This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.
Economic growth drivers
The economic growth is driven by the services sector of the economy as well as rapid urbanization. Nigerian people have a very entrepreneurial spirit – 38% of the middle class that work in the private sector run their own business. The government is promoting entrepreneurship and information is increasingly becoming available.
There are initiatives by the government to increase domestic production, such as one-digit interest rates offered by the Bank of Industry, as opposed to two digit interest rates offered by the commercial banks.
Historically, Nigeria has never had as much educated people as it has now. There are also more financial sources to tap into, there’s plenty of room with debt being only around 22% of the GDP.
Lagos state has successfully introduced efficient tax collection, the internal revenues are now bigger than the federal allocation. This is money that can be invested in the state and it also helps the state with issuing state bonds. The Lagos taxation model can be copied and applied in other states, bringing economic growth in other states of the nation.
Across the industries, there have been Private Public Partnerships that have resulted in new foreigner capital flowing in the nation. This model has proven to be successful, attracting capital and creating local jobs and economic growth.
There is an urgency to diversify the economy – it’s is imposed by the low oil prices and efforts are made to diversify away from oil. Diversification will continue the economic growth the country has seen over the last decade.
Nigeria is still dependent on foreigner aid and assistance as a driver of economic activity, however, the age of aid is ending and the only aid left is aid for business.
Growth limiting factors
It’s very common for developing nations to grow until they run out of the infrastructure to carry on their growth. This usually leads to economic growth stagnation. Lack of infrastructure is one of the main drivers for increasing food imports and as Aliko Dangote puts it – “If we import, we import poverty and export jobs”.
It’s not just that the infrastructure is needed to be build, it’s also necessary to maintain and increase capacity of the existing and to be built infrastructure. This remains a concern for the future of the economy and it remains to be seen if Nigeria can develop a maintenance culture.
There is an increasing wealth gap between the South and the North, the inequality in the country is increasing. The main causes are structural imbalances, education gaps, poor infrastructure, corruption and political instability. Overdependence on the oil sector is one of the main roots of these problems.
It’s not just that the country has to diversify its economy and attract foreigner direct investment, it also has to find a way to transform these dividends into education and health care – things that will decrease the inequality of the country.
Another major problem the Nigerian economy is facing is financing the sectors of the economy. The domestic investors, such as pension funds and banks, find it hard to beat the two digit interest rates the federal government bonds offer, in the developing and capital demanding sectors of the economy.
Increased US interest rates remains a concern for the Nigerian economy. Simple announcements of increases in 2013 saw an outflow of capital across the developing economies, including Africa. This is not so much the case with Nigeria and Africa however, as it is with other continents. It does remain a concern though – when the investment appetite driving factors, such as low interest rates in the developed countries and high oil prices, disappear, so do the foreigner investment inflows.
The country is adding back to its reserves after spending in 2014 and early 2015. It’s important that the nation keeps its reserves, otherwise it’s more vulnerable to financial crises and might not be able to protect the Naira when the time comes.