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Nigeria has the largest market in Africa with a population of over 200 million. It is one of Africa’s key oil producers, producing high-value, low-sulfur crude oil. The economy is heavily dependent on oil. In the first quarter of 2021, oil accounted for about 9.25% of Nigeria’s gross domestic product (GDP), up from 5.8% recorded in the fourth quarter 2020, and contributing approximately 85% of export earnings and around 50% of total government revenues. Nigeria’s economy and commercial activities were severely affected by the COVID-19 pandemic and associated declining oil prices due to the country’s heavy reliance on oil.
In December 2020, the government of Nigeria (GON) passed a $4.829 trillion (13.5 trillion naira) 2021 budget premised on a crude oil production levels of $40, exchange rate of 379 naira to the dollar, and GDP growth rate of 3%. An additional supplementary budget of $2.39 billion (982.7 billion naira) was passed in July 2021, ostensibly to fight rising insecurity in the country and fund COVID-19 vaccine procurements.
The country is facing severe challenges ranging from rising inflation, increasing food prices, currency devaluation, high unemployment, and widespread insecurity. GON rolled out several fiscal and macroeconomic policies aimed at promoting the economic growth of the country to mitigate the recession brought on by the COVID-19 pandemic. The impact of several measures intended to mitigate the spread of the disease adversely impacted business activities and supply chains. Some believe these measures will gradually get the economy out of recession. As a result of dwindling revenue, GON has increased borrowings from several international lenders to offset its revenue shortfalls. The Governor of the Central Bank of Nigeria recently declared that the country would require about 35 trillion naira ($85 billion) investment in infrastructure to attain double digit economic growth.
The slowdown in economic activity was compounded by inadequate supply of foreign exchange and worsening inflation (peaking at 18.7% in March 2021 from 11.37% in January 2019)
In line with OPEC’s directives, Nigeria recorded average oil production of 1.56 million barrels per day (bpd), although the country exceeded this level in May 2021, raising production to 1.6 million bpd. GON, through the Central Bank of Nigeria (CBN), has made initial steps toward harmonizing multiple exchange rate regimes operating in the market as it implements continued measures to stabilize the naira.
The Nigerian economy is broadly classified into formal and informal sectors. Business analysts estimate that the informal sector accounts for as much as 65% of the total economy, although the sector is not included in GDP calculations due to lack of credible data on the mostly cash-based activities. Nigeria’s formal sector economic activities are conducted across several sectors including the agricultural, services, and industrial sectors. The services sector – consisting of telecommunications, financial, and other services – is the largest sector in Nigeria, although it saw a slight decline, accounting for about 54.39% of GDP in Q4 2020. Agriculture accounted for 21.96% of GDP in the same period, while industries (oil and non-oil) accounted for 23.65% with oil sector accounting for 5.87%, while the non-oil sector accounted for 94.13% of the GDP in the Q4 of 2020. Several issues impacted the growth of the services sector, slowing the projected growth trajectory of these sectors and reducing their contributions to GDP.
Nigeria has an abundance of labor at rates well below high-income and some middle-income countries. Nigeria also has an abundance of natural resources including oil, commercial minerals, and precious stones. However, major impediments to development and trade include: inadequate power supply, deficient transportation infrastructure, a slow and ineffective judicial system, endemic public sector corruption, pervasive insecurity, non-inclusive growth, poverty, poor maternal and infant mortality indices, underachieving education services, underperforming healthcare sector, and poor distribution of wealth amongst its citizens.
In July 2020, Nigeria’s annual urban inflation rate rose to 13.40%, up from 13.18% in June of the same year. The rural inflation rose to 12.28% in July 2020, up from 11.99% in June 2020. According to the National Bureau of Statistics (NBS), Nigeria recorded a slight GDP growth of 0.51% (year-on-year) in the first quarter of 2021, slower than the 1.87% growth recorded in Q1 2020 and higher than 0.11% recorded in Q4 of 2020. Nigeria’s annual inflation rate reduced slightly to 17.75% in June 2021 from 17.93% in May.
In April 2021, the International Monetary Fund (IMF) revised its 2021 economic growth forecast for Nigeria to 2.5%, up from the earlier 1.5% projection it made in January 2021. To help mitigate the adverse effects of COVID-19 and the slump in oil prices, the African Development Bank (AfDB) approved a $288.5 million COVID-19 support package for the country, while the World Bank is offering a $1.5 billion stimulus plan. In April 2020, the IMF also approved $3.4 billion in emergency financial assistance for Nigeria to support its COVID-19 response.
GON initiated an Economic Sustainability Plan (ESP) aimed at providing a stimulus of 2.3 trillion naira (about $5.9 billion) to support the economy following disruptions due to COVID-19 in hopes of reducing economic contraction. Other plans, such as the Economic Recovery and Growth Plan (ERGP), Report of the Economic Crisis Committee, The Finance Act 2019, and the CBN proposals, have all been incorporated into the ESP. The GON plans to fund the ESP through Special Accounts (500 billion naira/$1.21 billion), CBN structured lending (1.1 trillion naira/$2.67 billion) and other funding sources (302.9 billion naira/$736 million).
According to a WorldCity analysis of the latest U.S. Census Bureau data, during the first five months of 2021, Nigeria’s trade with the United States amounted to $1.43 billion. This is 25.4% below its total trade during the same time the previous year. U.S. exports to Nigeria decreased 4.35%, while U.S. imports from Nigeria fell 47.1%. The U.S. trade surplus with Nigeria was $432.67 million.
According to the Nigeria Bureau of Statistics, the United States was Nigeria’s third largest import partner with 8.54% of the entire volume of imports in the fourth quarter 2020. Products such as durum wheat (in seed and not in seed), and used vehicles were mostly imported from the United States, and the country spent over 153.13 billion naira ($372 million) on the importation of used cars from United States in the first quarter of 2021 alone. Other Nigerian imports from the United States included spare parts and machinery, refined petroleum products, and military hardware.
The United States and Nigeria have a bilateral Trade and Investment Framework Agreement (TIFA) and Nigeria is eligible for preferential trade benefits under the African Growth and Opportunity Act (AGOA). Nigeria receives development assistance from the United States through its Agency for International Development (USAID).
Nigeria plays an important leadership role in both West Africa and on the African continent. The headquarters of the Economic Community of West African States (ECOWAS) is in Abuja. Nigeria, which represents roughly 70% of the 15-country ECOWAS GDP and over half of the ECOWAS region’s population, plays a significant role in ECOWAS. In 2019, Nigeria signed the African Continental Free Trade Agreement (AfCFTA) aimed at creating intra-African trade and a $3.4 trillion economic bloc across Sub Saharan Africa. Nonetheless, Nigeria had for some time been largely responsible for the decades-long delays in developing the ECOWAS Common External Tariff (CET).
Under President Muhammadu Buhari, Nigeria has prioritized self-sufficiency as key to economic growth and national security, promoting backward integration, import substitution, and local content laws.
Nigeria can be a lucrative market for companies that can learn to navigate a complex and evolving business environment. Established multinationals that have mastered operating in this challenging regulatory environment make substantial profits despite the country’s low level of income and logistical difficulties. GON continues to promote Nigeria as a rewarding target for Foreign Direct Investment (FDI). Foreign capital flows into all major sectors of the economy with the United Kingdom, United States, Canada, France, and China as the main sources. China has emerged as a major development, trade, and investment partner of GON and is Nigeria’s largest contractor and partner in infrastructure projects, with its total volume of projects estimated at $77 billion. These projects include several infrastructure sectors – road, rail, power, and construction.
Nigeria has some of the largest natural gas deposits in the world with 180 trillion cubic feet of proven reserves. However, the country has been unable to mobilize that gas for the domestic market. Political interference, delays in legislating key issues, and an inconsistent approach to regulating the price of gas collectively deterred the necessary investment to capture and deliver gas to domestic markets. In July 2021, after more than 10 years of delay, the country passed into law the Petroleum Industry Act (PIA). It is expected that the passage of the PIA will facilitate increased investments in Nigeria oil and gas industry.
Nigeria is among the world’s top five exporters of liquefied natural gas (LNG). In Q4 2020, the petroleum sector contributed 5.87% to Nigeria’s GDP and accounted for approximately 90% of GON income. In the first quarter of 2019, the oil sector contributed 9.14% to the country’s GDP, and 7.32% in Q4 as reported by the National Bureau of Statistics.
The oil and gas sector is the largest contributor to government revenues and the largest export product from Nigeria, however, disruptions due to the fall in oil prices in 2020 and COVID-19 led to huge losses in the sale of its crude. As a member of the Organization of Petroleum Exporting Countries (OPEC), Nigeria’s daily production of oil is regulated by OPEC as a mechanism of price regulation in the global oil market. The oil and gas sector continues to be a source of growth for the Nigerian economy with major capital projects being conducted in the country. In May 2021, the Nigerian National Petroleum Corporation (NNPC) awarded 57 marginal fields to 161 successful bidders. These marginal fields are located on land, swamp, and shallow offshore terrains.
Lax contract enforcement, a lack of regulatory clarity, and high and costly operational risks constrains growth and investment in this sector. The regulatory environment for international oil companies in Nigeria is further affected by the Nigerian Oil and Gas Industry Content Development Act of 2010. Under the Act, Nigerian independent operators are given first consideration in the award of oil projects in Nigeria. In addition, multinational companies working through Nigerian subsidiaries must demonstrate that a minimum of 50% of the equipment used is owned by Nigerian subsidiaries.
The power sector neither meets the existing demand nor delivers uninterrupted reliable electricity. Today, 23 grid-connected generating plants are in the country with a total installed capacity of 12,500 megawatts (MW), but a daily operational average near 4,000 MW. GON plans to improve access to electricity from 45% to about 90% by 2030. Through a series of reforms and policy initiatives, GON is focused on promoting efficiency in the sector to attract private investment, increase generation, reduce transmission losses, improve revenue collection, and resolve critical issues adversely impacting the sector.
Nigeria’s publicly owned and operated transportation infrastructure is a major constraint to economic development. The principal ports are in Lagos (Apapa and Tin Can Island), Port Harcourt, and Calabar. Of the 50,000 kilometers of roads, only a little more than 10,000 kilometers are paved, and many of these paved roads are in poor condition. In 2020 the government approved 35.944 billion naira ($87 million) in funding for the construction and rehabilitation of major roads (140 km) in six states. Only five of Nigeria’s twenty-two airports—Lagos, Kano, Port Harcourt, Enugu, and Abuja—currently receive international commercial flights. Nigeria’s railway currently has eight lines that are slightly more than 2,000 miles long collectively. These railways require major rehabilitation, modernization, and expansion. It has been estimated that a total of $3 trillion is needed to reduce Nigeria’s infrastructure deficit gap over the next three decades.
Nigeria’s services output ranks as the 63rd largest worldwide and fifth largest in Africa. The potential of the Nigerian financial services sector remains enormous, and foreign banks are increasingly attracted to the market. However, much of Nigeria’s population has only limited access to financial services – a problem compounded by high levels of bureaucracy required to complete even simple transactions. GON aims to push ahead with reforms of the insurance and pension industries. The insurance sector in Nigeria has low penetration but has grown over the past ten years.
Private equity (PE) in Nigeria is a growing aspect of the financial sector with over 20 PE firms operating in the country with funds ranging from $100 million to $1 billion in size. Over the past five years, Nigeria has accounted for more than half of the PE deals in West Africa. Nigeria has an active capital market with over 161 companies listed on the exchange and a market capitalization of 38.351 trillion naira ($73.35 billion) as of July 2021.
Nigeria is an increasingly important market and manufacturing center for the African consumer product sector. Nigeria is currently home to a growing middle class, now estimated to be about 50 million people. It is a clear leader in the regional economic group ECOWAS and regionalization efforts. Major challenges to companies in the consumer products sector in Nigeria include protectionist policies and lack of adequate intellectual property rights protection.
Nigeria is Africa’s largest ICT market, accounting for 29% of internet usage in Africa. In May 2021, the Nigerian Communications Commission reported that Nigeria had more than 160 million active mobile telecoms subscribers of GSM. Fiber optic expansion is currently taking place in Lagos and Abuja. However, expansion in rural areas continues to be hampered as telecom providers await pending legislation on right of way (ROW) protection for telecom infrastructure. To boost investments in telecom infrastructure within local districts, some states have provided discounted costs for ROW charges. GON still maintains an ambitious plan of attaining 90% broadband penetration by 2025. Penetration is slightly above 40% according to GON. However, the ICT sector remains an important driver of growth in Nigeria and helped the country recover from recession in the last quarter of 2020.
Nigeria’s agricultural sector employs nearly 70% of the population and comprises nearly 22% of GDP. Nigeria possesses an abundance of arable land and a favorable climate for production of nuts, fruits, tubers, and grains. Most farming in Nigeria is subsistence based, utilizing manual labor and relatively little agricultural machinery. Nigeria continues to maintain import restrictions (high duties, levies, quotas, and import bans) on several agricultural products, including poultry, beef, pork, and rice, among others on GON’s banned items list.
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