WED, MARCH 06 2019-theG&BJournal-Charlie Robertson, Global Chief Economist at Renaissance Capital (RenCap) is blunt about what Nigeria needs to do if it is to regain the top spot as Africa’s biggest economy. But first he clarified the accounting fog that had confused Nigerians about how big the economy really is and whether it is actually the biggest in the continent.
‘’Purchasing Power Parity (PPP) dollars, which show Nigeria was the biggest in 2017 at $1.2 trillion, don’t buy you the imports you need to build an oil refinery,’’ he said, as he revealed what put Nigeria’s GDP where it is today.
‘’PPP dollars are NOT what puts Nigeria’s GDP at $397bn. The $397bn figure is the exchange rate the IMF used which is different from the NAFEX rate of NGN362/$ we use).’’
Outlined in RenCap’s 2019-23 outlook for Nigeria, his note yesterday made available to theG&BJournal, is an assessment of the country’s weaknesses and strengths. RenCap identified areas where the government should invest urgently to secure accelerated real per capita GDP growth, areas where the country is not doing enough, and indicated that Nigeria has to face up to the hard truth about some of its economic policies.
‘’To get real per capita GDP growth up to 4-6% (ie headline GDP growth of 7-9%) requires either a doubling of the oil price, or Industrialisation,’’ he said. ‘’Without it, per capita GDP growth may be around 0% which implies headline GDP rising at roughly 3% annually.’’
To achieve industrialisation, Nigeria needs to raise the adult literacy rate from 60% to 70-80% – ‘’which we think can happen from 2024 onwards.’’ His suggestion; an adult literacy campaign could accelerate this – copying what the super poor, war-torn state of South Korea did in the 1950s.
Robertson was clear about what the country has to do about the electricity sector, the biggest challenge investors faced for decades now, ‘’Treble electricity consumption – which we assume requires at least a doubling of the electricity tariff.’’
‘’Buhari’s team has not forced through any of the annual increases due since 2016. As a result, Nigeria has three times more installed generating capacity than actual distribution. We are too glib to suggest it is just about the electricity price – but a big hike will surely be part of the solution.’’
He is also clear about the direction the country needs to go to if it is to attract quality investments.
‘’Double the investment rate from 13% of GDP to 26% of GDP – or triple it, to match what Ethiopia is doing.’’
‘’We suggest that reforms may be needed like removing the implicit fuel subsidy which costs about 0.5% of GDP. It supports consumption and not investment. Morocco after 2012, Egypt since 2014 and even the Gulf countries are cutting fuel subsidies.
Encourage foreign direct investment, which in 2018 fell to $2.2bn according to UNCTAD. Ghana got $3bn. To match Ghana (per capita), Nigeria should be getting $24bn a year. A change of approach to MTN, the oil majors and others may be required.
Boost domestic savings and bring down interest rates which will probably require a smaller budget deficit and higher taxes.
Allow the currency to trade closer to fair value which we estimate today at NGN440/$, NGN470 by year-end and NGN670 by end-2023. Allowing faster currency depreciation does partly contradict point 3 on cutting interest rates. Note that in the immediate term, ahead of the CBN governor’s term expiring on 2 June, fixed income investors are probably assuming short-term currency stability, based on decent FX reserves figures (over $40bn), a current account in small surplus and high domestic interest rates. Our base case is that whoever the governor is, the currency will end-2019 at NGN395/$. We have no reason to believe that if there is a change of CBN governor, we will see an end to the multiple exchange rate regime.’’
RenCap’s summation is a familiar narrative. The good news is that the country’s leadership under President Muhammadu Buhari has a blueprint in its Economic Recovery and Growth Plan (ERGP) which lays out the government’s strategy for achieving sustained and inclusive growth that is similar. But the concern is the pace at which the economy drivers are punching the accelerators.
RenCap’s outlook is a reminder of how to drive the economy, it is about commitment to policies that will as they put it, ‘’accelerate economic growth and ensure that the growth rate surpasses the rate of growth of population.’’
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