Macroeconomic Report & Economic Updates

Nigeria’s Micro, Small and Medium Enterprises (MSME) sector showed noteworthy growth potentials between 2013 and 2017. A total number of 4.4 million MSMEs were established within the time period, increasing the sector’s economic participation to 41.5 million MSMEs¹. As an important backbone of economic growth and development, the MSMEs contribute to employment and job creation. About 18.1 million jobs were created in the time period, increasing the sector’s share of the labour force from 84% to 86.3% within the same time period. In addition, the sector’s contribution to GDP increased marginally to 49.8% in 2017. While a large MSME sector is characteristic of a growing economy, the slow/insufficient transition of MSMEs into large firms implies that the quality jobs available remains static. As such, there is a stagnation in wages paid and wage growth, which in turn deters high-skilled workers and limits the productivity growth of MSMEs. While pro-business policies are being put in place such as the recent (July 2019) CBN directive to banks to increase lending to the real sector, structural issues that hinder lending such as information asymmetries between banks and business owners will need to be addressed to encourage the implementation of these policies

On July 7, 2019, Nigeria signed the Africa Continental Free Trade Area (AfCFTA) agreement¹ – the world’s largest free trade area deal since the formation of the World Trade Organization. The AfCFTA aims to, among other cardinal objectives, boost intra-regional trade which stands in favour of Nigeria and improve its low bilateral trade with other African countries. According to the NBS, exports from Nigeria to the rest of Africa accounted for 13.2% of total exports in 2018², far below 43.9% and 27.9% to Europe and Asia respectively; also, imports from other African countries made up only 3.5% of total imports, unrivalled with 41% and 44% from Europe and Asia respectively.  By signing the AfCTA which removes the tariff on about 90% of the commodities produced within Africa, trade between Nigeria and other African countries could potentially increase to 52% by 2022. However, the extent to which Nigeria would reap the encompassing benefits of the CFTA depends strongly on the improvement in the efficiency of local firms and the development of continent-wide systems upon which trade can thrive.  To address the former, the inefficiency and opacity in border administration and the lack of connective infrastructure will need to be dealt with. Furthermore, the Nigerian government may strongly consider signing the Protocol on free movement of people, which stipulates visa-free entry for up to 30 days for African nationals and the introduction of an ‘African passport’ issued by member states, that opened up for signature in March 2018 and has been signed by 32 countries³.

The total value of capital importation into Nigeria amounted to US$ 8.49 billion in the first quarter of 2019¹. This represents a significant increase of 216% relative to 2018Q4 and   about 35% growth when compared to the corresponding quarter in 2018. The largest amount of capital importation by type was received through portfolio investment, which accounted for 84% (US$ 7.15 billion) of total capital importation. Other investments and foreign direct investments also increased during the quarter and accounted for 13% (US$ 1.10 billion) and 2.86% (US$ 243.36 million) of total capital imported in 2019Q1. In the months following the end of election period, there seems to have been a build-up in investors’ confidence in the macro economy, as partly evidenced in portfolio investment QOQ increase of 306% – from US$ 1.4 billion to US$ 7.1 billion. However, the agriculture and manufacturing sectors, that are expected to deliver inclusive growth and sustainable development, have not attracted the majority of the investment. To attract capital into these sectors, the cost of local production will need to be lowered by building competitive infrastructure and reducing import protection such as the removal of the Import Prohibition List.

Foreign and domestic investors consolidated their portfolio investments in May 2019 by increasing the value of their buy orders for Nigerian equities by about 50%. Compared to April 2019, total portfolio investments increased from N148.91 billion to N221.13 billion in May 2019¹. This makes it the second month of increase in the second quarter, indicating improvements from previous months of decline in the first quarter of 2019. The increases were triggered by greater investments from domestic investors, as the total value of transactions executed by domestic investors significantly outperformed transactions executed by foreign investors by 30%. However, improvements in both the domestic and foreign portfolio investments may be connected to limited uncertainties and a boost in investors’ confidence in the economy, following the end of the election periods. At the minimum, we expect that the portfolio inflows will be sustained. However, increments in portfolio investment will depend on the extent to which inflation is curbed, maintaining stability in the foreign exchange market and the friendliness of the overall investment climate

Foreign Direct Investment (FDI) flows into Nigeria contracted substantially in 2018. Figures from the United Nations Conference on Trade and Development (UNCTAD) show that FDI inflows dropped by a significant 43% to $2 billion in 2018¹, ripping Nigeria off the top position as the largest FDI recipient in West Africa, in favor of Ghana. Evidence shows that in 2018, foreign investors treaded cautiously, and may have withheld or withdrawn their scheduled investments in view of risks arising from government’s conflicts with multinationals and investment precariousness connected with Nigeria’s elections. For instance, the review year saw the giant telecoms company, MTN, remain entangled in legal disputes with the government over profit repatriations². In addition to fold-up of companies, two of the largest global banking and financial services institutions, HSBC and UBS, closed their local representative offices in Nigeria in 2018³. Despite these obvious capital flight during the year and contrary to UNCTAD’s stance, the Nigerian government through the CBN has refuted claims of FDI declines in 2018⁴. FDI is expected to rebound in 2019 with the relatively peaceful conduct of the general elections dousing uncertainties. Going forward, the government needs to improve its policy coherence and avoid conflicting efforts that seek to promote FDI on one hand and curb business excesses via heavy-handed regulation on the other hand.