NIGERIA ECONOMIC UPDATE  |  FALL 2019 Jumpstarting Inclusive Growth: Unlocking the Productive Potential of Nigeria’s People and Resource Endowments Nigeria Economic Update Fall 2019 Jumpstarting Inclusive Growth: Unlocking the Productive Potential of Nigeria’s People and Resource Endowments © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Acknowledgements The Nigeria Economic Update is a World Bank report series produced twice a year (Spring and Fall). It assesses recent economic and social developments, prospects, and policies in Nigeria. The team was led by Gloria Joseph-Raji (Senior Economist), Emilija Timmis (Economist), and Marco Hernandez (Lead Economist) and included: Mohammed Shuaibu; Joseph Ogebe; Sean Lothrop; Suzana Jukic; Mariano Cortes and Andrej Popovic (financial sector section); Masami Kojima (oil and gas); Max Rudibert Steinbach (global outlook); Abul Azad and Heidi Kaila (box on the impact of conflict on households); Jakob Engel (box on the African Continental Free Trade Area); Dmitry Chugunov (box on education financing); and Maryam Lawal (box on the digital economy). The focus section on productivity was prepared jointly with Cesar Calderon and Catalina Cantu. The team is grateful for valuable discussions with the Ministry of Finance, Budget and National Planning, the Central Bank of Nigeria, and the National Bureau of Statistics. The team also appreciates the comments provided by Hiroshi Tsubota, Muna Meky, Sarosh Sattar, Masami Kojima, Amine Mati, and Liam O'Sullivan. The team would like to thank the International Monetary Fund’s Mission Chief, Amine Mati, and his team for invitations to participate in macro-monitoring missions and for their continual dialogue and collaboration. Ifeoma Ikenye assisted the team. Anne Grant provided assistance in editing and Budy Wirasmo provided assistance in designing. The dissemination of the report and external and media relations are managed by Mansir Nasir. The report was prepared under the overall supervision of Shubham Chaudhuri (Country Director for Nigeria), Elisabeth Huybens (Regional Director for Equitable Growth, Finance, and Institutions), and Francisco Carneiro (Practice Manager for Macroeconomics, Trade, and Investment). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. NIGERIA ECONOMIC UPDATE FALL 2019 Contents Acknowledgementsiii Abbreviations and Acronyms vii Overview1  ecent Economic Developments Chapter 1: R 5 Economic Growth: A slow recovery limits progress in improving living standards 5 The Labor Market: More jobs are needed to employ a fast-growing labor force 8 The External Sector: Exports have increased, but the external balance has deteriorated 10 Monetary and Financial-Sector Policy: Conflicting objectives limit the effectiveness of macroeconomic management14 Fiscal Policy: Limited buffers and oil dependence leave Nigeria vulnerable to shocks 16 Chapter 2: Economic Outlook 24 Global Economic Prospects: Global economic growth is slowing in a context of policy uncertainty and trade tensions 24 Nigeria’s Economic Outlook: Stable growth but vulnerable to risks 24 Risk Scenario: A moderate decline in oil prices could lead to a recession in Nigeria 28 Boosting Productivity to Accelerate Growth and Job Creation Chapter 3:  33 Introduction33 The Evolution of Productivity in Nigeria 35 Drivers of Productivity in Nigeria 39 Resources and Incomplete Economic Transformation 42 Policy Options to Boost Productivity 46 Policy Transparency and Predictability 47 Input Quality and Availability 49 Reduced Regulatory Discretion 51 Access to Finance 52 References54 Nigeria: Key Economic Indicators 56 iv Contents JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS List of Figures Figure O.1. Nigeria continues to recover from the 2016 recession, though growth is projected to be below peers 3 Figure O.2. More Nigerians are looking for jobs, but few find them 3 Figure O.3. Raising revenues would allow Nigeria to invest in much-needed human capital and infrastructure 3 Figure O.4. Nonoil exports increased but overall the external balance deteriorated 3 Figure O.5. Under a business-as-usual scenario, the number of people living in poverty could increase dramatically 3 Figure O.6. Boosting the productivity of the Nigerian economy will help promote growth and job creation 3 Figure 1.1. Nigeria’s real GDP growth has trailed growth in peer1 countries since 2015 5 Figure 1.2. GDP growth remains below the rate of population growth 5 Figure 1.3. Services contributed most to growth in H1 2019 7 Figure 1.4. Oil prices declined slightly; production recovered 7 Figure 1.5. Nigeria’s GDP per capita is contracting 7 Figure 1.6. Nigeria’s per capita income is not catching up 7 Figure 1.7. As more people look for jobs, few find them; new jobs tend to be part-time and informal 9 Figure 1.8. Unemployment is rising as more Nigerians compete for fewer jobs 9  n the year following the recession (Q1 2017–Q1 2018) no Nigerian state created enough jobs to Figure 1.9. I accommodate its growing labor force… 9 Figure 1.10. …but the situation improved, and by Q3 2018, four states were creating enough jobs to reduce the number of unemployed workers. 9 Figure 1.11. The current account balance turned negative in H1 2019 11 Figure 1.12. Foreign portfolio investments are by far the largest share of capital inflows into Nigeria 11 Figure 1.13. An upsurge in imports had the most impact on the current account balance in H1 2019 11 Figure 1.14. The CBN issued more securities in 2019 14 Figure 1.15. Foreign portfolio investment grew significantly in 2019 14 Figure 1.16. Banking system credit to the Federal Government has soared, while credit to the private sector remains low 15 Figure 1.17. Commercial bank credit in H1 2019 was concentrated in industry and services 15 Figure 1.18. Fiscal buffers are depleted even though the average crude price mostly exceeds the budget benchmark18 Figure 1.19. Compared to peers, Nigeria’s consolidated government revenues are strikingly low 18 Figure 1.20. Nigeria’s public debt portfolio is largely domestic 21 Figure 1.21. The Federal Government’s debt is by far the largest 21 Figure 2.1. Growth is forecast to stagnate; any shocks would lower it further 25 Figure 2.2. With per capita incomes contracting, poverty will continue to rise 25 Figure 2.3. A moderate and temporary decline in international oil prices… 31 Figure 2.4. …would have a significant negative impact on GDP growth in Nigeria 31  igeria’s Business-as-Usual Scenario: Projected Population Growth, Required Job Creation, and Figure 3.1. N Share of the World’s Poor, 2018–30 33 Figure 3.2. Aggregate Labor Productivity Relative to the United States, 1960–2017 36 Figure 3.3. Output per Worker, Nigeria and Comparators Relative to the United States, 1980 vs. 2017 36 Figure 3.4. Traditional Solow Growth Decomposition, 1961–2017 36 Figure 3.5. Growth Decomposition in Nigeria, 1961–2017 37 Contributions to the Output per Worker Growth from Factor Accumulation and TFP, relative to Figure 3.6.  the US, Nigeria, 1960–2017 37 Growth Decomposition: Conventional and Natural Resource-Reflective Methodologies, Nigeria Figure 3.7.  and Comparators, 1996–2017 37 Figure 3.8. Growth Decompositions, Traditional and Accounting for Natural Capital, 1996–2017 38 Contents v NIGERIA ECONOMIC UPDATE FALL 2019 Figure 3.9. Changes in TFP, Natural Capital and Standard Solow Models, Nigeria 38 Figure 3.10. Changes in Natural Capital stock and Oil Prices, Nigeria 38 Figure 3.11. Capital-Output Ratios, Nigeria and SSA Averages, 1960–2017 39 Figure 3.12. Public and Private Capital Stock, Nigeria and Comparators, 2017 40 Figure 3.13. Public and Private Investment, Nigeria and Comparators, 2011–17 40 Figure 3.14. Human Capital Index Scores and Real GDP per Capita, Nigeria and Comparators, 2017 41 Figure 3.15. Sectoral Contribution to Growth, 2004–14 42 Figure 3.16. Sectoral Contribution to Growth, 2015–18 42 Figure 3.17. Share in Total Employment, 2005–15 43 Figure 3.18. Share in Total Value Added, 2005–15 43 Figure 3.19. Labor Productivity of Nonresource Sectors relative to Agriculture, Nigeria 44 Figure 3.20. Labor Productivity of Nonresource Sectors relative to Agriculture, SSA 44 Figure 3.21. Labor Productivity in Agriculture and Other Nonresource Sectors relative to the US, Nigeria 44 Figure 3.22. Labor Productivity in Agriculture and Other Nonresource Sectors relative to the US, SSA 44 Figure 3.23. Employment and Productivity in Nigeria, 1971–2011 45 Figure 3.24. Employment in Agriculture and Global Oil Prices, 1970–2011 45 Figure 3.25. Sectoral Employment Shares, Nigeria and Comparators, 2016 46 Figure 3.26. Sectoral Value-Added per Worker, Nigeria and Comparators, 2016, relative to the US 46 List of Tables Table 2.1. Medium-Term Macro-Fiscal Projections 26 Table 3.1. Traditional Solow Growth Decomposition, 1961–2017 36 List of Boxes Box 1.1. Harnessing the Benefits of the African Continental Free Trade Area (AfCFTA) 12 Figure B1.1.1. Nigeria is among the most closed economies 13 Figure B1.1.2. Nigeria’s exports are highly concentrated… 13 Figure B1.1.3. …more than those of other large commodity exporters. 13 Box 1.2. Financing Human Capital Development in Nigeria: Basic Education 19 Figure B1.2.1. Gross enrollment in basic education will rise between 2018 and 2030 20 Box 1.3. The Impact of Conflict on Households and Welfare in Nigeria 21 Figure B1.3.1. Conflict events have risen since 2010 22 Figure B1.3.2. The North-east of Nigeria is affected most by conflict 22 Box 1.4. Digital Economy Reforms for Nigeria’s Economic Transformation 30 Box 3.1. Defining Productivity 35 vi Contents JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Abbreviations and Acronyms AfCFTA African Continental Free Trade Area bbl Barrels BDC Bureau De Change bn Billion BOF Budget Office of the Federation BoP Balance of Payments CBN Central Bank of Nigeria DMO Debt Management Office ECA Excess Crude Account ERGP Economic Recovery and Growth Plan FDI Foreign Direct Investment FGN Federal Government of Nigeria FMDQ Financial Markets Dealers Quotations Forex Foreign Exchange FPI Foreign Portfolio Investment GDP Gross Domestic Product H1 First Half of the Calendar Year H2 Second Half of the Calendar Year HCI Human Capital Index IEFX Investors & Exporters Foreign Exchange mbd Million Barrels per Day MPR Monetary Policy Rate MSME Micro, Small and Medium Enterprise NBS National Bureau of Statistics NNPC Nigerian National Petroleum Corporation OAGF Office of the Accountant-General of the Federation SME Small and Medium Enterprise SSA Sub-Saharan Africa TFP Total Factor Productivity TSA Treasury Single Account VAT Value Added Tax WDI World Development Indicators WEO World Economic Outlook WEF World Economic Forum Abbreviations and Acronyms vii JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Overview Nigeria continues its recovery from the 2016 Nigeria’s growth outlook is vulnerable to external and recession, sustaining an estimated 2 percent growth domestic risks. Externally, Nigeria is confronted with a rate in 2019. The collapse of global oil prices during sharper-than-expected slowdown in the global economy, 2014–16, combined with lower domestic oil production, and geopolitical and trade tensions. Domestically, led to a sudden slowdown in economic activity. Nigeria’s the main risks are associated with the degree of annual real GDP growth rate, which averaged 7 percent predictability of macroeconomic policies, the pace of from 2000 to 2014, fell to 2.7 percent in 2015 and to structural reforms, and the country’s security situation. -1.6 percent in 2016. Growth rebounded to 0.8 percent The economy’s sensitivity to volatile oil markets is a in 2017, 1.9 percent in 2018, and then plateaued at major cause of uncertainty and a disincentive to long- 2 percent in the first half of 2019, where it is expected term investment. For instance, a decline in oil prices to remain for the rest of the year. Services, particularly to the levels seen in 2016 would significantly reduce telecoms, remained the main driver of growth in 2019, growth, potentially leading to another recession. This although trade started contracting amidst increasing time, however, Nigeria’s fiscal and external positions use of policy measures aimed at import substitution. are more fragile because the fiscal buffers in the excess Agricultural growth picked up slightly but remains crude account are depleted, and international reserves affected by insurgency in the Northeast region and mask considerable amounts of foreign-held short-term ongoing farmer-herder conflicts. Industrial performance government and central bank securities. In this context, was mixed: growth in the oil sector remained stable, but a negative shift in investor confidence could lead to a manufacturing production slowed in a context of weaker drop in international reserves and put pressure on the power sector supply. Overall, the slow pace of recovery exchange rate and the public debt stock. Conversely, in 2019 is attributable to weak consumer demand growth could be accelerated through reforms that boost and lower public and private investment. The annual tax revenues to allow for higher investment in human headline inflation rate fell from a peak of 15.7 percent and physical capital, as well as efforts to improve the in 2016 to a projected 11.6 percent in 2019 but remains quality of spending and reduce barriers to trade and high and above the central bank’s target of 6–9 percent. private sector development. For example, gradually eliminating the use of monetary policies that crowd out In the absence of structural reforms, growth is credit to the private sector would accelerate growth. projected to remain stable, averaging 2.1 percent during 2020–21. In agriculture, the outlook remains The recession spurred a rise in unemployment, but below potential due to continued insurgencies, which some states have recently begun creating enough in the recent past have displaced people and destroyed jobs to keep pace with their growing labor force. crops. Oil production is projected to remain levelled In 2018, Nigeria created about 450,000 new (net) at around 2 million barrels per day (mb/d), below the jobs, partially offsetting the loss of 700,000 jobs in the 2.3 mb/d target outlined in the government’s medium- previous year. However, Nigeria’s labor force is growing term fiscal strategy. Growth in the nonoil industry rapidly. In 2018, about 5 million Nigerians entered and services would remain stable in a context of low the labor market, resulting in an additional 4.9 million investment levels, high unemployment, and high unemployed people in the last year. In percentage terms, financing costs. the national unemployment rate rose from 18.8 percent in the third quarter (Q3) of 2017 (the year following the recession) to 23.1 percent in Q3 2018. Positive news are Overview 1 NIGERIA ECONOMIC UPDATE FALL 2019 emerging from a subset of states that are now creating development, and improve the efficiency of public more jobs than the entrants to the labor market. In service delivery. 2017, none of the 36 states in Nigeria and its Federal Capital Territory created enough jobs to absorb new Increasing productivity will be vital to support labor market entrants. The situation improved in 2018, robust growth and job creation in Nigeria. Nigeria’s with four states—Lagos, Rivers, Enugu, and Ondo— economic productivity is low by international standards. generating more jobs than labor-market entrants, leading Productivity has grown slowly, and since the recession, to a decline in unemployment in these states. it has been declining, affecting growth. The productivity gap between Nigeria and comparator countries Economic and demographic projections highlight reflects both its lower relative stocks of physical and the urgent need for reform. With population growth human capital and the inefficiency with which inputs (estimated at 2.6 percent) outpacing economic growth in (capital and labor) are transformed into outputs. The a context of weak job creation, per capita incomes are vulnerability of Nigeria’s economy to volatile oil prices falling. Today an estimated 100 million Nigerians live on has also inhibited sustained productivity gains: labor has less than US$1.90 per day. Close to 80 percent of poor repeatedly shifted from agriculture to services when oil household are in northern Nigeria, while employment prices were high, then shifted back when oil prices were creation and income gains have been concentrated in low, thereby limiting the economic transformation that central and southern Nigeria. The “cost of inaction” is is needed to produce more and better-paid jobs. significant. Under a business-as-usual scenario, where Nigeria maintains the current pace of growth and The focus section of this report analyzes the evolution employment levels, by 2030 the number of Nigerians of productivity in Nigeria and identifies policies and living in extreme poverty could increase by more than institutions that can leverage productivity growth to 30 million, and Nigeria could account for 25 percent of accelerate Nigeria’s economic expansion and create world’s extremely poor population. new job opportunities. The analysis highlights four key priorities. First, ensuring policy transparency and Building reform momentum is essential to mitigate predictability will be critical to reduce investment risk risks and promote faster, more inclusive, and and promote growth outside the extractive industry. sustainable growth that improves living standards Second, investing in infrastructure, strengthening land- and reduces poverty. Robust growth and job creation tenure security, improving educational outcomes, and will require strengthening macroeconomic management liberalizing the trade regime and enhancing trade and while increasing fiscal revenues to attenuate the impact transport facilitation would help develop value chains of oil-sector fluctuations and advance much-needed and facilitate the efficient reallocation of factors of investments in human capital and infrastructure. production, making Nigeria more cost-competitive. This edition of the Nigeria Economic Update (NEU) Third, reducing regulatory discretion would help attract discusses selected reform areas, including: (i) leveraging foreign and domestic investment to the nonoil sector, trade integration to harness the benefits of the encourage competition, and promote formalization. Africa Continental Free Trade Area; (ii) improving And fourth, improving access to finance could enable basic education financing to improve human capital new firms to compete with incumbents and allow more- outcomes; (iii) monitoring the impact of conflict on productive firms to scale up their operations. Actions household’s welfare to protect the poor and vulnerable; in these areas would lay the groundwork for Nigeria’s and (iv) leveraging digital technologies to diversify the transition to a new economic model that more effectively economy and create jobs for young workers. Reforms in utilizes its large, young population and abundant natural these and other areas would enable Nigeria to strengthen resources to support sustainable growth and poverty its macroeconomic resilience, promote private sector reduction. 2 Overview JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure O.1. Nigeria continues to recover from the Figure O.2. More Nigerians are looking for jobs, but 2016 recession, though growth is projected to be few find them below peers Real GDP growth (percent): Nigeria and comparators Labor force entrants and jobs created, 2015–18, million 2016 2017 2018 2019 2020 2021 6– Nigeria -1.6 0.8 1.9 2.0 2.1 2.1 4– Commodity- 1.5 2.1 2.2 2.1 3.1 3.0 2– exporting EMDE 0– Other EMDE 6.0 6.1 5.8 5.2 5.5 5.5 -2 – Sub-Saharan 1.3 2.6 2.5 2.9 3.3 3.5 Africa -4 – Q4-2015 Q4-2016 Q4-2017 Q3-2018 Advanced 1.7 2.3 2.1 1.7 1.5 1.5 J Net new jobs (full-time) J Net new jobs (part-time) ▬ Net labor force entrants economies ▬ Net working age population addition Q Net new jobs (part- and full-time) Source: For Nigeria: National authorities and World Bank calculations. For remaining Source: National authorities and World Bank estimates. region: World Bank Global Economic Prospects (June 2019). Note: EMDE = Emerging Markets and Developing Economies. Figure O.3. Raising revenues would allow Nigeria Figure O.4. Nonoil exports increased but overall the to invest in much-needed human capital and external balance deteriorated infrastructure General government revenue (share of nominal GDP), av. 2015–18 Change in current account balance and its contributions, 2011–19 35 – 6– 30 – 4– 25 – 2– 20 – 0– 15 – 10 – -2 – 5– -4 – 0– -6 – . . . S A F dle al p EX ral p IND EN GA ) al p DN GA RU BR ZA midome n M ctu K N 14 ion I N r inc iratio u – eg -8 – e w - sp t r 0 0 R 11 12 13 14 15 16 17 18 H1 19 L o A S (2 0 20 20 20 20 20 20 20 20 20 ▬ SSA average ▬ 25th percentile MIC ▬ 75th percentile MIC J Oil exports J G&S exports excl. oil J G&S imports (reduction in) J Net remittances J Net income and transfers excl. remittances Q CAB Source: World Bank calculations based on World Development Indicators. Source: National authorities and World Bank estimates. Figure O.5. Under a business-as-usual scenario, Figure O.6. Boosting the productivity of the Nigerian the number of people living in poverty could increase economy will help promote growth and job creation dramatically Projected population growth and share of the world’s poor Aggregate labor productivity relative to the United States, (2018–30) 1960–2017 Number of jobs needed to reach middle Share of world's poor in Nigeria, percent US=100 income employment level, million 30 – 25 – 90 – 80 – 20 – 70 – 20 – 60 – 15 – 50 – 40 – 10 – 10 – 30 – 5– 20 – 10 – 0– 0– 0– 60 63 66 69 72 5 78 81 84 7 90 93 96 99 02 5 08 11 14 7 2018 2030 2018 2030 19 19 19 19 19 197 19 19 19 198 19 19 19 19 20 200 20 20 20 201 ▬ Advanced economies ▬ Non-SSA developing countries ▬ Sub-Saharan Africa ▬ Nigeria Source: World Bank estimates (see text for details). Source: World Bank estimates (see text for details). Overview 3 JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS  ecent Economic Chapter 1: R Developments Economic Growth: A slow recovery 2.7 percent in 2015 and -1.6 percent in 2016. Despite limits progress in improving living its modest recovery since 2017, Nigeria’s growth rate standards remains below those of peer countries (Figure 1.1). Nigeria’s economy continues to recover from the Nigeria’s recent economic performance reflects a 2016 recession, with GDP growth remaining broadly combination of slow growth in private consumption stable at 2 percent in the first half (H1) of 2019. The and private investment combined with contracting real GDP growth rate accelerated from 1.7 percent in net exports. Though positive, the growth of private H1 2018 to 2.1 percent in H2 2018, then eased slightly consumption (accounting for about 60 percent of to 2 percent in H1 2019. However, Nigeria’s recovery GDP) remains constrained by high inflation (averaging following the 2014–15 oil shock has been slower than 11 percent during H1 2019) and stagnating real those of most comparator economies (Figure 1.1). Until incomes. While an uptick in public capital spending in 2015, Nigeria’s real GDP growth compared favorably the beginning of the year has helped boost investment, with that of peer countries, including structural peers the contribution of investment to growth remains (i.e., commodity exporters with large populations) and limited due its small share in the economy.2 Net exports aspirational peers (i.e., upper-middle-income countries of goods and services contracted, as import growth with growth rates that Nigeria could match). Between (especially capital goods and services) outpaced oil- 2000 and 2014, Nigeria’s GDP growth rate averaged dominated exports. 7.2 percent, but the oil shock caused it to plunge to Figure 1.1. Nigeria’s real GDP growth has trailed Figure 1.2. GDP growth remains below the rate of growth in peer1 countries since 2015 population growth GDP growth (constant 2010 US$), av. 2015–18, percent GDP and population growth, 2009–18, percent 10 – 9– 8– 7– 6– 5– 4– 2– 3– 0– 1– -2 – -1 – -4 – A ND EN al p. al p. DN dlee EX al p. AF GA US RA NG 1 4) I K ion ctur I midom M ion t Z N R B -3 – – g er -inc ira 0 00 Re Stru w s p 09 10 11 12 13 14 15 16 17 18 (2 L o A 20 20 20 20 20 20 20 20 20 20 ▬ SSA average ▬ 25th percentile MIC ▬ 75th percentile MIC J Real GDP (constant 2010 market prices) ▬ Population growth Source: World Bank calculations based on WDI. Source: World Bank calculations based on NBS. 1 Structural peers include countries that resemble Nigeria in terms of their economic structure and performance indicators. These include lower-middle-income countries with large populations and natural-resource exports exceeding 20percent of total exports. Aspirational peers are countries that Nigeria could match in terms of their economic performance. These include upper-middle-income countries with nominal income per capita at least double that of Nigeria, populations of over 30 million, and natural resources exceeding 20 percent of total exports. Regional comparators are geographically proximate countries that exhibit similar economic characteristics. 2 The latest expenditure-side GDP estimates released by Nigeria’s National Bureau of Statistics (NBS) date from the first quarter of 2019. Chapter 1: Recent Economic Developments 5 NIGERIA ECONOMIC UPDATE FALL 2019 Services drove growth in the first half of 2019, and promote import substitution. The strategy aims supported by agriculture and industry. Representing to achieve production self-sufficiency in certain partly 53 percent of the economy and growing at a rate of imported commodities, including rice, wheat, sugar, and 2.2 percent, services contributed 1.2 percentage points palm oil. Consequently, agriculture has received ample (pp) to GDP growth, with telecommunications and direct support from the government and, in recent years, information services contributing the most (Figure from the Central Bank of Nigeria (CBN). In H1 2019, 1.3). Agriculture grew by 2.5 percent and contributed the CBN continued to support agriculture through 0.5 pp to GDP growth. Industry growth was dominated concessionary financing and risk-sharing programs by the oil sector, which contributed 0.2 pp to growth, such as the Commercial Agricultural Credit Scheme with nonoil industry (manufacturing, construction, (CACS), the Nigerian Incentive-Based Risk Sharing and utilities) growing by 1 percent year-on-year and in Agricultural Lending (NIRSAL) program, and the contributing about 0.1 pp to growth. Anchor Borrowers Program. Since 2015, importers are not eligible to source foreign exchange from Nigerian The growth of services accelerated from 0.8 percent forex windows for staples such as rice, vegetables, in H1 2018 to 2.2 percent in H1 2019. Expanding at poultry, meat, and tomatoes. a rate of 9 percent year-on-year, information technology and telecommunications drove the overall growth of Rising oil production accelerated the growth of the services, bolstered by gains in road transportation. (Figure 1.4). Nigeria’s oil sector despite lower oil prices  Wholesale and retail trade (which provides employment oil output in H1 2019 (2.0 mbd) was marginally higher opportunities to about 10 million Nigerians)3, recovered than in H1 2018 (1.9 mbd) but remained below the through H2 2018, but then slowed and started government’s budget benchmark of 2.3 mbd (Figure contracting in early 2019 in a context of tight foreign- 1.4). Meanwhile, the average price of Bonny Light, exchange (forex) restrictions. The finance and real estate Nigeria’s premium-grade crude oil, declined by about subsectors showed similar patterns. 7 percent from US$72 in H1 2018 to US$67 in H1 2019. Oil output is limited by a lack of significant Agriculture, which constitutes a quarter of the new investments, which are deterred by regulatory country’s GDP and employs about half of the labor uncertainty. Nigeria also continued to suffer episodes force, picked up slightly, but remains below its of crude oil theft in H1 2019.5 Oil and gas, which potential. In H1 2019, crop production, which is make up only 10 percent of GDP and employ less than responsible for 90 percent of agricultural output,4 was 1 percent of the labor force, remain the country’s main affected by the ongoing insurgency in the northeast export commodities (accounting for 90 percent of total region and by farmer-herder conflicts in the north- goods exports) and contribute about 50 percent of total central region. Together, those regions produce a government revenues. The sector therefore remains significant share of the country’s main crops, particularly central to Nigeria’s economy. grains (sorghum, millet, maize, and rice), beans, yams, cassava, potatoes, groundnuts, sesame, and soybeans. The growth of the nonoil industrial sector slowed Agriculture grew by 2.5 percent in H1 2019, marginally from 2.7 percent in H1 2018 to 1 percent in H1 up from 2.1 percent in H1 2018. The government’s 2019. Manufacturing growth slowed from 2 percent in Economic Recovery and Growth Plan targets agriculture H1 2018 to less than 1 percent, as lower real incomes, as a key sector to support economic diversification electricity shortages, the high cost of bank financing, and 3 National Bureau of Statistics data; includes those working 1–19 hours and treated as unemployed for the unemployment statistics. 4 The other components are livestock production, fishing, and forestry. 5 The Nigerian National Petroleum Corporation (NNPC) reported that Nigeria lost about 22 million barrels of its crude oil production to theft in the first half of 2019. This is equivalent to about 120,000 b/d—about 6 percent of Nigeria’s daily production. 6 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS restrictions on access to forex for some imported inputs GDP growth remains below the estimated population eroded private demand.6 The early-June adjustment of growth rate of 2.6 percent, resulting in declining the exchange rate used to compute customs duties from real per capita incomes. In the aftermath of the recent N305/US$ to N326/US$ added to the challenges faced oil shock, Nigeria’s living standards began to decline by manufacturers. After a prolonged period of slow as sustained high population growth rates exceed the growth, coal mining grew by 20 percent in H1 2019, but growth rate of the economy (Figure 1.5). In 2018, metal ore mining contracted. The production of solid about half of all Nigerians were estimated to be living minerals, which Nigeria has in abundance, constitutes in extreme poverty. The vulnerability of those living about 2 percent of GDP, and the government is seeking below the poverty line is worsened by the adverse to encourage exploitation of solid minerals. Supported security situation in the north, which has displaced a by higher public investment and private megaprojects, large population that has amplified the high incidence of the construction subsector grew in H1 2019, albeit at a poverty in the north-east. lower rate than in the previous year. Figure 1.3. Services contributed most to growth in H1 Figure 1.4. Oil prices declined slightly; production 2019 recovered Real GDP growth by sector, 2015–19, percent Oil production, 2014–19, mbpd US$/bbl 4– 2.5 – – 80 3– – 70 2.0 – 2– – 60 1– 1.5 – – 50 0– – 40 -1 – 1.0 – – 30 -2 – – 20 0.5 – -3 – – 10 -4 – 0– –0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 J Agriculture J Oil industry J Non-oil industry J Services J Domestic oil production, lhs ▬ Bonny Light Price, rhs Q Real GDP (% yoy, market prices) Source: World Bank calculations based on NBS. Source: Nigerian National Petroleum Corporation (NNPC). Figure 1.5. Nigeria’s GDP per capita is contracting Figure 1.6. Nigeria’s per capita income is not catching up GDP, population, and GDP per capita growth rates (percent change in constant US$ or GDP per capita, PPP (constant 2011 international $) relative to the US (US=100) people) 20 – 35 – 30 – 15 – 25 – 10 – 20 – 5– 15 – 10 – 0– 5– -5 – 0– 00 02 04 06 08 10 12 14 16 18 98 00 02 04 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 20 20 19 20 20 20 20 20 20 20 20 20 20 ▬ GDP growth ▬ GDP per capita growth ▬ Population growth ▬ Nigeria ▬ China ▬ Regional peers Source: World Bank calculations based on WDI. Source: World Bank calculations based on WDI. 6 Since 2015 (at the height of the oil price shock and reduction in foreign exchange inflows from oil exports), the CBN designated some imported products as ineligible for foreign exchange in a bid to manage forex demand. Some of these products (now 42 of them) are inputs into manufacturing. Chapter 1: Recent Economic Developments 7 NIGERIA ECONOMIC UPDATE FALL 2019 While Nigeria has achieved considerable progress in Nigerians in 2018, 90 million were active in the labor boosting income levels and living standards, it has force. Of these, about 70 million were employed full- or not yet managed to reach a convergence path with part-time, while another 21 million were unemployed advanced economies. Nigeria’s performance relative to but actively looking for a job. Nigeria’s labor force is China illustrates the missed opportunities of the past also growing rapidly: in the last five years, 19 million five decades (Figure 1.6). In 1970, Nigeria’s per capita Nigerians entered the labor force (Figure 1.7).8 During GDP was roughly double that of China in purchasing- the same period (which spans the recent recession) power-parity terms. By 1998, China had caught up with 3.5 million jobs were created. Consequently, 80 percent Nigeria, and both countries had per capita income levels of new labor market entrants ended up unemployed, equal to about 7 percent of that of the United States at adding 15 million to the number of unemployed. the time. However, the Chinese economy continued to Between 2015 and 2018, the number of unemployed accelerate, and by 2018 China’s GDP per capita was nearly quadrupled (Figure 1.8), and the unemployment almost five times that of Nigeria. rate reached 23 percent. Nationally, in the year after the recession (Q3 2017–Q3 2018, latest available), more High levels of income inequality weaken the impact than 5 million Nigerians entered the labor force (Figure of growth on poverty reduction. Nigeria’s Gini 1.7). Joining the 16 million already unemployed, they coefficient was 43 in 2009, the latest year for which competed for just 450,000 net new jobs. Given the data are available. Though not exceptionally high by the high population growth rates, nearly 30 million new standards of Sub-Saharan Africa (SSA), national-level jobs would be needed by 2030 just to keep the current inequality indicators obscure profound regional and employment rate constant. rural/urban disparities. Central and southern Nigeria are wealthier than the northern regions, and urban Unemployment is particularly acute among youth areas dramatically outperform rural areas on indicators and women. In 2018, 37 percent of 15–24-year- of both monetary poverty and nonmonetary wellbeing. olds were unemployed, compared to 16–24 percent in The country’s poorest areas are also highly vulnerable the other age groups. Of those employed, only one- to conflict (see Box 1.3), and the ongoing Boko Haram third have a full-time job, compared to two-thirds of insurgency has displaced millions of people in the areas the workforce as a whole. Gender disparities in full- bordering Niger, Chad, and Cameroon. time employment are also considerable: 48 percent of active women are employed full-time, compared to 64 percent of men. Women hold only about 30 percent of civil-service and college-lecturer jobs and constitute just 6 percent of national parliamentarians. Women’s The Labor Market: More jobs are economic empowerment is vital to growth and job needed to employ a fast-growing creation in Nigeria, particularly in the context of a large labor force young population with higher expectations for quality employment. The October 2019 edition of the World The differential between high rates of population Bank’s Africa’s Pulse discusses policies that can improve growth and low rates of job creation has led to an women’s economic opportunities and narrow gender increase in unemployment and underemployment. gaps.9 Nigeria’s labor force is large: according to the National Bureau of Statistics,7 out of 115 million working-age 7 This section references the Nigeria’s National Bureau of Statistics labor force data according to the Nigerian definitions of employment and unemployment. Total number of the employed includes those employed full time (at least 40 hours a week) and part-time employees (working 20 –39 hours a week). The unemployment numbers include those in the labor force unable to find any employment (0 hours) and those under-employed (0–19 hours). 8 The national fertility rate is 5.5 children per woman, well above the rates of regional and structural peers. 9 See World Bank (2019), Africa’s Pulse, October 2019, Volume 20. Washington, D.C.: The World Bank. 8 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 1.7. As more people look for jobs, few find Figure 1.8. Unemployment is rising as more Nigerians them; new jobs tend to be part-time and informal compete for fewer jobs Annual change to labor force and jobs (millions) Index of employed, unemployed and inactive people (Q4 2014=100) 6– 350 – 325 – 4– 300 – 275 – 250 – 2– 225 – 200 – 0– 175 – 150 – -2 – 125 – 100 – -4 – 75 – 4 1 15 01 6 01 7 01 7 18 Q4-2015 Q4-2016 Q4-2017 Q3-2018 -20 -20 -2 -2 -2 -20 Q4 Q3 Q2 Q1 Q4 Q3 J Net new jobs (full-time) J Net new jobs (part-time) ▬ Net labor force entrants J Recession - - - Employed full-time - - - Employed part-time ▬ Unemployed ▬ Net working age population addition Q Net new jobs (part- and full-time) ▬ Inactive ▬ Employed full- and part-time Source: World Bank calculations based on NBS data. Notes: Figure 1.7 plots the difference in the level of variables over the course of one year (e.g. for 2017, the net labor force entrants present difference between the total labor force in Q4 2017 compared to Q4 2016). Figure 1.8 the labor force variables as index (where Q4 2014 value is equal to 100). Due to data avilability, annual estimates for 2018, are based on data for Q3 2017–Q3 2018. Figure 1.9. In the year following the recession (Q1 2017–Q1 2018) no Nigerian state created enough jobs to accommodate its growing labor force… Annual change in number of people in the labor force, employed, and unemployed 600,000 – 500,000 – 400,000 – 300,000 – 200,000 – 100,000 – 0– -100,000 – -200,000 – -300,000 – do gu os wa gi yi lsa be un yo iti fara una araAbia Imo awa mbe teau koto Edo vers sina bbi Fct bra iger awa gun iverraba bomorno nue chi elta ano /37 On Enu Lagsara Ko bonaye Yo Os O Ek m d w Jig Go Pla So Ri Kat Ke am Ndam O ss R Ta wa I B Be Bau D K eria Na E B Za Ka K An A Cr o Ak Nig J New jobs (full- and part-time) J Net addition to labor force Q Net new unemployed (total) Figure 1.10. …but the situation improved, and by Q3 2018, four states were creating enough jobs to reduce the number of unemployed workers. Annual change in number of people in the labor force, employed, and unemployed 600,000 – 500,000 – 400,000 – 300,000 – 200,000 – 100,000 – 0– -100,000 – -200,000 – -300,000 – s s o gi wa mo na yi yo lsa bia be iti on un wa bra do ara oto au ara T be bi ina er rno er un wa lta ba ue hi no 7 go er gu nd ra I adu bon O aye A Yo Eka Ib OsJiga am E Kw Sok lateamf FC om Keb ats Nig Bo Riv Og ma DeTara Ben auc Ka ria/3 La Riv Enu O Ko sa G K s a Na K E B Ak w An P Z os Ad B e Cr Nig J New jobs (full- and part-time) J Net addition to labor force Q Net new unemployed (total) Source: World Bank calculations based on NBS data. Notes: The graphs plot the absolute number of: net new part- and full-time jobs created in each state (upper panel: Q1 2017–Q1 2018; lower panel: Q3 2017–Q3 2018). Chapter 1: Recent Economic Developments 9 NIGERIA ECONOMIC UPDATE FALL 2019 Some states are creating enough jobs to keep up with informal. Informal jobs tend to offer less employment the growth of their labor forces. In the year following and income security, especially since employers have little the recession (between the first quarter of 2017 and access to financial services. Many low-income households the first quarter of 2018), 10 states saw some positive depend on subsistence agriculture or low-productivity job creation (Figure 1.9), but the number of new jobs self-employment in services and industry, and a was not sufficient to absorb the new entrants into the significant share of the population moves in and out of labor force. Meanwhile, 26 of 36 states and the Federal poverty. Nigeria has the largest installed manufacturing Capital Territory (FCT) were still losing jobs, and base in West Africa, yet wage employment in industry unemployment has been rising across all Nigerian states. is rare. Just 10 percent of the working-age population By the third quarter of 2018, (latest available), in four is employed in formal wage labor, and over half these states—Lagos, Rivers, Enugu, and Ondo—in 2018 jobs are in the public sector. Informal enterprises have growth of full- and part-time jobs significantly outpaced low growth potential, limited access to the formal legal the growth of the labor force, reducing unemployed, system, and few opportunities to leverage the economies and the number of job-losing states declined to 21 plus of scale and agglomeration associated with urban centers. the FCT (Figure 1.10). The remaining 11 states created Informality also narrows the tax base, which is already new jobs, but not enough to employ all new labor-force distorted by an overreliance on oil revenues and limits entrants. Average unemployment rates are higher in oil- the resources available for public investment. abundant southern states and in the north, where they are also rising more rapidly. In 2018, nine northern Higher investments in the current and future states experienced increases in unemployment rates of workforce skills would help Nigeria harness some over 10 pp. of the demographic dividend. Most of Nigeria’s labor force are low-skilled: about 50 percent of workers have However, the quality of the available jobs has only a primary education or less; 30 percent never declined. Most new jobs created in the last five years attended school. Just 20 percent of Nigerian adults aged were part-time, and the likelihood of getting a full-time 18–37 years who completed primary school can read. job is now lower than it was before the oil shock (Figure Among workers aged 15–24, only 59 percent of women 1.7). In 2014, 81 percent of new jobs were full-time. As are literate compared to 71 percent of men; less than the economy entered recession in 2016, fewer full-time half completed secondary school. Meanwhile, 9 million jobs became available, though there were more part-time Nigerian children are out of school, especially in the jobs (Figure 1.7). In 2017, there were not enough part- northeast, where families were displaced by the Boko time jobs to balance the sustained decline in full-time Haram insurgency.11 jobs, and total jobs fell by more than 700,000. In 2018, both full- and part-time jobs grew positively but at a low rate. By the end of the year, 3 million fewer full-time jobs were available than had been before the crisis. The External Sector: Exports have High rates of unemployment and underemployment increased, but the external balance have contributed to the growth of the informal has deteriorated economy. Nigeria now has an estimated 54.6 million informal workers, representing 53 percent of the labor Despite a modest increase in the dollar value of force.10 The size of Nigeria’s informal economy has goods and services exports, Nigeria’s current-account been estimated at 50 percent, among the highest on the balance turned negative in H1 2019. Nigeria’s current- continent. An estimated 75 percent of all new jobs are account balance declined from 3.0 percent of GDP 10 According to National Bureau of Statistics data, there is slightly more than one informal worker for every formal sector worker. 11 See the Fall 2018 edition of the NEU: “Investing in Human Capital for Nigeria’s Future.” 10 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 1.11. The current account balance turned Figure 1.12. Foreign portfolio investments are by far negative in H1 2019 the largest share of capital inflows into Nigeria Balance of Payments, 2015–19 Composition of the Financial Account, 2015–19 Percent of GDP US$ billion US$ billion 4– – 60 15 – 3– 10 – – 50 2– 5– 1– – 40 0– 0– – 30 -5 – -1 – -10 – -2 – – 20 -3 – -15 – – 10 -20 – -4 – -5 – -25 – H1 H2 H1 H2 H1 H2 H1 H2 H1 – 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 J CAB, lhs J Financial account balance, lhs ▬ External reserves (end of period), rhs J Net FDI J Net FPI J Other inflows (net) Q Financial account balance Source: World Bank calculations based on CBN data. Source: World Bank calculations based on CBN data. in H1 2018 to -2.6 percent in H1 2019 as higher Figure 1.13. An upsurge in imports had the most impact on the current account balance in H1 2019 capital and services imports increase, in part related to Contribution to the change in Current Account Balance, construction of a private petroleum refinery in Lagos 2011–19 State (Figure 1.11 and Figure 1.13). Other nonoil Percent of GDP imports have been subdued by weak demand and forex 6– restrictions on 42 groups of products. The value of oil 4– and gasoline imports fell, partly due to the lower oil 2– prices. The services and income components of the 0– current account are in negative territory, as has typically been the case, though service imports, particularly -2 – travel and transportation, have been rising. Current -4 – transfers, mainly diaspora worker remittances, steadied -6 – in H1 2019 at US$13.5 billion—more than half the -8 – US$22.7 billion value of net oil exports in the first half 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 H1 20 19 of the year. Over time, the steady flow of remittances J Oil exports J G&S exports excl. oil J G&S imports (reduction in) J Net remittances J Net income and transfers excl. remittances Q CAB into Nigeria has been a solid support for the current Source: World Bank calculations based on CBN data. account, which would have often been negative without it.12 first pillar of the government’s Economic Recovery and Growth Plan 2017–20, drafted after the 2014/2015 Oil and gas continue to dominate Nigeria’s export commodity price crash, calls for improving the external portfolio, contributing an estimated 86 percent of balance of trade by broadening the export base; however, total exports in 2019  (see Figure B1.1.2 in Box 1.1). as yet progress has been slow to make a dent in the trade The slight increase of the value of total goods exports in account. H1 2019 (US$31.3, compared to US$30.2 billion in H1 2018) was driven by the small uptick in nonoil exports, On July 7, 2019, Nigeria signed the Africa which rose from US$2.7 billion to US$4.3 billion. Continental Free Trade Area (AfCFTA) agreement. Oil exports declined slightly from US$27.5 billion to The goal of AfCFTA is to increase trade between African US$27 billion due to lower prices (Figure 1.4). The countries. As one of the most closed economies in Africa 12 The section refers to the CBN Balance of Payments data. Chapter 1: Recent Economic Developments 11 NIGERIA ECONOMIC UPDATE FALL 2019 with a concentrated export-base, Nigeria can gain from business regulation, long-term investors continue to increased regional integration. Box 1.1 provides a brief find Nigeria unattractive because of such fundamental overview of the potential welfare gains that the AfCFTA structural deficiencies as prolonged insecurity and a can have for the country. significant infrastructure deficit. The increased outflows of “other investment” in H1 2019, and large and The financial account balance is also estimated volatile errors and omissions in the balance of payments to have deteriorated despite sustained Foreign highlight the need to improve Nigeria’s external sector Portfolio Investment (FPI) flows ( Figure 1.12). FPI statistics. inflows rose in 2017, after exchange rate stabilization, and were further spurred by accelerated issuance Sources of external financing for Nigeria require of CBN bills and after the 2019 national election, close monitoring. Highly concentrated in monetary supported by the stability of the Investors & Exporters instruments, FPI flows tend to be responsive to domestic Foreign Exchange (IEFX) window exchange rate and monetary policy decisions, oil price movements, and by high short-term domestic money market rates unpredictable policy adjustments globally. For Nigeria, (rates on Nigerian Treasury and CBN bills), which sudden outflows would eat into already slipping external currently range from 11 to 17 percent. Foreign direct reserves and could destabilize the current exchange rate investment (FDI) picked up slightly but at 0.6 percent solution decision to hold the IEFX rate at about N360/ of GDP remained low. Uncertainties about Nigeria’s US$). External reserves rose from US$43.1 billion in macroeconomic fundamentals may limit FDI inflows January to US$45.1 billion at the end of June, equivalent to small investments in domestic production. Although to 6 months of goods and services imports.13 However, in recent years the federal government and some state the gross figure masks a considerable amounts of forex governments have made significant efforts to improve swaps, and foreign holdings of short-term government Box 1.1. Harnessing the Benefits of the African Continental Free Trade Area (AfCFTA) Nigeria can gain from the AfCFTA. It is among the most closed countries in Africa (Figure B1.1.1) and its exports are the least diversified (Figures B1.1.2-3). Because its exports are highly concentrated in oil, they fluctuate with oil prices. Nigeria trades little with other African countries and has few nonoil exports beyond relatively basic agricultural goods. Accelerating diversification and becoming more integrated into the regional and global economy could help Nigeria achieve its potential as an African economic powerhouse. Nigeria has yet to take a leading role in the Economic Community of West African States (ECOWAS), or beyond the region in the African Union (AU). The good news is that Nigeria’s signing of the AfCFTA in July 2019 and proactive stakeholder consultation efforts beforehand could signal that it is now more willing to become a driver of continental growth and integration. Today, Nigeria has an opportunity to capitalize on the potential gains of doing so. Nigeria could leverage integration into the regional market to achieve economies of scale and lower costs for manufacturers and exporters. That would make it possible for its competitive services firms to expand into other countries. Working through AfCFTA, Nigeria could leverage regional market integration to achieve economies of scale, lower costs, build regional value chains, and take a larger role worldwide—e.g., regional value chains can provide a stepping stone into global value chains. 13 This is the 12-month moving average; the CBN has not published day-to-day external reserves data since November 2011. 12 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Box 1.1 continued There will be losers and winners. The International Monetary Fund estimates that trade reforms foreseen in the AfCFTA would lead to welfare gains of 1–1.2 percent, with most gains driven by the reduction of nontariff barriers (NTBs), e.g., reducing the widespread use of import bans and addressing inefficiencies at borders (Abrego et al. 2019). Nigeria’s short-term revenue losses from AfCFTA's tariff liberalization would be small and distributed over 10 years (Arenas and Vnukova 2019); the result would be only a 0.2 annual percentage change in tariff revenues (0.1 percent of tax revenues). In the long run, trade and welfare gains are estimated to increase substantially in response to such other aspects of trade agreements as trade facilitation, elimination of NTBs, and liberalization of services (Vanzetti et al. 2018). Nigeria’s proactive stance in AfCFTA negotiations would ensure that its private sector can take advantage of new opportunities. At the same time, the federal government needs to address concerns that greater integration could hurt Nigerian manufacturers. To support those who might lose from increased openness, the government has options, among them a new Africa Union facility to support countries that experience revenue declines from the AfCFTA. The African Export-Import Bank has also agreed to provide a credit line of up to $1.5 bn to help members meet shortfalls. Figure B1.1.1. Nigeria is among the most closed economies Trade Openness of Goods and Services, 2015–17 Percent of GDP 140 – 120 – 100 – 80 – 60 – 40 – 20 – 0– A A S le le diitng y NG ) NG IDN EG Y IND ME X MY ZA F dd e mi om dd e mi om or 14 mo t ies 0 3– p er -inc w er -inc o mx p n t r (20 Up Lo C e ou c Source: World Bank calculations based on data from WDI and CBN. Figure B1.1.2. Nigeria’s exports are highly Figure B1.1.3. …more than those of other large concentrated… commodity exporters. Composition of Nigeria’s Exports Composition of Exports of Other Large Commodity Exporters Extractives Other goods Extractives Food, vegetables, Other goods animals Food, vegetables, animals Source: World Bank calculations based on data from World Integrated Trade Solution (WITS). Note: Other commodity exporters include Nigeria’s structural and aspirational peers (Brazil, Colombia, Algeria, Egypt, Indonesia, India, Mexico, Malaysia, Peru, Russian Federation and South Africa. Chapter 1: Recent Economic Developments 13 NIGERIA ECONOMIC UPDATE FALL 2019 and CBN securities; a sudden reversal of capital inflows Actions to keep exchange rate and foreign reserves into Nigeria could swing the financial account position stable slowed the growth of credit to the private very quickly, putting pressure not only on international sector. The main monetary policy instrument deployed reserves but also on exchange rates and domestic yields. in 2019 was the issuance of liquidity management International reserves fell to US$42 billion at the end of bills (“CBN bills”) through open-market operations. August 2019 following a reduction in foreign holdings While these bills are often issued to control monetary of short-term securities. growth, in H1 2019 they were used more often and at higher yields to attract foreign investors and thus keep foreign reserves and the exchange rate stable. The stock of CBN bills grew markedly between June 2018 and June 2019, hitting US$48 billion in June 2019 (Figure Monetary and Financial-Sector 1.14), with yields of 16–17 percent. Their issuance also Policy: Conflicting objectives limit included maturities that compete with federal Treasury the effectiveness of macroeconomic bills (T-bills). The attractive yields on both CBN and management government securities supported sizable foreign inflows into Nigeria in H1 2019 (Figure 1.15), and over one- The headline inflation rate remained stable in H1 third of CBN securities are currently held by foreigners. 2019. Inflation settled between 11.0 and 11.4 percent However, they also reduce incentives for commercial in H1 2019, driven by higher food prices, and remains banks to lend to the private sector, because banks would above the CBN’s target range of 6–9 percent. While rather invest in high-yielding, income-tax-exempt, core inflation trended down from 9.9 percent in January and bank risk-capital-free exposures than in more risky to 8.8 percent in June, food inflation, which has a private assets. Bank exposures to the private sector have weighting of over 50 percent in the Consumer Price continued to fall in relation to total bank assets and in Index (CPI) basket, has been affected by persistent real terms (by about 8 percent in Q1 2019). Meanwhile, conflict in the major food-producing regions of northeast the combined exposure of commercial bank balance and north-central Nigeria (Box 1.3). In H1 2019, the sheets to government and CBN securities increased from food-inflation rate ranged from 13.2 to 13.8 percent. about 40 percent of private sector credit as of 2017 to about 56 percent as of March 2019. Figure 1.14. The CBN issued more securities in 2019 Figure 1.15. Foreign portfolio investment grew significantly in 2019 Value of CBN-Issued Bills, 2017–19 FPI and FDI Inflows to Nigeria, 2015–19 US$ billion US$ billion 50 – 14 – 45 – 12 – 40 – 35 – 10 – 30 – 8– 25 – 20 – 6– 15 – 4– 10 – 2– 5– 0– 0– 7 7 8 8 9 9 H1 H2 H1 H2 H1 H2 H1 H2 H1 n-1 Ju l-1 n-1 Ju l-1 n-1 n-1 2015 2016 2017 2018 2019 Ja Ja Ja Ju ▬ FPI inflows ▬ FDI inflows Source: CBN. Source: CBN. 14 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS As commercial banks’ access to CBN bills and the CBN refunded some of the additional cash reserves government securities increased, the CBN introduced which it had debited from the 12 penalized banks as measures aimed to encourage banks lending. The they began to meet the LDR. growth of commercial bank credit to the private sector has been negative since 2017, and in June 2019 it It is possible that policy and regulatory efforts to reached -0.2 percent, year-on-year. Via a circular issued stimulate commercial bank lending to selected private on July 3rd, the CBN instructed banks to ensure a credit segments, while well-intentioned, could entail minimum loan-to-deposit ratio (LDR) of 60 percent by unintended negative consequences. For example, September 30, 2019. Adherence to the LDR was to be the minimum LDR requirement could lead banks to reviewed quarterly, and failure to meet the requirement approve loans that expose them to more-risky credits, would result in the imposition of additional cash reserve undermining the quality of their loan portfolios. It could requirements on the shortfall. By September 30th, the also lead banks to shift funding modalities away from CBN had debited 12 defaulting banks a cumulative mobilizing deposits, which would undermine financial N499 billion, and the CBN raised the LDR target to inclusion initiatives. Dropping the level of deposits 65 percent by December 31, 2019. Furthermore, a July for which the CBN would remunerate banks when 10 circular informed banks of a maximum N2 billion using the SDF could undermine the CBN’s ability to remunerable deposit in the CBN’s Standing Lending control liquidity conditions in the banking system, and Facility (SLF). The CBN had previously abolished the additional, potentially costlier open market operations symmetric corridor of the Standing Deposit Facility would be required to drain liquidity. (SDF),14 and the SLF rates varied around the monetary policy rate (MPR). The CBN resorted to an asymmetric Previous measures to incentivize increased corridor in which the SDF rate would be 5 pp below the commercial bank credit to the private sector have MPR, while the SLF rate remained at 2 pp above the met with limited success. Under a 2018 differentiated MPR—thereby reducing the incentive for commercial cash reserve requirement (DCRR), banks interested banks to accumulate deposits at the CBN. In October, in utilizing additional resources to finance new and Figure 1.16. Banking system credit to the Federal Figure 1.17. Commercial bank credit in H1 2019 was Government has soared, while credit to the private concentrated in industry and services sector remains low Credit to the Government and the Private Sector, 2016–19 Distribution of Commercial Bank Credit, H1 2019 Percent Percent Percent 200 – – 20 – 18 56 150 – – 16 – 14 100 – – 12 50 – – 10 4 –8 0– –6 –4 -50 – 22 –2 -100 – –0 18 H1 H2 H1 H2 H1 H2 H1 2016 2017 2018 2019 ▬ Net credit to federal government (growth) ▬ Net credit to private sector (growth) J Agriculture J Oil industry J Non oil industry J Services ▬ Money supply (M2) (growth) ▬ Inflation rate, rhs Source: CBN. Source: NBS. 14 The SDF is a remunerated facility of the CBN where banks can deposit their excess funds. The SLF is a facility, also of the CBN from which banks that are short of funds can borrow for the short-term. The CBN lends to commercial banks from its SLF at the given SLF rate, while it accepts deposits from them in its SDF at the SDF rate. The MPR is only an indicative rate somewhere in between these two rates; the SLF rate being above the MPR and the SDF rate being below. The gap (“corridor”) between the MPR and both rates has usually been even (“symmetric”) but was recently made uneven (“asymmetric”). Chapter 1: Recent Economic Developments 15 NIGERIA ECONOMIC UPDATE FALL 2019 expansion projects in agriculture and manufacturing Nigeria’s total forex transactions, the interbank-retail, could request the release of funds from their cash reserve and the interbank-wholesale market windows are still requirement (CRR) deposits with the CBN. However, open, though the exchange rates in these windows this measure did not yield the desired growth in credit have been relatively stable in the N335–N365/US$ to the private sector, as lending is influenced more by range. The Bureau-de-Change (BDC) window exists for a bank’s assessment of credit risk than by regulatory retail transactions. The CBN has a window for selected measures. imports, such as refined petroleum products, and its rate of N305–307/US$ could imply a potential arbitrage The CBN continued to support credit growth premium of about 10–20 percent. International through directed lending. In recent years, the growth experience suggests that multiple exchange rates create of commercial bank credit to the private sector has been implicit public subsidies that can distort the allocation of limited overall and concentrated in the oil industry, resources in the economy (see Chapter 3). large-borrower segments of nonoil industry, and services (Figure 1.17). Since 2014, the CBN has ramped up Banks are performing better, but asset quality needs its own directed and subsidized financing to firms to be monitored closely. Nonperforming loans (NPLs) in agriculture and manufacturing, especially micro, as a percentage of total loans—mostly in the oil, gas, small, and medium-scale enterprises (MSMEs).15 It has and power sectors—declined from 12.4 percent in June also provided subsidies to the power sector. Though 2018 to 9.4 percent in June 2019 (the prudential limit is well-intentioned, these practices could have adverse 5 percent). The recent reduction in NPLs was driven by consequences. For example, CBN interventions could: write-offs and clearance of oil-sector-related arrears that (i) undermine the effectiveness of the credit transmission improved the cash flow of bank borrowers so they could channel of monetary policy and the signaling role of repay banks, and sales to asset management companies. changes in the MPR; (ii) crowd out private-sector Meanwhile, driven by healthy profitability, the aggregate funding by discouraging banks from venturing into capital adequacy ratio (CAR) also improved, from 12.1 underserved markets without subsidies when the schemes to 15.3 percent, slightly better than the prudential are not properly targeted, as well as creating expectations requirement of 15 percent. Going forward, asset quality for borrowing at single-digit rates; (iii) create a potential needs to be closely monitored because it may deteriorate conflict of interest for the CBN between its oversight if the CBN continues to exercise regulatory forbearance role in the banking sector, its objectives as an operator for undercapitalized banks. The CBN gave liquidity of development financing schemes (whether directly or support to four medium-sized banks that were severely through the on-lending relationships with banks), and undercapitalized, without requiring hard time-bound its interests as a shareholder in development finance recapitalization plans. institutions; (iv) reduce the CBN’s operational surpluses, a share of which is normally transferred to the federal government as part of its independent revenue; and (v) undermine transparency and accountability in the allocation of public resources by circumventing the Fiscal Policy: Limited buffers government’s standard budgetary process. and oil dependence leave Nigeria vulnerable to shocks Exchange-rate convergence is improving. There are, however, still several foreign-exchange windows. While Nigeria remains heavily dependent on the oil sector the IEFX window accounts for at least 50 percent of as a source of federal revenue. In H1 2019, oil-related 15 Among the CBN schemes are the Agricultural Credit Guarantee Scheme (ACGS), the Commercial Agriculture Credit Scheme (CACS), and the Anchor Borrowers Program (ABP). In February 2019, CBN announced the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL) Micro Finance Bank (MFB) to empower about 400,000 small enterprises and small-holder farmers. 16 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS taxes provided over half of gross federal revenue. Given from October 2018 to March 2019 (US$67) exceeded Nigeria’s low revenue levels (Figure 1.19), the Economic the average budget benchmark price (US$51.5), the Recovery and Growth Plan (ERGP) emphasizes average output of 1.9 mbd fell short of the budgeted increasing nonoil revenue, and in 2016 the government 2.3 mbd.18 Furthermore, the various deductions by the embarked on a series of actions to boost tax revenues, Nigerian National Petroleum Corporation (NNPC) starting with the review and revision of its National from payments for crude oil purchased from the federal Tax Policy in 2016–17, which was followed by a one- government (including “cost under-recovery” for year tax amnesty program, the Voluntary Assets and unbudgeted petrol subsidies which mostly benefit non- Income Declaration Scheme, from July 1, 2017, to June poor households) caused the realized net oil revenues to 30, 2018, and by a variety of other tax administration come in much lower than budgeted. Though growing reforms and some tax policy adjustments, notably a largely in line with inflation in nominal terms, nonoil minor increase in excises on tobacco and alcohol in revenues continue to stagnate in real terms, with no 2017. However, nonoil revenues have been stagnant at significant yields from tax administration reforms and no around 4 percent of GDP—not enough to buffer against significant tax policy reforms. the volatility of oil revenues. Mobilizing nonoil revenues would require action on several fronts, including NNPC deductions of petrol subsidies from crude enhancing the VAT system; rationalizing tax incentives oil sales revenue amounted to N294 billion (almost that narrow the corporate tax base; and further US$1 billion, or 0.2 percent of annual GDP)19 in strengthening tax administration to reduce compliance H1 2019. In addition to this nominal price subsidy, costs for taxpayers. Furthermore, recent studies have imports of the product are subsidized with a preferential shown that tax morale is low among Nigerians because exchange rate valued at about 18 percent above the tax system is complex, taxpayers’ experience with the prevailing exchange rate. Steadily rising petrol tax officials is generally negative, and taxpayers perceive consumption contributes to this quantum of subsidies. the use of public resources to be relatively opaque and The Petroleum Product Pricing and Regulatory Agency inefficient.16 Recent efforts to mobilize nonoil revenues, (PPPRA) reports that Nigeria’s daily petrol consumption including the Ministry of Finance’s Strategic Revenue has been rising steadily, reaching 56 million liters in Growth Initiative (SRGI) and the re-establishment of April 2019. However, there are also widely reported the National Tax Policy Implementation Committee to cases of petrol smuggling from Nigeria into neighboring drive tax policy reforms, starting with drafting of a new countries where pump prices are higher than the Finance Bill, are positive developments. Nigerian subsidized price. Federally collected revenues fell by 16 percent relative Fiscal buffers in the Excess Crude Account (ECA) to GDP between H1 2018 and H1 2019.17 Total have been exhausted, rendering Nigeria more revenue in H1 2019 reached 2.4 percent of annual vulnerable to shocks  (Figure 1.18). The account GDP, down from 2.9 percent a year earlier. Oil revenues balance on June 30th was US$0.1 billion, down from drove the decline, falling by 26 percent year-on-year. US$0.6 billion at the end of 2018 and US$2.5 billion Meanwhile, nonoil revenues grew by 2 percent, year- at the end of 2017. The ECA has rarely operated as on-year, due in part to rising customs revenue, as capital envisaged; when it was established in 2004, it was to imports increased and higher exchange rates boosted the be drawn on only when the actual crude oil price falls real value of customs duties. While the average oil price below the budget benchmark price for three consecutive 16 See for example: Kouame, Wilfried (2019), “Trust to Pay? Tax Morale and Trust in Africa”, World Bank Policy Research Paper 8968. Washington, D.C.: The World Bank. 17 This refers to the net measure of federation and VAT accounts revenues (i.e. gross revenues net of revenue-collection agencies’ costs of collection, cost recoveries on oil and gas sales (including petrol subsidy deductions), government’s contribution to cost of oil production and costs of other federally- funded upstream projects). It is the net revenue that is distributed to the three tiers of government, in line with the existing revenue-sharing formulae. 18 October 2018–March 2019 price and output are used to reference oil revenues of January–June 2019 because there is usually a three-month lag between oil export sales and realized oil export revenues. 19 According to the NNPC monthly report data. Chapter 1: Recent Economic Developments 17 NIGERIA ECONOMIC UPDATE FALL 2019 months. However, the state governments contended to execute its recurrent spending budget in January that the federal Fiscal Responsibility Act (FRA) of 2007 (subject to the previous year’s budget for each spending creating the ECA was not binding on state and local category) but execution of the 2019 capital budget did governments. In 2011 the Nigeria Sovereign Investment not begin until May 29; although the implementation Authority (NSIA) Act was therefore passed, establishing of the carry-over of 2018 capital budget continued.20 the Nigeria Sovereign Wealth Fund (NSWF) as the The federal government’s realized revenues in H1 2019 oil savings fund for the country; it has three ring- were 19 percent lower (in real terms) than H1 2018 fenced funds (future generations, infrastructure, and receipts, reflecting both contracting federation account stabilization funds), jointly owned by the three tiers of revenues and its independent revenues, which comprise government. The stabilization fund, much like the ECA, elements like operational surpluses of government- was to support federation revenue in times of economic owned enterprises, and personal income taxes of stress, and it was envisaged that the balance in the ECA federal government employees. Nevertheless, federal in 2011 would be transferred to this fund. Instead, in government spending accelerated slightly, particularly 2012 seed capital of only US$1.5 billion was transferred, for capital projects. plus another US$0.5 billion in 2017. The stabilization and future generations funds have, however, earned In H1 2019 the fiscal deficit of the FGN increased, some investment income and the infrastructure fund has from -1.8 percent of GDP in H1 2018 to -2.1 percent been deployed for certain projects like the Second Niger and is increasingly financed by the CBN. This higher Bridge. deficit was the result of both lower oil and independent revenues and higher capital spending around the The Federal Government’s (FGN) fiscal position elections. The deficit was financed domestically by FGN deteriorated in H1 2019 as realized revenues fell bonds, Treasury bills, and overdrafts at the CBN. Having behind H1 2018. The 2019 budget law was not speeded up issuance of Eurobonds in 2017–18, and with enacted until the end of May, five months into the the November 2018 issue yielding up to 9.25 percent for year—similar delay compared to the recent years. As the 30-year series, the FGN did not signify any intention the constitution provides, the federal government began to access the Eurobond market to finance its 2019 Figure 1.18. Fiscal buffers are depleted even though Figure 1.19. Compared to peers, Nigeria’s the average crude price mostly exceeds the budget consolidated government revenues are strikingly low benchmark Excess Crude Account Balance and Oil Prices, 2008–19 General Government Revenue (Share of Nominal GDP), av. 2015–18 US$ billion US$/bl Percent 20 – – 140 35 – – 120 30 – 15 – 25 – – 100 20 – – 80 10 – 15 – – 60 10 – – 40 5– 5– – 20 0– . . . S A F dle al p EX ral p IND EN GA ) al p DN GA 0– –0 RU BR ZA midome t i o n M c t u K N 14 ion I N r c a tru – g 08 009 010 011 012 013 014 015 016 017 018 H1 19 o we -inspir S 0 00 Re 20 2 2 2 2 2 2 2 2 2 2 20 L A ( 2 J ECA balance (end of period) ▬ Budget oil price benchmark ▬ Average crude oil price ▬ SSA average ▬ 25th percentile MIC ▬ 75th percentile MIC Source: OAGF, NNPC, BOF. Source: World Bank calculations based on World Economic Outlook. 20 The mismatch between the recurrent and the capital budget cycles has been the practice for a number of years and it makes fiscal accounting at the FGN level rather complicated. Th FGN is keen to revert to a regular budget calendar of January to December. 18 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS deficit. It increasingly used domestic financing; and by fiscal constraints in H1 2019. Moreover, the federal June 2019, overdrafts at the CBN had grown by over government recently announced that it would begin 300 percent year-on-year. to deduct at source payments due from 35 states that benefitted from the N614 billion state budget support The revenue shortfalls affected the share of federally facility, set up in the 2016–17 Fiscal Sustainability Plan collected revenues accruing to the state governments. (FSP), which had a grace period of two years. For states State governments received only half of what was that had not factored it into their budgeting, this would projected in the federation revenue framework. While worsen the fiscal stress. several states are working to boost internally generated revenue, the states’ share of federation account Nigeria’s consolidated government revenue are very revenues still financed the bulk of most state budgets. low by the standards of comparable countries. During Consequently, many states suffered from significant the commodity boom Nigeria’s consolidated government Box 1.2. Financing Human Capital Development in Nigeria: Basic Education Although Nigeria has a longstanding commitment to universal basic education, the number of out-of- school Nigerian children is among the highest in the world. The Universal Basic Education (UBE) Act of 2004 stipulates free, compulsory, and universal basic education for grades 1–9; six years of primary school followed by three years of junior secondary school. Yet in recent years enrollment in basic education has gone up only slightly; in 2017–18 the gross enrollment ratio (GER) was 76.6 percent in primary and 40.0 in junior secondary. As for education quality, the 2013 Service Delivery Indicator (SDI) survey in four Nigerian states found that only one-third of grade 4 pupils had acquired minimum numeracy and literacy skills. Inadequate learning has contributed to Nigeria’s low rank on the Human Capital Index (HCI) of 0.34, placing the country at 152 out of 157. Children in Nigeria are expected to complete 8.2 years of education by age 18, slightly above the regional average of 8.1. However, because they learn relatively little, their years in school are equivalent to just 3.4 years of learning; 4.7 years are lost because the quality of Nigeria’s education system is poor. Consequently, a Nigerian child born today will be only 34 percent as productive when she grows up as she could be if she enjoyed complete education and full health. Nigeria’s HCI places the country lower than the average for Sub-Saharan Africa (SSA), its region, and for lower-middle-income countries, its peers. Financing of public education in Nigeria is complex, and there is no clear division of responsibilities: both the federal government and the states finance secondary and tertiary schools; local governments, in  theory, finance most primary education but in practice have ceded all management responsibilities to the states. In addition, arrangements vary from state to state, and there is no requirement for states to report their education spending to the federal level, which makes it difficult to obtain a complete picture of public education spending. According to the last comprehensive analysis available,1 in 2013 total public spending on education by all levels was 1.7 percent of GDP. As a share of total public spending, it increased marginally from 10.2 to 1 World Bank. 2015. Governance and Finance Analysis of the Basic Education Sector in Nigeria. Chapter 1: Recent Economic Developments 19 NIGERIA ECONOMIC UPDATE FALL 2019 Box 1.2 continued 12.5 percent over 2009–13. Nigeria’s spending on education is thus lower than the SSA average of 4.6 percent of GDP and 16 percent of total public spending. Based the current development trend in education is simply “business as usual”, by 2030 enrollment in basic education will go up by 18.5 million (53 percent).2 At the same time, the GER will remain far from universal, increasing to 79.5 percent in primary and 41.9 in junior secondary education as high birth rates exceed growth in enrollments (Figure B1.3.1). Fulfilling the Government of Nigeria’s commitment to UBE by 2030 will require a more efficient system in which more children complete the primary cycle and transition to junior secondary. A scenario in which system efficiency gradually improves through 2030 calls for rising intake, promotion, and transition rates, falling repetition rates, and absorption of out-of-school children. As a result, the number of students in basic education would increase on average by 11 percent a year in 2020–30, culminating in about 80 million students enrolled in basic education. Absorbing all these students will likely cost on average an additional US$7.2 billion annually for 2020– 30—an increase in public basic education spending of 1–5 percent of GDP. Though this is a substantial increase, it must be kept in mind that Nigeria’s current spending on public education is very low. Moreover, the cost of universalizing basic education can be reduced through savings in both capital and recurrent spending. To curb recurrent spending, better allocation and deployment of teachers are crucial. For capital spending, savings in the cost of constructing new classrooms and specialized facilities can be very important. Simulating the fiscal impact of common-sense reforms on the input model of primary and junior secondary schooling, including classroom libraries and better utilization of classrooms and teachers, leads to projections that by 2030 could cut the annual cost of basic education by at least 27 percent (Figure B1.2.1). Figure B1.2.1. Gross enrollment in basic Figure B1.2.2. The cost of universalizing basic education will rise between 2018 and 2030 education can be reduced through savings in both capital and recurrent spending Projected gross enrollment ratio in primary and Potential reductions in the fiscal implications of the basic secondary education, 2015–30 education expansion Percent NGN billion 140 – 9,000 – 120 – 115.8 8,000 – 103.8 7,000 – 100 – 6,000 – 80 – Business as usual 5,000 – 77.1 79.5 60 – 4,000 – Business as usual 3,000 – 40 – 40.0 41.8 2,000 – 20 – 1,000 – 0– 0– 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 021 022 023 024 025 026 027 028 029 030 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 2 2 2 2 2 2 2 2 2 2 ▬ Primary GER ▬ Junior secondary GER ▬ Efficient system with current input model ▬ All savings scenarios Source: World Bank calculations. Source: World Bank calculations. 2 Enrollment projections and associated costs are derived from an Excel-based simulation model, which employs UN population projections and recent trends in student promotion and retention. The tool allows users to easily adjust a range of policy and service parameters in order to estimate the impact on public costs. 20 Chapter 1: Recent Economic Developments JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS revenue reached 12 percent of GDP, among the lowest The ratio of public debt to GDP is relatively modest ratios for structural, aspirational, and regional peers at around 20 percent, but debt sustainability is (Figure 1.19). After oil price and production shocks challenged by low revenues. The interest payments on and Nigeria’s first recession in over two decades, in 2016 public debt are high and rising, due to growing debt general government revenue plunged to 6 percent of stock and because of high interest rates in the domestic GDP—second lowest of 115 countries for which data debt market and the high proportion of domestic debt. are available. Recovering to 8 percent of GDP in 2018, Government domestic debt constitutes 77 percent of government revenues are projected to plateau there total domestic debt, which itself is almost 70 percent unless there are significant tax policy and administration of total debt (Figure 1.20 and Figure 1.21). Yields reforms. This will continue to constrain the budget on FGN T-bills and FGN bonds are in the region of envelope and limit fiscal space for investing in physical 11–15 percent. Interest payments are particularly high and human capital (Box 1.2). relative to the low revenue collection, with the FGN interest-to-revenue ratio at about 60 percent since 2016. Figure 1.20. Nigeria’s public debt portfolio is largely Figure 1.21. The Federal Government’s debt is by far domestic the largest Composition of Public Debt (2014–18) Holdings of Public Debt (2014–18) Percent of GDP Percent of GDP 20 – 19 19 20 – 17 4 4 5 6 15 – 3 15 – 4 13 12 2 2 2 3 10 – 10 – 15 15 14 14 13 13 5– 11 11 5– 10 11 0– 0– 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 J Total gov’t debt domestic J Total gov't debt external Q Total public debt J Total FGN debt J Total SG debt Q Total Public debt Source: World Bank calculations based on DMO data. Source: World Bank calculations based on DMO. Box 1.3. The Impact of Conflict on Households and Welfare in Nigeria The rise in conflict in Nigeria is affecting many households:  Between 2010 and 2017, 22 percent of households in the Niger Delta (South-South), reported at least one event, with bandits and criminals responsible for 42 percent of the events; 49 percent of households in the North-East had similarly been victims of a conflict event, more than 66 percent of which were reportedly caused by Boko Haram; and 25 percent of households in the North-Central region experienced at least one such event, usually perpetrated by pastoralists or nomads (45 percent) and insurgents (21 percent).1 1 The data is showing only one side of the farmer herder conflict as the sample of interviewed households does not include nomadic households. The data does not capture information on attacks perpetrated by farmers. Chapter 1: Recent Economic Developments 21 NIGERIA ECONOMIC UPDATE FALL 2019 Box 1.3 continued These conflict events have severe consequences for household welfare. It is estimated that one additional such event leads to a 3–4 percent decrease in total consumption (food and nonfood). Based on the US$1.90 per capita per day poverty threshold, the study also finds that that poor households are more likely to stay poor after being victimized, whereas nonpoor households manage to prevent themselves from falling into poverty. An additional conflict event is estimated to increase food insecurity by about 4.4–5.2 percent. Generally, property events are more detrimental to consumption and food insecurity than are violent events. Victimization is related to more symptoms of depression, especially after violent attacks and those perpetrated by insurgents. On average, conflict events are not found to have an impact on household spending on health and education, but farmer herder clashes are related to increased health spending and decreased education spending. These findings highlight the importance of collecting nuanced information on household conflict exposure. Figure B1.3.1. Conflict events have risen since Figure B1.3.2. The North-east of Nigeria is 2010 affected most by conflict Household conflict exposure in the North-East, the Intensity of conflict and victimization over time North-Central, and the South-South 0.45 – 0.40 – 0.35 – 0.30 – 0.25 – 0.20 – 0.15 – 0.10 – 0.05 – 0– 2010 2011 2012 2013 2014 2015 2016 ▬ GTD fatalities ▬ ACLED fatalities J 49% J 25% J 22% ‡ No data ▬ All conflict events to households (WB/NBS) ▬ Fatalities Source: Kaila and Azad (2019). Source: Kaila and Azad (2019). Note: Vertical axes reprenset fatality distribution over time. Reference: Kaila and Azad (2019), “Conflict, Household Victimization, and Welfare: Does the Perpetrator Matter?”. World Bank Policy Research Paper 9019. Washington, D.C.: The World Bank. 22 Chapter 1: Recent Economic Developments Chapter 2: Economic Outlook NIGERIA ECONOMIC UPDATE FALL 2019 Chapter 2: Economic Outlook Global Economic Prospects: Global States terminated the waivers it had granted for its economic growth is slowing in a sanctions on the Islamic Republic of Iran and by rising context of policy uncertainty and geopolitical tensions in the Middle East. More recently, trade tensions however, concerns about slowing global demand amid heightened trade tensions have been weighing heavily. Global growth projections have been revised down Yet a major disruption to supply from Saudi Arabia as policy uncertainty and an escalation of trade in mid-September exerted renewed, though probably tensions between major economies undermine global temporary, upward pressure on prices, underscoring confidence, and therefore investment. Growth in the uncertainty of the oil outlook. Nonetheless, oil global GDP is expected to slow from 3 percent in 2018 prices in 2019 are expected to moderate from 2018 to 2.6 percent; in 2020 and 2021 activity is projected to levels and in 2020 decline to an average of US$63–64 firm somewhat with growth rising to 2.8 percent. This per barrel of Nigeria’s Bonny Light crude, as softening modest rise assumes that global financing conditions global activity continues to reduce oil demand. While will stay benign, and that activity will recover in major the current heightened geopolitical concerns present a commodity exporters and in emerging market and key upside risk to the price outlook, further weakening developing economies previously affected by financial in global growth poses a significant downside risk. With market stress. In the Euro Area—the main destination exports of oil-related products accounting for more than for Nigeria’s exports—growth is expected to decelerate in 90 percent of Nigeria’s total goods exports, a decline in 2019 with weakness in manufacturing because of slowing oil prices more than is forecast will damage the country’s exports. Although global growth is projected to edge up terms of trade. in 2020–21, it is not likely that more accommodative fiscal and monetary policy support can fully offset the weak economic activity. In the United States, growth is projected to slow in 2019 and decelerate into 2021 as the effects of fiscal stimulus wane and as escalating trade Nigeria’s Economic Outlook: Stable tensions discourage activity. Similarly, growth in China growth but vulnerable to risks is expected to moderate as manufacturing and trade soften as trade tensions with the United States continue. However, it is assumed that policy actions in China will The growth outlook is stable, but population move to mitigate the headwinds to activity. growth is expected to continue exceeding economic growth, undermining Nigeria’s prospects for poverty Though oil prices in 2019 have been buffeted by reduction. Nigeria’s real GDP is projected to grow both supply and demand factors, prices are expected by 2.0 percent in 2019 and hold at about 2.1 percent to moderate. On the supply side, prices have been through 2021, below the average for SSA (3 percent), supported by production quotas set by Organization and considerably below rates expected in East and South of the Petroleum Exporting Countries (OPEC) and its Asia (6–7 percent). With economic growth expected partners first half of this year and now extended into to remain below the estimated population growth of March 2020. Prices were also buoyed when the United 2.6 percent through 2021, per capita real GDP will 24 Chapter 2: Economic Outlook JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 2.1. Growth is forecast to stagnate; any shocks Figure 2.2. With per capita incomes contracting, would lower it further poverty will continue to rise Real GDP Growth and Contribution to Growth, 2015–21 Real GDP and Poverty Rates, 2003–21 Percent Percent Constant LCU, in thousands 4– 100 – – 450 – 400 3– 80 – – 350 2– – 300 1– 60 – – 250 0– – 200 40 – – 150 -1 – 20 – – 100 -2 – – 50 -3 – 0– –0 03 05 07 09 11 13 15 17 19 21 2015 2016 2017 2018 2019 2020 2021 20 20 20 20 20 20 20 20 20 20 J Agriculture J Oil industry J Non oil industry J Services ▬ Real GDP growth ▬ International poverty rate, lhs ▬ Lower middle-income poverty rate, lhs ▬ Upper middle-income poverty rate, lhs ▬ Real GDP per capita, rhs Source: World Bank calculations based on data from Nigerian authorities. decline from US$2,485 in 2018 to US$2,460 by 2021, crowded out by the public sector. Manufacturing growth pushing more Nigerians into poverty. outlook remains positive as the food and beverage sector slowly expands in response to the policy drive Medium term growth could be boosted by to develop domestic industries, but lack of access to implementing core structural reforms. Rethinking reliable power will continue to hold the sector back. agriculture finance may increase efficiency of public Supported by current mega-projects, construction will sector support to the sector. Agricultural output will continue expanding, but growth is likely to stagnate as continue to be affected by the insurgencies that have public investment slows. While large industry players displaced people, destroyed crops, and prevented are partially shielded from international competition cultivation. With agriculture mostly rainfed, the weather through forex and import restrictions, growth among will also have sporadic impact on crops. CBN financing MSMEs is restricted by minimal access to financing and schemes for the sector and forex restrictions designed to its high cost, which deters job creation. Growth in the reduce imports of staple foods will continue to support services sector, which accounts for over 50 percent of the the sector but will affect the quality and increase the economy, will remain dominated by sustained expansion price of agricultural products. With little growth in of telecommunications. The trade sector, the second agriculture and few opportunities elsewhere, agricultural largest employer after agriculture and providing incomes labor productivity is expected to stagnate, failing to to 14 percent of those employed and underemployed improve the living standards of the 40 million Nigerians (about 11 million people) will likely be impacted by the it employs.21 increased use of measures intended to spur the growth of domestic industry. A reduction in trade-restricting Reducing the crowding out of private sector credit measures and a phasing out of monetary policy measures could help boost domestic demand and spur growth which currently add to the crowding out credit to the in nonoil industry and services. Consumer demand private sector would improve the competitiveness of the will remain depressed by stagnating incomes, persistent nonoil industry and services. unemployment, and the high cost of financing. Global and domestic policy uncertainties limit private The outlook for the oil sector is stable. Oil production investment in Nigeria, with domestic investment is projected to remain around 2 mbd in the medium 21 National Bureau of Statistics estimate; includes those underemployed. Chapter 2: Economic Outlook 25 NIGERIA ECONOMIC UPDATE FALL 2019 term, below the 2.3 mbd target outlined in the medium- prices. Without sustained investment, given the high term fiscal strategy. Among the numerous problems levels of natural decline, oil production may slip below weighing on production growth are the lack of certainty current levels. about and the possible content of the petroleum sector legislation, attacks on oil and gas infrastructure and The external balances will be sensitive to both external theft, more financially attractive lower-cost projects shocks and domestic policy decisions. By 2021, elsewhere, currency restrictions, and uncertainty about the external balance is expected to improve gradually, Table 2.1. Medium-Term Macro-Fiscal Projections Macroeconomic Indicators 2015 2016 2017 2018 2019 2020 2021 (Annual percent change, unless indicated otherwise) Real GDP growth at constant market prices 2.7 -1.6 0.8 1.9 2.0 2.1 2.1 Private consumption 1.5 -5.7 -1.0 0.1 0.1 0.3 0.5 Government consumption -11.9 -15.1 -8.0 9.5 3.8 -2.7 -1.4 Gross fixed capital formation -1.3 -4.8 -3.0 24.5 -4.8 2.3 6.3 Exports of goods and services 0.1 11.5 8.7 0.5 13.5 3.7 2.6 Imports of goods and services -25.7 -10.4 4.8 28.8 13.4 -4.7 0.1 Real GDP growth at constant factor prices 2.8 -1.6 0.8 1.9 2.0 2.1 2.1 Agriculture 3.7 4.1 3.4 2.1 2.6 3.1 3.3 Industry (oil) -5.4 -14.4 4.7 1.1 3.3 1.7 0.0 Industry (nonoil) 0.1 -5.0 0.6 2.4 1.1 2.0 2.4 Services 4.8 -0.8 -0.9 1.8 1.7 1.6 1.7 Inflation (Consumer Price Index) 9.0 15.7 16.5 12.1 11.6 12.2 11.4 Current account balance (% of GDP) -3.2 0.7 2.8 1.3 -0.7 0.0 0.2 Goods & services exports (% GDP) 10.1 9.5 13.5 17.1 15.0 13.2 12.0 of which: oil and gas exports (% GDP) 8.7 7.9 11.3 14.7 12.8 11.2 10.2 Goods & services imports (% GDP) 14.8 11.6 13.6 18.0 18.2 15.5 13.9 Net income and transfers (% GDP) 1.5 2.8 2.8 2.3 2.6 2.3 2.1 of which: remittances (% GDP) 4.2 4.8 5.8 6.1 5.5 5.0 4.5 GDP per capita (annual percent change, 0.0 -4.1 -1.8 -0.7 -0.6 -0.5 -0.5 real LCU) Oil price (Bonny light, US$) 54 45 55 72 65 63 64 Oil production (mb/d) 2.1 1.8 1.9 1.9 2.1 2.1 2.1 Fiscal and Debt Indicators (Percent of GDP, unless indicated otherwise) Federal government Revenue 2.7 2.0 2.4 2.8 2.5 2.5 2.3 Expenditure 5.0 4.7 5.6 6.1 6.4 6.1 6.0 Fiscal balance -2.2 -2.7 -3.2 -3.3 -3.9 -3.6 -3.7 Debt 10.8 13.1 14.7 15.2 17.7 19.6 21.4 Interest (% of GDP) 1.1 1.2 1.4 1.7 1.8 1.9 2.0 Interest (% of revenue) 39 61 57 60 72 75 88 Debt (% of revenue) 395 654 622 545 713 788 924 General government Revenue 7.5 5.9 6.7 7.8 7.5 7.0 6.6 Spending 10.7 9.7 10.6 12.2 12.4 11.6 11.2 Fiscal balance -3.2 -3.8 -3.9 -4.4 -4.9 -4.6 -4.6 Debt 14.2 17.3 19.0 19.2 22.3 24.6 26.9 Source: World Bank calculations based on data from Nigerian authorities. 26 Chapter 2: Economic Outlook JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS but the improvement will mask a contraction in both Further efforts to increase domestic revenues and exports and imports relative to GDP. In 2019, with improve expenditure and debt management would capital imports rising, the current account is expected to help strengthen Nigeria’s fiscal position. If domestic be in deficit, recovering in the medium term to a small revenues do not rise, the general government’s fiscal surplus. Exports, which remain dominated by oil, are deficit will remain high at over 4 percent of GDP expected to moderate in line with the lower prices and during 2020–21, and rising debt service will eat into stable production outlook, but oil will continue to be the fiscal space needed to build human and physical vulnerable to shocks, theft, and attacks. Imports, after capital. If passed, the law raising the VAT rate would increasing in H1 2019 because of the capital imports, mark a positive step in tax policy reform. However, are expected to decline, returning to more subdued bolder measures to mobilize domestic revenue, such levels observed in 2018, with possible further policy as eliminating the fuel subsidy or rationalizing tax measures aiming to spur domestic industrialization. incentives, are needed to push revenue above its current The food import bill, which is equivalent to about 10 level of 8 percent of GDP. Oil revenues continue to be percent of goods imports, is likely to decline due to undermined by discretionary deductions and by the tighter forex restrictions on a widening range of imports, CBN’s below-market exchange rate. With oil prices including meat, rice, vegetables, oils, and tomato paste. and production expected to remain flat in a context of Fuel imports, which account for about 30 percent of sustained inflation, oil and gas revenues will shrink as all goods imports, are expected to remain high and a share of GDP, and without nonoil tax policy reforms, to exceed domestic consumption, as the fuel subsidy that share will continue to stagnate in real terms. The will continue to encourage smuggling to neighboring resulting sustained revenue shortfalls will continue countries. Capital imports are expected to exceed 2017– to limit government spending to about 12 percent of 18 levels, as the growth of import-substitution industries GDP, which is not enough to fund desperately needed boosts imports of machinery and other capital goods. investments in infrastructure and social development. Remittances, which are equivalent to about 50 percent of oil and gas export earnings,22 are expected to keep The FGN deficit, which constitutes about half of growing as Nigerians seek jobs abroad. general government spending, is projected to widen to nearly 4 percent of GDP, above the 3 percent limit Measures that increase the effectiveness of stipulated in the 2007 Fiscal Responsibility Act. monetary policy would strengthen macroeconomic Although the new minimum wage is not expected to management. A review of policies and programs aimed have a strong impact, soaring interest payments on the at encouraging commercial banks to lend to the private growing public debt and subsidies to the power sector sector through regulations on minimum loan-to-deposit will worsen the deficit. The growth in capital spending ratios or directed lending by the CBN or supporting seen in H1 2019 is not likely to be sustained in H2, import-substitution through forex restrictions and particularly as Nigeria plans to issue no Eurobonds, its import bans would help assess the efficiency and efficacy, usual choice for boosting infrastructure investment. and potential unintended effects, on credit, inflation, With revenue likely to stagnate in 2019 and to contract reserves, and exchange rate stability. Inflation is expected relative to the economy in the medium term, FGN to remain high in 2020 around 12 percent in a context capital spending is expected to hold at about 1 percent of of import-substitution policies and border closures that GDP—less than its interest payments, which consume are expected to increase the prices of some tradable 60 percent of its retained revenues. The minimum goods. wage law is expected to have more impact on recurrent spending by the states. Because their borrowing 22 This was the average for 2015–18, when oil prices were relatively low. In 2010–14, when oil prices were high, remittances were equivalent to about 25 percent of oil and gas export earnings. Chapter 2: Economic Outlook 27 NIGERIA ECONOMIC UPDATE FALL 2019 constraints are higher, however, the cumulative deficits Risk Scenario: A moderate decline are not expected to exceed 1 percent of national GDP. in oil prices could lead to a recession in Nigeria Nigeria’s stock of public debt and the related interest payments are projected to rise. Although Nigeria’s Due to its dependence on oil, the Nigerian economy debt, about 20 percent of GDP, may seem low by is highly vulnerable to a drop in oil prices. The oil international standards, its low domestic revenue raises sector remains the dominant source of risk for growth questions about debt sustainability. Nigeria’s public of Nigeria’s economy, with sustained suboptimal policy debt is growing rapidly with sustained fiscal deficits. decisions aggravating the size of the potential impact on The FGN holds more than 75 percent of public debt the economy. For example, a sudden decline in oil prices stock,23 with the share of external commercial debt rising to 2016 levels, sustained for a year, would undermine steadily; cumulative state debt is equivalent to 4 percent growth and fiscal balances. And the lack of monetary of GDP. With no Eurobonds, which constitute external and fiscal buffers would magnify the impact of any shock deficit financing, expected in 2019, deficits will be to the economy. If oil prices dropped again by about domestically financed, adding pressure to already high 25 percent in oil prices, down to about US$50/bbl, the domestic interest rates. Mobilizing domestic revenues country swing into a recession, with a more difficult would help ease debt sustainability constraints arising recovery path: from high debt servicing cost as a share of low revenues and make more space for productive investments. • Impact of a temporary decline in oil price shock on growth:  A direct hit on oil sector value-added Externally, geopolitical risks are contributing to an could subtract up to 0.5 pp from growth. Yet, the increasingly volatile environment, highlighting the indirect (spillover) effects on external and fiscal need to build fiscal and external buffers to mitigate balances and the financial sector would be significant, shocks. The World Bank’s 2019 edition of Global similar to, if not worse, than what happened during Economic Prospects revised down its 2019 projections by the 2016 recession. For some companies an oil price 0.3 pp for global growth and 0.5 pp for growth in SSA; shock would not only reduce their earnings but any further slowing would have serious negative spillovers might even make some high-cost fields unprofitable, on Nigeria because of both lower external demand for its which would threaten their ability to service debts to exports and lower remittances and FDI. The prolonged commercial banks. If so, NPLs would rise, causing trade dispute between the United States and China banks to lend less to other sectors and raising the and the ongoing uncertainty surrounding Brexit are cost of lending for all. Firms in nonoil industries and generating anxiety about resurgent protectionism, which services would find it even harder to access finance may adversely affect growth prospects both in Nigeria and would stagnate; those servicing the oil sector and worldwide. Moreover, Nigeria’s crude oil faces would start contracting. heightened competition from rising US production of light crude, which could cut into demand for Nigeria’s • Impact on exports and reserves:  The value of oil key export. The underdevelopment of the Nigerian exports would fall, widening the current account domestic sovereign bond market amplifies its exposure deficit and nibbling away at external reserves. Export to hikes in global interest rates. earnings would decline by more than 25 percent as less demand for Nigerian crude reduces the volume as well as the unit value of oil exports. A small corresponding decline in the cost of oil imports, which constitute only 20 percent of export value, 23 Federal government debt as recorded excludes arrears to domestic contractor, which are being recognized through gradual issuance of promissory notes. 28 Chapter 2: Economic Outlook JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS would make little impression on the import bill. The articulation and bold implementation of The current account deficit would widen to about structural reforms would boost the growth of the 2 percent of GDP, pushing external reserves below economy. Reforms that could have a significant impact US$40 billion. on the economy’s trajectory in the short-term are the removal of subsidies with adequate social protection • Impact on financial flows:  The slippage in external for the most vulnerable, review of the measures reserves would put pressure on the nominal exchange aiming to spur industrialization and through which rate. External portfolio investors could become institutions they are channeled, greater transparency nervous enough to flee; cashing out their holdings of and predictability of monetary policy, and increased short-term paper before a likely devaluation would domestic revenue mobilization. Such reforms would help slash external reserves below 2016 levels and intensify improve investor confidence and raise living standards of devaluation pressure. The banking sector would low-income groups while increasing spending on much stiffen, and development of local supply chains would needed public services. The special chapter of this report have to be put on hold as financing and import costs on boosting productivity for growth and jobs articulates spike. the priority reforms in more detail. The Box 1.4 provides an overview of the potential growth-catalyzing effects of • Impact on public finances and inflation:  Since the digital economy reforms. the FGN deficit is already twice the size of Nigeria’s revenues, the fall in fiscal revenues proportionate to the 25 percent fall in oil prices would virtually eliminate space for infrastructure spending, with obvious long-term repercussions for growth. With no fiscal buffers available—the Excess Crude Account balance is less than US$0.5 billion—and no likelihood of external borrowing as investor confidence drops because of uncertainty over Nigeria’s policy response (steep devaluation or introduction of capital controls), deficits would have to be financed domestically, sending the cost of borrowing soaring. • Overall impact of the shock:  Given the small size of the sector (10% GDP), the direct impact of oil sector contraction would be relatively small, about 0.5 percentage points. But because there are no buffers, the nonoil economy could contract by more than in 2016, with the economy as a whole shrinking by more than 2 percent. Inflation would shoot up. The monetary and fiscal authorities would have little room to maneuver in making policy decisions. • Recovery would be slow in the absence of structural reforms, even if the oil price rebounded by about 15 percent as the global economy recovers. Chapter 2: Economic Outlook 29 NIGERIA ECONOMIC UPDATE FALL 2019 Box 1.4. Digital Economy Reforms for Nigeria’s Economic Transformation By leveraging ICT, Nigeria has the potential to diversify its economy and create jobs for its youth. Digital financial services alone could be transformative, creating more than 3 million new jobs in the next few years. The country currently uses only 4 percent of its Internet capacity. At the end of 2018 fixed broadband had a household penetration rate of 0.04 percent, below the Sub-Saharan African (SSA) average of 0.6 percent and far below the world average of 13.6 percent (ITU 2018). According to ITU, mobile broadband (3G) coverage reaches 54 percent of the population, against the SSA average of 62.7 percent (ITU, 2018); 4G coverage is also very low and concentrated in urban areas. According to The State of ICT in Nigeria 2018 there is a serious digital gap in mobile broadband, with just over 20 percent of Nigerians owning a smartphone, 45 percent a feature phone, and 32 percent a basic phone. The gender gap in mobile phone ownership is also significant, with a higher probability of mobile phone ownership among men than women. In 2018, 19.9 percent of Nigerians used their cellphone to connect to the Internet. Overall Internet usage in Nigeria stands at 27.7 percent—above the 22.1 percent average for Africa (ITU 2018). Nigeria lacks digital skills, ranking 121st out of 139 countries in the Global Competitiveness Report’s assessment. Thus, the poorest are excluded from the benefits of the digital world. Of the total population of around 200 million, the labor force is estimated to be about 90 million, with a literacy rate of 51 percent. Although Nigeria does not participate in international or regional student assessments, after completing grade 4 only 66 percent of public-school students can read at least one of three words and only 78 percent can add single digits; Nigeria trails Ghana, Kenya, and Senegal in the quality of its math and science education. Such shortages of foundational skills will make it difficult for Nigeria to heighten digital literacy and will lower the chances it can take advantage of the opportunities the digital economy offers. Nigeria’s Economic Recovery and Growth Plan (ERGP) demonstrates the Government’s intent to support development of the digital economy. It adopted the Nigeria ICT Roadmap 2017–20, and the Nigeria ICT Innovation and Entrepreneurship Vision (NIIEV) was released in 2018. NIIEV sets up three ambitious goals to be achieved by 2025: (1) access to broadband Internet available to 95 percent of the population; (2) 75 percent digital literacy nationally; and (3) ICT contributing 25 percent of GDP. Through reforms in the digital economy, Nigeria can catalyze private investment and job creation. Such reforms would include deployment of wholesale, carrier-neutral, shared infrastructure to increase 4G deployment, creation of a Wholesale Open Access Network (WOAN), simplification of digital rights of way, digitalization of all government payments, formal teacher training in the use of technology to enhance learning, seeking global partners to gain global standard certification for local ICT, and better regulation of mobile money. Reference: World Bank (2019). Digital Economy for Africa (DE4A) Diagnostic. Washington, D.C.: The World Bank. 30 Chapter 2: Economic Outlook JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 2.3. A moderate and temporary decline in Figure 2.4. …would have a significant negative international oil prices… impact on GDP growth in Nigeria Simulated oil price shock Estimated effect of the decline in oil prices on Nigeria’s GDP growth US$/bbl Percent 80 – 3– 2– 60 – 1– 0– 40 – -1 – -2 – 20 – -3 – 0– -4 – 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 ▬ Bonny light price – baseline ▬ Bonny light price - risk scenario ▬ Growth - baseline ▬ Growth - risk Source: World Bank calculations. Source: World Bank calculations. Chapter 2: Economic Outlook 31 JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS  oosting Productivity to Chapter 3: B Accelerate Growth and Job Creation “Productivity isn't everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” —Paul Krugman, Nobel Laureate, Professor of Economics at the City University of New York and columnist for The New York Times Introduction productivity growth rate can have major implications for economic growth, job creation, and living standards. Nigeria’s productivity indicators are low compared to The Nigerian government aspires to enable 100 those of peer countries, and slow or negative productivity million people to escape poverty over the next decade; growth rates in recent years have hindered overall achieving this ambitious goal will require bold economic growth. reforms designed to boost economic productivity. Nigeria’s growth and jobs challenges stem from its low The returns to recent growth have been concentrated levels of productivity. Productivity reflects the relative among wealthier households in urban areas and efficiency and intensity with which inputs are used in have done little to reduce poverty. Half of Nigeria’s the production process. In other words, it measures how population (or about 100 million people), lives in successfully the economy transforms land, labor, capital, extreme poverty. Unless the pace of growth and job and other inputs into goods and services. Policymakers creation accelerates, by 2030 the number of Nigerians and analysts focus on productivity because a country’s living in extreme poverty could increase by more than Figure 3.1. Nigeria’s Business-as-Usual Scenario: Projected Population Growth, Required Job Creation, and Share of the World’s Poor, 2018–30 Population projection by age group Number of jobs needed to reach Share of world’s poor in Nigeria middle income employment level In million In million Percent 300 – 30 – 25 – 250 – 25 – 20 – 200 – 20 – 15 – 150 – 15 – 10 – 100 – 10 – 5– 50 – 5– 0– 0– 0– 2018 2030 2018 2030 2018 2030 J 0–14 J 15–64 J 65+ ▬ Total Source: World Bank calculations based on data from NBS, UN Population Division, and World Poverty Clock. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 33 NIGERIA ECONOMIC UPDATE FALL 2019 30 million, and Nigeria would account for a quarter of productivity).25 The analysis uses both development all people living in extreme poverty worldwide (Figure accounting exercises and a growth decomposition to find 3.1). the sources of Nigeria’s economic growth per worker over the past 50 years. The decomposition quantifies Creating opportunities for Nigeria’s rapidly the shares of growth attributable to physical and to expanding labor force will require a new economic human capital and illuminates the influence of public model based on productivity growth. The country’s investment and natural resources. The analysis assesses working-age population is projected to grow by trends in labor productivity by sector and distinguishes 35 million over the next decade. Demographic pressures between manufacturing and nonmanufacturing and rapid urbanization are intensifying competition for activities in the industrial sector, and between market scarce fiscal, economic, and environmental resources. and nonmarket services in the tertiary sector. Using If too few jobs are created, the risk of social instability data on labor productivity and labor shares, the analysis could rise, especially in urban areas and in the conflict- examines changes in resource allocation by sector over affected north. The World Bank’s 2019 Nigeria the past several decades. After identifying the institutions Systematic Country Diagnostic highlights that achieving and policies that affect productivity growth and those income convergence with advanced economies will that drive misallocation of resources, it concludes with require that Nigeria maintain macroeconomic stability recommendations for improving labor productivity and while shifting its growth drivers from consumption increasing the efficiency of the economy. and public spending to investment and nonoil exports. A strong private sector will be crucial to support The analysis highlights four priority areas for policy productivity gains and job creation. action. Sustainably accelerating productivity growth will require comprehensive reforms to fiscal, monetary, Without robust productivity growth, poverty in and trade policy, plus measures to improve the business Nigeria will continue to rise, and living standards will and investment climate and strengthen Nigeria’s public continue to deteriorate. Given the current levels and institutions. Given the country’s limited institutional trajectory of human and physical capital investment, capacity, effective prioritization is critical to the success increasing the efficiency with which the economy of any reform agenda. Actions in the following areas transforms inputs into outputs will be vital to ensure will lay the groundwork for Nigeria’s transition to a new sustainable economic growth underpinned by robust economic model based on efficiency improvements and job creation. If labor productivity remains on its current diversification beyond the extractive industries: path, workers will not be able to earn enough to reduce the number of Nigerians living below the poverty line. 1. Promoting policy transparency and predictability will create the certainty necessary to make effective  This chapter analyzes the evolution and determinants long-term economic decisions, reduce investment of productivity in Nigeria.24 It begins by describing risk, and promote sustainable growth outside the labor and multifactor productivity trends in Nigeria extractive industries. and comparator countries, examines differences in 2. Enhancing factor quality b y investing in the intensity with which different inputs are used, and infrastructure, making land tenure more secure, explores patterns of growth in total factor productivity improving educational outcomes and building skills, (TFP) across countries (see Box 3.1 for definitions of and liberalizing the trade regime will facilitate the 24 The emphasis of the analysis is on resource misallocation. In seminal work, Restuccia and Rogerson (2008) and Hsieh and Klenow (2009) have argued that the microstructure of firms in different sectors of the economy can help to explain the development gap between rich and poor countries. Aggregate total factor productivity is influenced by (1) how productivity is distributed across production units and how those units allocate resources (e.g., how manufacturers allocate capital and labor), and (2) the number of firms per capita (Hopenhayn 2014). In this context, institutions and policies that impede the systematic redistribution of resources from less to more productive agents will worsen TFP. Restuccia and Rogerson classify these types of policies and institutions into two groups: (1) regulation that affect such discretionary choices as firing costs, size-dependent policies (e.g., subsidies to SMEs), labor and product market regulations, state-owned enterprises, and restrictions on land markets; and (2) market imperfections, such as trade policies, mark-ups, credit constraints, imperfect information, and insurance. 25 The analysis presented in this section draws on a forthcoming World Bank report, “Boosting Productivity in Sub-Saharan Africa,” by Cesar Calderon. 34 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Box 3.1. Defining Productivity This analysis focuses on two aspects of productivity: labor productivity and total factor productivity (TFP).  Labor productivity  measures the value of the output generated by a single worker and allows for simple cross- country comparisons. For example, if the United States (US) and Nigeria produce the same good, and Nigeria’s labor productivity is 10 percent that of the US, then a worker in the US would produce ten units of the good in the same time it takes a Nigerian worker to produce one. The growth of marginal labor productivity is defined as the percentage change in real output per worker from one year to the next. TFP  measures the efficiency with which inputs are transformed into outputs. TFP is the difference between the aggregate value of the labor and capital used in production and the aggregate value of the goods and services produced. In cross-country comparisons, TFP indicates differences in economic output that are not accounted for by differences in the supply of human, physical, and natural capital. efficient reallocation of factors and make Nigeria between 2000 and 2014, the output of the average more cost-competitive. Nigerian worker fell from 26 percent of the average 3. Reducing regulatory discretion w  ill alleviate US worker in the 1970s to just 15 percent in 2010– constraints on market entry and formalization, 14; one of the worst declines in a region where labor promote competition, and sharpen incentives to productivity has been slipping steadily in relative terms improve productivity. (Figure 3.3). Meanwhile, most non-SSA developing 4. Improving access to finance w  ill help establish a countries narrowed the gap with advanced economies, competitive playing field that enables new firms underscoring Nigeria’s competitiveness challenges to compete with incumbents and allows more- (Figure 3.2 and Figure 3.3). productive firms to scale up their operations. The accumulation of physical capital during oil- revenue booms has not generated substantial gains in Nigeria’s TFP or labor productivity; instead, it has led The Evolution of Productivity in to structural economic changes that have exacerbated Nigeria inefficiency and driven a decline in capacity utilization. Whereas in advanced economies and non- SSA developing countries, growth over 1961–2017 was Low productivity growth combined with rapid at least partly driven by improvements in TFP, in Nigeria population growth are causing Nigeria’s per capita growth relied almost entirely on capital accumulation GDP to contract. As ever-larger cohorts of new workers (Figure 3.4 and Table 3.1). Instead of enhancing growth, enter a private sector marked by slow-growing capital the contribution of TFP in Nigeria has been negative stock, persistent allocative inefficiencies, and inadequate for much of the last 60 years, indicating a decrease in infrastructure, Nigeria’s labor productivity is falling the efficiency with which productive resources are further below the levels of both advanced economies utilized, and undermining the positive impact of capital and developing countries outside Sub-Saharan Africa accumulation. (SSA).26 Despite the robust GDP growth rates recorded 26 The frontier is proxied by the United States. Figure 3.2 plots the labor productivity (that is, real output per worker, PPP) of Nigeria and other country groups as a share of US labor of productivity (output per worker). Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 35 NIGERIA ECONOMIC UPDATE FALL 2019 Figure 3.2. Aggregate Labor Productivity Relative to Figure 3.3. Output per Worker, Nigeria and the United States, 1960–2017 Comparators Relative to the United States, 1980 vs. 2017 US=100 Real output per worker, 2017, US=100 90 – 120 – 80 – 100 – 70 – 60 – 80 – 50 – 60 – 40 – GAB MUS 30 – 40 – GNQ NAM BWA ZAF 20 – SWZ 20 – CPV AGO 10 – STP NGA BEN COM 0– 0– 60 63 66 69 72 5 78 81 84 7 90 93 96 99 02 5 08 11 14 7 19 19 19 19 19 197 19 19 19 198 19 19 19 19 20 200 20 20 20 201 0 20 40 60 80 100 ▬ Advanced economies ▬ Non-SSA developing countries Real output per worker, 1980, US=100 ▬ Sub-Saharan Africa (SSA) ▬ Nigeria ‹ Sub-Saharan Africa J Non SSA developing countries Q Advanced economies Source: World Bank calculations based on Calderon (forthcoming) using Penn World Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1 data. Tables 9.0 and 9.1 data. Note: Relative output per worker uses real GDP at 2011 US dollars (PPP). Regional Note: Relative output per worker uses real GDP at constant 2011 US dollars. averages are employment-weighted. Figure 3.4. Traditional Solow Growth Decomposition, Table 3.1. Traditional Solow Growth Decomposition, 1961–2017 1961–2017 Percent per Worker per Year Percent per Worker per Year 5– GDP Human Physical TFP Growth Capital Capital 4– 3– 1961–2017 1.7 0.3 2.6 -1.2 2– 1961–1977 1.9 0.0 4.2 -2.4 1– 1978–1995 0.2 0.2 2.3 -2.4 0– 1996–2017 2.7 0.5 1.5 0.7 -1 – -2 – -3 – 1961–2017 1961–1977 1978–1995 1996–2017 J Physical capital J Human capital J TFP Q Output Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1. Note: Growth = growth in real GDP per capita per worker. From 2001 to 2011, Nigeria, breaking with the banking-sector supervision, and trade reforms. Nigeria previous trend, enjoyed a decade of consistently experienced its greatest surge in productivity growth positive TFP growth, but this period ended in 2012, during this period, when there were efforts to build up and in the recent recession TFP contracted abruptly political institutions and expand economic inclusion (Figure 3.5). Since 1960, Nigeria has experienced four  as the country moved from military rule to democracy. periods of negative TFP growth (1960–69, 1976–84, Most governance indicators improved moderately, 1991–2000, and 2012–18) and three periods of positive demonstrating the importance of institutional quality. growth (1970–75, 1985–90, and 2001–11). The However, after the collapse of global oil prices in 2014, most recent period of positive TFP growth, 2001–11, compounded by an inadequate macrofinancial policy was supported by stable macroeconomic policies and response, productivity again began to contract; and major economic and governance reforms, among them after the 2016 recession TFP deteriorated dramatically, privatization of SOEs, civil-service reforms, enhanced underscoring the fragility of Nigeria’s growth model. 36 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 3.5. Growth Decomposition in Nigeria, 1961–2017 Percent 20 – 15 – 10 – 5– 0– -5 – -10 – -15 – -20 – 61 65 69 73 77 81 85 89 93 97 01 05 09 13 1 7 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 J Physical capital J Human capital J TFP Q Output Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1. Note: Growth in real GDP per worker is decomposed into contributions from physical capital, human capital and total factor productivity (dtfp). Figure 3.6. Contributions to the Output per Worker Low growth of TFP is driving Nigeria’s continued Growth from Factor Accumulation and TFP, relative to the US, Nigeria, 1960–2017 divergence from advanced economies ( Figure 3.6). Percent US=1.0 From the 1960s through the 1980s, the gap in output 100 – – 0.3 per worker between Nigeria and advanced economies primarily reflected Nigeria’s lower base levels of physical 80 – and human capital and the slow process of capital 60 – – 0.2 formation. Since the 1980s, however, that gap in labor productivity has been primarily attributable to Nigeria’s 40 – slow rate of TFP growth: Nigerian workers are now less – 0.1 productive primarily because the Nigerian economy is 20 – becoming less efficient at transforming labor, capital, 0– –0 and other productive factors into goods and services. The 69 79 89 99 09 17 19 6 0– 19 70– 19 80– 19 90– 20 00– 10– differences seen in TFP likely reflect greater inefficiencies 20 J Factor accumulation J TFP ▬ Real GDP growth per worker, rhs in the use of production inputs by firms—a hypothesis Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1. widely supported by the international literature on Figure 3.7. Growth Decomposition: Conventional and Natural Resource-Reflective Methodologies, Nigeria and Comparators, 1996–2017 Percent 3.0 – 2.5 – 2.0 – 1.5 – 1.0 – 0.5 – 0– -0.5 – -1.0 – -1.5 – Conventional Natural resource Conventional Natural resource Conventional Natural resource Conventional Natural resource SSA resource abundant SSA oil abundant SSA resource abundant excl. Nigeria excl. Nigeria Nigeria J Capital (composite) J Human capital J TFP Q Output Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1, and Lange et al. (2018). Note: Growth in real GDP per worker is decomposed into contributions from physical capital, natural capital, human capital and total factor productivity. Data on natural resource wealth is available until 2014 only. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 37 NIGERIA ECONOMIC UPDATE FALL 2019 misallocation of resources. In other words, low levels corresponding decrease in TFP. In Nigeria, however, of TFP suggest that inefficient allocations of labor and including natural resources shrinks the capital stock capital are inhibiting the transformation of the Nigerian and causes a commensurate increase in TFP. This might economy. be attributed to a combination of greater sensitivity of the valuation of natural resource wealth in Nigeria to By conventional measures, since 1990s TFP has oil price fluctuations and depletion or reduction of been a positive contributor to growth in Nigeria, resources in times of declining prices. (Figure 3.10). and its influence increases when natural capital Since 1996, steep drops in oil prices have repeatedly is accounted for  (Figure 3.7). This finding is dragged the contribution of the resource sector to total counterintuitive; it suggests that natural resources physical capital into negative territory. The opposite detract from growth. Accounting for natural resources pattern prevails among comparator groups because their typically boosts the contribution of total capital stock aggregate resource sectors are much more diverse and to growth, and since TFP is calculated as the residual, far less vulnerable to a single, highly volatile commodity an increase in the contribution of capital is offset by a market. Figure 3.8. Growth Decompositions, Traditional and Accounting for Natural Capital, 1996–2017 Standard Solow Augmented Solow (natural capital) Percent Percent 20 – 20 – – 1.2 15 – 15 – – 1.0 10 – 10 – – 0.8 5– 5– – 0.6 0– 0– – 0.4 -5 – -5 – – 0.2 -10 – -10 – –0 96 99 02 05 08 11 14 17 96 99 02 05 08 11 14 17 19 19 20 20 20 20 20 20 19 19 20 20 20 20 20 20 J Physical capital J Human capital J TFP Q Output J Physical capital J Natural capital J Human capital J TFP Q Output Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1, and Lange et al. (2018). Note: Growth in real GDP per worker is decomposed into contributions from physical capital, natural capital, human capital and total factor productivity. Data on natural resource wealth is available until 2014 only. Figure 3.9. Changes in TFP, Natural Capital and Figure 3.10. Changes in Natural Capital stock and Oil Standard Solow Models, Nigeria Prices, Nigeria Percent Percent 20 – – 1.2 20 – – 80 15 – – 1.0 15 – – 60 – 40 10 – – 0.8 10 – – 20 5– – 0.6 5– –0 0– – 0.4 0– – -20 -5 – – 0.2 -5 – – -40 -10 – –0 -10 – – -60 96 99 02 05 08 11 14 17 96 99 02 05 08 11 14 17 19 19 20 20 20 20 20 20 19 19 20 20 20 20 20 20 ▬ TFP (Standard Solow) ▬ TFP (Augmented Solow) ▬ Natural capital ▬ Oil price Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1. Notes: Figure 3.9 plots the TFP from Standard Solow decompositions and the model augmented with natural capital. Figure 3.10 plots the annual changes in the measure of natural wealth (dt) and nominal oil price. 38 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 3.11. Capital-Output Ratios, Nigeria and SSA Drivers of Productivity in Nigeria Averages, 1960–2017 y-axis 1.2 – As well as reflecting the progressive accumulation 1.0 – of human and physical capital or improvements in the efficiency with which those factors are used 0.8 – (productivity), changes in Nigeria’s per capita income 0.6 – are driven by fluctuations in oil prices. The capital- 0.4 – output ratio is often used to highlight the relationship between the value of capital invested in the economy and 0.2 – the consequent increase in GDP because it shows the 0– amount of capital used to produce one unit of output. In 60 63 66 69 72 5 78 81 84 7 90 93 96 99 02 5 08 11 14 7 19 19 19 19 19 197 19 19 19 198 19 19 19 19 20 200 20 20 20 201 Nigeria, the productive capacity of the economy varies ▬ SSA weighted average ▬ SSA median ▬ Nigeria Source: World Bank calculations based on Calderon (forthcoming) using Penn World with oil-price movements, and the oil sector’s influence Tables 9.0 and 9.1. on the capital-output ratio contributes to a vicious cycle of underinvestment and volatility (Figure 3.11). The oil greatest surge in productivity between 2000 and 2011, boom drove a steep increase in economic inefficiency as a period marked not only by increasing g(if volatile) the capacity utilization rate fell from about 80 percent oil prices, but also by economic reforms and efforts to in the mid-1970s to 40 percent by 1984 (Sala-i-Martin create more inclusive political institutions as the country et al. 2012). In the early 1960s, Nigeria’s capital-output moved from military rule to democracy. At that time, ratio was much lower than the SSA average, indicating most governance indicators improved moderately, that productive efficiency was relatively high. Over demonstrating the importance of institutional quality time, however, that ratio has steadily converged with for productivity growth. the regional average, illustrating the erosion of Nigeria’s competitiveness against comparable economies. Policy measures have exacerbated the misallocation of capital and labor by sector, accelerating the decline Nigeria’s stock of natural capital—specifically its oil in economic efficiency. As detailed below, inefficient and gas reserves—has influenced the evolution of distribution of productive factors affects aggregate both its economy and government institutions. While output and productivity through three channels: at first the extractive industries seem to have made a technology, selection, and misallocation. The institutions positive contribution to growth, the effect vanishes and policies driving misallocation can generate when their impact on institutional quality is accounted additional inefficiency through both the selection and for. Natural resource rents are a valuable income stream, technology channels. Meanwhile, discretionary subsidy but without adequate institutional checks and balances, policies, deficiencies in taxation and regulation, and competition between interest groups can promote imperfections in credit and land markets also contribute patronage and clientelism, encouraging corruption and to misallocation of resources. even violence. The corrosive effects of the “resource curse” on public institutions can discourage productive The government’s dependence on volatile oil revenues investment and inhibit long-term growth of nonresource and limited institutional capacity make the public sectors, intensifying the economy’s dependence on sector less effective. In the absence of fiscal buffers, natural resources (Badinger and Nindl 2014; Beck et al. macroeconomic policy is not capable of mitigating 2000; Holder 2006; Lane and Tornell 1996; Mehlum oil-price volatility, which is transmitted directly to et al. 2006; Raggl 2017). Nigeria experienced its government spending and household consumption. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 39 NIGERIA ECONOMIC UPDATE FALL 2019 Revenue volatility undermines the efficiency of public 10 percent, and private investment has driven 39 percent spending through project delays and cost overruns. of growth per worker. Investment needs are increasing as Erratic public spending destabilizes employment many young Nigerians enter the labor force. and undermines private investment, inhibiting the accumulation of private capital and slowing growth Low rates of public investment have contributed to of the nonoil economy. The government’s approach a vast infrastructure deficit, which slows growth and to macroeconomic management obstructs economic exacerbates the misallocation of productive resources. diversification, narrows the revenue base, and intensifies For instance, Nigeria’s road network is extensive, but dependence of the public sector on oil, which further its condition is generally poor, especially in rural areas. undermines the quality of public policies and erodes the Deficiencies in transportation infrastructure increase capacity of institutions. logistical and transaction costs, restrict factor mobility, and slow the process of economic transformation. In The decline in labor productivity reflects persistent both rural and urban areas, deficiencies in transportation underinvestment in both physical and human networks impose constraints on household access capital. Among oil-rich countries in SSA, for the to economic and social opportunities. Similarly, a past half century accumulation of physical capital has limited and unreliable power supply worsens allocative overwhelmingly driven economic growth, with public inefficiencies and makes it harder for poor households investment making a much larger contribution than to maximize the value of their labor. About 80 million private. Yet in Nigeria, this pattern has been inverted: Nigerians have no access to electricity, and despite capital accumulation has made a smaller contribution recent privatization measures, the power supply is still to growth than in comparable countries, with both inadequate and unreliable because weak governance and private investment and public investment levels and erratic contract enforcement combine to undermine stocks below comparative averages (Figure 3.12 and operational efficiency and financial viability. Figure 3.13). Among resource-rich countries in SSA, for the past three decades public capital has contributed an A combination of public-sector debt and the average of 36 percent to the growth of labor productivity, concentration of commercial loans in the extractive compared to 21 percent attributable to growth in private industries is crowding out credit to the nonoil capital; in Nigeria, public capital has contributed only private sector. High rates offered on government Figure 3.12. Public and Private Capital Stock, Nigeria Figure 3.13. Public and Private Investment, Nigeria and Comparators, 2017 and Comparators, 2011–17 Percent of GDP Percent of GDP 250 – 25 – 200 – 20 – 150 – 72.3 15 – 71.6 68.0 77.6 71.1 77.7 100 – 10 – 69.6 82.1 50 – 5– 28.4 27.7 32.0 28.9 30.4 22.4 22.3 17.9 0– 0– Structural Aspirational Regional Structural Aspirational Regional Nigeria peers peers peers Nigeria peers peers peers J Government J Private J Government J Private Source: World Bank calculations based on Calderon (forthcoming) using Penn World Tables 9.0 and 9.1. Note: The data labels indicate the share of private/public investment or stock in the total investment or stock. 40 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 3.14. Human Capital Index Scores and Real GDP per Capita, Nigeria and Comparators, 2017 HCI 0.95 – SGP 0.85 – AUS IRL CZE 0.75 – SRB BEL MKD HRV BGR LUX 0.65 – VNM BHR ARE ALB ARG MYS QAT KGZ ARM SAU KWT 0.55 – PAN KEN SLV TUN DZADOM KIR BGD 0.45 – HTI GTM GHA NAM BWA COG AFG CMR PAK IRQ BDI COD 0.35 – AGO LBR MLI TCD NGA 0.25 – 6 7 8 9 10 11 12 Real GDP per capita at PPP Source: World Bank Human Capital Index. Note: GDP per capita values are in logs. and central bank securities, in the context of complex are among the lowest in the world—far below what monetary policy, high inflation, and no way to register its per capita GDP would predict. It ranked 142nd of collateral, among other factors, reduce commercial bank 157 countries in the World Bank’s most recent Human willingness to lend to nonoil sector entities. The level Capital Index (HCI), outperforming only Chad, of domestic credit in Nigeria is below that of both its Liberia, Mali, Niger, and South Sudan in SSA. Gains structural and aspirational peers. Moreover, the volatile in educational attainment are usually associated with oil and gas sector continues to take-up about one-third of accelerated economic growth, especially in countries total industry lending. Distortions in financial markets with low GDP per capita, but Nigeria’s educational can lead to misallocation of capital and reduce aggregate outcomes have improved very slowly. Between 1999 productivity by creating barriers to entry in specific and 2011, the share of Nigerians with at least some sectors, discouraging adoption of new technologies, and secondary education rose from 25 to about 35 percent, creating differentials in producer returns on capital. and since 2010 average years of schooling for Nigerians aged 15 and above have risen from 5.1 to 6.1 (Cohen Foreign direct investment (FDI) is low, limited by the and Soto 2007). However, based on the HCI, a child slow recovery of domestic consumer demand, trade born in Nigeria today will only realize 34 percent of her restrictions, and policy uncertainty. FDI is negligible productive potential by age 18, and Nigerian children relative to foreign portfolio investment (FPI), and, like are especially vulnerable to stunting as well as poor the domestic credit supply, it goes primarily to the oil learning outcomes (Figure 3.14). As Nigeria’s human sector. The economy’s increasing reliance on FPI is costly capital base is relatively small, modest improvements in and increases the exposure of Nigeria’s foreign reserves the quality of health and education spending could have to external and domestic shocks. The country’s external a highly positive impact on future economic growth and position is now doubly sensitive to oil-price fluctuations: labor productivity. declining oil prices would not only reduce foreign- exchange earnings from oil and gas exports but could Greater investment in human capital will be vital to also induce capital flight, further deterring FDI. support sustainable and inclusive growth. In 2016, recurrent spending on public health was just US$16 Slow rates of physical capital formation are per capita, far below the SSA average of US$40 and the compounded by persistently poor education and lower-middle-income country average of US$26. Today health outcomes. Nigeria’s human capital indicators education accounts for only 12 percent of government Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 41 NIGERIA ECONOMIC UPDATE FALL 2019 spending, but Nigeria would need to raise that to at least Resources and Incomplete 20 percent if it is to achieve its sustainable development Economic Transformation goals for education. Investing more in vocational training and workforce skills development could enable Nigerian firms to more effectively leverage the productive Despite its relatively modest direct contribution potential of new technologies. to growth, the resource sector exerts an outsized influence on the Nigerian economy. Oil dominates While physical, human, and natural capital are each both export earnings and public revenue, and it has important for economic growth, improvements profoundly influenced how other sectors have developed. in TFP will be essential to Nigeria’s long-term Oil rose from just 3 percent of total merchandise exports development. The country’s incomplete economic in 1960 to over 90 percent in 1974, and from the 1970s transformation is a major obstacle to inclusive growth through 2012 it accounted for about 80 percent of total and poverty reduction, and the productivity gaps export receipts. between sectors, even when the resource sector is excluded, suggest that the Nigerian economy is not Decades of oil-driven growth favored development fully leveraging potential productivity gains from of services at the expense of manufacturing.27 In reallocating labor and capital, let alone improvements 2014, the collapse of global oil prices coupled with a in within sector productivity. Policies designed to boost drop in production caused the oil sector to contract, productivity in agriculture and remove constraints on and the growth rate of market services plunged (Figure factor mobility could not only accelerate growth but also 3.15 and Figure 3.16). Manufacturing fared even worse enhance the allocative efficiency of Nigeria’s physical, in absolute terms, experiencing a small but significant financial, and human capital. contraction over 2015–18. Agriculture proved more resilient, but its output is far below its potential due to conflicts like the Boko Haram insurgency and farmer- herder clashes. Figure 3.15. Sectoral Contribution to Growth, 2004– Figure 3.16. Sectoral Contribution to Growth, 2015– 14 18 Percent Percent 7– 1.5 – 1.3 – 6– 1.1 – 5– 0.9 – 0.7 – 4– 0.5 – 3– 0.3 – 2– 0.1 – -0.1 – 1– -0.3 – 0– -0.5 – 2004–14 2015–18 J Agriculture J Manufacturing J Nonmanufacturing J Agriculture J Manufacturing J Nonmanufacturing J Market services J Nonmarket services Q GDP (at constant basic prices) J Market services J Nonmarket services Q GDP (at constant basic prices) Source: World Bank calculations using the classification of Barrot, Calderon, and Serven 2018. Note: Nonmanufacturing industry consists of extractives, utilities, and construction; market services span trade, hospitality, transport, financial, real estate, and other business activities; nonmarket services consist predominantly of the public sector, health, education, and social services. 27 High-value oil exports put upward pressure on the exchange rate, making imports more competitive against domestic products. Diminished external competitiveness discourages investment in manufacturing, agriculture, and tradable services, and rising domestic purchasing power accelerates the growth of non-tradable services. Meanwhile, the large returns offered by investment in the extractive industries draw financial capital away from other sectors, further slowing the evolution of the nonresource economy. First identified in the 1970s, this is the phenomenon known as Dutch disease. 42 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Figure 3.17. Share in Total Employment, 2005–15 Figure 3.18. Share in Total Value Added, 2005–15 Percent Percent 100 – 100 – 90 – 17 90 – 22 80 – 80 – 70 – 70 – 32 27 60 – 60 – 50 – 3 50 – 8 19 40 – 40 – 30 – 30 – 8 20 – 40 20 – 10 – 10 – 24 0– 0– Nigeria, sector share in total employment, average 2005–15 Nigeria, sector share in value added, average 2005–15 J Agriculture J Manufacturing J Nonmanufacturing J Agriculture J Manufacturing J Nonmanufacturing J Market services J Nonmarket services J Market services J Nonmarket services Source: World Bank staff calculations based on Barrot, Calderon, and Serven 2018. The oil sector has been a factor in the unbalanced Nigeria's agricultural sector is vast, but productivity development of the urban economy, which is is low. For the past 20 years, agricultural value-added dominated by services (Figure 3.18). Market per capita has risen by less than 1 percent a year, and services account for 32 percent of employment, and marginal yield is far below its potential. Most Nigerian nonmarket services, which include the public sector, farms are small, rain-fed rather than irrigated, with account for 17 percent (Figure 3.17)28. Meanwhile, minimal physical capital. Agricultural value chains are manufacturing employs just 8 percent of Nigerian underdeveloped due to poor infrastructure, inefficient workers. The contributions to GDP of both services and land markets, limited access to finance, unreliable policy, manufacturing are consistent with their shares in total and inadequate market information. These conditions employment. By contrast, nonmanufacturing industry, discourage investment and inhibit the uptake of new which includes construction, utilities, and the oil sector, technologies, slowing productivity growth. employs just 3 percent of the Nigerian labor force but accounts for 19 percent of GDP. Limited urban employment opportunities slow the process of economic transformation; and throughout The incomplete transformation of the Nigerian the economy underutilization of human capital is a economy is both a cause and a consequence of major drag on productivity growth. In the traditional its sensitivity to what happens in the oil sector. model of economic transformation, expanding urban Agriculture is the country’s largest employer, accounting manufacturing and service sectors attract a large share for 40 percent of its workers (Figure 3.17), but of the agricultural workforce by offering better income contributes just 25 percent to GDP (Figure 3.18). prospects. The exodus of agricultural workers creates Nigeria’s agricultural sector is unusually large by SSA incentives for farmers to invest in physical capital standards, but the productivity of its labor is below the like tractors and irrigation systems, which augments average for peer countries. Although over time labor has the productivity of the remaining rural workforce. gradually shifted out of agriculture, the process has been In Nigeria, however, this process is incomplete. The slow and uneven. Although in 2015 the share of market persistent abundance of rural workers keeps agricultural services in GDP exceeded that of agriculture, in the wages low and discourages investment in physical capital. average SSA country that had happened almost a decade Meanwhile, the most productive segment of the urban earlier. economy—nonmanufacturing industry (primarily the 28 Data from Barrot, Calderon, and Serven 2018, averages 2005–15. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 43 NIGERIA ECONOMIC UPDATE FALL 2019 oil sector)—cannot absorb more than a small fraction Meanwhile, elsewhere in SSA (Figure 3.20) average labor of the agricultural workforce. Unless the government productivity in both manufacturing and nonmarket can create the conditions necessary for robust growth services is five times as high as in agriculture. While in higher-productivity industrial and service sectors, a Nigeria is suffering from inefficiencies in the allocation of very large share of Nigerian workers will stay trapped in labor by sector, its labor force is also unproductive across a low-wage, low-productivity equilibrium in the rural the board (Figure 3.21 and Figure 3.22). While more economy. human and capital investments will be needed across sectors to account for large and growing workforce, Recent sectoral growth studies have revealed vast enabling the dynamic reallocation of labor will require disparities in labor productivity between nonresource policies that reduce both domestic and international sectors (  Barrot, Calderon, and Serven 2018). In Nigeria, barriers to the mobility of factors and goods, such as labor productivity in manufacturing is twice as high as investments in basic infrastructure to reduce transaction in agriculture (Figure 3.19) and in nonmarket services costs and in technological improvements to promote (mostly the public sector) it is three times as high. productive processes. Figure 3.19. Labor Productivity of Nonresource Figure 3.20. Labor Productivity of Nonresource Sectors relative to Agriculture, Nigeria Sectors relative to Agriculture, SSA 6.8 – 6.8 – 5.8 – 5.8 – 4.8 – 4.8 – 3.8 – 3.8 – 2.8 – 2.8 – 1.8 – 1.8 – 0.8 – 0.8 – 90 92 94 96 98 00 02 04 06 08 10 12 14 16 90 92 94 96 98 00 02 04 06 08 10 12 14 16 19 19 19 19 19 20 20 20 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 ▬ Manufacturing ▬ Market services ▬ Nonmarket services ▬ Manufacturing ▬ Market services ▬ Nonmarket services Source: World Bank calculations based on Barrot, Calderon and Serven 2018. Source: World Bank calculations based on Barrot, Calderon and Serven 2018. Note: Agriculture sector labor productivity equals unity. Note: Agriculture sector labor productivity equals unity. Figure 3.21. Labor Productivity in Agriculture and Figure 3.22. Labor Productivity in Agriculture and Other Nonresource Sectors relative to the US, Nigeria Other Nonresource Sectors relative to the US, SSA US=1.0 US=1.0 0.3 – 0.3 – 0.2 – 0.2 – 0.1 – 0.1 – 0– 0– 90 92 94 96 98 00 02 04 06 08 10 12 14 16 90 92 94 96 98 00 02 04 06 08 10 12 14 16 19 19 19 19 19 20 20 20 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 ▬ Agriculture ▬ Manufacturing ▬ Market services ▬ Nonmarket services ▬ Agriculture ▬ Manufacturing ▬ Market services ▬ Nonmarket services Source: World Bank calculations based on Barrot, Calderon, and Serven 2018. Source: World Bank calculations based on Barrot, Calderon, and Serven 2018. Note: Each US sector equals unity. Note: Each US sector equals unity. 44 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Numerous studies have shown that resource sector has gone up (Figure 3.23; McMillan, Rodrik. reallocation across sectors has had a trivial or even and Verduzco 2014; De Vries et al. 2011; Enachi, negative impact on growth in Nigeria. This is likely due Ghani, and O’Connell 2016). Although the resource to the incomplete process of economic transformation sector is capital-intensive, its productivity is so high and the enclave nature of the natural-resource sector, relative to other sectors that even modest employment which is highly productive but generates little direct gains generate a significant improvement in national employment and is only minimally connected to the productivity. When the resource sector is excluded rest of the economy. Misallocation of productive factors from the analysis, the positive effect vanishes, and the may also reflect the distortion in relative prices that increase in productivity from labor reallocation becomes affects exports and leads to the inefficient allocation of insignificant. resources between traded and nontraded sectors that is common in resource-dependent economies. Higher Reallocation of labor across sectors has been oil prices are highly correlated with a stronger naira (in uneven, and low oil prices have driven labor back nominal and real terms), discouraging growth in output to agriculture, which often serves as employer of and productivity in non-resource base (and especially last resort. From the 1970s until the mid-1980s, high tradable) sectors. Countries with undervalued currencies oil prices were accompanied by the sustained outflow tend to experience a more rapid process of growth- of labor from agriculture; but between the 1980s and enhancing structural change (McMillan, Rodrik. and 2000 oil prices fell and agricultural employment rose. Verduzco 2014; De Vries et al. 2011; Enachi, Ghani, From 2000 to 2014, as oil prices recovered, agricultural and O’Connell 2016). employment again declined (Figure 3.24). Despite the enclave nature of oil production, high oil prices have The reallocation of labor has contributed to economic clear employment spillovers onto wholesale and retail growth, but this is entirely due to productivity trade. As oil prices rise and the share of agricultural differences between the resource and non-resource employment falls, employment in wholesale and retail sectors. Over time, employment in less-productive trade also goes up, and as oil prices fall, so does the share sectors like agriculture and manufacturing has dropped, of employment in wholesale and retail trade (Enache, and employment in the highly productive resource Ghani, and O’Connell 2016). Figure 3.23. Employment and Productivity in Nigeria, Figure 3.24. Employment in Agriculture and Global Oil 1971–2011 Prices, 1970–2011 Relative productivity (log) Percent US$ per barrel β = 86.46 ; t-stat = 1.97 80 – – 120 8– 75 – – 100 6– 70 – MIN – 80 65 – 4– 60 – – 60 2– 55 – – 40 CON 50 – 0– – 20 PU FIRE 45 – WRT TRA AGR MAN OTH GOV -2 – 40 – –0 60 63 66 69 72 5 78 81 84 7 90 93 96 99 02 5 08 11 14 7 -0.04 -0.02 0 0.02 0.04 19 19 19 19 19 197 19 19 19 198 19 19 19 19 20 200 20 20 20 201 Change in employment share ▬ Share of employment in agriculture ▬ Spot crude oil price (WTI), rhs Source: Lennon (2016). Source: World Bank calculations based on Groningen Growth and Development database; FRED. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 45 NIGERIA ECONOMIC UPDATE FALL 2019 Figure 3.25. Sectoral Employment Shares, Nigeria Figure 3.26. Sectoral Value-Added per Worker, and Comparators, 2016 Nigeria and Comparators, 2016, relative to the US US=1.0 2.0 – 2.0 – 1.6 – 1.6 – 1.2 – 1.2 – 0.8 – 0.8 – 0.4 – 0.4 – 0– 0– Nonmanu- Market Nonmarket Nonmanu- Market Nonmarket Agriculture Manufacturing facturing services services Agriculture Manufacturing facturing services services J Nigeria J SSA J Non-SSA less developed countries J Nigeria J SSA J Non-SSA less developed countries J Emerging market economies J Advanced economies, rhs J Emerging market economies J Advanced economies, rhs Source: World Bank calculations based on Calderon (forthcoming). While the role of the rural economy as employer could accelerate growth and facilitate economic of last resort has softened the impact of economic transformation. downturns, it has also eroded the efficiency gains generated by the movement of labor between sectors. Agriculture in Nigeria employs a larger share of the workforce than it does in comparable countries, and its labor productivity is significantly lower (Figure 3.25 and Policy Options to Boost Figure 3.26). Since the likelihood that agriculture would Productivity remain an automatic stabilizer to the economy during downturns, improving sector’s productivity remains crucial. Given Nigeria’s formidable development challenges in Nigeria, there is urgency to boost productivity to Though the persistence of productivity gaps between reduce the country's heavy reliance on oil and climate- sectors suggests that the Nigerian economy is not dependent resources and create an environment in fully leveraging the potential productivity gains from which the private sector can thrive and create more reallocating labor and capital, Nigeria’s economic and better jobs. In recent years Nigeria has moved to do history suggests that with the right mix of policies so: it has, among other measures, sustained productivity growth can be achieved. During the high-growth period of the mid-2000s, • improved regulation to make it easier for economic transformation was proceeding apace, and entrepreneurs to start and operate a business; TFP was rising. High oil prices were contributing to • launched a Central Portal for Government Services to growth, but governance reforms and public investment improve transparency in public service delivery; facilitated the increase in productivity. However, the • ratified the Social Protection Policy and established subsequent downturn in oil prices drove workers back a state and national Social Registry of poor and to agriculture, partly reversing these. Given the historical vulnerable households to enhance social protection; relationship between agricultural employment and oil • established a Basic Health Care Provision Fund; and prices, policies to diversify production and mitigate • improved payment service regulations to promote the impact of the oil sector on the rest of the economy financial inclusion. 46 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS While these are notable achievements, now, given investment. Lack of monetary, external, and fiscal slow growth, rising poverty, and limited public policy predictability makes longer-term production revenue for much-needed investments in physical and horizons less attractive, diverts local financing to short- human capital, it is critical for Nigeria to implement time decisions, and pushes potential foreign investors a bold reform program to boost productivity. Given away from Nigeria. Defining clear tax, exchange rate, Nigeria’s fast-growing labor force, investment in human inflation, banking, and other crucial policy objectives capital and its utilization is critical to boost productivity and demonstrating that policies are carried out in and improve living standards. Improving human systematic, predictable ways would invite investment capital requires investing more to raise education and in local productive capacity. Channeling development health outcomes and adopting policies and programs finance through dedicated institutions, financed through to increase women empowerment and girls’ access to the budget, could enhance policy credibility and schooling. Though investments in human capital are make the allocation process more transparent. Clearly needed now, results will only be visible in the medium communicating fiscal policies and coordinating and to longer term. In the near term, the following measures harmonizing taxation across tiers of government could can help increase the efficiency with which Nigeria’s help firms make more informed investment decisions. limited physical and human capital is allocated and used. Increased countercyclicality of fiscal policy and Certain policy and institutional reforms could rationalized forex policies could increase efficiency reduce distortions in the allocation of physical and of resource allocation. Ensuring that fiscal policy is human capital and ultimately boost productivity. predictable, nondiscretionary, and countercyclical will be Feasible in the near term, they could bring Nigeria’s critical if Nigeria is to break the boom-bust pattern of GDP growth rate closer to its long-run potential. The the fiscal cycle, smooth output volatility, increase public options below are far from exhaustive but highlight investment in critical infrastructure, and encourage the key priorities: longer-term investments in human complementary private investment. Non-oil revenue and physical capital will be crucial to sustain growth, mobilization is critical to ensure sustainable funds which needs to be adequately supported by the country’s financing core public goods to avoid ever thinning macroeconomic fundamentals and competitive private spread of government services to a growing population. sector while ensuring sufficient fiscal space to finance Rationalizing foreign-exchange policies would heighten provision of essential public goods. The selected policy transparency, bolster market confidence, and enhance options are consistent with the priorities identified in the business climate. Multiple exchange rates create the Government of Nigeria’s Economic Recovery and a complex scheme of implicit public subsidies and Growth Plan (ERGP). In line with its objectives, the distort national accounting, and, crucially, allocation recommendations respond to major constraints on of resources. Full exchange-rate convergence across the private sector development: (1) policy transparency and various windows at a market-convertible rate, such as the predictability; (2) quality and availability of inputs; (3) IEFX, would again enhance transparency and build up regulatory discretion; and (4) access to finance. the confidence of market participants. A more open and transparent trade policy would Policy Transparency and Predictability foster competition among firms and help make the entire economy more productive. Trade policies More transparent, predictable, and evenhanded supporting specific sectors and regions in a country macroeconomic policies would streamline long- distort factor allocations and lower productivity. The term economic decision-making and encourage restrictive trade and exchange-rate policies directed Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 47 NIGERIA ECONOMIC UPDATE FALL 2019 to import-substitution that were adopted during the improve their transparency by defining subsidies downturn in global oil prices did protect domestic explicitly in the federal government’ budget. producers in targeted industries, but they also created barriers to the sourcing of inputs used by domestic ii) Enhancing intergovernmental fiscal coordination and ( manufacturers. Access to a wide range of affordable subnational fiscal management inputs is necessary for firms to leverage economies of scale, reduce production costs, and ensure that • Bolster the fiscal responsibility framework and exports are competitive. In the medium to long improve intergovernmental fiscal coordination by term, removing distortive incentives would promote incentivizing states to fully implement the 22-point productivity by facilitating the exit of less-productive Fiscal Sustainability Plan. firms and by encouraging other firms to grow faster. • Increase subnational own-source revenues by Nigeria’s recent signing of the Africa Continental Free establishing consolidated and harmonized state Trade Area agreement recognizes its need to focus on revenue codes, expanding electronic tax payments such trade-enabling factors as better transportation and reducing cash payments, establishing and communications connectivity, investment in the consolidated state revenue accounts as part of state technological skills of the workforce, and provision of TSAs; and introducing a well-designed, progressive, incentives and financing to stimulate industrial growth. and properly administered property tax to induce more efficient land use and provide revenue to Selected policy options that would promote policy state and local governments. To help minimize transparency and predictability fall into three priority double taxation vis-à-vis federal policies, record groups: and harmonize subnational revenue policies and administration measures across states. (i) Improving monetary policy transparency and effectiveness  • Accelerate progress under the National Action Plan for Open Government Partnership and • Refocus monetary policy on achieving price stability, other initiatives designed to enhance fiscal policy primarily through variations in the policy rate, transparency, social accountability, and citizen with open-market operations geared to controlling engagement. liquidity conditions and ensuring that interbank market transactions are conducted within a narrow  iii) Boosting domestic revenue mobilization and improving ( band around the policy rate. This would also help public expenditure management and transparency reduce the risk that CBN operations crowd out private-sector borrowing. • Enhance fiscal resilience to oil shocks by expanding • Unify exchange rates into a single market-driven the nonoil revenue base and building the capacity of window to eliminate market distortions and allow the fiscal institutions to smooth public consumption and exchange rate more flexibility to help buffer shocks; investment. and remove forex restrictions. • Increase nonoil revenue through comprehensive tax • Improve transparency by annually publishing audited policy and administration reforms; raise value-added financial statements of all central bank operations. tax and excise tax revenues, rationalize ineffective tax • Strengthen the resolution framework and discontinue incentives, and strengthen the capacity of customs regulatory forbearance of undercapitalized banks. and the federal and state tax administrations to • Evaluate and review the effectiveness and efficacy both improve collection and reduce the high cost of of development-finance interventions and import- compliance. substitution policies; if these policies continue, 48 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS • Enhance oil-revenue remittances by managing • Harmonize regional tariffs by fully implementing unbudgeted NNPC deductions and underpayments the Economic Community of West African States and by ensuring that petroleum industry bills are (ECOWAS) common external tariff regime and consistent with sustaining or increasing public by applying its rules of origin, linking regional revenue. and unilateral trade reforms to address the risks of • Strengthen taxpayer engagement, increase tax trade diversion arising from the implementation of morale, and address negative taxpayer perceptions by ECOWAS or AfCFTA. providing more clarity and transparency regarding • Gradually phase out tariffs in sectors where there are which taxes need to be paid by whom and for what concerns about competitiveness and job losses and through enhanced taxpayer education; training tax prepare complementary policies to support those officials to treat taxpayers as clients in a professional who are negatively impacted by reforms; develop a and fair way; strengthening public accountability on clear adjustment mechanism for firms and industries the collection of tax revenues; and linking taxation to affected by liberalization; and provide support to help improvements in the quality and relevance of public domestic firms meet the standards of export markets. services. • Enhance public expenditure management by costing and recognizing subsidies in the budget; removing Input Quality and Availability petrol price subsidies while shielding the poor from negative impacts; improving budget implementation Improving the quality of infrastructure, in particular by strengthening multi-year budgeting practices power and transport infrastructure, would improve based on realistic macroeconomic assumptions, productivity by building up information and actual past revenue outturns, and a costed impact transportation networks, lowering logistics and of new revenue measures; and by monitoring and transaction costs, and alleviating market access strengthening the efficiency and effectiveness of difficulties. The substantial infrastructure deficit marked public spending. by severe deficiencies in electricity and transportation • Further strengthen public debt management and networks is a major obstacle to productivity growth in transparency by adopting more realistic estimates Nigeria.29 For example, investments in rural roads will of future deficit financing and providing more be necessary to connect producers and consumers to detailed reporting of the debt stock, including federal markets, and urban transportation infrastructure will government arrears. be crucial to manage the country’s rapid urbanization. Similarly, a combination of rural electrification and Harmonize trade policy and increase its transparency (iv)  increased urban power supply will be necessary to alleviate the problems that electricity access gaps pose • Review and update Nigeria’s trade policy and for productivity growth. In both rural and urban areas, legal framework by rerevising outdated laws and deficiencies in transportation networks are major establishing monitoring and evaluation mechanisms barriers to the access of poor Nigerian households to to measure the impact of trade policy. economic and social opportunities. Lack of access and • Review existing non-tariff measures to assess their unreliable power both lead to allocative inefficiencies distortionary impact and phase out foreign exchange and make it difficult for poor households to direct their restrictions on 42 import groups, import prohibitions labor resources for market production. Approximately on 44 products by the Nigerian Customs Service, and 80 million Nigerians have no access to electricity. The local content requirements in the oil sector, which are power that is available is inadequate and unreliable; considered in conflict with WTO rules. a combination of inadequate governance and erratic 29 The World Economic Forum (WEF) ranks Nigeria 132nd of 138 countries for infrastructure quality. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 49 NIGERIA ECONOMIC UPDATE FALL 2019 contract enforcement undermines operational efficiency, of intergenerational wealth and thus deters social and financial viability. Because agriculture has a critical mobility. Without more investment in human and role in providing fallback employment when oil prices physical capital, workers are unable to take advantage are low, public investment in rural infrastructure will of the higher returns offered by employment in more be vital to build up agricultural productivity during productive sectors. oil-price downturns. The spread of digital technologies can reduce informational frictions and expand access to Reducing trade and transport costs would improve financial services; Nigeria’s rates of mobile phone and the allocative efficiency of domestic resources and Internet penetration could be improved through more attract foreign capital. Tariff and nontariff barriers public investment in digital connectivity. combine to create protected sectors whose excess returns divert productive factors from their most efficient More secure land tenure could boost investment use. Nigeria’s current policy structure systematically in agriculture. Agricultural growth and land-policy disadvantages exporters and service providers; it also reform have substantial implications for poverty incentivizes resource flows to the least-productive reduction, employment, and higher living standards. sectors, possibly limiting productivity growth. Import Agricultural production in Nigeria is labor-intensive; data underscore how little Nigeria is integrated into high population growth rates, deep regional inequalities, international markets. Yet importing firms in Nigeria inadequate protection of land and property rights, are more productive than non-importers, suggesting and periodic episodes of reverse rural-urban migration that access to foreign inputs enhances labor productivity. have discouraged investment in agricultural capital. International experience shows that the removal of trade Rental activity could have a crucial role in reducing the restrictions tends to facilitate the exit of less-productive dispersion in the marginal product of land across farmers firms or accelerate firm growth; by removing those and raising the productivity of agriculture. Although restrictions Nigeria would eliminate a major economic rentals can help reallocate land from less to more distortion while promoting much-needed investment in productive farms, farms that rent land still operate far physical and human capital. from the efficiency benchmark. This suggests that land markets are still subject to other frictions. Selected policy options that would improve input quality and availability: Enhancing the quality of education and building their skills could give workers more mobility across • Accelerate the implementation of the Power Sector regions and sectors for better allocation of human Reform Program—a credible and fiscally sustainable capital. Ability to reap the benefits of structural financing plan with tariff adjustments to protect transformation will depend on a well-educated and poor households while reducing the overall burden mobile labor force that can meet the evolving demands of power subsidies on the budget, combined with a of a dynamic economy. Low stock of human capital and robust turnaround plan for distribution companies— its subsequently small contribution to labor productivity to unlock private investment and provide much- and growth makes it imperative for Nigeria to move needed power to Nigerian firms and households. urgently to enhance human capital by investing more • Enable the expansion of well-managed public-private in education, health, and skills development. Slow and partnerships (PPPs) in key infrastructure networks incomplete school-to-work transitions diminish labor (e.g., roads, railways, and airports) by (i) adopting a mobility. Young people tend to enter the labor force legal framework for PPPs to strengthen institutions too early and with too little education. Inadequate and regulations governing project origination, project skills development leads to minimal accumulation preparation, contract management, contingent- 50 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS liability assessment, and processing for government • Improve workforce-skills development by guarantees; (ii) clarifying the roles and responsibilities formulating a national skills-development strategy of the numerous institutions linked to PPPs at and by aligning the supply of skills with the needs of the federal and state level; (iii) preparing a robust the labor market. pipeline of infrastructure projects and ensuring that project standards, procurement, and contract management are predictable and publicly disclosed; Reduced Regulatory Discretion and (iv) approving a list of prioritized PPP projects to provide regulatory clarity on how PPP projects are Even-handed regulation would boost investor originated and designated, the risks the government confidence, foster competition, and could encourage is taking, and the guarantees to be provided. formalization. A high degree of market concentration • Build a coherent institutional and governance characterizes the Nigerian formal sector with a few large framework to implement and coordinate digital firms dominating key industries and sectors. Inadequate economy reforms across all relevant agencies and competition pushes up input prices and makes Nigerian governmental levels. firms less competitive. Market concentration is especially • Facilitate the adoption of digital technologies to distortive in upstream sectors, such as construction improve connectivity to inputs and markets among materials, and in business-related services, such as farmers and entrepreneurs. telecommunications. Market concentration is reinforced • Adopt a comprehensive package of reforms by regulatory obstacles and other domestic barriers to designed to: (i) improve land management and entry, as well as by import-substitution policies, which mobilize private infrastructure investment to build limit exposure to foreign competition. up agriculture value chains; and (ii) remove the monopoly on agricultural insurance and enact the Eliminating distortions in the tax system will be vital Plant Variety Protection Act to incentivize national to treat the private sector fairly and expand the space and multinational agribusiness investments. for public investment. Nigeria’s tax system interferes • Address high-priority measures to reduce the costs, with the equalization of marginal products between delays, and inefficiencies involved in border and firms. Rationalizing tax expenditures, especially pioneer- port clearance by reducing redundant formalities status schemes, by linking them to clearly defined policy (simplifying and harmonizing documents, objectives and tailoring their use to specific policy streamlining procedures, automation, etc.), objectives would reduce investment distortions and promoting good governance, and expanding the fiscal waste. The impact of taxes is especially deleterious availability of information. if the associated distortion is positively correlated with • Improve safety and security for road freight vehicles productivity—i.e., if the tax burden is greater for highly traveling and parking along strategic routes. productive firms. Finally, tax exemptions reduce Nigeria’s • Develop a clear and comprehensive compliance- already limited fiscal space, and current efforts to start management strategy for customs and other border- rationalizing them are not yet yielding the returns related agencies. necessary to enable adequate investment in the country’s • Expedite the implementation of reforms to align fiscal priorities. Nigeria with the WTO Trade Facilitation Agreement. • Increase investment in education and health and adopt policies and programs to increase women’s empowerment and promote girls’ access to education. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 51 NIGERIA ECONOMIC UPDATE FALL 2019 Selected policy options to reduce regulatory using internal resources for investments, and nearly discretion: 90 percent of loans require collateral, with an average value of almost 230 percent of the loan amount. Only • Revise business regulation to reduce transaction costs 40 percent of Nigerian adults have a bank account, and and the administrative burden for firms, e.g., by just 6 percent have a mobile money account; neither adopting the Companies Allied Matters Act. indicator has improved since 2014 (World Bank 2019). • Improve access to information and digitize regulatory processes to reduce transaction costs for investors and Because robust job creation hinges on the dynamism increase their confidence. of small, new businesses, access to finance is critical • Incentivize reforms of the subnational business to enable smaller firms to compete with established environment and peer-to-peer learning across states. incumbents. Policy options include fully implementing • Build up FDI policy and promotion and the licensing and regulatory guidelines for payment- emphasize that the National Investment Promotion service banks and expediting review of applications for Commission (NIPC) is mandated to (1) establish payment-service bank licenses. Restoring the previous more open and predictable entry procedures; and minimum capital requirements for microfinance (2) enhance investor confidence and protect investor institutions, as delineated in the central bank’s October guarantees. 22, 2018, circular, would also help strengthen and • Rationalizing tax expenditures, especially pioneer- consolidate the microfinance subsector. Nigeria’s recent status schemes, and establish a robust monitoring and YouWin! competition showcased the potential impact evaluation system for entities with pioneer status. The of improving access to finance30 among small firms latest list, published in August 2017 in the Official and should serve as a model for similar initiatives. Gazette of the Federal Republic of Nigeria, shows as The results of the YouWin! program31 were positive: many as 99 products and industries in 39 subsectors Competition winners were more likely than their peers of 11 main sectors, are benefitting from pioneer to innovate, survive in the market, achieve higher sales status, which grants companies a CIT exemption and profits, and employ more people. Three years after for up to three years from commencement of the the competition, winning firms were over 20 percentage business, extendable to another two years. points more likely than control firms to employ 10 or • Adopt the Nigeria National Quality Policy to more workers (McKenzie 2017). consolidate, refine, and sustain an effective and efficient national quality infrastructure. Curbing CBN use of quasi-fiscal operations would both alleviate distortions in the allocation of credit and improve policy predictability. The Access to Finance central bank has attempted to directly increase the flow of credit to targeted sectors through development Improving access to finance, particularly for small and finance operations, with the aim to overcome the medium-sized enterprises, can promote productivity shallowness of the commercial bank credit market. by improving resource allocation. Credit-market Many of these operations are agricultural development imperfections lead to misallocation of resources by schemes intended to support small rural enterprises creating barriers to entry and inhibiting adoption of new and smallholder farmers. Regardless of their merits as technologies. Results of enterprise surveys in Nigeria development policies, financing these interventions underscore the importance of alleviating constraints on through the CBN rather than the federal budget reduces access to bank financing: over 50 percent of firms report 30 Although note that the competition administered grants, not loans. 31 The Nigeria YouWin! competition attracted 24,000 grant applications from individuals that wanted to start a new business or expand one. The top 6,000 applicants were selected for a 4-day business plan training course and each winner \ was awarded an average grant of US$50,000. 52 Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS the transparency of fiscal policy and the effectiveness of monetary policy. Selected policy options that would improve access to finance: • Make the banking sector more resilient by reinforcing capital buffers, with credible time- bound recapitalization plans for banks, phasing out regulatory forbearance, and enforcing strict requirements for reporting by financial institutions. • Apply the guidelines for licensing and regulation of payment service banks by expediting the review of applications for those licenses. • Establish an effective structure for carrying out the National Financial Inclusion Strategy, including consolidation of the microfinance banking sector. • Enhance the legal framework for debt resolution and foreclosure to encourage lending to SMEs. • Improve credit information systems by enforcing current requirements and facilitating collection of credit information from additional sources to foster outreach to unbanked clients. • Enact the Data Protection Bill to protect the privacy and security of financial data. • Foster digital financial services, which can help banking the unbanked and potential serve as a springboard to access formal financial sectors. Chapter 3: Boosting Productivity to Accelerate Growth and Job Creation 53 NIGERIA ECONOMIC UPDATE FALL 2019 References Abrego, L., Amado, M.A., Gursoy, T., Nicholls, G. Kouame, Wilfried (2019). Trust to Pay? Tax Morale and P., and Perez-Saiz, H. (2019). The African Trust in Africa. World Bank Policy Research Continental Free Trade Area: Welfare Gains Paper 8968. Washington, D.C.: The World Estimates from a General Equilibrium Model. Bank. International Monetary Fund Working Paper Lane, P.R. and Tornell, A. (1996). Power, Growth and the No. 19/124. Voracity Effect. Journal of Economic Growth, 1 Arenas, G. and Vnukova, Y. (2019). Short-Term Revenue (2): 213-241. Implications of Tariff Liberalization under the Lange, Glenn-Marie; Wodon, Quentin; Carey, Kevin African Continental Free Trade Area. World Bank, (2018). The Changing Wealth of Nations 2018: Washington, DC. Building a Sustainable Future. Washington, Badinger, H. and Nindl, E. (2014). “Globalisation and D.C.: World Bank. 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Washington, D.C.: The Quarterly Journal of Economics, 124(4): 1403- World Bank. 48. 54 References Nigeria: Key Economic Indicators NIGERIA ECONOMIC UPDATE FALL 2019 Nigeria: Key Economic Indicators Economy 2015 2016 2017 2018 H1 2018 H1 2019 Real GDP Growth (% yoy) 2.7 -1.6 0.8 1.9 1.7 2.0 Nominal GDP (Naira tr) 95 103 115 129 60 67 Oil Production (mb/d) 2.1 1.8 1.9 1.9 1.9 2.0 Oil Price (Bonny light, US$/bbl) 54.2 45.2 54.8 72.1 71.3 66.9 Inflation (%yoy, average) 9.0 15.7 16.5 12.1 13.0 11.3 Real sectoral growth (%, yoy) 2015 2016 2017 2018 H1 2018 H1 2019 Agriculture 3.7 4.1 3.4 2.1 2.1 2.5 Industry, of which: -2.2 -8.9 2.1 1.9 3.4 1.3 Oil and Gas -5.4 -14.4 4.7 1.1 4.6 1.7 Manufacturing -1.5 -4.3 -0.2 2.1 2.0 0.3 Construction 4.4 -5.9 1.0 2.3 3.2 1.8 Services, of which: 4.8 -0.8 -0.9 1.8 0.8 2.2 Trade (wholesale and retail) 5.1 -0.2 -1.1 -0.6 -2.4 0.3 ICT 6.2 2.0 -1.0 9.7 6.8 9.2 Finance and Insurance 7.1 -4.5 1.3 2.0 7.1 -5.0 Real Estate 2.1 -6.9 -4.3 -4.7 -6.4 -1.7 Public Administration -12.3 -4.6 -0.4 -2.0 -3.5 -8.6 Oil GDP -5.4 -14.4 4.7 1.1 4.6 1.7 Non-Oil GDP 3.7 -0.2 0.5 2.0 1.4 2.1 Non-oil industry 0.1 -5.0 0.6 2.4 2.7 1.0 Non-Oil, Non-Agriculture 3.8 -1.7 -0.6 2.0 1.2 1.9 GDP Composition (%) 2015 2016 2017 2018 H1 2018 H1 2019 Total GDP (2010 basic prices) 100 100 100 100 100 100 Agriculture 20.9 21.2 21.1 21.4 18.1 19.3 Industry, of which: 20.4 18.4 22.5 26.0 28.0 28.2 Oil and Gas 6.4 5.3 9.1 10.5 12.9 9.2 Manufacturing 9.5 8.8 8.8 9.7 9.4 11.4 Construction 3.7 3.6 3.8 4.7 4.8 6.5 Services, of which: 58.8 60.4 56.4 52.6 53.9 52.6 Trade (wholesale and retail) 19.2 20.4 19.0 17.2 17.5 16.1 ICT 11.5 11.3 10.3 10.2 10.9 12.3 Finance and Insurance 3.5 3.5 3.4 3.1 3.6 3.1 Real Estate 8.7 8.2 7.6 6.8 6.5 6.1 Public Administration 2.7 2.7 2.6 2.3 2.4 2.0 Oil GDP 6.4 5.3 9.1 10.5 12.9 9.2 Non-Oil GDP 93.6 94.7 90.9 89.5 87.1 90.8 Non-oil industry 14.0 13.1 13.4 15.5 15.0 19.0 Non-Oil, Non-Agriculture 72.8 73.5 69.8 68.0 68.9 71.5 Source: National authorities and World Bank calculations. 56 Nigeria: Key Economic Indicators JUMPSTARTING INCLUSIVE GROWTH: UNLOCKING THE PRODUCTIVE POTENTIAL OF NIGERIA’S PEOPLE AND RESOURCE ENDOWMENTS Monetary and Financial Sector 2015 2016 2017 2018 H1 2018 H1 2019 (% change yoy, end of period, unless indicated otherwise) Broad Money 6.1 17.8 2.3 12.1 12.9 12.4 Narrow Money 24.6 31.5 -0.9 5.2 5.0 4.3 Net Foreign Assets -18.7 61.8 69.6 18.5 116.5 0.7 Net Domestic Credit 12.1 24.3 -3.5 6.3 -7.9 28.9 o/w to the Federal Government (Net) 152.0 68.6 -25.4 33.7 -46.6 170.3 o/w to the Private Sector (Net) 3.1 15.8 -1.2 1.9 -1.4 12.8 Monetary policy parameters: Monetary Policy Rate (absolute rate, end of period) 11.0 14.0 14.0 14.0 14.0 13.5 Liquidity Ratio (absolute rate, end of period) 30.0 30.0 30.0 30.0 30.0 30.0 Cash Reserve Requirement 20.0 22.5 22.5 22.5 22.5 22.5 (absolute rate, end of period) Financial Market Indicators (end of period) Stock Market (NSE) Index 28,642 26,875 38,243 31,431 38,279 29,967 Fitch Sovereign Long Term Foreign Debt Rating BB- B+ B+ B+ B+ B+ Moody's Sovereign Long Term Foreign Debt Ba3 B1 B2 B2 B2 B2 Rating S&P Sovereign Long Term Foreign Debt Rating B+ B B B B B External Sector 2015 2016 2017 2018 H1 2018 H1 2019 Exchange rate - official (N/US$, end of period) 197 305 306 307 306 307 Exchange rate - parallel (N/US$, end of period) 267 490 363 370 362 361 Real effective exchange rate index (end of period) 67 86 99 87 91 83 Current Account Balance (US$ bn) -15.4 2.7 10.4 5.3 5.8 -5.7 Current Account Balance (%GDP) -3.2 0.7 2.8 1.3 3.1 -2.7 Exports of Goods and Services (US$ bn) 49 38 51 68 32 34 o/w oil and gas exports 42 32 42 58 27 27 Imports of Goods and Services (US$ bn) 72 47 51 72 31 47 Net Direct Investment (US$ bn) 2 3 2 1 1 1 Net Portfolio Investment (US$ bn) 1 2 9 13 9 12 Net Other Investment (US$ bn) -9 -4 -2 -9 -3 -19 Remittances (net, US$ bn) 19 19 22 24 12 12 External Reserves (US$ bn, end of period) 29 26 39 43 48 45 Equivalent months of imports of G&S 5 7 9 7 9 6 Source: National authorities and World Bank calculations. Net Federation Account Revenues Actual (% of annual GDP) 2015 2016 2017 2018 H1 2018 H1 2019 Total Federation Account Net Revenues 5.6 4.2 4.9 6.1 2.9 2.5 Oil and Gas (Net) /1 3.0 1.6 2.3 3.6 1.8 1.4 Other Extractives-related revenues and inflows /2 0.2 0.4 0.3 0.2 0.0 0.0 Non-oil Revenues (Net) 2.3 2.2 2.3 2.4 1.1 1.1 Corporate 1.0 0.9 1.0 1.1 0.4 0.4 Customs 0.5 0.5 0.5 0.5 0.2 0.3 VAT 0.8 0.8 0.8 0.8 0.4 0.4 Source: National authorities and World Bank calculations. Notes: /1 After budgeted and discretionary deductions, but before derivation. /2 Includes Solid Minerals, NLNG Dividend, and Signature Bonus; exchange rate difference, excess PPT. Nigeria: Key Economic Indicators 57 NIGERIA ECONOMIC UPDATE FALL 2019 FGN Fiscal Accounts 2015 2016 2017 2018 H1 2018 H1 2019 Total FGN Revenue 2.7 2.0 2.4 2.8 1.3 1.1 Oil and Gas /1 1.4 1.0 1.2 1.6 0.8 0.6 Non-oil Revenues 0.9 0.8 0.8 0.9 0.4 0.4 Corporate 0.5 0.4 0.5 0.5 0.2 0.2 Customs 0.3 0.2 0.2 0.2 0.1 0.1 VAT 0.1 0.1 0.1 0.1 0.1 0.1 FGN Independent Revenues 0.3 0.2 0.3 0.3 0.2 0.1 Total FGN Expenditures 5.0 4.7 5.6 6.1 3.1 3.2 Recurrent Expenditures (excl. Statutory Transfers) 3.7 3.7 4.1 4.2 2.0 2.2 Capital Expenditures (calendar) /2 0.4 0.6 1.1 1.3 0.7 0.8 Statutory Transfers 0.4 0.3 0.4 0.4 0.2 0.2 Other Outflows /3 0.5 0.1 0.0 0.2 0.2 0.0 Fiscal Balance -2.23 -2.7 -3.2 -3.3 -1.8 -2.1 FGN Debt 10.8 13.1 14.9 15.2 13.6 14.4 Source: National authorities and World Bank calculations. Notes: The reported revenue and fiscal balance figures differ from the published FGN budget figures as the World Bank excludes the non-revenue items under international classification. Total expenditure for some years differs from the FGN reports as the World Bank excludes debt amortization payments from expenditure. Figures exclude GOEs and donor funding. /1 Includes other extractives revenues. /2 The actual capital spending reported for the calendar year. /3 Other Outflows include irregular items. 58 Nigeria: Key Economic Indicators Nigeria Economic Update Fall 2019 View this report online: www.worldbank.org/en/country/nigeria Yet We Had No Burns, Blisters by Godwin Arikpo Godwin Arikpo was born in 1981 in Cross River State, Nigeria. He is a multi-dimensional artist that fuses acrylics, fabrics, wood, ropes and other assemblage to create his works of art. Arikpo incorporates traditional symbols into his works to authenticate his quest for history with an imagery that is distinctive, subjective, contemporary, and simple. Arikpo obtained a B.A. in Arts in 2007 from the University of Port Harcourt. Since then he has participated in several Art Workshops, Auctions, and Exhibitions, some of which include: ArtBurst (2011, 2013), the Annual Society of Nigerian Artist Exhibition in Port Harcourt, Rivers State; Poems in the Mangrove (2012), Port Harcourt, Rivers State; Horizons of Hope Exhibition (2015), held at the Quintessence Art Gallery in Lagos; Chronicles of Truth (2015), held at the Mydrim Gallery in Lagos; Faces and Phases (2016), held at the Terra Kulture Art Gallery in Lagos; Harmattan Workshop (2016), organized by the Bruce Onobrakpeya Foundation; Art as Therapy (2018), organized by the United States Embassy; ArtHouse Contemporary Auction (2018); and Faces and Forms Contemporary Art Expo (2019). People forge ideas, people mold dreams, and people create art. To connect local artists to a broader audience, the cover of this report and following editions will feature art from Nigeria.