Beyond oil: Review of PwC, LCCI report on diversification of Nigeria’s economy

PricewaterhouseCoopers, a leading professional services firm and the Lagos Chamber of Commerce & Industries (LCCI) teamed up to produce a report titled: Nigeria: Looking beyond Oil and presented it to the public on March 17, 2016.

The report identified key areas like agriculture, petroleum (petrochemical and refining), retail, and Information Communication Technology (ICT) as priority sectors with the most dominant transmission links to the overall economy and can be alternatives to diversify the economy away from oil.

These sectors were said to be in the medium-to-long term, key to boosting other sectors like manufacturing. They also provide forward linkages to agro processing and other services such as logistics as well as backward integration to input supply sectors could improve farm incomes, increase employment and improve domestic food security.

Economic analysis

The report noted that Gross Domestic Product (GDP) has slowed, driven by lower oil sector growth and a weaker non-oil sector.

“Nigeria’s economy grew by 2.7 percent y/y in 2015, which represents the slowest growth in the past five years, much lower than the 5-year real GDP average of 4.8 percent y/y. Real growth decelerated sharply to 2.1 percent y/y in Q4’15, reflecting the weakest quarterly performance following a contraction in growth across industries and moderation in the services sector (77 percent of GDP).

Real growth in the crude petroleum and natural gas sector was -5.4 percent y/y in 2015, even as oil exports declined circa 49 percent y/y in 2015.Excluding this sector, the performance of the manufacturing sector was unimpressive with real growth at -1 percent y/y (2014:15 percent y/y) with the sector plagued by the deteriorating operational and macro backdrop; largely the impact of Foreign Exchange (FX) unavailability on raw materials and intermediate inputs.”

The implication of the picture is that despite slowing significantly, Nigeria’s economy remains driven by the non-oil sector which recorded growth of 3.7 percent y/y (2014: 7.1 percent y/y) as the oil sector continues to underperform.

Through a survey of industry leaders PwC and LCCI stated that respondents highlighted Agriculture, Manufacturing and Financial services sectors as those with the most opportunities for growth in the near to medium term at 13 percent. The table below presents the result obtained.

Three reasons were advanced for diversification away from oil; to insulate the economy from the risk of being vulnerable to a single commodity as the different oil price crashes have shown; to create jobs that can raise the standard of living of an average Nigerian. (Oil and Gas jobs account for less than 1% of total employment and the young population can no longer be absorbed by the public sector); to prepare for life beyond the oil resource.

Nigeria has abundance of metals and minerals, a bubbling retail sector and a young middle class that is starting to embrace e-commerce. Nigeria also has a big domestic market for manufactured consumer goods and a population of 177 million with annual growth rate of 3.2 percent and population demographics of 67 percent below the age of 30. This would be assets if political will is directed at strategic policy.

Recommended areas of focus  Agriculture

At independence agriculture was the mainstay of Nigeria’s economy with export crops like groundnut, cocoa, cotton and palm oil earning foreign exchange. But by mid 1980s the country has shifted focus from agriculture exports to petroleum products. As observed by Arunma Oteh in her speech recently, the problem with the situation was that Nigeria’s spending grew more than it earned during the oil boom years.

PwC and LCCI encourage the continued adoption of the Agriculture Transformation Agenda which liberalised seed and fertilizer supply and the development of the Staple Crop Processing Zone (SPCZ) as well as the channelling of more financing to the agriculture sector.

“The impact has been immediate; our analysis shows Nigeria’s share of agriculture exports hitting 1 percent in 2012 for the first time since the 1960s although this has declined to 0.43 percent and 0.45 percent in 2013 and 2014 respectively. We estimate that Nigeria’s agriculture exports could reach US$59 billion (2014: US$8 billion) in 2030 if current reforms are sustained, implying a growth of 9.6 percent per year. This will require raising yields through greater use of fertilizer, seeds and mechanised implements, and increasing the amount of land under cultivation.”

Petrochemicals

The petroleum sector was highlighted due to its significant forward and backward linkages potentials. Diversification within the petroleum sector is key to harnessing the linkages to the non-oil economy. This implies investments across the downstream sector to develop petrochemicals, fertilizers, methanol and refining, industries relevant in both industrial and consumer products which Nigeria currently imports.

Retail

The services sector is Nigeria’s largest and fastest growing sector, accounting for 59 percent of GDP7 and 58 percent of employment according to the report. Structural change in Nigeria has resulted in a shift from agriculture to the services sector.  Trade accounts for 17 percent of GDP and 23 percent of employment and has recorded average real GDP growth rate of 5.48 percent, higher than the economy wide real GDP growth of 5.31 percent over the past four years.

ICT

Citing figures from NCC, it noted that Nigeria has increased internet usage to 95 million people from 10,000 people in 1996 although much of this is mobile broadband. Mobile broad band coverage and usage is concentrated in the major cities too. Weak infrastructure, has kept Nigeria’s internet penetration capped.

“As a market with rising mobile penetration and a negligible fixed broadband infrastructure, Nigeria has the opportunity to leverage mobile technology to generate improved social and economic outcomes across the consumer sector through e-commerce, the financial services sector through mobile banking and mobile insurance and social services through education and healthcare,” noted the report.

Challenges and opportunities

Four key concerns are highlighted that threaten the Nigerian business environment: corruption, inadequate infrastructure, low skill levels and macroeconomic uncertainty.

Taiwo Oyedele, partner and Head of Tax & Regulatory Services said power was not included among the challenges because power was susceptive to policy uncertainties. “The problem with power in Nigeria is policy.”

Other challenges include ease of doing business.  In the 2016 Ease of Doing Business ranking, Nigeria ranks 169th out of 189 economies surveyed. . For instance, it takes 5 days to start a business in Rwanda relative to 28 days in Nigeria. Cost to export is around US$786 vs US$183 in Rwanda.

Exchange rate is also seen as a top challenge facing industries. Capital controls, FX rationing, and restrictions on the importation of certain items, measures adopted by the CBN to preserve the foreign reserves and maintain currency stability, and sustained over a long time will leave the economy worse off.

Pwc and LCCI encouraged policy makers to create an economic and regulatory environment that is unambiguous, transparent, and conducive for business. It also called for developing a knowledge based economy that will yield a skilled workforce, proper fiscal management that will improve tax collection and administration and imbibe a savings culture that will cushion the effects of economic volatility.

The work is the product of analysis of emerging economic patterns, study of economic activities, interviews of foreign companies across Nigeria, impact assessment of regulatory policies and market analysis.

While this report is product of pragmatic thinking, the challenge in Nigeria is getting those who take economic decisions for the country summon the political will to implement wise policies.

ISAAC ANYAOGU