Impact of low oil prices in Nigeria

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.

Diversifying the economy has always been on the Nigerian governments agenda. With the falling of oil prices and decreased inflow of oil revenues, the need to do so is arriving with a great urgency.

The fall of oil prices has only had an impact on the government revenues. Oil and gas sector was never a major job creator for the economy and the capital generated didn’t stay in the country. The revenues the government generated were not invested in infrastructure but rather consumed. This has had an impact on the industries that are dependent on domestic demand, such as retail and telecoms, but there are no other major challenges to the economy due to the falling oil prices.

Uncertainties with the Naira and oil prices have not changed the investment appetite for Nigeria, it’s changed the activity in investments and approaches to investments. Some investors are taking a “wait and see” stance, while others are exploring other aspects of the economy. There has always been interest in mining and agriculture, but there were plenty of opportunities in oil, so no real considerations were made. Low oil prices have made investors consider these sectors more seriously.

Long term prospects of unconventional sources of oil suggest that prices will likely remain low. Many people view this positive for the country in the long term, there has been a sense of oil being a curse for the country. With the discovery of oil in 1960’s, many of the strong sectors of the economy vanished. Nigeria was once supplying 27% of worlds sun flower oil demand, it was the leading country in sun flower oil exports.

Every poor country in the world that has discovered oil saw an incredible rise in corruption. Every dollar invested in infrastructure has proven to return itself multiple times, yet African countries haven’t been doing that since they were able to simply live off of the oil revenues.

Some African nations are oil importers, such as Ethiopia. With high oil prices, billions of dollars were flowing out of the country. Now this money is staying in the county and is being spend on the country. This puts even more urgency for Nigeria to develop alternative revenues and invest them in the country, to keep up with other African nations in development. The country might, otherwise, see future FDI flow to these oil importing countries that now have the chance to grow their sectors and industries with the money they’re saving on oil.

Low oil prices are of short term benefit to the manufacturing industry – most electricity generators in Nigeria run on diesel. Getting used to cheap diesel to run factories on, is a threat in case the oil prices go back up however, adding risks to investments in the manufacturing sector.

For the natural resources investors, there are over 40 different minerals that can be found in Nigeria, with a number of them potentially commercially viable for extraction.

The future of Nigeria is not in oil, it’s in services, infrastructure and industrialization.


Devaluation remains one of the biggest investor concerns. Naira has seen a lot of fluctuations in 2014 and early 2015. In November 2014 Naira was officially devaluated from 150-160 Naira per USD, to 160-176 Naira per USD.

Naira kept falling versus the dollar throughout 2014. The Central Bank of Nigeria had to spend some of its reserves in early 2015 to protect Naira from a continued fall.

It has now been stable for the last 6 months at around 199 Naira per $1.

Nigeria has one of the strongest currencies of the oil exporting nations.

Buhari has made public statements on international news channels, stating that he doesn’t think it’s healthy for Nigerians if Naira is devaluated and that he won’t let Naira go.

There have been foreign currency trade restrictions in the exchanges, this has been felt by many businesses that use foreign currency to conduct business. For example, some firms are unable to source the dollars they need to pay foreigner suppliers. The logistics industry, combined with other issues the country is facing, such as Boko Haram, is seeing Naira devaluation reflected in their bottom lines, as they need to operate in multiple currencies.

A lot of economists are continuously arguing that Naira should be devaluated as this will increase domestic production. This would also go in hand with other policies the government is implementing, such as high tariffs and import bans, as well as the general perception of the domestic manufacturing and consumption potential. There has, however, historically been a bias towards strong African currencies by the central banks, to keep the currencies up, not to face inflation and civil unrests.

Some have argued that there is no need for devaluation, but rather a stabilization of Naira against major currencies.

Any risk analysis done by investors shall account where Naira will fall out.

Domestic companies are advised to borrow in local currencies.


The short term economic difficulties, such as falling Naira and outflows of foreigner capital, are providing discounted deals in underdeveloped industries and sectors of the economy. Some of these industries are far away from any infrastructure peaks, providing great growth and return potentials for investors. The young, upwardly mobile consumer base is proving the big returns Nigerian industries are seeing to be sustainable for long term returns and growth.

The low oil prices have made a shift from oil based economy to a diversified economy. This has shifted focus to underdeveloped industries within the Nigerian economy full of opportunities. Some industries that are just now starting in Nigeria, such as mobile advertising, real estate and technology are bond by the macro threats the economy is facing to a limited extend, decreasing the associated risks with Nigeria while returning the expected frontier market returns.


Nigeria’s import tariffs

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.

Nigeria imports most of the foods it could be producing domestically. The success of the domestic cement industry is considered a result of non-issuing cement import licenses, resulting in the country wishing to extend the cement industries success to other sectors. The most talked about import tariff is the rice tariff. Nigeria is one of the world’s biggest rice importers. Most of the rice come from Thailand where it can be produced two times cheaper than in Nigeria and the Thai rice is considered better tasting than Nigerian rice.

Tariffs have proven to be very successful with the automobiles industry, where a 70% import tariff was introduced for companies without assembly plants in the country. Companies with assembly plants had a zero duty on imported Completely Knocked Down (CKD) vehicles. This resulted in the car manufacturers opening their assemblies locally.

There is the obvious macro-economic question of protectionism versus free trade, that the Nigerian government might be forced to officially address soon, due to Nigeria’s involvement in Economic Community of West African States (ECOWAS).

ECOWAS has been discussing a deal with the EU for liberalisation of 75% of goods and service over the next 20 years, while the EU would provide a duty-free access and €6.5bn in development programmes between 2015 and 2019 to support capacity development. Nigerian government however has raised concerns about this deal jeopardizing efforts at industrialization and protection of local industries. Other peer ECOWAS countries have given support for these concerns.

Potential for big, international trade duty free deals make some industries volatile, especially considering the political uncertainty. If an ideological party supporting free-trade was to evolve, one election could evolve multiple industries dependent on the high import tariff policies.

Nigeria remains the biggest tariff imposer between the ECOWAS countries. Nigeria has flat out bans on 24 product categories.

ECOWAS is agreeing on a common external tariffs for product groups for all of the countries in the bloc. ECOWAS inner trading is quite low, around 10% of the total trading the bloc sees. This indicates that the bloc is to function as an international bloc than anything else. There have also been talks about a common currency.

The international stance and plans of ECOWAS, is taking away some of the control Nigeria needs to develop its domestic industries based on the protectionism policies. It could be argued that the investment opportunities based on these tariffs, such as rice mills, have even more added risks than the regular investment opportunities in Nigeria.

The tariffs have made the multi nationals that manufacture locally to look for sourcing locally, as they can potentially face big import tariffs for their inputs. Their main concern is if they can achieve the same level of product quality by sourcing locally.

Nigeria also has to tackle some of the issues associated with introduction of high import tariffs, such as increased smuggling, increased informal market activity, expected relations with the importing countries, economic difficulties for import driven companies and there is also the risk of inefficient development of the domestic industries, as witnessed in the Kenya’s sugar industry.

The short term success of these tariffs will be dependent on how successful the government is with governing its borders and effectively tackling smuggling.

Nigeria’s economy by numbers and the elements

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.

Economy by numbers

Area – 923,768 km2
Coastline – 853 km
Agricultural land – 78%
Arable land – 37.3%

Population – 181,562,056
Population growth rate – 2.45%
Urban – 47.8%
Urbanization rate – 4.66%
Labour force – 54,970,000
Unemployment rate – 23.9%
Population below poverty line – 70%

GDP (nominal) – $573,652 billion
Rebasing exercise – GDP increase by 89% in April 2014
GDP per capita – $6,000
$1 – NGN199.35

Debt – $22.01 billion
October 2015.

Source: The CIA World Factbook

Informal sector

Research has been conducted that indicates that Nigeria might have one of the world biggest informal economies yet to be accounted for in the GDP.

The informal sector is the biggest job creator in Nigeria and Africa generally, with 80% of the labour force in Sub-Saharan Africa being employed by the informal sector and contributing around 55% of the GDP. Informal sector jobs are attractive to the young and women.

The informal sector is considered a growth opportunity for the Nigerian economy, as it can be formalized to gain taxes and be better accounted for in terms of the GDP growth. Formalizing the informal sector also increases available domestic capital, due to 7% contribution to the pension fund.

Decreases in informal market activity are linked to decreases in poverty.

Poverty and unemployment

Poverty levels (people living on 1.25$ and under a day) have increased over the last decade to 70% of the Nigerian population in 2015.

The average 7% a year economy growth of 2001-2010, has been captured by the top 5%-10% of the country, not particularly the masses, they’re left behind.

There is 23.9% unemployment rate and 1.8 million youths enter the labour force every year. The sectors that creates jobs, such as agriculture, education, public and social administration are growing slowly, not at the pace of demand for jobs.

There are plans and programmes by the government to create 17 million jobs by 2020 by increasing supply-chain linkages between SMEs and large firms.

The youth unemployment rate is at 56%, this is resulting in social unrests led by the 16 to 24 age group.


Nigeria has the biggest population in Africa and the 7th in the world at 181.5 million citizens. 62.5% of the population is under the age of 25 and the median age is 18.2.

47.8% of the population live in urban areas, it’s projected that this will increase to 65% by 2020. An urbanization rate of 4.66% is considered to be one of the GDP growth drivers.

The middle class consists of 23% of Nigerians, there are 8 million households in Nigeria earning over $7,500 a year.


The tax revenues are 4% of Nigeria’s GDP, this is lower than most peer African economies. The government lacks income streams, most businesses taxed are the big corporates focused on exports. Personal income tax is considered irrelevant to the average Nigerian.

Government officials have made public statements, estimating that 75% of registered businesses do not pay taxes and that taxes won’t be increased but rather the collection of taxes will be improved. The government is looking to increase Government Revenue Generation by using e-payment system services.

Formalizing the informal market is considered an alternative to increasing taxes. It remains to be seen if this can be done successfully, since only a small portion of the population has a bank account – everything is in cash in Nigeria and Africa generally.

If the country is able to tackle corruption, it might be able to spend its budget more efficiently.


The country has seen a lot of privatization happen in the power sector – selling successor generation and distribution companies to private investors, while retaining state control of grid transmission. This has been done to finance capacity of the power generators, as there is huge demand and not enough funds for the government to finance it.

The major motivation for privatization in Nigeria is to limit government’s intervention in the management of the economy. This has been seen in a lot of the infrastructure sectors. In railroads a new railway bill has passed through the senate to remove the monopoly privileges of state owned Nigerian Railway Corporation.

Privatization across Africa is one of the biggest opportunities for investors.

Drivers of Nigeria’s economy

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.

Nigeria – ripe for growth

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.

Africa missed out on the industrialization that has happened all around the world in the last 200 years, it is happening to Africa right now and is the main growth driver for the economy and the continents development. The growth will reach a peak in 2050 and Nigeria is due a lot of growth till then.

Nigeria is picking up just now due to the human capital now being way better educated than ever before and the lack of opportunities in other frontier markets, such as South America.

Some government policies have proven to drive the growth of Nigeria, such as the pension funds. Pension funds are creating domestic funds available to be invested in domestic deals.

A UN report listed 9 countries that will have the most population growth by 2050, five out of nine were in Sub-Saharan Africa. In 2050, 50% of people in the world under the age of 25 will be in Sub-Saharan Africa. The preparation for the growing population and this new population itself, is expected to grow the economy and the continent.

People have to eat no matter what, products such as butter are driven by this population growth and there is going to be a lot of economic activity regardless of if the country achieves its economic potential.

Big portion of educated Nigerians have studied abroad, they’re bringing back knowledge to run businesses and also the lifestyle expectations. A lot of the growth in the country is simply due to Nigerians expecting and demanding better quality. People are getting used to good and comfortable lifestyles. Middle class Nigerians have disposable incomes, yet there is little emphasis on savings.

The big multi-nationals that are manufacturing locally are creating demand for commodities, such as sweeteners for bottled drinks companies.

Generally, there is a very strong entrepreneurial spirit in Nigeria, it’s creating Nigeria into a dynamic growth place of Africa.

Investor concerns in Nigeria

While many of the worlds developing frontier markets are similar in their economical appeal, they differ in their operations and if the opportunities are realizable by the companies looking at these opportunities. One of the biggest concerns foreigners have is the business culture and the operational know how.

Enron put blame on their Nigerian power plant when they faced their corporate problems. There have been other examples of huge corporate failures in Nigeria due to lack of governance or other systematic failures. These cases gets associated with Nigeria and create negative investment sentiment.

Rwanda is known of finding out how the criteria for World Bank ratings work and adjusting their policies accordingly. Tactics such as these are employed by countries that have been under a lot of pressure and bad publicity. Rwanda for instance, had to take a lot of aid in the past. This is not a general trend in Africa, but business people should be doing due-diligence on countries themselves, rather than purely relaying on world’s organizations ratings.

Risks can be minimized by understanding the Nigerian market terrain. All of the consultants, documents and reports produced are creating more understanding of the market and generating an investment friendly terrain. Business people shall take advantage of these things to address their concerns.

Another major concern is political stability. There is a risk of emergency elections in case the APC party splits and a lot of the countries potential depends on good governance of the country and passing the necessary policies.

The lack of infrastructure remains a big concern – you cannot run a business without electricity.

The high interest rate government bonds remains an issue. It’s hard to attract investors when the government offers 13% interest rate bonds. The big interest rates are also not sustainable for local manufacturers – it’s hard to stay competitive with a two digit interest rate. By the time a manufacturer receives their money on a 2 year loan period, it’s time to ask the bank to re-finance it.