Nigerians will see their real income per head fall every year until at least 2023, according to forecasts by the IMF, a potentially painful squeeze for a country with per capita gross domestic product of just $1,994.
If realised, Africa’s most-populous country — projected to have almost 400m people by 2050, behind only India and China — will suffer at least eight straight years of declining income per capita.
“If the IMF is right that would obviously be awful, a very depressing result,” said John Ashbourne, Africa economist at Capital Economics, a consultancy.
“They have a very rapidly growing population. If they are not able to diversify their economy faster than they have before, a huge number of these people will end up being trapped either in agriculture or low-skilled service jobs.”
Nigeria eked out headline GDP growth of 0.8 per cent last year as it pulled out of a recession fuelled by a combination of falling oil prices and declining oil and gas output due to an insurgency in the Niger Delta. With petrodollars accounting for 70 per cent of government revenues and 90 per cent of export earnings, Abuja’s attempts to maintain the value of the naira via import controls and restrictions on foreign exchange spread the pain to the manufacturing sector.
Yet while growth is widely expected to rise further this year as both oil prices and output recover, with annual population growth of 2.6 per cent, Amine Mati, the IMF’s mission chief for Nigeria, said: “Urgent implementation of a comprehensive policy package will be needed for real economic growth to outpace population growth, which would make an increase in real income per person possible and could make a dent in poverty reduction and employment creation.”
In the eyes of the IMF, one of the core problems holding Nigeria back is a chronic lack of economic diversification, even by the standards of major commodity exporters.
Based on an index maintained by the Observatory of Economic Complexity, a platform operated by the MIT Media Lab, the diversity and sophistication of Nigeria’s exports is the second lowest of 139 countries, marginally ahead of only Guinea-Bissau, but comfortably behind other oil exporters such as Angola, Iraq and Saudi Arabia, as well as extremely poor countries such as Afghanistan, Burkina Faso and Chad.
As the first chart shows, there is a strong relationship between export complexity and GDP per head, suggesting this is a big factor holding Nigeria back.
Moreover, Nigeria is among the minority of countries in the region that saw their export complexity decline between 1995 and 2015, as depicted in the second chart, suggesting the problem is getting worse.
The government of Muhammadu Buhari launched an economic recovery and growth plan last year, which the IMF said had resulted in “significant strides in strengthening the business environment and steps to improve governance”.
However, it added that the plan had “not yet boosted non-oil, non-agricultural activity, brought inflation [currently 12.5 per cent] close to the target range, contained banking sector vulnerabilities or reduced unemployment”.
Instead, a higher fiscal deficit driven by weak government revenues — equivalent to just 5.7 per cent of GDP last year, one of the lowest levels in the world — combined with “still tight domestic financing conditions” has raised bond yields and crowded out private sector credit.
While higher oil prices are supporting near-term growth, without a change in direction, poverty levels will remain high and per capita GDP will continue to fall in the medium term, the Washington-based body concluded.
Even with the short-term pick-up, the IMF is forecasting GDP growth will peak at just 2.1 per cent this year, and is pencilling in marginally weaker numbers still for every year up until 2023, as seen in the third chart.
Non-oil, non-agricultural GDP growth — the main driver of employment — is forecast to be weaker still, remaining below 1 per cent until 2020 and even then only rising to a modest 1.5 per cent.
The economic pain of prolonged negative per capita growth is also likely to spread to Nigeria’s neighbours, with the IMF noting that the country absorbs about 70 per cent of exports from the 14 other members of Ecowas, the Economic Community of West African States.
The Fund called for Nigeria to enact a series of “comprehensive and coherent policy actions” as a matter of urgency to turn its fortunes around.
These include a “growth-friendly” fiscal policy centred on increasing non-oil government revenues to bolster capital spending and the social safety net; maintaining tight monetary policy; and removing distortions in the foreign exchange market, which currently features an official exchange rate of 305 naira to the dollar alongside a separate rate of 365/$ that many companies are forced to use to access dollars.
Structural reforms are also needed to improve the business environment and increase electricity production.
Under this “adjustment scenario”, the IMF estimates that GDP growth would hit 4 per cent by 2020 and accelerate further to 5.2 per cent by 2022.
“Policy action to address current and longer-standing challenges remains urgent and should not be delayed by approaching elections and rising oil prices,” the IMF said, referring to presidential elections scheduled for February.
“Demographic trends imply that Nigeria could be the third most populous country in the world by 2050, requiring faster growth to improve per capita incomes and significantly reduce high unemployment and poverty.”
The IMF’s pessimism is shared to some degree by others. Oliver Bell, portfolio manager of the T Rowe Price Frontier Markets Equity Fund, who has just returned from a visit to Nigeria, said: “The key takeaway from the trip was that Nigeria remains an economy whose fortune is tied to the oil price and this will not change until we see meaningful reform, something that continues to be frustratingly elusive.
“President Muhammadu Buhari has yet to deliver meaningful reform aside from improving security conditions in the oil-producing delta region and in the north against [Islamist insurgents] Boko Haram.”
Other analysts are somewhat more positive than the IMF, however — one school of thought is that the Fund is deliberately taking a particularly gloomy view in order to spur the Nigerian government into action.
“We are a bit more optimistic than they are,” said Capital Economics’ Mr Ashbourne, who has pencilled in growth of 3 per cent this year, a little ahead of population growth (although that was before the release of data this week showing growth was just 2 per cent year on year in the first quarter of 2018, below consensus estimates of 2.6 per cent, with wholesale and retail trade contracting 2.6 per cent).
In the short term, GDP growth will be aided by firmer oil prices, with Brent crude currently trading at $79 a barrel, comfortably above the $67.80 figure the IMF used in its 2018 forecast.
Charles Robertson, chief economist at Renaissance Capital, an emerging market-focused investment bank, who last week hosted a conference on Nigeria, also saw the country enjoying a cyclical uptick given its ongoing recovery from recession and the jump in oil prices.
However, he believed Nigeria would struggle to capitalise on this while it lacked three key drivers of structural growth.
Firstly, adult literacy rates are around 60 per cent, he said, below the 70 per cent that typically needs to be in place to underpin large-scale industrialisation. Secondly, investment should be at least 25 per cent of GDP, but is in fact closer to 15 per cent. Thirdly, power production is sub-150kw hours per capita, when mass industrialisation rarely occurs below 300kwh, he argued.
Insufficient power supply was cited as the single biggest drag on growth in the corporate sector in the Nigerian central bank’s monthly business expectations survey in April.
Moreover, Mr Robertson noted that under a “business as usual” scenario, the central government’s interest payments to revenue ratio would reach 82.3 per cent by 2023, under the IMF’s forecasts, from 59.7 per cent this year, something “which would worry investors” (under the IMF’s adjustment scenario this figure would fall to 22 per cent by 2023).
Despite this, he does believe Nigeria should be able to grow at a 4-5 per cent rate in the coming years, based on 3 per cent annual growth in its working-age population and productivity growth of up to 2 per cent.
Mr Ashbourne argued Nigeria needed to increase investment in agriculture and food processing, in areas such as rice milling and tomato tinning.
“There is a sense that agriculture is the problem and you need to move people out of it, but you also need to raise productivity in agriculture. That would raise income in rural areas,” he said.
“It’s true that agriculture can’t be the future in itself, but it’s certainly the case that it’s going to be a sector that will employ a huge number of people for the next 50 years. You can’t just move everybody out of it and become another Singapore.”
Likewise infrastructure investment should be a priority, with better roads perhaps as important as greater electricity production, Mr Ashbourne argued.
“The cost of producing things in Nigeria is incredibly high. Right now Nigeria imports so much through the port of Lagos because it’s cheaper to import things from China than to make them itself,” he said.
If the IMF’s downbeat forecasts do come to pass, it would not be unprecedented, Mr Ashbourne said, with much of sub-Saharan Africa suffering from falling GDP per capita in the 1970s, 1980s and 1990s, before growth picked up, aided by the start of the global commodity supercycle.
Mr Robertson said the situation in Nigeria in the 1980s was “atrocious”, with per capita income falling 10 per cent in three separate years. While the coming period is highly unlikely to be anywhere near as bad as that, that may be little consolation to those already living in poverty.