November 22, 2011 11:38 pm
The economy: Once more courting the attention of investors
With eurozone economies drowning in debt, the US economy languishing and the edge coming off China and India’s lightning expansion, Nigeria’s much-vaunted potential looks alluring once again.
African economies have been growing at their fastest pace in generations. For the most part, they resisted the global downturn better than expected. Since 2000, Nigeria’s economy, the second-largest in sub-Saharan Africa, has quadrupled in size.
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However, it is still one of the most difficult places in which to do business. Two years ago it slipped 28 places in the World Economic Forum’s global competitiveness index, to 127 out of 133, where it has remained.
But it is partly because there is so much still to build and so many services still lacking in a market potentially larger than the rest of west Africa combined, that investors sniff an opportunity.
Forecasting much higher growth than the International Monetary Fund, Renaissance Capital, the bullish Russian investment bank, recently drew attention to an expanding class of consumers. “We think plans to improve electricity generation and transmission could help GDP growth accelerate … A $247bn economy in 2011 could be a $460bn economy by 2016,” it said in a report last month.
Compared with Europe, there has been something of a reversal in terms of how the books are balanced too. Following a debt writedown in the mid part of the past decade, external debt is just 5 per cent of gross domestic product. It is early, however, to be uncorking the champagne.
Lamido Sanusi, the central bank governor who has spent three years sanitising the banking system following a crash that mirrored the west’s in terms of excess, says Nigeria could be hit by renewed recession in Europe, because of its continuing dependence on a single commodity. “The economy remains extremely vulnerable to volatilities in the oil price and those have an impact on government finances, in particular on the general liquidity in the system,” he says.
Moreover, the cushion available to the state would be smaller than in 2008, were the oil price, on which the government typically depends for more than 80 per cent of revenues, to fall.
A period of lax control saw spending balloon from 2009 until the first half of this year. Foreign reserves halved and rainy day savings above the budgeted price of oil were divvied out to state governments and depleted.
Nasir el-Rufai, the former minister for federal capital territories, says that government has grown so unwieldy that any fall below the $70 a barrel for crude oil budgeted for in 2012 would make footing the salary bill a struggle. This has grown to a staggering 74 per cent of the national budget.
“We have created states and local governments and ministries as structures that are economically unviable,” Mr el-Rufai wrote in a recent column.
Meanwhile, the cost of subsidising fuel and providing credits to oil marketers is equal to more than the oil sector brings in in revenues. Mr Sanusi says: “Between January and November we earned $16bn from oil and spent $200,000 more than that on the subsidy and LCs [letters of credit] to our marketers. If you remove the subsidy you would at least take away all the demand that is fuelled by smuggling and rent seeking.”
Ngozi Okonjo-Iweala, an outgoing managing director at the World Bank, has returned to the finance ministry and is promising to tighten up. Her goals, however, look modest, with the proportion of the budget dedicated to recurrent expenditure projected to fall just 4 per cent to 70 per cent during President Goodluck Jonathan’s four-year term. This leaves little room for investment in infrastructure, education and health. Instead the government is hoping the private sector will bridge part of the gap.
In the past 10 years, those areas of the economy liberated from state control have tended to flourish. With no help, agriculture has grown consistently, spurred not by better yields or more inputs but by rapid population growth and the use of more land and labour. The government is now promising to prioritise commercialisation of the sector.
Trailing the telecoms companies and banks which have seen exponential growth, supermarket chains are moving in, shopping malls are going up and a flourishing and even lucrative arts scene has evolved.
But says, Bismarck Rewane, an investment consultant, the big winners have been what he calls “regime corporates” – big companies and individuals with ties to the government. “Oligarchies are naturally opposed to efficiencies. They are so few yet they are holding the country down,” he says.
Mr Sanusi says this would change and opportunities would be democratised if reforms in power generation and the financial sector take root.
“If you look at the Chinese and the Indian economies you have China with millions of millionaires and you’ve got India with hundreds of billionaires, because it’s the nature of these economies.
“India is more heavy industry with more information technology, while China is more light industry, processing and so on. That is what you want,” he says.
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