Nigeria’s Economic Competitiveness in the African Context

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John C. Anyanwu - j.anyanwu@afdb.org

African Development Bank, Tunisia

Andrew E. O. Erhijakpor -erhijakpor@yahoo.com

Delta State University, Asaba, Nigeria

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This paper addresses two keyissues. First, we provide a set of basic facts on the current state of Nigeria’s economic competitiveness. Using the World Economic Forum’s GlobalCompetitiveness Index, we identify Nigeria’s main competitive strengths and weaknesses.Comparisons with selected African and other countries provide an idea of Nigeria’s economicpreparedness to move to a more advanced stage of development.Second, the paper focuses onthe fact that in spite of huge oil resources, the nation’s economic competitiveness remains verylow. We note the role of expenditure policy in managing the volatility of oil revenue/wealth,which has implications for economic development in Nigeria.We then highlight the areas onwhich the country should focus in order to achieve higher economic competitiveness, sustainablegrowth and enduring prosperity for its citizens. These include measures at the macro, micro,state, and regional levels, in addition to adopting sound and prudent fiscal policy, productiveinvestments (especially on infrastructure and human capital), and diversification of the economy.

The initial version of this paper was presented at the Plenary Session of the 2008 AnnualConference of the Nigerian Economic Society, Abuja, 26-28 August 2008. The views expressed inthis paper are those of the authors and in no way represent those of their respective employers.

Keywords

: Economic competitiveness, competitiveness index, poverty incidence, oil-dependence.

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At least until recently, Nigeria

continued to make progress with its economic reform programme,based on increased oil prices and the National Economic Empowerment and DevelopmentStrategy (NEEDS), aimed at accelerating economic growth, reducing poverty, and achieving theMillennium Development Goals (MDGs).The recent oil boom and reform programme had led to significantly-improved macroeconomicresults, with a modest gross domestic product (GDP) growth and lower inflation (see Figure 1and Table 1). The performance of the Nigerian economy in recent years has benefited both fromthe high world price of oil and better economic fundamentals resulting from economic reforms.Real GDP growth rate averaged 6 percent during the period 2002-06. This solid growth rate,however, still falls short of the NEEDS target rate of 10 percent required to achieve many of theMDGs. Moreover, after peaking at about 10 percent in 2003, real GDP growth slowed to 6.5percent in 2005 and to 5.3 percent in 2006, due to the disruptions in oil production in the NigerDelta.

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However, Nigeria’s economy continues to be vulnerable to external shocks, given its heavydependence on oil. Plummeting oil prices in the second half of 2008 and ongoing unrest in theNiger Delta reduced oil production in the country. However, the non-oil sector’s strongperformance during the year led to overall estimated growth of 6.4% in 2008, despite a decline inoil output. Projections carried out by the African Development Bank in May 2009 indicate a fallin Nigeria’s economic growth to 2.8% and 2.7% in 2009 and 2010, respectively. Other economicfundamentals – fiscal balance, external current account balance and trade balance – are alsoprojected to worsen in 2009 (see Table 1).

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1 9 7 0 1 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 0 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 Q 1

Years

I n f l a t i o n R a t e a n d E x c h a n g e R a t e

-40.00-20.000.0020.0040.0060.0080.00100.00120.00

C r u d e O i l P r i c e a n d R e a l P e r C a p i t a G D P G r o w t h R a t e

Inflation Rate (%)Exchange Rate (N/US$)Crude Oil Price (US$ Per Barrel)Real Per Capita GDP Growth Rate (%)

Source: Authors using CBN Statistical Bulletin Data, Various Years.

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2000 2001 2002 2003 2004 2005 2006 2007 2008(e) 2009(p) 2010(p)

Real GDP Growth (%) 5.3 8.2 21.2 9.6 6.6 6.5 6.0 6.5 6.4 2.8

2.7

Consumer Price Inflation (%) 6.9 18.9 12.9 14.0 15.0 17.9 8.2 5.4 11.6 10.1 2.7Overall Fiscal Balance, includingGrants (% of GDP)5.9 -5.3 -3.3 0.0 8.1 9.4 7.7 0.4 0.0 -12.3 10.0Trade Balance (% of GDP) 27.3 12.8 3.2 11.6 19.9 21.9 18.6 16.3 13.5 2.9 -9.4Source: African Development Bank Database and CBN, Annual Report, 2008(e) estimate (p) projection

Recent official figures indicate that Nigeria’s poverty levels have reduced (Table 2). Accordingto a recent survey, the proportion of people living below the poverty line declined from 70percent in 2000 to 54.4 percent in 2004, though unofficial figures based on household surveysgive higher national poverty figures. Rural areas bear the brunt of poverty, with the poverty ratein excess of 63 percent (see also, Anyanwu, 2005). Nevertheless, income inequality is higher in

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urban areas than in rural areas; the Gini coefficients for urban and rural areas in Nigeria are 0.55and 0.53, respectively.

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YearPoverty IncidenceEstimated Totalpopulation(million)Populationin Poverty(million)

1980 28.1 65 18.261985 46.3 75 34.731992 42.7 91.5 39.071996 65.6 102.3 67.112004 54.4 126.3 68.7

Source: National Bureau of Statistics (NBS), 2006.

The above table shows the national incidence of relative poverty as the percentage of thepopulation with an income of less than two-thirds of the average per capita expenditure inNigeria.Before the global financial crisis, progress was also made in the areas of financial-sector reform(through banking sector consolidation, but recently there was a major rescue of five banks due totheir significant non-performing loans), debt management (especially the Paris Club deal),foreign reserves accumulation (which has recently reduced substantially to finance imports dueto falling oil revenues), and exchange rate stability (which has been unstable since the lastquarter of 2008). The recent increases in world oil prices have enabled the government to pay off its remaining external debt, following the 60 percent debt relief (amounting to about $18 billion)provided by the Paris Club of creditor nations.The Central Bank of Nigeria targets the exchange rate as well as inflation. The naira hasfluctuated within a narrow range against the US dollar. The differential between the officialexchange rate and the parallel market dropped to below 5 percent before the second half of 2008.However, the large depreciation in the naira exchange rate at the end of the year continued in2009, thus jeopardizing the stability of the exchange rate and increasing inflation.In mid-2008, before oil prices plunged, Nigeria’s foreign reserves reached the equivalent of about 10 months of imports, strengthening investor sentiment. As oil prices collapsed, however,reserves also dropped from about $67 billion at mid-2008 to $51.55 billion at the end of the year,falling to $49.9 billion at the end of August 2009.The Nigerian equity market boomed in 2007 and early 2008 with a rate of return of 74.7 percent,well above those in South Africa and Ghana, but then plunged in the second half of 2008 alongwith falling oil prices and the spread of international financial contagion. Market capitalizationas a percentage of GDP fell from 56% in 2007 to 39.7% at the end of 2008. By August 2009, thestock market index was only a third of its peak in early 2008. The crisis in the Nigerian financialsystem is ultimately due to the potent combination of the world financial shocks, Nigeria’sexcessive dependence on oil, a frail domestic financial system, and deficient regulatoryoversight.