New Risks to Nigeria’s Growth Promise

Only a year ago, Nigeria’s BRIC future still seemed reachable. Today, domestic threats are increasing, while the international environment is far more challenging.

A decade ago, Goldman Sachs’s BRIC analysts included Nigeria among the potential BRIC successor economies. A few years later, the government released its transformation agenda, aimed at making Nigeria one of the top-20 leading economies by 2020. A year ago, PricewaterhouseCoopers included Vietnam and Nigeria “as potential fast-growing ‘wild cards’ outside of the G20.”

Indeed, the nation has been featured in many long-term rankings as a major driver of regional growth in Africa in the long-term – and rightly so.

With lingering US recovery and lost decades in Europe and Japan, even mini-BRICs are no longer immune to the aftermath of the global crisis, however. This is becoming increasingly clear with the US Fed’s tapering and subsequent capital outflows from emerging and developing economies.

New risks

International investors believe that Nigeria is currently facing four major risks. Each one has become more prominent relatively fast.

First of all, there is the general election of 2015, which could foster political gridlock or fragmentation. As President Goodluck Jonathan’s People’s Democratic Party seeks to renew its mandate, splinter groups are proliferating, along with new alignments. In contrast, tough political decisions would require consolidated power or consensus.

Second, the leadership of the central bank (CBN) was expected to change in June 2014. However, things changed dramatically a few days ago, when Lamido Sanusi, Nigeria’s internationally highly-regarded CBN governor was suspended by President Goodluck. Sanusi believes that over a 19-month period over $1 billion was unaccounted for every month in the notoriously opaque oil sector. Reportedly, he will challenge the suspension to preserve the central bank’s independence. Meanwhile, Sanusi’s critics speculate on his own political ambitions.

Whatever the real facts, the net impression internationally is that, instead of suspending the whistleblower, the government should focus on stopping fraud. As Sanusi’s suspension caused uncertainty, it led foreign exchange, bond and money markets to stop trading. Unless the friction between the government and the central bank can be overcome, the debacle has potential to create significant political uncertainty and market volatility.

Third, there is the cold reality of terrorism. Only days ago in Bama, an agricultural and commercial town in the northeast, some 1,500 buildings were razed and some 400 vehicles in the latest assault by armed groups. As traditional rulers accused the military for not confronting the fighters, Boko Haram’s leaders warned leading Nigerian Muslim politicians and religious leaders that they would be targeted for pursuing democracy and Western-style education. The net effect is increasing security risk.

Fourth, the U. S. Fed’s tapering began with reduced bond purchases in December in January and is likely to result in rising rates by 2015. In the most thriving emerging markets, these capital flows will gradually stabilize; but in the more fragile ones, they will translate to increasing uncertainty and volatility.

Finally, the shale gas revolution has taken off in America, a major client of Nigeria’s natural resources, which is likely to become energy-independent by 2020. Further, parallel mini-shale gas revolutions are rapidly reshaping the international energy map, which is likely to contribute to pricing pressures among the major energy producers, including Nigeria.

Erosion of competitiveness

Even worse, these four risks are moving hand in hand with medium-term Nigeria’s weakened competitiveness.

After its inauguration a year ago, the Board of the National Competitive Council of Nigeria (NCCN) has hoped to raise Nigeria’s global competitiveness ranking, in order to attract domestic and foreign investment, especially in the manufacturing sector. Yet, Nigerian competitiveness has eroded. Last year the country’s ranking in the competitiveness index slipped from the 15th to the 120th.

The absence of adequate diversification is reinforced by the country’s weak institutions (129th), with insufficiently protected property rights, and high corruption. Additionally, the country is not upgrading its infrastructure (135th), health and primary education (146th) fast enough. There is also much room to harness the latest technologies for productivity enhancements, as evidenced by low rates of ICT penetration.

With its large market size (32nd), impressive growth and youthful demographics, Nigeria is often seen as a natural candidate for inward foreign investment. After all, the country also enjoys an increasingly efficient labor market, and the financial sector has been recovering from the 2008/9 crisis.

Yet, paradoxically, Nigeria’s greatest assets – its abundant natural resources – are its greatest potential liability, at least from the competitiveness perspective. Some of the most competitive countries in the world – from the Nordics to Japan – are not blessed with such resources and thus have a natural incentive toward efficiency and innovation. Necessity is the mother of invention, as they say.

Of course, countries that possess substantial natural resources can also be competitive and innovative, but only if they engage in decisive efforts to industrialize and diversify their economy. That is Nigeria’s greatest and most critical challenge – to diversify with and away from the oil sector.

Challenging business conditions

In Nigeria, the most problematic factors for doing business involve the inadequate supply of infrastructure, corruption and access to financing, according to the World Economic Forum.

World Bank’s Doing Business ranking reflects similar erosion. Last year, Nigeria was 114th; now 122nd. Challenges are discernible particularly in getting electricity, registering property, paying taxes, and trading across borders.

Nonetheless, challenging business conditions are not necessarily identical with low entrepreneurial drive. Among the factor-driven economies, the sub-Saharan states, especially Nigeria and Zambia, have the highest early-stage entrepreneurial rates, according to the Global Entrepreneurship Monitor.

Nigeria has 39% of the adult population (18-64 years old) involved in early-stage entrepreneurial activity. Further, like Ghana and Zambia, it shows more participation of women than men.

In other words, there is great energy, presence and initiative in Nigerian entrepreneurship, but it continues to be constrained by obstacles in the business environment, which work against doing business.

What Nigeria may need is a revised transformation agenda that will promote inclusive growth and structural reforms, with particular emphasis on the role of family firms and small- and medium-size companies, as well as entrepreneurship.

Nigeria’s long-term promise as an emerging economy remains, but neither oil nor youthful demographics is enough to realize that dream.

The original version was published by BusinessDay Nigeria on March 4, 2014