Nigeria’s rapidly growing economy has increased its appeal to the world’s emerging market investors. But political tensions ahead of next year’s elections and failed reforms have exposed some glaring weaknesses.

Nigeria has wafted along a wave of optimism for the past five years. The economy of the oil-rich west African country, by far the continent’s most populous, has been growing at roughly 7% annually in that period, making it one of the fastest expanding in the world.

Investors have rushed in to buy its bonds, shares and property. Their optimism is likely to be heightened further once the government completes a long-awaited recalculation of gross domestic product (GDP), the results of which were set to be released on March 31, after The Banker went to press. With the rebasing, Nigeria could overtake South Africa to become the largest economy in Africa.

International admirers

The country’s rising appeal was reflected earlier this year when Jim O’Neill, the influential ex-Goldman Sachs economist, placed it together with Mexico, Indonesia and Turkey. The MINTs, he believes, will be increasingly important for global investors.

Former Barclays chief executive Bob Diamond’s interest in Nigeria has been viewed as another stamp of approval. He has met senior financial officials in the country in recent months, fuelling speculation that he will use a $325m cash shell he listed in London last December to bid for one of three nationalised banks the government wants to sell. “It’s the first time a banker of that stature has demonstrated such interest in us,” says a businessman in Lagos.

Yet if foreigners needed a reminder of the risks of investing in Nigeria, they got one in February when the president, Goodluck Jonathan, suspended Lamido Sanusi, the widely respected governor of the central bank, for “financial recklessness and misconduct”.

Markets seized up immediately and the naira fell to a record low as investors perceived Mr Sanusi’s ousting to be retribution for his recent claim that the state oil company, the Nigerian National Petroleum Corp (NNPC), had failed to remit $20bn to the government. “We don’t see any upside to this decision at all,” said an analyst at the time. “It has really dented our confidence in the central bank being an independent institution.”

Political tensions

The suspension brought to the fore growing political tensions in the run up to next February’s elections. Nigerians have long suspected ruling politicians of siphoning oil revenues to fund their patronage networks, but even they were shocked by the extent of corruption and mismanagement alleged by Mr Sanusi. For Mr Jonathan, under pressure for a host of issues, not least a failure to quell a violent Islamist insurgency in the north-east of the country, the hassle of those huge losses being made public was scarcely welcome. “Having to explain the alleged withholding of $20bn of oil revenues is not what he needs,” says Mark Schroeder of Stratfor, a US geopolitical analysis firm. “There are so many other criticisms that his opponents can level at him. So, this was something he had to get rid of.”

The elections could be the closest since Nigeria’s transition from military rule to democracy in 1999. The four main opposition parties merged last year to form the All Progressives Congress (APC). It has grown quickly and has already enticed several prominent legislators from the ruling People’s Democratic Party (PDP) and state governors to change their allegiances. “Things move very rapidly in Nigerian politics,” says Vivien Shobo, chief executive of Agusto & Co, a local rating agency. “Not many people expected the APC to get the membership it has in such a short period.”

Its chances of beating the PDP will depend on whether it can stay unified. It has yet to pick a presidential candidate, an issue over which many Nigerian parties have come unstuck in the past. “At the moment, everyone is a beautiful bride,” says Kayode Akindele, a Lagos-based partner at 46 Parallels, an investment fund. “Once they start handing out positions and the losers find out they haven’t got what they wanted, then we’ll know what the APC is really made of.”

At the least, it is likely to present the most formidable opponent yet for the PDP, which has held power easily since 1999. Cabinet ministers admit as much. “The PDP has a challenge that didn’t exist before,” says Ngozi Okonjo-Iweala, the minister for finance and the economy.

Nigeria – Macroeconomic Snapshot

Goodluck’s travails

The APC’s emergence is in part a consequence of dissatisfaction towards the president within the PDP, which is yet to give him formal backing to run for another term. Many of the party’s members feel that Mr Jonathan, a Christian southerner, should step aside for a Muslim from the north. “To a lot of Nigerian politicians, this is the only thing that matters,” says Mr Schroeder.

The issue, a microcosm of the geographical and religious divisions afflicting the country as a whole, is likely to loom large over the PDP as the polls approach. Analysts say it will make the president, already weakened by defections to the APC, reluctant to initiate any major economic reforms that might erode his popularity even more. “It will be very difficult for the Jonathan administration to bring about reforms,” says Mr Schroeder. “Politically, he would be playing with fire if he carried out reforms that were controversial. He would risk what remains of his power base.”

To his critics, Mr Jonathan has failed to implement enough structural reforms since the last elections in 2011. One example often cited is the oil sector. There have been some changes, including the introduction of local content rules, which have led to the birth of several indigenous upstream companies and ended the virtual monopoly of foreign ones. Yet little has been done to make the overall industry more transparent, which Mr Sanusi laid bare with his assertion that billions of dollars of state revenues were missing.

The Petroleum Industry Bill, a key piece of legislation designed to overhaul the oil sector and make the NNPC more transparent, has for years been fought over by politicians and oil operators and is seemingly a long way off being passed. The result is that investment in Nigerian oil fields has fallen sharply. Production, which has also been hit by widespread theft and pipeline sabotage, dropped from 2.1 million barrels per day in 2011 to 1.9 million last year, according to Standard Bank.

Power privatisation

There has been progress elsewhere. In agriculture, the sector which makes up the biggest proportion of Nigeria's GDP, reforms have encouraged greater private sector participation in areas such as the delivery of fertiliser. These have boosted food production. “Agriculture has seen a step change,” says Mr Akindele. “The reforms showed up during the heavy flooding [in 2012] when inflation didn’t go up that much. Overall supply had increased enough to compensate for what shortages did occur.”

Godwin Emefiele, nominated by the president to succeed Mr Sanusi and the current head of Zenith Bank, says that because of the reforms, commercial lenders are starting to provide more agricultural loans, albeit from a low base. “We’ve seen loans to the sector grow from about 1% of banks’ portfolios in 2010 to more than 4%,” he says. “That’s significant.”

One of Nigeria’s main constraints is a shortage of electricity. It generates barely 4000 megawatts (MW) for its 170 million people, which is one-tenth of what South Africa, with a population of 51 million, produces. Since 2011, generation capacity has barely budged. But last year 14 state-owned power companies were sold to local and international investors as part of efforts to privatise the industry. Some believe that will be one of Mr Jonathan’s main legacies. “We will see the efficiencies that come with private sector ownership,” says Bolaji Balogun, head of Chapel Hill Denham, a Lagos-based investment bank. “The real increases [in electricity production] will occur next year at the earliest. But in five years, we should be generating at least 10,000MW.”

Another initiative was the launching of the Nigeria Mortgage Refinance Company (NMRC) in January. Described by Ms Okonjo-Iweala as one of the “missing institutions” Nigeria needs, it is meant to promote home ownership by providing long-term on-lending facilities to banks, which have tended to shun mortgages or only provide them with interest rates of more than 20%. “It will help us deal with social exclusion,” she says. “We’ve never used the housing sector to drive growth before. The NMRC will drive more jobs for carpenters and welders. The cement industry will benefit too. The multiplier effects on the economy will be huge.”

Analysts say plenty of factors are behind the country having less than 50,000 mortgages today, not least a lack of title deeds and an absence of commercial courts, which makes it difficult for banks to foreclose properties. But bankers say the NMRC’s creation is a positive start. “In Nigeria, if you want to buy a property, you practically have to deposit 100% of the cash upfront,” says Mr Emefiele. “For the government to say it’s going to do mortgage financing is an excellent step. No doubt there are other issues that need to be addressed. But once they are [a mortgage market] will blossom.”

Macro stability, for now

Nigeria has experienced macroeconomic stability for several years. As well as having a high real GDP growth rate, its inflation is well into single digits, having fallen from 13% in 2012 to 7.7% in February this year, according to the national statistics bureau. Its foreign exchange (FX) reserves have decreased in the past 12 months from $49bn to $38bn, but are still equivalent to nine months of imports, which is well above the level in most other African countries.

Ms Okonjo-Iweala’s reputation has been hurt by the scandal of the missing oil money, with critics saying that she is responsible for ensuring that the government’s revenues are properly accounted for. But she has otherwise been praised for her fiscal reforms and management. Her 2014 budget was conservative, projecting a deficit of 1.9% of GDP and cutting expenditure by 7%. Most economists believe the fiscal deficit will be bigger, at about 3%, as politicians increase spending before the elections, but say that would still be sustainable, especially given Nigeria’s low debt-to-GDP ratio of just over 20%.

In recent months, the country’s macroeconomic vulnerabilities have been on show. The stock exchange, which climbed over 40% in 2013, has dropped significantly and the naira has been under pressure due to falling oil revenues and a slowdown in portfolio inflows. The latter started happening late last year as the US prepared to unwind its quantitative easing programme, but has been exacerbated by the nervousness created by Mr Sanusi’s suspension.

The central bank has kept its base rate at 12% since early 2011, despite calls from politicians for a cut, and in the past eight months has hiked cash reserve requirements for public sector deposits as it tries to rein in liquidity and protect the exchange rate. But it has warned that this is becoming increasingly difficult, prompting analysts to predict it will have to devalue the currency. “It has almost run out of ammunition,” says Esili Eigbe, head of west African research at Exotix, a frontier markets investment bank.

Monetary policy-makers have thus called on fiscal authorities to do more. They are especially keen for the excess crude account, a government savings fund that stood at $12bn at the end of 2012 but has since shrunk to $3.5bn, to be rebuilt. “If it comes back up significantly, to say $15bn, and if FX reserves do too, the case for a tight monetary policy could be revisited,” says Kingsley Moghalu, a deputy central bank governor. “There’s a reason monetary policy is tight. A large part of it is the softness of the fiscal underbelly.”

Bigger problems

A bigger concern for Nigeria is that its structural weaknesses mean economic expansion is bringing few benefits to the majority of its population. According to national statistics, poverty in the country is worsening, with the proportion of people living on less than a dollar a day rising from 52% in 2004 to 63% in 2011. Economists say unless this trend reverses and more jobs are created, the government will struggle to combat extremism in the north.

The country regularly comes near the bottom of global rankings measuring corruption and competitiveness. Its infrastructure is still mostly dire and the government relies far too heavily on oil, from which it derives 70% of its revenues and 90% of its export earnings. Excluding crude, Nigeria’s revenue collection ratio is a paltry 7% of GDP, according to the International Monetary Fund, and will only drop once output is revised upwards with the rebasing.

Nigeria’s GDP is widely forecast to expand by more than 7% in both 2014 and 2015, while inflation should remain below 10%. In such a scenario, it can hardly fail to attract more attention from global investors. Yet over the longer term it will not be able to ignore its structural deficiencies, none of which will be solved by becoming Africa’s biggest economy. The reforms carried out over the past few years have made a difference. But there is still plenty more to do.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter