Unlocking the Productive Potential of Nigeria's People and Resource Endowments

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Monday, December 02, 2019  / 12:35 PM / by World Bank Group / Header Image Credit: World Bank Group

 

Nigeria continues its recovery from the 2016 recession, sustaining an estimated 2 percent growth rate in 2019. The collapse of global oil prices during 2014-16, combined with lower domestic oil production, led to a sudden slowdown in economic activity. Nigeria's annual real GDP growth rate, which averaged 7 percent from 2000 to 2014, fell to 2.7 percent in 2015 and to -1.6 percent in 2016. Growth rebounded to 0.8 percent in 2017, 1.9 percent in 2018, and then plateaued at 2 percent in the first half of 2019, where it is expected to remain for the rest of the year. Services, particularly telecoms, remained the main driver of growth in 2019, although trade started contracting amidst increasing use of policy measures aimed at import substitution.

 

Agricultural growth picked up slightly but remains affected by insurgency in the Northeast region and ongoing farmer-herder conflicts. Industrial performance was mixed: growth in the oil sector remained stable, but manufacturing production slowed in a context of weaker power sector supply. Overall, the slow pace of recovery in 2019 is attributable to weak consumer demand and lower public and private investment. The annual headline inflation rate fell from a peak of 15.7 percent in 2016 to a projected 11.6 percent in 2019 but remains high and above the central bank's target of 6-9 percent.

 

In the absence of structural reforms, growth is projected to remain stable, averaging 2.1 percent during 2020-21. In agriculture, the outlook remains below potential due to continued insurgencies, which in the recent past have displaced people and destroyed crops. Oil production is projected to remain leveled at around 2 million barrels per day (mb/d), below the 2.3 mb/d target outlined in the government's medium term fiscal strategy. Growth in the non-oil industry and services would remain stable in a context of low investment levels, high unemployment, and high financing costs.

 

Nigeria's growth outlook is vulnerable to external and domestic risks. Externally, Nigeria is confronted with a sharper-than-expected slowdown in the global economy, and geopolitical and trade tensions. Domestically, the main risks are associated with the degree of predictability of macroeconomic policies, the pace of structural reforms, and the country's security situation.


The economy's sensitivity to volatile oil markets is a major cause of uncertainty and a disincentive to long term investment. For instance, a decline in oil prices to the levels seen in 2016 would significantly reduce growth, potentially leading to another recession. This time, however, Nigeria's fiscal and external positions are more fragile because the fiscal buffers in the excess crude account are depleted, and international reserves mask considerable amounts of foreign-held short-term government and central bank securities. In this context, a negative shift in investor confidence could lead to a drop in international reserves and put pressure on the exchange rate and the public debt stock. Conversely, growth could be accelerated through reforms that boost tax revenues to allow for higher investment in human and physical capital, as well as efforts to improve the quality of spending and reduce barriers to trade and private sector development. For example, gradually eliminating the use of monetary policies that crowd out credit to the private sector would accelerate growth.

 

The recession spurred a rise in unemployment, but some states have recently begun creating enough jobs to keep pace with their growing labor force. In 2018, Nigeria created about 450,000 new (net) jobs, partially offsetting the loss of 700,000 jobs in the previous year. However, Nigeria's labor force is growing rapidly. In 2018, about 5 million Nigerians entered the labor market, resulting in an additional 4.9 million unemployed people in the last year. In percentage terms, the national unemployment rate rose from 18.8 percent in the third quarter (Q3) of 2017 (the year following the recession) to 23.1 percent in Q3 2018. Positive news are   emerging from a subset of states that are now creating more jobs than the entrants to the labor market. In 2017, none of the 36 states in Nigeria and its Federal Capital Territory created enough jobs to absorb new labor market entrants. The situation improved in 2018, with four states-Lagos, Rivers, Enugu, and Ondo-generating more jobs than labor-market entrants, leading to a decline in unemployment in these states.

 

Economic and demographic projections highlight the urgent need for reform. With population growth (estimated at 2.6 percent) outpacing economic growth in a context of weak job creation, per capita incomes are falling. Today an estimated 100 million Nigerians live on less than US$1.90 per day. Close to 80 percent of poor household are in northern Nigeria, while employment creation and income gains have been concentrated in central and southern Nigeria. The "cost of inaction" is significant. Under a business-as-usual scenario, where Nigeria maintains the current pace of growth and employment levels, by 2030 the number of Nigerians living in extreme poverty could increase by more than 30 million, and Nigeria could account for 25 percent of world's extremely poor population.

 

Building reform momentum is essential to mitigate risks and promote faster, more inclusive, and sustainable growth that improves living standards and reduces poverty. Robust growth and job creation will require strengthening macroeconomic management while increasing fiscal revenues to attenuate the impact of oil-sector fluctuations and advance much-needed investments in human capital and infrastructure.

 

This edition of the Nigeria Economic Update (NEU) discusses selected reform areas, including: (i) leveraging trade integration to harness the benefits of the Africa Continental Free Trade Area; (ii) improving basic education financing to improve human capital outcomes; (iii) monitoring the impact of conflict on household'' welfare to protect the poor and vulnerabland (iv) leveraging digital technologies to diversify the economy and create jobs for young workers. Reforms in these and other areas would enable Nigeria to strengthen its macroeconomic resilience, promote private sector development, and improve the efficiency of public service delivery.

 

Increasing productivity will be vital to support robust growth and job creation in Nigeria. Nigeria's economic productivity is low by international standards. Productivity has grown slowly, and since the recession, it has been declining, affecting growth. The productivity gap between Nigeria and comparator countries reflects both its lower relative stocks of physical and human capital and the inefficiency with which inputs (capital and labor) are transformed into outputs. The vulnerability of Nigeria's economy to volatile oil prices has also inhibited sustained productivity gains: labor has repeatedly shifted from agriculture to services when oil prices were high, then shifted back when oil prices were low, thereby limiting the economic transformation that is needed to produce more and better-paid jobs.

 

The focus section of this report analyzes the evolution of productivity in Nigeria and identifies policies and institutions that can leverage productivity growth to accelerate Nigeria's economic expansion and create new job opportunities. The analysis highlights four key priorities.

 

First, ensuring policy transparency and predictability will be critical to reduce investment risk and promote growth outside the extractive industry.

 

Second, investing in infrastructure, strengthening land tenure security, improving educational outcomes, and liberalizing the trade regime and enhancing trade and transport facilitation would help develop value chains and facilitate the efficient reallocation of factors of production, making Nigeria more cost-competitive.

 

Third, reducing regulatory discretion would help attract foreign and domestic investment to the nonoil sector, encourage competition, and promote formalization.

 

And fourth, improving access to finance could enable new firms to compete with incumbents and allow more productive firms to scale up their operations. Actions in these areas would lay the groundwork for Nigeria's transition to a new economic model that more effectively utilizes its large, young population and abundant natural resources to support sustainable growth and poverty  reduction.

  

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.


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Proshare Nigeria Pvt. Ltd.


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