Must Nigeria’s path to growth involve excessive borrowing?

Saying the last six years have been tough for the Nigerian economy might be an understatement, but tough doesn't capture the impact of having two recessions in six years.

Although there is no stipulated duration for how long it takes countries to recover from recessions (the opposite of economic growth), given that Nigeria is yet to return to its 2015 real per capita income levels, it's clear the country is yet to recover.
 

In real life, the implications of these recessions are businesses shutting down, increased unemployment, and more people being plunged into poverty. The World Bank reported that 40% of Nigerians employed in non-farm enterprises lost some of their income in 2020. Also, the most recent data on poverty reveals that over 60% of Nigerians are multidimensionally poor.

Therefore, economic growth is critical to any conversation about Nigeria in the coming years. Because with economic growth comes increased production, more businesses or expansion of existing businesses, more employment, and increased well-being of people in the country.

While analysing manifestos by the various parties in our just concluded #manifestoweek, we established that APC's plans to delink expenditure from revenue will prove detrimental to the economy because it would require increasing the FG's debt to GDP ratio from 23% today to about 59% next year.

The increase in debt could be for two reasons: for the government to create the infrastructure required to attract capital or to provide the private sector with subsidies and other incentives to drive investment.

But excessive borrowing is more feasible for Nigeria if our revenue is sufficient to meet our debt interest payments. So it's worth exploring whether Nigeria can grow rapidly without borrowing significantly.

For the sake of our argument in this piece, we’ll assume that 10% is a rapid enough growth rate, given that more than one presidential aspirant has indicated that as their growth target for the next four years.

To show you how Nigeria can achieve such growth without too much borrowing, we'll look at Nigeria's history to know if it's something we've ever done before and, if it is, why we have the potential to sustain such growth.

We'll start with the first: Is 10% growth achievable in Nigeria?
 

Y2K, the dawn of the golden decade

The short answer is yes, and the early 2000s show how Nigeria can grow rapidly.

Between 1999, when Nigeria exited military rule, and 2010, Nigeria had an average GDP growth rate of 7.7%, with a peak growth of 15% in 2002. Around this time, Nigeria earned its "African giant" title, as it was among the fastest-growing economies in the world.

Such growth was possible in Nigeria for two reasons: Nigeria's status as a developing country and the policies the country implemented to drive such growth.

Emerging and developing economies are countries that have the potential to be developed but have yet to be there. Typically, these are countries that are large in terms of the size of their economies and have access to international markets. Nigeria currently has the largest economy in Africa in terms of GDP, and its per capita income is $2,085; (taking 21st place in Africa); it also has access to international lending markets.

This makes Nigeria a low-income developing country with the potential to grow quickly because it still has a long way to go to catch up with developed countries. These countries sometimes rely on existing technology to develop—manufacture, or deploy services.

Essentially, developing countries do not necessarily innovate but imitate what the developed world has worked on in the past. Imitation is one of the key contributors to China's success in its early days. Its industries focused on light manufacturing items already existing in the developed world. So it didn't have to incur the initial cost of research or trial and error.

Also, developing or emerging economies are more poised for growth because of how much work they must do to catch up with the western world. An apt term for this is the base effect—when your starting point is very low, every growth seems like a leap.

That’s why when China’s growth began in the late 70s and 80s, imitating manufacturing in developed countries,  it grew by an average of 10% every year for the first two decades because it was coming from a place of low productivity. It’s almost impossible for a developed country to grow that rapidly because it’s already very large. 

In many developing or emerging economies, nascent industries or sectors require heavy initial infrastructure like transportation (accessible roads and ports), power and internet, before they can start working efficiently. That initial investment in the infrastructure is one way the economy can achieve rapid growth.

Likewise, other sectors start to spring up on the back of that initial investment, too—due to the multiplier effect.

An example is the telecommunications (telco) sector, which was privatised in the early 2000s and ushered in a host of telecommunications companies and technology that continues to power the rapidly developing tech ecosystem.

Also, as emerging or developing economies grow, consumption increases, creating a large market for existing and new businesses. Hence, as a developing economy, Nigeria has the potential for high growth, just like Rwanda, which grew at an average of 6% in the last ten years. 

Therefore, Nigeria can achieve high growth as an emerging and developing economy. Also, this growth is typically powered by an influx of foreign investment into the countries because investment typically goes where it attracts the highest returns. So, emerging economies typically attract foreign investment once the right infrastructure and favourable regulations are in place. This, therefore, reduces the burden on the government to increase the local production capacity of the country, leaving more room for private sector involvement—and reducing the need for borrowing.

We’ve established that two things were responsible for Nigeria’s rapid growth in the early 2000s. So far, we’ve seen how its status as an emerging and developing economy comes from the base effect of having nascent sectors which attract investment and lead to growth in other sectors.

The other reason for the rapid growth is the policies implemented locally that propelled Nigeria to its high growth, which we’ll dive into in the next section.
 

Nigeria put in some work

The second reason for Nigeria's rapid growth at the time was a combination of factors that aligned perfectly in the country's favour: economic restructuring due to key policy reforms, high oil prices and low debt (which gave the government room to spend on the economy).

One of the main achievements of the Obasanjo administration was Paris Club debt relief, which wiped out the country's debt from $36 billion to $18 billion in less than a year. This meant that the government had more money to spend on developing the country.

Also, crude oil prices at the time (in the early 2000s)  were relatively higher than usual, and Nigeria took great advantage of it. After almost five years of crude oil prices being less than $30 per barrel, prices shot up to over $140 per barrel. And unlike now, oil producers in Nigeria took advantage of the price increase by producing over two million barrels of oil daily at the time, unlike this year when the country's production was the lowest it has ever been. 

But that was no easy feat.  The Niger Delta (where crude oil is produced)  has suffered violence over the years, which typically interrupts oil production. So, the government attempted to secure the region by using force and then through the presidential amnesty program in 2007.

Although the oil sector’s contribution to GDP has declined, its importance to the Nigerian economy cannot be overemphasised, given the government’s dependence on it for income and foreign exchange. Till 2015, Nigeria’s oil revenue was at least twice the value of non-oil revenue, partly because of the high oil price. But also because the government was not necessarily deliberate about increasing non-oil revenue.  As we saw in 2015 and 2020, Nigeria tends to slip into a recession when there's a decline in oil revenue. 

However, the Nigerian government also implemented several economic reforms critical to the real economy (bar oil and gas), such as privatising redundant state-owned enterprises, ushering a wave of foreign investment into the country. Again, the telecommunications sector is the poster child for the privatisation policies' success back then. This led to the inflow of investment into the sector, making mobile communication possible in Nigeria. Although the telecoms sector is still far from perfect, the impact was indirect, especially in the banking and tech ecosystems that rely heavily on telecoms infrastructure. So we’re still reaping the benefits of the policies made in the early 2000s.

Finally, the development in other sectors became evident in the restructuring of the economy and their contribution to GDP.

The chart above shows us that in the late 1990s, oil mining—crude oil production—was responsible for almost a third of Nigeria's GDP. The downside was that oil mining is largely capital-intensive, so even when it grew, it didn't necessarily translate to high employment. For instance, the oil mining sector only employs 0.17% of the Nigerian labour force, even though it contributes 9% to the GDP.

Likewise, the information and communication technology (ICT) sector doesn't employ so many people directly (employs only 0.55% of the labour force). However, it has a multiplier effect on the fast-growing tech ecosystem, which is already the largest job creator in Nigeria.

Therefore, Nigeria's growth in the early 2000s resulted from a combination of its status as a developing country and key policies, like privatisation, that improved the structure of the Nigerian economy.

Remember, the question is if Nigeria can grow rapidly without incurring much debt. So far, we’ve looked at how Nigeria achieved fast growth in the early 2000s, but that’s only one part of the answer. The other part is whether the country took on much debt around that time. Looking into Nigeria’s debt situation at the time, we see that the federal government's external debt stock reduced from ₦2.5 trillion in 1999 to less than ₦700 billion in 2010—despite a devaluation of the naira, which increased the exchange rate of the dollar from ₦92 in 1999 to ₦150 in 2010.

What can Nigeria then do to replicate such growth (without debt) today? That’s what we’ll look at in the next section.
 

Letting it stick 

As we explained earlier, Nigeria has experienced two recessions—negative growth over several quarters—in the last six years. These recessions were due to the sharp decline in crude oil prices and the Covid-19 pandemic and have shown how Nigeria’s dependence on crude oil can leave the economy vulnerable.

Other critical sectors of the economy, like manufacturing—that have the potential to employ more people and generate rapid growth in the economy still contribute less than 10% to the GDP in Nigeria (from 30% in 1981). This is primarily due to the risks of producing in Nigeria, think high production costs—like limited transportation options, poor access to foreign exchange for importation and repatriation and poor access to electricity. Likewise, volatile policies and poor access to foreign exchange make doing business more unpredictable for stakeholders. With manufacturers stuck in a complex production environment, their growth is stifled.  

Although Nigeria's GDP distribution has changed over the years, our trade distribution hasn't changed much. Crude oil is still responsible for over 80% of our exports and foreign exchange in the country. The volatility of crude oil makes it an unreliable source of foreign exchange revenue in the country. Without sufficient foreign exchange, businesses won’t be able to import raw materials and machinery.

However, today, Nigeria is not even taking advantage of the high crude oil prices we enjoyed in the early 2000s because low production and subsidies are eating into our revenue.

Nigeria's potential to grow rapidly without taking on much debt lies in the FG's hands. It requires putting in motion favourable investment conditions for businesses to thrive within the country. The tech ecosystem already presents Nigeria with an opportunity for high growth, which can be sustained over a long time. Growth without borrowing excessively is certainly possible but requires significant changes to the current state of Nigeria's economy.