Published On: Fri, Jun 19th, 2015

After oil

IN THE DAYS before Mr Buhari’s inauguration, wags in Abuja’s watering holes were joking that the new finance minister would find a note on his desk: “Sorry, there’s no money left.” They had a point: lower oil prices and the profligacy of Mr Jonathan’s government have hit Nigeria’s finances hard.

Oil contributes only about a tenth of Nigeria’s GDP, but directly accounts for around 70% of government revenue. Add in indirect taxes, and its contribution rises to about 85%, government officials say. When oil prices were high, there should have been plenty of money to run the country while also saving for a rainy day. Yet over the past two years the government spent when it should have saved.

Government officials are now frantically trying to plug the gaping hole in the public finances that the fall in oil prices has opened up. The value of Nigeria’s oil exports is expected to drop to about $52 billion this year, from $88 billion in 2014. Government revenues will decline by about 40%, and spending will slump. Economic growth is expected to slow to about 4.5% this year, from an average of over 7% a year during the past decade. The government’s capital spending will probably fall by more than half, halting construction of desperately needed roads, bridges and railways.

These difficulties are compounded by the state governments’ murky finances. Some analysts reckon that more than half the states are bankrupt. Many have not paid civil servants’ salaries for three months or more. Lower oil prices also threaten to spill into other sectors of the economy. Consumer spending, much of which is kept going by civil-service salaries, has stagnated. Banks face a wave of bad debts from Nigerian oil firms that bought oilfields when prices were high and are now struggling to repay their loans. In short, Nigeria risks repeating a pattern of wild swings in growth caused by gyrations in the oil price.

Aside from facing an immediate cash crunch, the government will find it hard to fund the new programmes it is hoping to introduce. Mr Buhari has outlined an ambitious programme aimed at reducing extreme poverty. These include a scheme to provide conditional social grants for the country’s 25m poorest people (modelled on Brazil’s bolsa familia scheme), payable if families do sensible things like enrolling children in school and having them immunised, which will cost some 1.25 trillion naira ($6.3 billion) a year.

APC officials say they hope to find the required cash through a combination of plugging “leakages”, short for corruption and waste, and new taxes. An obvious place to start would be subsidies on petrol. Nigeria spends about $6 billion a year (about 1% of its GDP) on these and about half as much again on kerosene, used by the poor for cooking and lighting. Yet it does not appear to be getting value for this money. Subsidised kerosene is nowhere to be seen: many think it is swiftly resold to airlines as jet fuel. Petrol, which is meant to sell in Nigeria for 87 naira ($0.43) a litre, is often smuggled to neighbouring countries where it fetches a higher price. For much of this year Nigeria has been suffering from dire fuel shortages that have forced residents to queue for hours, sometimes days. Traders on the black market, meanwhile, do brisk business selling the stuff for 200 naira a litre outside the official stations, and a lot more at times of extreme shortage.

The new government also urgently needs to reform a tax system that collects much less revenue from companies and from value-added tax (VAT) than do most other developing countries. That is because taxing stuff that comes out of the ground is a lot easier than getting people to hand over some of their own hard-earned cash. Nigerians have long tolerated the theft and squandering of oil wealth, but if the government wants to spread the tax net more widely, it will have to show that the money will not simply leak into the offshore accounts of politicians and senior civil servants.

Yet for all the short-term pain, Nigeria’s economy has made enormous strides to wean itself off oil in recent years. Almost half of its economic output now comes from services. Nollywood, the country’s home-grown film industry, has become the world’s second-largest by output. Innovative startups offering everything from fashion to software development are popping up all over the place, helping to soften the oil shock. And although the naira has fallen sharply against the dollar, food inflation has not speeded up as it usually does when the currency weakens because Nigeria has vastly expanded its own food production over the past few years. The finance ministry reckons that between 2009 and 2013 food imports declined by about $2 billion, to $4.3 billion.

This is partly thanks to food factories like Nestlé’s in Nigeria’s industrial heart of Agbara, to the west of Lagos, one of the Swiss company’s largest. Together with a sister plant farther to the east, it ferments, mixes and presses some 90m soup cubes a day, about one for every two Nigerians. The management is facing the usual problems with infrastructure: it has to generate its own power, clean up its own water and provide health care for its employees, and poor transport links drive up the cost of its raw materials. Even so, it is one of the company’s most efficient factories on the globe, in part because of the benefits of scale from producing a narrow range of products for a huge market. It is also stupendously profitable. Return on investment at Nestle’s Nigerian subsidiary is twice as high as for its global parent.

An economy that has doubled in size over the past decade is an irresistible target. Verod, a Nigerian private-equity firm, has earned some 15 times more than it spent on building Nigeria’s first factory to make drinks cans. It is now investing in fruit-juice makers, a fish farm and a packaging firm. “Our business model is to look for anything that comes into Nigeria by boat and asking if we can make it more cheaply here,” says Danladi Verheijen, the firm’s co-founder and a graduate of Stanford and Harvard Business School. IHS, a firm that is buying mobile-phone towers and managing them more efficiently, has raised more than $5 billion in debt and equity over the past few years.

The proliferation of consumer industries in Nigeria is transforming its economy in more ways than one. The first, and most obvious, is that they are making its economy far less dependent on oil and therefore less vulnerable to oil shocks. Manufacturing now accounts for almost as big a share of GDP as oil, though there is more to do. Services, which include mobile phones and the like, make up about half the economy now. Nollywood employs about 1m people who between them produce some 50 films a week, and is winning viewers right across the continent.

This diversification is also driving a far more important change. As the country moves from pumping oil out of the ground to producing wealth through its industry and talent, it is creating a vast new middle class of entrepreneurs and professionals who want to make money through their own efforts instead of seeking government jobs to siphon off oil revenues.

Some industries in Nigeria still earn huge margins thanks to tariff protection and friends in the government. But in many areas tariffs are falling and new domestic competitors are emerging. Dangote Cement, a Nigerian firm, used to earn margins of more than 60% thanks to import curbs, but competition from other cement-makers, including Lafarge, a French producer with operations in Nigeria, has forced it to cut prices by more than 40% in recent months.

Government efforts to industrialise have not been blessed with much success. Nigeria has spent billions of dollars building vast steel plants that have yet to produce a bar of steel. It is now trying to encourage carmaking at home by levying import tariffs of up to 70% on imported cars. Official car imports into the country have fallen to about a third of their previous level, but those to neighbouring Benin, a minnow of 10m people, have surged to a level about three times higher than Nigeria’s, pointing to a flourishing car-smuggling industry.

Investment in agriculture seems a lot more promising. At independence in 1960 Nigeria was the world’s largest exporter of groundnuts as well as a leading cotton and cocoa grower, but output collapsed in the 1970s as rural infrastructure crumbled. Firms such as Nestlé are trying to buy more of their raw materials in Nigeria, including starch made from cassava, a drought-tolerant plant that produces large tubers. Nigeria is the world’s biggest grower of cassava, but does not do it particularly well: yields per hectare are a quarter of those in some Asian countries. As a result, most of what Nigeria produces is eaten as a subsistence crop on the farms where it is grown, and very little is processed into higher-value foods.

Researchers at the International Institute of Tropical Agriculture, a multinational research centre with headquarters in Ibadan, Nigeria’s third-largest city, have been working with Nestlé on developing high-yielding varieties of the crop and teaching farmers how to grow it. The results are impressive. On a lush green hillside in the institute’s grounds, Alfred Dixon, nicknamed “Dr Cassava”, points to plots of tall, green-leaved bushes that are producing 50 tonnes or more of cassava per hectare, about five times as much as the current Nigerian average.

McKinsey, a consulting firm, reckons that Nigeria could easily double its agricultural output over the next 15 years by introducing some simple reforms. To be fair to Mr Jonathan’s government, his agriculture minister, Akinwumi Adesina, one of the few stars in a generally lacklustre cabinet, had already started to introduce some of them. For example, he pulled the government out of the corruption-ridden business of distributing fertiliser and seeds to poor farmers, introducing smart cards and electronic vouchers distributed through mobile phones. Almost overnight he eliminated a major source of corruption and created booming private markets that attracted investment by big agricultural suppliers. That is reducing poverty, particularly in the restive north, and channelling raw materials into the sort of unflashy industrialisation that creates jobs.

Paradoxically, the depth of Nigeria’s fall is one of the reasons to be optimistic about its future: there is so much to be gained by getting just a few things right. Perhaps the most important of these is to improve its rural infrastructure so that farmers can get their produce to market, and to generate sufficient power to allow businesses to operate unhindered.


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