There is a general consensus that the high incidence of poverty and unemployment is incoherent with a numerically growing economy; 7.5% GDP growth over the last decade but counter-intuitively inflation and interest rates remain in double digits.
Nigeria is a mono economy highly dependent on inflows from the sale of crude oil within a global economy in decline. While production risks have largely been mitigated with the return of peace in the Niger Delta region due to the implementation of the Amnesty Programme, the corresponding political risks have been heightened by the insurgences in the North and the lack of internal democracy across parties.
From the above key economic indicators, it is clear that the Nigerian economy requires a mixture of solutions working in tandem to improve the standard of living of the average Nigerian through job creation.
The growing income inequality within Nigeria’s largely youth population is turning a demographic boom into a national security challenge. The faster and more effectively the environment of business can allow individuals to acquire productive skills, conceive business ideas and access capital to turn their ideas into thriving businesses, the more prosperous and politically stable Nigerian economy will be.
The Nigerian economy faced numerous challenges which impacted the overall economic activity in 2012. Declines in the real growth rates of economic activity were experienced in both the oil and non-oil sectors. Oil production was less than expected due to security challenges, while the non-oil sector (notably Agriculture, Wholesale & Retail Trade) was mostly affected by the floods and weaker consumer demand.
In particular, the agricultural sector suffered declines due to the floods, which also affected the Wholesale and Retail sector (as key inputs in the sector are from the agricultural sector). There were also slight declines in the Manufacturing sector due to remaining electricity supply challenges, declines in the Telecommunications sector as a result of lower quality of service delivery, and declines in Real Estate sector.
Major Sector Driving Nigeria’s Economy:
Agriculture is the largest sector of the Nigerian economy with GDP contribution of about 40%. Research shows that Nigeria has over 80 million hectares of arable land. This accounts for about 23% of arable land across all of West Africa. The necessary key for successful reform is to turn agriculture into a business that makes money, with a focus on investments as opposed to aid and development. Prospects for the agricultural sector is very bright, owning to the growing demand for food driven by a large population and growing incomes as well as higher prices due to demand in the international market.
The Federal Government, through the Ministry of Agriculture announced a supportive program towards creating a Nigerian agricultural sector worth $256 billion by 2030. By this gesture, government intends to stop food importation valued at over ₦1 trillion annually and ensure a massive growth in the sector, in partnership with the private sector. As against the annual loss of funds to importation, ₦350 billion would accrue to the nation’s economy by the end of 2015 following the import substitution policy for rice, while the substitution of wheat flour content in bread with cassava flour is estimated to generate over ₦60 billion.
Currently, Nigeria is rolling out an ambitious reform programme across its agricultural sector aimed at cutting the country’s dependency on food imports, creating jobs and generating growth. The reforms such as the move to privatise the procurement and distribution of fertiliser and seed have resulted in more private sector participation as well as increasing in foreign direct investments.
The key to unlocking the growth potential of agriculture in Nigeria is to improve the lot of small scale farmers. Empowering the millions of small holder farmers who have access to millions of hectares will ensure they have access to appropriate inputs, sufficient financing that will significantly boost productivity. The key model developed to this effect is the Agricultural Franchise Model. This makes the small holder farmer a franchisee of a larger farm, with access to all the necessary inputs. This model stands to minimise the risks associated with investing in the sector and thereby stimulates the financial sector to invest in the Nigerian Agricultural Sector.
With the growth rate of 32.5% and GDP contribution of 7%, Nigeria has established itself as the largest telecommunication market in Africa. The country’s telecom sector is undergoing speedy transformation on account of explosive growth and rapid infrastructure developments. Liberalisation of the telecom sector along with increased competition among players have brought substantial benefits to the consumers in terms of lower subscription rates and enhanced choice. Moreover, the Nigerian government is making efforts to transform the country’s economy into a knowledge-based economy.
The introduction of mobile number portability (MNP) along with issuance of 3G and 4G licenses will also play an important role in driving the growth of telecom sector in the country. Mobile market of the country possesses tremendous growth potential given the fact that penetration rate is over 60%. With the rapidly improving mobile infrastructure and intense competition among mobile operators, it is expected that the number of mobile subscribers will grow at a compound annual growth rate (CAGR) of around 15% during 2009-2014, with a penetration rate exceeding 88% by 2014 end.
The Nigerian manufacturing sector performed 'poorly' in the out gone year as it contributed only 5% to the nation's Gross Domestic Product. According to data obtained from the office of the Director-General, West African Institute of Financial and Economic Management, "In developed countries where the real sectors are thriving, manufacturing contribute as much as between 35 and 40% to the GDP. For instance, in Malaysia, the manufacturing sector contributes about 45% to the GDP.”
Political and economic factors contributed greatly to the decline in the manufacturing sectors. For instance, poor infrastructure and epileptic power supply are key impediments to the industry. The industry as a whole operates on more than 70% of energy it generates, using generators. And operating these generators greatly increases the cost of manufacturing goods. Other factors include increase in the prices of petroleum products used by industries, multiple taxation, unabated smuggling and inadequate access to finance, both locally and abroad.
Nigeria’s financial system is still shallow as majority of Nigerians lack access to formal financial services provider. The financial sector accounts for about 3% of the GDP. The turnaround Nigerian banks have made since 2009 has been particularly striking. This comes after the banks near death experience from a banking crisis that led to costly bailouts, mergers and the formation of a state bad bank, the Asset Management Corporation of Nigeria (AMCON).
While bank/private sector lending has expanded significantly over recent years, it is still below average for other emerging markets in Africa. Only an estimated 22 million people, representing less than 20% of the population, have bank accounts. Banking penetration is well below the average for its emerging market peers with total loans to GDP ratio at 32%, compared with 90% for South Africa. Banking assets to GDP ratio also lags behind its peers at 57%, as against 66% for Kenya, 106% for Egypt, and 111% for South Africa.
The wide consensus that credit from banks and other financial institutions play an important role in generating growth and reducing poverty is in no doubt. This is because availability of credit facilities enhances the purchasing power of individuals and households, and this has a multiplier effect on the economy of any nation.
Since finance is the resource that connects all aspects of the political economy, providing solutions for financing social services, growing the real sector is very critical to our socio-economic development. The sustainable path to financial inclusion remains an educational renaissance to rapidly build capacity in agriculture, Information and Communication Technology (ICT), allied functional technical skills and logistics. This would provide the basis for extending financial services to stimulate economic activities in a manner that creates linkages across economic value chains.
However, most banks in Nigeria have historically tended to concentrate lending to the corporate and commercial segments of the market, thereby locking out the retail/consumer segment from the credit system; largely on account of the lack of credit information on individuals and persons in the country, which make up that segment.
It is also generally agreed that small and medium-sized enterprises (SMEs) stand a better chance of creating more jobs to match population growth. What is, however, not clear, especially to the aspiring entrepreneur, is ‘the how’ to engage public and private institutions turn their ideas into thriving business enterprises. As it stands, the interest rates from Deposit Money Banks are either unaffordable or inaccessible to, more often than not, a semi-skilled so-called average Nigerian living in a rural area where agriculture remains the only means of gainful employment. If Nigerians have access to credit at below one percent as it is in Japan today, they would have closed the infrastructure gap in power, transportation, financial inclusion, etc. Creating modern economies requires specialised scientific and technological skills mixed with management talent in the public and private sectors, while the arts maintain or rebuild the ethical infrastructure.
We have a situation in Nigeria quite different from that of the West, where labour is highly skilled and very expensive but capital is cheap. Nigeria, and indeed sub-Saharan Africa, has very cheap semi-skilled labour but very expensive capital. This implies that we cannot adopt the same type of technologies developed for environments where capital is cheap to revitalise the real sector. We need technologies (education, healthcare, industrial machinery, finance and infrastructure) that require cheap capital and labour. It is clear from this comparison that there is a connection between access to cheap capital and the quality of the workforce in every nation.