For decades Nigeria’s economy was characterised by the growing dominance of the public sector, over-reliance on a single commodity and the pursuit of an import-substituting industrial strategy. Consolidated government expenditure is budgeted at 40% of GDP in 2004, having peaked at 47% in 2001, while oil alone constitutes 40% of GDP, 95% of foreign exchange earnings and 70% of fiscal revenue. The National Economic Empowerment and Development Strategy (NEEDS), the government’s blueprint for economic reform, reflects policy markers’ acknowledgement that growth based on expansionary public expenditure, import-substitution industrialisation and reliance on the export of a few primary commodities is neither efficient nor sustainable.
In addition to a number of weak development indicators – two-thirds of the population below the poverty line and falling per capita incomes – a more telling indictment of Nigeria’s recent industrial strategy is the dismal state of its industrial base, declining industrial output and low capacity utilisation (just 26% in 2000 but improving). In 2003, manufacturing accounted for just 3.8% of GDP.
The private sector is dominated by a few large multinationals, which are heavily dependent on imports and operate largely as enclaves, and a large segment of small and medium-sized enterprises (SMEs) with very little, if any, linkage to the multinationals. A rent-seeking and unproductive culture of over-dependence on government patronage and contracts, with very little value-add, governs the sector.
Barriers to progress
Frequently cited challenges to growing the private sector include:
- the poor state of physical infrastructure;
- the high cost and limited access to appropriate financing;
- insufficient domestic demand;
- the high cost of imported raw materials, equipment and spare parts;
- the lack of skilled labour.
In addition, the legislative and regulatory framework remains oriented toward import substitution and protection of Nigeria’s numerous large, inefficient state-owned companies. As part of the transformation agenda, the government is trying to diversify the economic base and reduce the dominance of the oil sector, mainstream the informal sector (while strengthening its linkages to the rest of the real sector), increase the value-add of local output, increase the share of manufactured goods in total exports and create incentives for a vibrant private sector that can respond to the rigours of market forces. The primary goal of the NEEDS strategy is to build a private sector that can take advantage of the opportunities in the domestic, regional, and global markets.
Strategic strands
There are a number of key strategic thrusts. The first is to redefine the role of government as a facilitator and promoter in the economy and to this end the government is pressing ahead with its privatisation programme (see page 22). Moreover, Nigeria’s policy makers have taken the view that market failures in developing economies require targeted incentives and interventions to promote specific sectors and industries.
The second thrust is to ensure an operating environment that is private-sector friendly. Specific measures include improvements to security, the rule of law, and the timely enforcement of contracts; a focus on reducing policy-related costs and risks, such as corruption, red tape and administrative barriers to businesses; and strengthening the legal system and proper protection of property rights.
Infrastructure
The third thrust is to invest heavily in infrastructure, especially electricity, transport and water. Studies indicate that about 25% of business start-up costs are spent on private power generators, and privately generated electricity costs about 2.5 times as much as electricity provided by the National Electric Power Authority.
The fourth thrust is to provide targeted interventions and incentives to grow the private sector. This will be pursued from a number of directions:
- Nationally co-ordinated strategies for the key sectors that drive growth:agriculture, SMEs, manufacturing, oil and gas sector, solid minerals and services (especially ICT and tourism). Explicit strategies and interventions are designed for each of these sectors to harness and maximise their potential for growth and poverty reduction.
- Cheap and easy access to finance. Consolidation in the banking sector is expected to strengthen banks’ means to serve the private sector while increased competition will squeeze margins and lower the cost of borrowing.
- Privatisation and liberalisation. Privatisation is aimed at shrinking the state sector and enlarging the size of the private sector. It is also aimed at improving the efficiency and competitiveness of enterprises, leading to their long-term sustainability. The liberalisation of sectors that were previously monopolised by the government should unleash competition in the private sector, spurring growth and job creation. This year, the National Assembly is expected to enact a law to give effect to the Competition Policy and Anti-Trust legislation, a key component of the private sector growth strategy.
- Promotion and development of industrial and science and technology parks and industrial clusters. The federal government will work with state governments and the private sector to promote the development of industrial parks as pilots for creating industrial growth points in the country. Export processing zones are also being developed and strengthened.
- Rationalisation and simplification of fiscal, monetary and legal incentives to ensure that firms have access to them.
- Selective import restrictions and aggressive export promotion as part of a strategy of industrial development. Nigeria’s policy-makers take the view that big bang import liberalisation hurts industrial development, benefiting only a small proportion of firms operating. While the government is reducing the cost of doing business in Nigeria, it will use restrictions on imports as part of a strategy to ensure orderly restructuring of the industrial sector. It will aggressively promote exports and foreign direct investment, and it will pursue export orientation as a deliberate policy.
At its core, NEEDS aims to alter the strategy for industrial development, to make it less import dependent, more local resource-based, and more related to local research and development strategies, particularly those focused on SMEs. This strategy will lead to the promotion and development of science and technology-based SMEs.
New role for government
The role of government will be redefined as that of a facilitator and a catalyst. Where it is in the public interest, deregulation will be vigorously pursued, with the government playing a supervisory and regulatory role. The achievements in the telecommunications sector, where the National Communications Commission acts as a pivotal agency for regulation and consumer protection, clearly illustrate the possibilities inherent in a successful deregulation programme.
How has the government fared so far? Private sector development is linked to confidence and fruits of reform have yet to show. It will take time. The government’s first priority is to create economic stability, which will be contingent, initially, on a series of prudent budget cycles but also monetary policy, which is subject to a transmission lag. At the same time, it must push through legislative and regulatory reform in the face of vested interests in the legislature and frequent opposition from ordinary Nigerians, a process that also cannot be rushed. Addressing the critical infrastructure backlog will also take time.
Indeed, the articulation and dissemination of NEEDS only really began in the first half of this year and, representing as it does such a comprehensive shift in economic thinking, it is improbable that it will be instantly absorbed and adopted. In other words, growth of the private sector will be the consequence of – and reward for – the full implementation of NEEDS.
Key strategy points 1 Redefine the role of government as a facilitator and promoter in the economy.
2 Ensure an operating environment that is private-sector friendly.
3 Invest heavily in infrastructure, especially electricity, transport and water.
4 Provide targeted interventions and incentives to grow the private sector
