Poor governance and violent unrests risk masking the significant economic progress Nigeria has made.
Nigeria’s $510 billion economy, said to be running on a $100 billion infrastructure, could see additional growth of $500 billion by 2030 from four sectors: trade and infrastructure as well as agriculture and manufacturing.
In a new report: Nigeria’s Renewal: Building Inclusive Growth in Africa’s Largest Economy by the McKinsey Global Institute and McKinsey’s Africa office, was presented on the final day of the World Economic Forum on Africa.
The pockets of new growth McKinsey identifies mirror the composition of Nigeria’s gross fixed capital formation in 1960/1961 and 1966/1967.
During both periods investments were concentrated in land and agricultural development, buildings, civil engineering works, plant, machinery and equipment and vehicles.
In that period, a big chunk of consumption and gross fixed capital formation (GFCF), which measures new or existing fixed assets by households, businesses, or government, was by the private sector i.e. companies and households.
In the 1960s the industrial strategy Nigeria pursued was as it is now: import substitution; mainly processing agricultural products, consumer goods and cement. During the 1960 to 1967 period the industrial sector grew by more than 10 percent a year, although from a low base.
Then as now, domestic value added was low; import content for locally manufactured goods was high.
Trading companies like the United Africa Company (UAC) became manufacturers because of generous incentives. Foreign Direct Investment (FDI) increased considerably that non-oil private investment surged by 97 percent between 1960 and 1964.
There was a development plan for 1962 to 1968. It ambitiously allocated 41 percent for electricity, transportation and trade and industry and naïvely set aside 10 percent and 2.5 percent for education and health respectively.
The seeds of squandermania were sown as oil production climbed to 415,000 barrels per day in 1966 from 17,000 in 1960. Recurrent expenditure enormously exceeded revenue.
McKinsey, however, contends that Nigeria’s underestimated economy is more than a play on oil. Based on nominal GDP figures for 2010 to 2013 (rebased), Entertainment, Financial services and Construction were the sectors with double digit compound annual growth rates.
The report notes a misconception “often held by those abroad” about the Nigerian economy. Many think “that oil and gas is the dominant sector and engine of growth”. But in reality the non-oil sector accounts for 86 percent of GDP. And the economy is more diversified than other developing- and emerging-economy oil producers.
The report also notes that “one of the most important under-appreciated changes in Nigeria is the growing size and strength of its consuming class.” Nigeria’s consuming class is expected to swell to 160 million out of a population of 273 million people in the next 15 years, “more consumers than the current populations of France and Germany combined”.
Nigeria’s consumer market, currently valued at $400 billion, could triple to $1.4 trillion by 2030. McKinsey reckons $1 trillion of the total will come from food and non-food consumer goods.
Nigeria’s demographics have been attracting manufacturers and retailers outside and within Africa. McKinsey says “growth in consumer goods purchases should raise trade GDP from $85 billion to $270 billion by 2030 at annual growth of 7 percent.”
Nigeria is where Dangote Cement, the largest cement producer sub-Saharan Africa, intends to generate 61 percent of its earnings by 2016. The housing shortage in Africa’s largest economy is estimated to be 18 million houses and building costs could be as much as $375 billion.
Heineken, the third-largest brewer in the world, has its second-largest brewing operation in the world, after Mexico, in Nigeria. Between 2011 and 2020 Nigeria’s beer market is forecasted to grow at a compound annual growth rate (CAGR) of 6 percent.
Approximately 70 percent of Nigeria’s growing and rapidly urbanising population is less than 30 years old.
Though the rebased GDP figures confirm the rise of a middle income class it also reveals a yawning income disparity. Nigeria’s robust GDP growth has failed to lift millions out of poverty.
Urbanisation has not increased incomes as it has in other developing economies because of the low level of formal, full-time employment. Rural incomes have stagnated as a result of low productivity and inefficient food distribution channels.
The transition from the farm to the factory is not happening. Constraints such as poor road networks and unreliable electricity supply hinder factories from absorbing the influx of people from the farms.
Productivity, not an expanded labour force, is driving growth. According to McKinsey, low productivity and low employment-to-population ratio means the Nigeria has the lowest GDP per person out of seven comparable economies.
To make growth inclusive and provide employment, Nigeria has to tackle illiteracy, invest heavily in infrastructure and healthcare.
The report notes that for investors looking for new fast-growth markets that deliver superior returns Africa holds the greatest potential.
And as Africa’s largest economy, Nigeria can harness this growing interest to realise its “immense economic and social potential” to lift millions out of poverty.
Overall the report (a full-version with further analysis will be published later this year) makes a strong case for Nigeria.
McKinsey argues that advantages like location (“Lagos is one of only two costal megacities in Africa”), economies of scale, entrepreneurialism, a young population and macroeconomic stability can help Nigeria achieve its potential, if challenges such as low productivity and market access in agriculture, prevalence of an informal economy and regulatory uncertainty in the oil and gas sector are tackled.
Tayo Fagbule
