Overview of Nigerian Economy

8/10/2019 Overview of Nigerian Economy

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Overview of Nigerian Economy:

Nigeria is a middle income, mixed economy and emerging market, with expanding service,

financial, entertainment and communications sectors. It is ranked 30th (40th in 2005, 52ndin 2000), in the world according to the GDP (PPP) as of 2012, and it is the 2nd largest within

Africa. It is on track to becoming one of the 20 largest economies in the world by 2020,

provided they take care of all the factors that are negatively hampering the growth of the

country. Its currently underperforming, manufacturing sector, which has a lot of scope for

improvement, is the third-largest on the continent, and it produces a very large proportion

of goods and services for the West African region.

Nigeria has been touted as an oil rich economy. But the economy has been troubled by

political instability, inadequate infrastructure, corruption, and poor macroeconomic

management. But starting from 2008, it began pursuing much needed economic reforms.

One of the problems facing Nigerian economy is the diversification of its economy. Its

former rulers failed miserably to diversify the economy away from its massive

overdependence on the capital-intensive oil sector, which accounts for the 95% of foreign

exchange earnings and about 80% of budgetary revenues. After it signed an IMF stand-by

agreement in 2000, Nigeria received a debt-restructuring deal from the Paris Club and a $1

billion credit from the IMF, both very much on economic reforms. But, Nigeria pulled out of

its IMF program in 2002, as it failed to meet the spending and exchange rate targets set for

it by these institutions, and as a result they were not eligible for any additional debtforgiveness from those institutions. In 2005 though, they were able to get Paris Club


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approval for a debt-relief deal that eliminated $18 billion of debt in exchange for $12 billion

in payments - a total package worth $30 billion of Nigeria's total $37 billion external debt.

Since 2008 the government has started to show the political will and resolve to implement

the much needed, market-oriented reforms urged by the IMF, such as removing subsidies,

modernizing the banking system, and resolving the regional disputes over the appropriate

distribution of earnings from the oil industry. GDP rose strongly in 2007-12 because of the

overall good performance led by the growth in non-oil sectors and the robust global crude

oil prices. Goodluck Jonathan has established an economic team that includes experienced

and reputable members and has announced plans to improve fiscal management, diversify

economic growth, and transparency. Lack of infrastructure spending and slow

implementation of reforms are the two factors hampering the growth. The government is

rigorously working toward developing s stronger public-private partnerships for roads,

power, and agriculture. Nigeria's financial sector was hurt by the global financial and

economic crises, but the Central Bank governor has taken measures to restructure and

strengthen the sector to include imposing mandatory higher minimum capital requirements.

Problems with the Economy:

Nigeria is suffering from one big problem and that is known as the "resource curse".

Resource curse means an abundance of natural resources which fuels official corruption

resulting in a violent competition for the resource by the citizens of the nation. Nigerias

economy is struggling to efficiently manage the vast resources that they have and areunsuccessful in leveraging these resources to displace the poverty problem that is affecting

around 45% of its population.

Nigeria's exports of oil and natural gas, on which they are highly dependent on, at a time of

peak prices, have enabled the country to post current account and merchandise trade

surpluses in recent years. Reportedly, 80% of Nigeria's energy revenues flow to the

government, 16% cover operational costs, and the remaining 4% go to investors. However,

the World Bank has estimated that as a result of corruption 80% of energy revenues benefit

only 1% of the population.

The country operates a political structure of 36 unequal and poor States with a strong

centre in what is supposed to be a Federal system. For their survival, each State requires

the bounty of the Federal Government in terms of oil revenue.

This situation could not but result in poverty especially where the sources and the pursuit of

internally generated revenue is very weak. Even with the kindness of the Federal

Government, which mainly relies heavily on the high volatility of crude oil prices in the

world market to balance its budget, the situation remains bleak to put it mildly. It is a very

sad story where an ailing father and his hungry children are relying on a single diet (oil and

gas) for their economic survival.


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The Nigerian economy depends greatly on oil, natural gas, coal and tin. It produces 3.3% of

the world's oil supply, which is not as high as other countries that make their money from

the oil industry.

Different sectors in Nigerian Economy:

Agriculture:

Nigeria has vast amount of arable lands and this shows as they rank sixth worldwide and

first in Africa in farm output.

Agriculture has suffered from years of neglect, mismanagement, inconsistent and poorly

conceived government policies and the lack of basic infrastructure. Still, the sector is verystrong and it accounts for over 26.8% of GDP and two-thirds of employment. Now, Nigeria is

no longer a major exporter of these things - groundnuts (peanuts), cocoa, rubber, and palm

oil.

Cocoa production which is taken mostly from the overage and obsolete varieties trees, is

stagnant at around 180,000 tons annually which has decreased from a figure of 300,000

tons, 25 years ago. The condition is even more dramatic in the areas of groundnut and palm

oil production where the production figures have taken a hit toll due to the neglect. The

presence of import constraints limit the availability of many agricultural and food processing

inputs for poultry and other sectors. Fisheries are poorly managed. A critical thing forNigerias future- the land tenure system does not encourage long-term investment in

technology or modern production methods and does not inspire the availability of rural

credit.

Agricultural products include the following:

Cassava (tapioca), corn, cocoa, millet, palm oil, peanuts, rice, rubber, sorghum, and yams.

The agricultural sector suffers from extremely low productivity, reflecting reliance on

antiquated methods. Although overall agricultural production rose by 28% during the 1990s,

per capita output rose by only 8.5% during the same decade. Agriculture has failed to keep

pace with Nigeria's very fast population growth, so that the country, which once exported

food, now relies on food imports to sustain itself.


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Key Economic Indicators:

GDP and GDP per Capita:

Nigerias GDP has seen a constant growth over the time, from 67.65 billion dollars in 2004 to

262.606 billion dollars in 2013. This reflects that the Nigerian economy is developing at a

steady rate. But the major issues here are:

Over dependence on Oil exports. Diversification is happening in Nigeria but that is occurring

at a very slow pace. In order come out of its present status Nigeria needs to pump money

into the non-oil sectors too so that the external shocks may not play a spoil sport to its

growth story.

Mismanagement of the vast natural resources which could see their growth rates even

fatter than what they are presently.


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Balance of Trade:

This shows that Nigeria has consistently been able to maintain a trade surplus. Meaning that

they are exporting more and are importing less than what they are exporting. This is mainly

due to the vast amount of resources that Nigeria possess. Nigerias dependency on oil

exports, their vast arable land available for production of food crops and the exports ofcocoa and rubber are the main things contributing to this factor.

Major EXPORTS:

Petroleum and petroleum products 95%, Cocoa, Rubber

Major IMPORTS:

Machinery, Chemicals, Transport Equipment, Manufactured Goods, Food and Live animals

Inflation Rate:


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Inflation rate has been a big problem for Nigeria. Inflation has been very high for most of

the times and this has been due to many factors that are present in Nigeria. The uncertain

political environment, the lack of drafting of fiscal policies that will alleviate the problem of

unemployment and inflation.

As we have seen that Nigeria maintains a trade surplus and hence it is a relatively closed

economy and thus the lack of competition drives up the prices. Also one more important

thing which drives up the prices i.e. their dependency on importing of the Machine and the

equipment necessary for doing businesses. This has also played up its part in driving up

prices


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Unemployment Rate:

The Unemployment rate is alarmingly high in Nigeria. The problem may prove out to be fatal

for the growth of the Nigerian economy as the rate is increasing at an alarming pace which

is not good for the country.

This is due to the political unrest, lack of framing of policies that will help open up differentsectors and provide job opportunities. This is also very highly dependent on the

predominance of the oil sector in Nigeria. As the oil rates fluctuate so does the

employability.

Interest Rate:


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The interest changes are not frequent as shown by the graph. Nigeria follows a fixed interest

rate of 12% which is relatively high and should be changed more often to produce results for

a volatile market.

Debt to GDP:

The Debt to GDP ratio of Nigeria is comparatively low and this is a positive thing about

Nigeria as they have scope for Debt financing if they want to do it to enhance theireconomy.


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Capital Markets in Nigeria

The main aim of the Nigerian capital market is to organize or mobilize long-term funds. The

Nigerian Stock Exchange (NSE) is the focal point of the capital market and the Securities and

Exchange Commission (SEC) serves as the apex regulatory body. It provides a way for

mobilizing private and public savings and makes such funds available for productive

purposes and activities. It also provides a means for trading in existing securities. To enable

small as well as large-scale enterprises gain access to public listing, the NSC operates the

main Exchange for relatively large enterprises, and the Second-Tier Security Market (SSM)

where listing requirements are less stringent for small and medium-scale enterprises.

The primary market is there for new issues of securities. The mode of offer for the securitiestraded in this market includes offer for rights issues, subscriptions, private placement, offer

for sale etc.

The Secondary market is a market for trading in existing securities. This consists of

exchanges and over the counter deals where securities are bought and sold after they are

issued in the primary market.

Documents

Overview of Nigerian Economy