Global output growth has been somewhat thwarted over the past few years due to lower global demand, particularly amongst advanced economies, averaging an estimated 3.25% per annum between FY2015/16 – affecting numerous countries across the world. Growth in emerging markets accounted for 70% of global growth during the same period. In contrast, advanced economies began to experience modest growth, showing early signs of recovery particularly in the US and Europe according to the IMF1. Global output is said to average around 3.4% in FY2017 as global demand begins to rise, albeit gradually on the back of growing demand from advanced economies. However, this begs the question: what does this mean for emerging markets in Africa and across the SADC region?
Nigeria experienced GDP growth between FY2011/12 and FY2014/15 ranging from 4.3-6.3% per annum, ultimately earning Nigeria the title of ‘largest economy in Africa’ in FY2015/16. To curb the stunted growth that followed soon thereafter, the Nigerian government adopted an expansionary budget in FY2016/17 seeking to stimulate demand through government expenditure measures. According to the Nigerian treasury, projected government revenue for the FY2015/16 national budget was USD 10.9 billion which was later revised to USD 9 billion (using the current estimated N317.50/USD exchange rate), largely due to the government’s failure to achieve projected oil production levels as well as lower global oil prices. Total budgeted government expenditure for the same period sat at USD 16 billion and of that, 94% was spent by the end of December FY2016/17, taking the budget deficit to 2.3% of GDP.
On the other hand, the FY2016 budgeted government expenditure amounted to US19 billion, a 35% increase from FY2015, signalling the government’s intent on stimulating the economy. The FY2016/17 national budget was formulated on the backdrop of declining oil prices, from an approximate USD 114 at its peak to USD 38 per barrel in FY2015/16. The assumptions of the national budget were premised on the following factors in FY2016/17: oil production of 2.2 million barrels per day, average oil price of USD 38 per barrel and average exchange rate of N197/USD2.
FY2015/16 real GDP declined from an impressive 6.3% growth rate in FY2014/15 according to CABRI3, dropping further into negative growth territory in FY2016. The Nigerian Bureau of Statistics reported in November FY2016/17 that real GDP fell to -2.3% in 3Q2016/17, a sharp contraction from 3Q2015/16 adjusted figures of 2.8% because of lower crude oil prices4. This level is far removed from GDP growth figures attained by fast growing nations (FGNs) within Africa, although it should be noted that GDP growth for regions such as Ethiopia comes from a low base. Nonetheless, Nigeria’s current GDP output is below par.
Another reason Nigeria experienced a substantial decline in GDP output in FY2015/16 when contrasted with the prior three years can be attributed to a significant decline in foreign direct investment (FDI). The United Nations Conference on Trade and Development (UNCTD) reported that FDI declined by USD 1.6 billion, from USD 4.7 billion in FY2014//15 to USD 3.1 billion in FY2015/165. Although, the oil industry plays an important role in the Nigerian economy, it only represents 10% of overall GDP. Sectors such agriculture account for almost 20% of GDP and the services sector makes up half of Nigeria’s GDP output, while employing most of the working population. The fall in FDI had a negative effect on the agricultural and manufacturing sectors, as crucial foreign investment into these core sectors waned from FY2014/15 to the end of FY2015/16. This could be attributed to changing global economy dynamics and market sentiment responding to a rebound in advanced economies – particularly the US economy which began showing signs of recovery during the same period.
As the most populous country in Africa, and one of the largest economies, Nigeria is a key player within the context of the development of the continent (in the same way South Africa is). As major oil exporter, Nigeria has faced several headwinds over the past 24 months, precipitated by a fall in oil and other commodity prices. However, other factors such as a deficient infrastructure, which continues to lag many other middle income nations, increasing security concerns over Boko Harem and other extremist groups, as well lack of policy certainty, contributed to the country’s lacklustre economic performance. Furthermore, Nigeria’s energy grid is unreliable, with tens of millions of individuals without access to electricity and other basic services, hindering the country’s true growth potential.
As one of the largest suppliers of crude oil in Africa, the country’s heavy reliance on oil exports for foreign exchange reserves continues to plague Nigeria’s economy, playing an inextricable part in its stagnant growth. The Finance Ministry announced the FY2016 national budget would be anchored on six pillars, namely: economic reforms, infrastructure, social development, governance & security, environment, state/regional development as the main priorities. Nonetheless, the country has a way to go in order to address its developmental challenges, especially since Nigeria has a considerably smaller national budget for its population size when contrasted with other middle income countries. To put this into perspective, South Africa has a national budget that is almost 10 times larger than Nigeria’s with almost a quarter of its population size. In some ways, this explains why the infrastructure challenge that Nigeria faces will be a perennial one in the medium to long term – the allocated national budget is minute for its population size.
Going forward, the Nigerian government seeks to stimulate real GDP by embarking on more public private partnerships. This will be done through the creation of a USD 25 billion infrastructure fund that will be funded by both the public and private sector within the next three years, asserts the Nigerian treasury6. However, the jury is out whether the government can reach the targeted fund size in such a short period, particularly in light of the fact that the fund size is larger than the FY2017/18 national budget.
After giving his FY2016/17 budget speech, the Nigerian Finance Minister conceded that although the government increased overall fiscal spending for that year, it was still insufficient to give the economy the necessary thrust it required. He alluded to the fact that the private sector has a major role to play in increasing the level of economic activity and encouraging private investors and corporations to invest in Nigeria. The FY2017/18 national budget is the largest ever of its kind. At USD 22.9 billion, the budget is 20.4% higher than the FY2016/17 budget, prompting an increasingly stronger focus by government to stimulate the economy through extensive public expenditure. Unlike FY2016/17, the FY2017/18 budget is premised on a crude oil benchmark price of USD 42.5 per barrel, conservative since OPEC predicts oil prices may reach USD 55 per barrel at some point during the year. Capital expenditure on infrastructural developments such as roads, rail and energy is expected to increase by 24% from the FY2016/17 budget. Once again, the increased budget allocation is welcomed, however, there’s significantly more that can be done with the large infrastructural deficit the country is facing.
Increased concern by investors over Nigeria’s economy has prompted the central bank to reduce the cost of borrowing for government and the private sector with the aim of extending credit to rejuvenate the economy. In fact, the Nigerian government recently announced a new retail savings bond with a coupon rate of 13%. The coupon rate is relatively high when contrasted with other emerging countries, signalling a higher relative risk associated with Nigerian government bonds. In contrast, investors view bonds such as South African Retail Bonds as less risky and therefore the market has priced them at a lower coupon rate. The primary aim for the introduction of the retail savings bond is to diversify sources of funding Nigeria’s government debt by raising capital domestically through local issuance, as opposed to solely relying on international borrowed capital.
On a positive note, Nigeria’s debt to GDP ratio remains one of the lowest in Africa, granting the government substantial leeway to expand fiscal spending. Nigeria’s government debt ratio has averaged around 10.5% to GDP between FY2011/12-FY2015/16 according to the CABRI. The FY2017/18 government budget deficit is projected to reach no more than 2.2% of GDP7, well within globally accepted norms. As admirable as the Nigerian government’s efforts are in restricting excessive government debt, the fact remains that infrastructural deficiency is the biggest factor limiting real economic growth. The IMF expects Nigeria to come out of recession in FY2017/18, projecting 0.8% GDP growth. FY2018/19 GDP growth is anticipated to increase slightly to 2.3%. Nonetheless, we are sceptical of these figures, as they rely heavily on crude oil averaging at least USD 45 per barrel between FY2017/18-FY2018/19. Crude oil remains a volatile commodity and global price stability over the medium term is unlikely to be attained.
The battle for supremacy as Africa’s largest economy is certain to continue, perhaps even intensify between South Africa and Nigeria jostling for the accolade. Both countries will wrestle to remain the largest economy in Africa in the short to medium term, a feat that should not be underrated. In the same way China is eagerly anticipating the day it is announcement as the largest economy on the globe by pipping the US. The size of a nation’s economy is more than a representative numerical figure of its GDP; it runs much deeper. It asserts a nation’s supremacy over its peers – a greater GDP output viewed as more favourable. From a political and economic standpoint, the country with the larger GDP output generally has more bargaining power on matters pertaining to international trade, influence in global governance committees and overall sovereignty over ‘lesser’ nations. Although South Africa and Nigeria are vastly different in some respects and are geographically separated in two distant parts Africa, the ideology connected with which country has the superior GDP output will only get more interesting in years to come.
In FY2015/16 Nigeria elected its new president, Buhari, which signalled a new era for its people. As the first democratically elected Nigerian president through the merger of four opposition parties, his self-handed mandate is to eradicate rampant corruption within the public sector as well as to focus on growing the economy through diversification during his tenure. Judging by his popularity, it is likely he will see out his presidential term in office. However, the more pertinent question is whether his government can deal with the threat posed by rebel groups and militants (such as Boko Harem) by restoring peace within the region. Neutralising these radicals will go a long way in instilling confidence in the Nigerian economy and region, making the country more receptive to foreign investment.
1 International Monetary Fund
2 Nigerian Bureau of Statistics
3 Collaborative Africa Budget Reform Initiative
4 Nigerian Bureau of Statistics
5 United Nations Conference on Trade and Development
6 Nigerian Bureau of Statistics
7 World Bank