As we celebrate Democracy Day in a pre-election year, we decided to look at four charts that hone in on some of the significant transformations the Nigerian economy has experienced over the years to give us a sense of the economy the next administration would be inheriting.
Key takeaways:
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Taking stock of Nigeria’s performance, we see that Nigeria’s current debt level has not only gone back to the 2004 levels (when we required debt forgiveness), but it has been rising rapidly too.
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Despite all the reforms in the electricity sector, Nigeria still suffers from an energy crisis, with grid shutdowns being the order of the day. Poor policy implementation has led to less than ideal solutions.
- However, some aspects of the economy are recording tremendous success, such as the pension and telecommunications sector. Both driven by market-led reforms, they have been able to withstand significant economic shocks and generate income
Since the early 2000s, we have experienced oil shocks, multiple FX crises, the rise of the digital economy, and a global pandemic. The year 1999 was quite significant for the Nigerian economy as it saw an intentional approach from the government towards market-led development. Unsurprisingly, we have witnessed key developments in sectors such as the pensions industry, telecommunications, and even attempts to deliver better and stable electricity to Nigerians. At the same time though, external government borrowing has gone through various phases.
1. Nigeria's rising debt stock
It's not news that Nigeria's debt has been increasing rapidly; it's something we've written about several times.
The year 2004 was monumental for our external debt stock position—our debt-to-GDP ratio was 58%, while the debt-to-revenue ratio hit 412%. Today, both metrics sit at 22% and 80%, respectively. This drop might seem like good news, but our external debt stock has tripled in just six years, indicating that our debt levels have been growing at an alarming pace.
Nigeria's debt of $36 billion in 2004 was an accumulation of debts for over 20 years. In 1980, Nigeria's debt stock was $3.4 billion; this increased to $17.3 billion in 1985, $32 billion in 1990 and $36 billion in 2004. But, between 2012 and 2022, Nigeria's debt has increased from $6.5 billion to $35.4 billion. This wouldn't be a problem if the country were growing at a similar pace. Yet, the economy has only been growing at roughly 3% annually.
Another cause for concern this time is how the loans are used. In 2004, a fundamental tenet for the Paris Club agreement to forgive Nigeria’s debt was the commitment to improving human capital and private sector-led development. However, this time, the Nigerian government has spent an enormous chunk of our debt on repaying existing debt and maintaining an unsustainable fuel subsidy regime.
In March, the International Monetary Fund (IMF) revealed that up to 23 African countries face high loan default risks. Hence, the next administration will need to figure out how to improve Nigeria's growing indebtedness. You see, the problem isn't so much that we owe so much money; it's more about our ability to pay it back.
2. The unsolved electricity crisis
In the spirit of thinking about top priorities for today’s government (and whoever gets elected next year), meeting Nigerians’ electricity needs should be high on the list.
A simple Google search for “Nigeria national grid” will yield results that include the word “collapse” in the top ten results. Between January and April this year, the grid collapsed five times. This is despite the significant reforms that the electricity sector has undergone over the years. The more things change, the more they stay the same—that’s how we would describe the Nigerian power sector. As of 1999, roughly 45% of Nigerians had access to grid electricity, but as of 2020, 55% had access, a meagre 10% rise in 21 years. Also, according to a recent World Bank survey, 78% of Nigerians connected to the grid receive less than 12 hours of electricity daily.
In comparison, 86% of Ghanaians have access to electricity from their national grid. We can’t ignore that Ghana is a smaller country than Nigeria but it’s also clear that Ghana has made considerable efforts to improve electricity.
For Nigeria, while privatisation was supposed to fix our power issues, faulty implementation stifled expected gains. Even the government’s intervention through the CBN hasn’t produced significant results. Since 2015 till date, the CBN has spent almost ₦2 trillion keeping the power sector afloat and providing funds for infrastructure.
Still, off-grid power solutions are slowly bridging the gap. Renewable energy providers are increasing electrification for all classes of Nigerian electricity consumers—from off-grid rural users to urban residential and commercial and industrial users with technologies like mini-grids, solar home systems and solar photovoltaic systems.
As Nigeria’s energy issues continue to deteriorate, from diesel prices to grid instability, more Nigerians are opting for off-grid solutions proving that the future of Nigeria’s electricity sector is off-grid.
3. Rising pension contributions
Before the pension reform act of 2004, the Nigerian pension industry was plagued by bloated pension liabilities and no remittance from employers. Simply, Nigerians were working with little to no savings for retirement. The public sector operated the pay-as-you-go (PAYG) scheme, which became unsustainable due to low budget provisions for pension payments. In contrast, in the private sector, pension schemes were unfunded and almost non-existent.
Things changed when the Pension Reform Act was implemented in 2004. Between 2007 and 2021, total pension contributions grew by 490.15%.
Pension contributions (savings) directly impact economic growth through investments. With pension fund custodians (PFCs) acting as long-term institutional investors, this pool of funds is primarily invested in safe havens like federal government securities (bonds, treasury bills), corporate bonds and money market securities (bank placements, commercial papers). In the latest annual report from Pencom (2020), 66% of pension funds were invested in FGN securities, followed by money market instruments (13.97%) and then corporate debt securities (6.13%).
The growth in pension savings is essential to the Nigerian government because when contributions rise, so does the level of pension fund investments.
Pension fund investments are a critical source of government revenue for crucial infrastructure projects like roads and rail, eventually boosting economic productivity and output. In the last 15 years, the value of pension fund assets has grown by a whopping 1,557.5% to ₦13.42 trillion, equivalent to 8% of the nominal GDP in 2021 (₦176.08 trillion).
However, the limitation here is that pension contributions (savings) are primarily dependent on the number of Retirement Savings Accounts (RSAs). Furthermore, access to RSAs depends on whether or not people are employed. So, if fewer people are employed in both the private and public sectors, the chances of pension funds assets growing significantly to increase investment slows. There’s also a time lag between when these investments are made and when the economy realises the rewards.
4. The telecommunications sector
In January 2001, the Nigerian Communications Commission (NCC) awarded two telecommunications licences to Econet Wireless (now Airtel) and MTN to begin operations in Nigeria. In just over two decades, the telecommunications industry has grown in stature, and it accounted for 12.6% of the Nigerian GDP in Q4 2021. According to the Federal Inland Revenue Services (FIRS), the telecommunications industry is under the professional services sector, and the sector is a significant contributor to company income tax.
In 2001, Nigeria had just 400,000 cellular subscribers, and all of these subscribed to the Nigerian Telecommunications Ltd (NITEL), which was government-owned. Fast forward to two decades later, Nigeria boasts about 200 million cellular subscribers, making it the 7th biggest telecommunications market in the world. According to the NCC, MTN, the market leader, had 73 million users as of July 2021. Globacom (51 million), Airtel (50.3million) and 9Mobile (12.9 million) follow closely.
The increase in cellular subscribers has directly impacted internet penetration in Nigeria. Like many other African countries, Nigeria is a mobile-first economy, and telcos have benefited massively. In the first quarter of 2021, revenue from data services for MTN grew by 54.5% year-on-year to ₦163 billion.
But it is not just data and communications where telcos have made an impact. In April 2022, MTN was awarded a mobile banking licence by the Central Bank of Nigeria. It joined other telcos, Airtel, 9Mobile, and Glo, which got their licence earlier to drive financial inclusion for the unbanked population of Nigerians.
However, it has not been all rosy for telecoms in Nigeria. MTN, in particular, has been at the end of some incredible settlements with the NCC. In 2015, the NCC fined MTN a mind-boggling $5.1 billion for failing to disconnect unregistered SIM cards. Eventually, only $1.7 billion was paid over three years after an out-of-court settlement was reached. One of the terms of this settlement included MTN going public on the Nigerian Stock Exchange (NSX), a decision which also extended to Airtel.
Despite the battles between the NCC and MTN, telcos have fared better than the likes of debt and electricity. That sector has contributed the most to company income tax from 2015 to 2020. In 2021, MTN alone contributed 13.5% of all non-oil revenue collections by the FIRS and 10% of all collections in the same year. Coupled with the growth in cellular subscribers and internet users, telcos might arguably be one of the sectors that have shown the most growth in Nigeria since 1999.
Evidently, growth in the sectors identified in this article has been private-sector-led, bar the electricity sector where private sector intervention hasn’t resulted in significant growth.
With the country’s debt rising rapidly, the government would need to source alternative and domestic sources of income. This may be the motivation behind some of the tax reforms we’ve seen in the telecommunications sector. However, the government must create a healthy balance between generating income for the government and stifling growth through prohibitive taxes.
