How to Solve Income Inequality in Nigeria


Monday, June 11, 2018/05:45PM /Proshare Research, Edited by David Odili

Excerpts from Proshare Confidential for May 2018 – POCKET Economics: Addressing Income Inequality

Gross Fixed Capital Formation: Unbuckling Capital Formation

Fig 1: Gross Fixed Capital Formation

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Source:  CBN


A cursory look at the nation’s low levels of capital formation on a quarterly basis points to the limitation of economic drivers. Over the last six (6) years, Nigeria’s average gross-fixed capital formation has remained at 2.374 trillion – a far cry from the nation’s GDP. The tepid capital formation rate of the nation has not matched the continued and rapid growth of labor, thus straining available infrastructure and exacerbating inequality.

In countries with low capital formation like Nigeria, income levels are always bound to fall because of low capital formation arising from structural factor. Conversely, countries with robust capital formation possess the right ammunition to drive GDP.  Painfully also, countries with low capital formation have relatively dimmer chances of driving up income levels and increasing economic opportunities for its people. Such countries can also suffer severely from export concentrations because low capital formation is indicative of an economy with weak shock absorbers. Comparatively, countries with sizable gross capital formation have better economic buffers and are resilient to export concentration.

It is clear that Nigeria direly needs capital to grease its economy. In the next section we look at a few suggestive approaches on how to swell capital formation. 

Fig 2:  Capital Formation among Selected Countries 

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     Source: world Bank


How to unbuckle capital formation:   

  • The new CAMA Act creates an investment friendly-environment for both foreign and local capital. We suggest it should be implemented rigorously.
  • Government needs to amplify existing preconditions for growth – from price stability to strong institutions. Nigeria has one of the lowest private contributions to gross capital formation, thus, urgent steps are necessary to stabilize prices, strengthen institutions, etc.
  • There is also the need to address physical infrastructure especially road and rail networks. Without addressing physical infrastructure, capital formation will remain stagnant. Moreover, there is the need to increase the infrastructure to GDP ratio by improving credit-deepening.
  • A large chunk of the economy remains informal. It is therefore necessary to address these structural strains.  In many circumstances, the informal sector is left out, making capital difficult to shore up.
  • There is also the need for policy clarity. The lack of political clarity has remained a headwind to capital formation.

Fig 3:  Saving from 2015 Q1 to 2016 Q4

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  • Nigeria has consistently failed to mobilize savings for real economic activity. Savings to GDP rate stands at 22%. Thus there is urgent need to mobilize savings to the real sector. 

  • Nigeria must begin to keep to long term growth. Her growth has been is largely dictated by short to medium term growth projections and cycles.  Such growth model makes physical stock difficult to ramp up.

  FDI: Propping up FDI   

   Fig 4: FDI over the years 

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     Source:  National Bureau of Statistics

At the end of the first quarter of 2018, foreign direct investment (FDI) increased by 18.19% to $400 million compared to the corresponding quarter-a paltry proportion of the total capital importation in the reviewed period. 

In addition, the contribution of FDI to GDP is less than 1% annually which reflects inadequate availability of foreign inflows into the major productive sectors of the economy. Efforts of the policy makers to come up with sustainable strategies to attractive funds into the critical sectors and to drive the desired growth in other sectors are hindered by unalloyed dependence on oil proceeds 


Fig 5: Foreign Direct Investment among Selected Countries

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Source:  OECD**the comparison is made for just the first 2 quarters of 2017.


It is, however, necessary to increase FDI for these two major reasons; 

·     The level of the output gap in Nigeria has continued to widen, consequent upon excess capacity in the labor market. To keep pace with the output deficit and optimizing the underutilized resources, offshore funds are vital options for a cut above fiscal plan. 

·    The nation is stuck in a diminishing per capital income, therefore measures to drive high base pay of the workforce and increase capital formation beyond 15% it currently contributes to total stock is not only needed by the industrial sector but also consumers whose incomes have been punctured by increase in commodity prices. 

It is however important to attract substantial level of FDI so as to place the economy back on its pre-burst optimum production frontier. 

To achieve these,

·   Nigeria needs policy clarity and a drastic dip in uncertainty because FDI is highly sensitive to policy summersaults and lack of policy clarity as investors always keep eyes on policy direction before taking position on the areas of economy with potential of optimize benefit on their investment.  

·         A significant improvement in the level of trade openness positions the economy for a boundless growth and industrialization. Evidently, countries with reputation for trade openness have attracted substantial foreign direct investment largely due to the fact that Multinational enterprises (MNE) have access to a large pool of market through a single country.    

·     Bi-causality effects exits between infrastructure and growth of FDI, that is, weak infrastructures deter FDI inflow. On the flip side, limited inflow of capital also affects the pace of closing fiscal deficit putting pressure on their net present value. 

·   A robust private public partnership framework is needed to cover infrastructure concession, similar models are being adopted  in countries like Chile and Brazil. 

·         Nigeria needs to do more to align domestic energy prices with foreign prices, secure property right and scale up effort on transparency. 

·         Countries which have coherent tax’s policy coupled with strong pro  investment initiative tend to attract foreign direct investment, notably Luxemburg    

·         Apart from the fact that the soft peg tend to limit the maneuvering position of the central bank. It also repels FDI. Obviously the on-going price discrimination witnessed in the exchange rate policy will continue to fuel the repulsion from FDI. 

·      Countries that place premium on high growth, stable exchange rate and price stability-often referred to as the “soft spot’’- have achieved such feat and are in a position of leverage. 

·      Financial stability is a pre-condition for FDI. Moreover, achieving an equilibrium between growth in base money and prudential is also paramount.   

·         Nigeria has tapped into the green energy space and hope to benefit from this alignment in terms of huge FDI inflows like Morocco 

·         Deliberate attention to human capital development is necessary to attract and retain the desired level of foreign direct investment.

Pension Management Asset: A Leveraging Tool 

Pension asset has consistently served as a measure of deferring consumption and a tool of buffering savings. More importantly, pension has also provided the leverage needed in financing infrastructure in specific countries and trawling such savings to physical stock.  

The level of decline in government fiscal capacity necessitates a cursory look at the Pension fund as the need to  mobilize savings such as pension fund to address the gap in infrastructure intensifies.  

Total Pension fund rose from N7.56 trillion at the end of the last quarter of 2017 to N7.94 trillion. This accounted for about  6% and 29% increase  in  the last quarter of 2017 and 2016 respectively.   


Fig 6: Total Pension Funds

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Source: NBS


However, the amount of pension fund ploughed towards domestic investment stood at N7.882 trillion reflective of  6.8% quarter on quarter increase.

Investment in foreign asset declined from N139.788 billion to N61.69 billion at the end of the quarter, reflective of about 56% when compared to the corresponding quarter.  The recent dynamic put the ratioof  pension asset to GDP at 6%, a relatively low value. Thus, making it 0.77% of total fund assets dilution in foreign assets  due to null activity in foreign money market. Notably, foreign assets were primarily foreign equity. 


Fig 7:  Composition of Foreign Domestic Investment of Pension Fund 

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Source: NBS


Over the last eleven years, the fund has maintained an average of 98.49% investment in the domestic economy, thus pinpointing strong bias for the domestic economy. 

Composition of Pension asset  

Fig 8:  Distribution on pension asset  

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Source: NBS


By the end of the first quarter of 2018, federal government security stood at N5.589 trillion, 6% increase in total pension; at the same time comprising 70.4% of the total pension asset.  

Federal government security class remain the dominating asset class given the relatively risk free nature, obviously improving the appetite for the asset. 

It is important to note that the decline in federal government bond by 4% to tilt inwards from N4.04 trillion at the last quarter of 2017 to N3.88 at the end of the first quarter of 2018.  However, the decline was offset by an increase in treasury bills from N1.17 trillion to N1.659 trillion compare to the previous quarter. 

Domestic equity rose from N743 billion from N672 billion compared to the previous quarter, 11% increase compared to the previous quarter.  State government securities stood at N161.1 billion and corporate bond stood at N651 billion at the end of the first quarter of 2018, thereby making it 2% and 4.9% of total pension fund asset.  

However, local money and real asset gulped N651 billion and N219 billion of the total pension asset respectively.  The paltry sum of N7.989 billion invested into infrastructure by pension fund administrators underpins the indifference in such asset class. 

Physical Stock Conundrum

According to the Organization for Economic Cooperation and Development (OECD), 4% of total pension is ploughed towards lands and buildings. This underlines the difficulty in mobilizing savings towards physical assets, while it is important to put on record that Nigeria is not the only country that has pension funds display substantial indifference to infrastructure.  

Fig 9:  Percentage of pension fund invested in physical asset

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Source: OECD


Plugging pension funds to infrastructure

  • First of all, infrastructure is largely tracked with inflation, thus providing the possibility for substantial discounting of the net present value of their asset. Thus, ensuring the important of  relatively stable price movement as the case in Indonesia and Finland
  • The inability to sustain a slow bias in exchange rate has increased the indifference to the sector. Thus, there is a need to ensure a more robust exchange rate policy in order to hedge against real interest loss.   


Fig 10: Risk

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Source: Ehlers 



  • Political Risk is always a concern a country like Nigeria evident in persistent policy summersault and policy lag. Thus, such scenario provides the wrong signal to pension fund administrators.    
  • The infrastructure market is relatively narrow and illiquid; the market need to be broadened with significant participation of private equity with strong liquidity to allow institutional investors like pension fund administrators have less restrictive entry and exit 


  • Over the years,  policy summersaults and inability to go through with reforms have affected the ability to generate significant income . Thus, the need to re-set policies to driving income has never been more imperative than now.
  • The difficulties in getting the supply side economics without mobilizing savings and encouraging foreign investment to shore up limited domestic capital should not be undermined, therefore proper plans and inclusive strategies are required.


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