Nigeria has taken steps to tap into its enormous economic potential, but challenges remain.

The Nigerian government’s current economic policies are focused on addressing key infrastructural shortcomings as a crucial element in setting the stage for longer-term stable growth in an effort to break the past 30 years of uncontrolled boomand- bust cycles. In recent years, the performance of the economy has responded positively to efficiency gains from economic reforms and, with the benefit of high oil prices, has generated strong growth. Economic growth at 7% in 2009 and at an even stronger estimated 8.1% in 2010 in the aftermath of the global economic crisis underscored the resilience of the economy and reflected the prudence of economic policies.

In 2009, the government eased the credit crunch by lowering interest rates. In addition, the government recapitalized struggling banks. These policies maintained the confidence of lenders and borrowers in the financial market and stimulated the economy. With the unfolding global economic recovery supporting high oil prices, Nigeria can expect to maintain strong growth in 2011 and 2012. Improved access to credit from the reformed banking sector and enhanced provision of domestic energy supplies are also expected to support continued improved performance of the non-oil sector. Real GDP growth is thus projected to remain robust at 6.9% in 2011 and at 6.7% in 2012.

The strong growth in output recorded in 2010 was supported by the expansion in oil production following relative peace in the Niger Delta region, but the key driver of growth remained the non-oil sector. Non-oil growth averaged 8.3% in 2010 and accounted for 84.8% of total GDP. The main growth drivers in the non-oil sector were telecommunications, general commerce, manufacturing, agriculture and services. The communications sector in Nigeria has boomed in the past five years, with growth averaging around 30% per annum, driven largely by the expansion of the Global System forMobile (GSM). Large inflows of foreign direct investment (FDI) have played a crucial role. The stock of FDI in telecommunications increased more than 200%, from $7.5 billion in 2005 to more than $18 billion in 2010. The number of mobile-phone lines has increased from fewer than 19 million in 2005 to nearly 80 million in 2010, with tele-density reaching 54.2 lines per 100 inhabitants. The tremendous progress made in telecommunications has contributed to an overall improvement in the business climate, benefiting in particular the manufacturing sector, which, in 2010, grew by more than 6% even with shortage of electricity and paucity of credit limiting the potential of the sub-sector.

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Nigeria’s agricultural sector has also performed remarkably well, with an estimated growth rate in 2010 exceeding 6.0%, reflecting the good weather conditions that boosted crop production. The government’s effort to address protracted issues of inadequate credit and high interest rates in agricultural lending through the Commercial Agricultural Credit Scheme (CACS) has also benefited agricultural expansion: in 2009/10 the government made 200 billion Nigerian naira ($1.2 billion) available at low interest rates to farmers and other practitioners in the agricultural sector.

In the oil sector, the previous five years had been characterized by declining output, due largely to militant activities and the accompanying disruption of oil-producing activities. Before militants began attacks and destruction of oil facilities in 2005, Nigeria had been producing about 2.5 million barrels per day (bpd). By 2008, output had been reduced by about 40% to 1.5 million barrels per day. Production appeared to stop declining in 2009, however, following the federal government’s amnesty program, which brought relative peace to the Niger Delta area. By the end of 2009, petroleum production had increased to more than 2 million bpd, an output level that was maintained in 2010. Oil GDP, comprising crude petroleum and natural gas, grew by 3.9% in 2010. At the same time, oil production remained the dominant activity for export and government revenues. According to government records, in 2010 oil and gas accounted for about 96% of total export receipts and nearly 66% of total government revenues.

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In line with the high infusion of funds into the telecom and oil industries, total investment in the economy has remained high. In 2010, a 4.5% increase in the volume of investment represented about 1.7% of real GDP growth. The contribution of investment to GDP growth is expected to increase to about 2.5% in 2011, but to fall slightly to 2.3% in 2012 as investor confidence in the economy wanes in the wake of the political process. Indeed, Nigeria’s prospects of enhancing investment contribution to growth will be better served if official policy, which establishes a series of incentives to attract foreign capital, is reconciled with what appears to be popular opposition to the presence of foreign investors in certain sectors of the economy. In 2009, for example, the overturn of several licenses and contracts by the government, which it alleged had been improperly awarded by the previous government, dented the country’s image among international investors.


 

This article originally appeared in AfricanEconomicOutlook.org, an online publication that combines the expertise of the African Development Bank, the OECD Development Center, the UN Economic Commission for Africa, the UN Development Program and a network of African think tanks and research centers.

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Analysis
Optimistic outlook

Many observers are optimistic about Nigeria’s future despite the challenges it is confronting. In October 2011, Fitch Ratings lifted its outlook on Nigeria from negative to stable citing an improved outlook for the reforms following the elections in April that brought Goodluck Jonathan to the presidency. Similarly, analysts at FBN Capital, a subsidiary of FirstBank Nigeria, the country’s largest financial institution, predicted in January that if the government pursues its reform agenda, GDP will grow at 8.1% in 2012. They also predicted the non-oil sector will be the major driver of the economy due to robust private consumption and the Nigeria’s economy is growing despite ongoing challenges. recovery in oil production.