Africa
The people crunch
By Patrick Smith, Africa Report `5/11/19
Nov 17, 2019 - 3:13:52 PM

The new Nigerian government only has a small window of time to get the solutions right and break out of a cycle of low growth before a ballooning demographic and technological change make the country’s path to industrialisation and development more perilous.

It was a rare call to the urgency of now from President Muhammadu Buhari. Addressing his new ministerial team in late August, he warned that the doubling of the country’s population to 411 million by 2050 might seem a frightening prospect. “But only if we sit idly by and expect handouts from so-called development partners. The solution to our problems lies within us.” Buhari’s re-election in March with a margin of 4m votes, although disputed by the main opposition candidate Atiku Abubakar, looks far less onerous than delivering on his pledges to fight corruption, diversify the economy and consolidate security.

Alongside exhortations for national self-sufficiency and scepticism about outside interventions, Buhari was sounding alarms about the most pressing demands on the country: low growth and stalling revenue, import dependence and slow industrialisation, corruption and dysfunctional politics, national and regional insecurity, and booming population growth that would make Nigeria the world’s third-most populous country by mid-century.
Business leaders and economists share the view that these issues are pushing Nigeria to a crunch point. Although technically the country is out of recession – as defined by two quarters of weaker growth – in practical terms it is not. With projected growth of 2% over the next year, population growth of 2.6% and inflation around 10%, that translates into what economists call ‘stagflation’.

Radical measures are needed to kickstart the economy according to Bismarck Rewane, managing director of Financial Derivatives Ltd. in Lagos: “The ultimate objective of all economists is to promote growth. There have to be clear signals. […] You cannot have a command economy in policy terms and a market economy in practice.” Such signals might be, says Rewane, the concessioning of the four biggest international airports or a new generation of interstate highways. “We need more actions and less documents […] to break out of this vicious circle of low growth.”

A senior economic adviser to the government in Abuja insists that plans for new transport corridors are already under way. “As part of our special economic zones strategy, we have organised finance for the Lagos to Ibadan railway […] and new rail routes from Lagos to Warri and on to Abuja as well as an eastern spine from Port Harcourt to Maiduguri.”

This year’s budget, he says, sees the biggest-ever allocation towards public investment projects as the government tries to consolidate the economic recovery in the wake of the oil price crash of 2015 and 2016.

As concerns mount over the international outlook amid the US- China trade war and other geopolitical tensions, economists warn that the oil price could fall below $50 a barrel again. This year’s budget is premised on a $60-a-barrel price, optimistic on current trends. It makes boosting oil production still more important.

Mele Kyari, the new managing director of the state oil company, forecasts that Nigeria will be producing at least 2.5m barrels per day (bpd) by the middle of next year, mainly by fixing damaged pipelines and dealing with security problems.
Kyari’s officials reel off a list of ongoing and planned projects involving France’s Total, Italy’s Eni, the US’s ExxonMobil and Chevron costing some $50bn and generating another 1m bpd. One, Total’s Egina field which will produce another 200,000 bpd, has started; the final investment decision on another – Shell’s Bonga South West to produce another 150,000 bpd – is due next year.

How far and how fast other projects move will depend on getting the national assembly to agree to long-delayed reforms mooted in the Petroleum Industry Bill (PIB), due to set out new fiscal terms and equity rules for oil companies. The PIB’s chances improved after Buhari’s party won substantial majorities in both houses of the national assembly in March. “There are now no fundamental differences on the PIB,” said the senior economic adviser. “There are legal drafting matters to resolve but no ideological issues outstanding.”

If he is right, that could give Nigeria’s oil and gas industry the fillip it needs. With oil reserves at 37.5bn barrels and the world’s ninth-biggest gas reserves at more than 200trn cubic feet, Nigeria would attract billions of fresh investment, according to David Cowan, Africa economist at Citibank. If the reforms go through, says Cowan: “The idea that Nigeria could be a 3m-4m bpd producer is quite possible.”

If higher oil production is to boost growth, it has to generate more revenue. But Nigeria’s revenue take lags well behind that of Kenya and South Africa, which have about a quarter the population of Nigeria. For example, Nigeria’s annual budget spending of N8.92trn and Kenya’s of KSh3.1trn are about the same (around $29bn).

Low rates of taxation and inefficient collection have been hitting revenue in many areas of Nigeria. Its revenue-to-GDP ratio of 7% is one of the lowest in the world, less than half that of South Africa.

Nonso Obikili, chief economist for the Lagos daily Business Day, says it is a political conundrum: “If you go back to the 1970s, Nigeria was an oil state. Now it’s how you transition to a tax-collection state.” Although the government is pushing up tax rates, a substantial change in the structure – bringing more plutocratic Nigerians into the system and unpicking the tax avoidance tactics of some companies – would require constitutional change, says Obikili.
There are heavy implications for public spending on education and health. Inefficient collection amounts to a “perverse social contract”, writes tax economist Uzochukwu Uchechukwu Alutu: ‘The notion that citizens can decide to not pay taxes in exchange that the state is not held strongly accountable for the delivery of services needs to change.’

The focus has to be faster growth and on the minimum conditions for industrialisation, says Charles Robertson, chief economist for Renaissance Capital: “That means 70% adult literacy, electricity of 300 kilowatt hours per person and an investment rate of 25% of gross domestic product – but Nigeria’s is running at about 13%.” Industrialisation, with the jobs and ancillary services that it generates, would take growth up to 4-5% a year, says Robertson. With growth from agriculture and natural resources, the country could get up to 7-8%: “You do that for 10 years and you start to look like China.”

Early steps would have to include an adult literacy campaign and changing policy incentives to ramp up investment, he adds. Herder-farmer clashes and terrorist militias in the Middle Belt and the northern states, respectively, are disrupting efforts to boost agricultural production and commodity processing.

Yet there are states – mainly in the southern coastal regions such as Lagos, Rivers and Akwa Ibom – that meet conditions for industrial growth: “In Lagos, you have about 16 million people, adult literacy rates of over 80% and it’s one of the top-10 economies in Africa,” says Robertson. Still, with its ruthless expansion of tax collection over the past two decades, much more needs to be done in Lagos to rebuild viable production lines after the de-industrialisation of the past three decades.

Following Buhari’s warning about the country’s population boom, one of his allies told us that pressure was mounting on the government to speed up efforts to restructure the country’s economy and politics.“The danger is that if these are not tackled now, that economic and social fissures widen and the country starts drifting apart.”