity was likely to be modest over the medium term, but with significant downside risks. Growth in 2016 was expected to decline further to 2.3 percent, with non-oil sector growth projected to slow from 3.6 percent in 2015 to 3.1 percent in 2016 before recovering to 3.5 percent in 2017, based on the results of policies under implementation — particularly in the oil sector—as well as an improvement in the terms of trade. The general government deficit is projected to widen somewhat in 2016 before improving in 2017, while the external current account deficit is likely to worsen further.
Nigeria overtook South Africa as the continent's largest economy with a GDP of $453 billion in 2012. The figure is based on a long-overdue rebasing of Nigeria's gross domestic product to reflect changes in the structure of production and consumption, and compares with South Africa's 2012 result of $384 billion.
Its very large population, together with endemic corruption, long periods of military misrule and the long-term mismanagement of resources has meant that Nigeria's socio-economic indicators are very low. Africa‘s second largest economy is a bundle of extreme contradictions; with billions of dollars in annual oil revenue on one end and pervasive poverty for most of its 150 million people on the other. Relative political stability since 1999 has delivered some reform and regulatory initiatives to correct huge and long-standing macroeconomic disparities, yet the country remains overwhelmed by persistently dismal indicators and human development indices. Nigeria‘s current per capita GDP of $1,418 ranks it below much smaller African economies like Sudan, Congo and Swaziland. The UNDP poverty survey of 108 developing nations placed the country at the 80th position, below Rwanda and Malawi.
Given the scale of petro-revenues and the potential of Nigeria’s natural resources, the oligarchy’s failure to address the most minimal of the majority’s basic human needs can be construed as criminal negligence. The World Bank ranks Nigeria as among the world’s poorest countries, with the vast majority of the population living on less than $2 per day. Only 40 percent of Nigerians have access to electricity. Most citizens suffer from grossly inadequate state services.
In the absence of coherent government programs, the major multinational oil companies have launched their own community development programs. The Niger Delta Development Commission (NDDC) was created to help spur economic and social development in the region, but it is widely perceived as ineffective and non-transparent. The government has promoted foreign investment and encouraged reforms in these and other areas, but the investment climate remains daunting to all but the most determined. Most critical for the country's future is Nigeria's land tenure system which does not encourage long-term investment in technology or modern production methods and does not inspire the availability of rural credit.
Nigeria continues to face intense pressure to accept multibillion dollar loans for railroads, power plants, roads, and other infrastructure. About 65% of the economically active population is serviced by the informal financial sector, including microfinance institutions, moneylenders, friends, relatives, and credit unions. Nigeria has made progress toward establishing a market based economy.
The federal government has passed implementing legislation on public procurement and fiscal transparency, but must still ensure that the 36 states pass and implement similar bills. It is widely perceived that government contracting remains rife with corruption and kickbacks and that many state and local officials continue to steal public funds outright. The Nigerian government is aware that sustaining democratic principles, enhancing security for life and property, and rebuilding and maintaining infrastructure are necessary for the country to attract foreign investment.
Nigeria is the United States' largest trading partner in sub-Saharan Africa, largely due to the high level of petroleum imports from Nigeria, which supply 8% of U.S. oil imports--nearly half of Nigeria's daily oil production. Nigeria is the fifth-largest exporter of oil to the United States. Two-way trade in 2010 was valued at more than $34 billion, a 51% increase over 2009, largely due to the recovery in the international price of crude oil. Led by cereals (wheat and rice), motor vehicles, petroleum products, and machinery, U.S. goods exports to Nigeria in 2010 were worth more than $4 billion.
In 2010, U.S. imports from Nigeria were over $30 billion, consisting overwhelmingly of crude oil. Cocoa, bauxite and aluminum, tobacco and waxes, rubber, and grains constituted about $73 million of U.S. imports from Nigeria in 2010. The U.S. trade deficit with Nigeria in 2010 was $26 billion. Nigeria was the 13th-largest trading partner for the United States in 2010. The United States is Nigeria's largest trading partner after the United Kingdom. Although the trade balance overwhelmingly favors Nigeria, thanks to oil exports, a large portion of U.S. exports to Nigeria is believed to enter the country outside of the Nigerian Government's official statistics, due to importers seeking to avoid Nigeria's tariffs and regulations.
The United States is the largest foreign investor in Nigeria. The stock of U.S. foreign direct investment (FDI) in Nigeria in 2009 was $5.4 billion, up from $3.4 billion in 2008. U.S. FDI in Nigeria is concentrated largely in the petroleum/mining and wholesale trade sectors. Exxon-Mobil and Chevron are the two largest U.S. corporate players in offshore oil and gas production.
In March 2009, the United States and Nigeria met under the existing Trade and Investment Framework Agreement (TIFA) to advance the ongoing work program and to discuss improvements in Nigerian trade policies and market access. Among the topics discussed were cooperation in the World Trade Organization (WTO), market access, export diversification, intellectual property protection and enforcement, commercial issues, trade capacity building and technical assistance, infrastructure, and investment issues.
Agriculture has suffered from years of mismanagement, inconsistent and poorly conceived government policies, and the lack of basic infrastructure. Still, the sector accounts for about 40% of GDP and two-thirds of employment. Agriculture provides a significant fraction (approximately 10%) of non-oil growth. Poultry and cocoa are just two areas where production is not keeping pace with domestic or international demand. Fisheries also have great potential, but are poorly managed. Most critical for the country's future, Nigeria's land tenure system does not encourage long-term investment in technology or modern production methods and does not inspire the availability of rural credit.
Oil dependency, and the allure it generated of great wealth through government contracts, spawned other economic distortions. The country's high propensity to import means roughly 80% of government expenditures is recycled into foreign exchange. Cheap consumer imports, resulting from an overvalued Naira, coupled with excessively high domestic production costs due in part to erratic electricity and fuel supply, have pushed down industrial capacity utilization to less than 30%. Many more Nigerian factories would have closed except for relatively low labor costs (10%-15%). Domestic manufacturers, especially pharmaceuticals and textiles, have lost their ability to compete in traditional regional markets; however, there are signs that some manufacturers have begun to address their competitiveness.
Arguably Nigeria's biggest macroeconomic achievement has been the sharp reduction in its external debt, which declined from 36% of GDP in 2004 to less than 4% of GDP in 2007. In October 2005, the International Monetary Fund (IMF) approved its first-ever Policy Support Instrument for Nigeria. In December 2005, the United States and seven other Paris Club nations signed debt reduction agreements with Nigeria for $18 billion in debt reduction, with the proviso that Nigeria pay back its remaining $12 billion in debt by March 2006. The United States was one of the smaller creditors, and received about $356 million from Nigeria in return for over $600 million of debt reduction. Merrill Lynch won the right to take on $509 million of Nigeria's promissory debt (accrued since 1984) to the "London Club" of private creditors. This arrangement saved Nigeria about $34 million over a simple prepayment of the notes. Nigeria faces intense pressure to accept multibillion dollar loans for railroads, power plants, roads, and other infrastructure. Expanded government spending also has led to upward pressure on consumer prices. However, a drop in world oil prices and the global financial crisis prompted the federal government to tap its foreign exchange reserves, which consequently decreased from $60 billion to $48 billion, in order to meet pressing budget demands from cash-strapped state and local governmental bodies.
In 2009, Nigeria took significant steps to strengthen the banking sector. After completing financial audits of all 24 national banks, the Central Bank found 10 of the banks to be undercapitalized or suffering from illiquidity. The Central Bank replaced many of the failing banks' management teams and pumped nearly $6 billion into the sector. In addition, the Central Bank published the names of significant loan defaulters, which included many prominent political and business figures. These reforms came on top of a major banking overhaul in 2006 that reduced the number of banks from 89 to 24, increased a bank's minimal capital requirement to $190 million, and required banks to hold 40% of their deposits in liquid assets.
Retail, corporate, and Internet banking are seen as intensively competitive, and the home loan market is considered moderately competitive. Less than 10% of lending is believed to be made to individuals. About 65% of the economically active population is serviced by the informal financial sector, e.g., microfinance institutions, moneylenders, friends, relatives, and credit unions. Since 1999, the Nigerian Stock Exchange has enjoyed strong performance, although equity as a means to foster corporate growth remains underutilized by Nigeria's private sector. Credit is largely inaccessible to rural communities, the real estate sector and small businesses receive a low level of lending, and the credit card market remains at an early stage of development.
Nigeria's publicly owned transportation infrastructure is a major constraint to economic development. Principal ports are at Lagos (Apapa and Tin Can Island), Port Harcourt, and Calabar. Docking fees for freighters are among the highest in the world. Of the 80,500 kilometers (50,000 mi.) of roads, more than 15,000 kilometers (10,000 mi.) are officially paved, but many remain in poor shape. Extensive road repairs and new construction activities are gradually being implemented as state governments, in particular, spend their portions of enhanced government revenue allocations. The government implementation of 100% destination inspection of all goods entering Nigeria has resulted in long delays in clearing goods for importers and created new sources of corruption, since the ports lack adequate facilities to carry out the inspection. Four of Nigeria's airports--Lagos, Kano, Port Harcourt and Abuja--currently receive international flights. There are several domestic private Nigerian carriers, and air service among Nigeria's cities is generally dependable. The maintenance culture of Nigeria's domestic airlines is not up to international standards.
Nigeria has made progress toward establishing a market-based economy. In recent years, it privatized the only government-owned petrochemical company and sold its interest in eight oil service companies. The Yar'Adua administration paid especially close attention to due process by overturning or reviewing a number of suspect contracts awarded by its predecessor. Nigeria's implementation of non-tariff barriers has been arbitrary and uneven and continues to violate WTO prohibitions against trade bans. However, Nigeria has made some progress in its implementation of the Economic Community of West African States (ECOWAS) Common External Tariff by removing some textile items from its list of prohibited imports in 2006.
In a September 2008 breakthrough, Nigeria decreased the number of banned import categories from 44 to 26 items, reduced a number of tariffs, and reiterated its commitment to harmonizing its tariff regime with its neighbors. Enforcement of criminal penalties against intellectual property rights (IPR) violations is weak, and firms that are successfully countering IPR piracy have generally done so through civil court cases. The government has created an intellectual property commission. Rules concerning sanitary and phytosanitary standards, testing, and labeling are well defined, but bureaucratic hurdles slow trade opportunities. The government is generally supportive of biotechnology cooperation, although legislation governing biosafety is sparse at best.
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