nigeria: economic growth drivers and financing challenges

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Nigeria: Economic Growth Drivers Nigeria: Economic Growth Drivers And Financing ChallengesAnd Financing Challenges

ByByCharles C. SoludoCharles C. Soludo

GovernorGovernorCentral Bank of NigeriaCentral Bank of Nigeria

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OutlineOutline

Growth Challenges in Nigeria?Growth Challenges in Nigeria?Sources and Drivers of Growth?Sources and Drivers of Growth?Macro Framework for NonMacro Framework for Non--inflationary Growth?inflationary Growth?nn Unholy trinity: Which Unholy trinity: Which price(sprice(s) should adjust under ) should adjust under

expansionary fiscal policy? (inflation, interest rate, expansionary fiscal policy? (inflation, interest rate, exchange rate)exchange rate)

Challenges of Financing: Sources and issuesChallenges of Financing: Sources and issuesSpecial Temporary (MicroSpecial Temporary (Micro--level) Interventions?level) Interventions?Medium and LongerMedium and Longer--term Challengesterm Challenges

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Growth Challenges?Growth Challenges?

Rapid Growth (7Rapid Growth (7-- 12% 12% p.ap.a) for ) for MDGsMDGs and and become Africa’s largest economybecome Africa’s largest economyNonNon--inflationary growth of noninflationary growth of non--oil sectoroil sectorInclusive growth (broadInclusive growth (broad--based) for poverty based) for poverty reduction and employment creationreduction and employment creationAddressing growth volatilityAddressing growth volatility------diversification away from primary sectorsdiversification away from primary sectorsSustainability of growth over the longSustainability of growth over the long--termterm

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Sources and Drivers of Growth?Sources and Drivers of Growth?

Growth Accounting: Growth Accounting: Factor accumulation == about 80% of Factor accumulation == about 80% of growth (growth (labourlabour = 65%; capital = 15%; = 65%; capital = 15%; efficiency/productivity = 20%)efficiency/productivity = 20%)Major implications for SKILLS Major implications for SKILLS Development (EDUCATION) and ICTDevelopment (EDUCATION) and ICT

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Growth Accounting: Growth Accounting: SectoralSectoralDecompositionDecomposition

Agriculture = 41.49%Agriculture = 41.49%nn Crop production = (36.95%)Crop production = (36.95%)

Crude petroleum = 25.72%Crude petroleum = 25.72%Mining and Quarrying = 0.27%Mining and Quarrying = 0.27%Manufacturing = 4.5%Manufacturing = 4.5%Building and Construction = 1.53%Building and Construction = 1.53%Wholesale and Retail Trade = 13.74%Wholesale and Retail Trade = 13.74%Services = 14.88%Services = 14.88%nn Communication = (1.4%)Communication = (1.4%)

MESSAGE: For shortMESSAGE: For short--term impact, agriculture and crude term impact, agriculture and crude petroleum (approx. 70% of GDP) hold the key to growth.petroleum (approx. 70% of GDP) hold the key to growth.Primary Sectors are highly Volatile: Diversification into Primary Sectors are highly Volatile: Diversification into Industry and Services is key for sustainable longIndustry and Services is key for sustainable long--term term growth.growth.

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1.85.2-0.5Wholesale & Retail Trade

45.7-20.4Building & Construction

-1.14.6-2Manufacturing

4-2.9-18.5Mining & Quarraying

0.67.3-2.9Crude Petroleum & Nat.

Gas

0.46.8-0.8Industry

2.321.7-14.4Fishing

1.8-0.60.1Forestry

1.71.65.9Livestock

3.65.54.7Crop Production

3.25.53.5Agriculture

Average 1991-98Average 1986-90Average 1982-85Sectors/Sub--sector

SECTORAL GROWTH RATE OF GROSS DOMESTIC PRODUCT AT 1990 CONSTANT BASIC PRICES (1982-1998)

778.31.9-6.9Other Services

1.822.3Health

1.822.3Education

1.822.3Public Administration

3.52.79.5Business Services

41.90.6Real Estate

3.18.2-4.4Insurance

429.91.2Financial Institutions

1.81-11.3Hotel & Restaurant

3.111.2-5.8Water

1.7-2.46.4Electricity

6.91.17.4Telecommunications

8.21.9-6.9Transport

Services

Average 1991-98Average 1986-90Average 1982-85Sectors/Sub--sector


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9.839.99.75.86.52.51.62.5Wholesale & Retail Trade

5.4-5.2108.84.31243.8Building & Construction

6.25.7105.6114.23.63.5Manufacturing

7.916.910.85.54.3103.83.8Mining & Quarraying

4-2.23.323.9-5.75.211.1-7.5Crude Petroleum &

Nat. Gas

4.2-1.34.121.4-3.85.210.2-6.2Industry

6.95.56.54.16.38414.2Fishing

3.186.51.50.721.51.3Forestry

4.36.66.54.24.832.32.8Livestock

5.26.396.574.23.835.2Crop Production

5.16.76.56.474.253.882.955.29Agriculture

Average 1999-20052005200420032002200120001999


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4.81.510.81.3151.61.61.7Other Services

49.810.820.81.61.61.7Health

5.910.610.877.91.61.61.7Education

5.4410.8018.11.61.61.7Public Adminstration

6.17.210.84.46.554.34.4Business Services

5.710.210.83353.93.8Real Estate

6.510.910.8-19.329.445.83.8Insurance

5.432.5-9.229.44.53.93.5Financial Institutions

7.61910.84.66.84.53.73.5Hotel & Restaurant

5.1010.88.27.52.43.53.1Water

9.89.310.43.428.613.721.3Electricity

26.830304346.610820Telecommunications

5.66.55.91.315442.5Transport

Services

Average 1999-20052005200420032002200120001999


10100.740.710.780.840.760.731.99(I) Comm., Social & Pers. Services

0.950.961.241.351.221.2511.06(h) Producers of Govt. Services

1.411.341.781.91.911.90.35(f) Real Estate & Business Services

3.984.085.346.55.25.211.16(e) Finance & Insurance

0.390.370.20.210.210.210.57(d) Hotel & Restaurant

3.63.580.520.540.460.440.61( c) Utilities

1.41.140.210.190.130.110.37(b) Communication

2.412.382.382.592.282.283.64(a) Transport

14.8814.5612.4514.1212.1712.1229.755. Services

13.7412.912.6813.2212.8513.1113.624. Wholesale & Retail Trade

1.531.442.082.112.091.952.463. Building & Construction

3.633.54.424.614.344.246.93( c) Manufacturing

0.270.260.30.310.310.290.37(b) Mining & Quarrying

23.8225.7233.4429.7532.6532.4512.47(a) Crude Petroleum

27.7229.4838.1634.6737.336.9819.772. Industry

1.371.371.691.791.741.692.15(d) Fishing

0.540.540.680.740.760.781.4( c) Forestry

2.632.63.283.473.423.486.06(b) Livestock

36.9536.4828.9829.8629.6629.8937.99(a) Crop Production

41.4940.9934.6335.8635.5835.8447.61. Agriculture

2005200420032002200120001999ACTIVITY SECTOR

SECTORAL CONTRIBUTION TO GDP (%)

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Growth Rate of some key sectors at 1990 Constant Basic Prices

-60

-40

-20

0

20

40

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

Per

cen

tag

e

Agriculture Crude Petroleum & Nat. GasMining & Quarrying Manufacturing

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Challenge for 2006?Challenge for 2006?

Rapid, inclusive growth of more than 7%Rapid, inclusive growth of more than 7%nn Led by the Private Sector?Led by the Private Sector?nn NonNon--Inflationary and Stable Exch. Rate regime?Inflationary and Stable Exch. Rate regime?nn Led by the nonLed by the non--Oil Sector?Oil Sector?

KEY SECTORS TO FOCUS?KEY SECTORS TO FOCUS?nn Agriculture (Crop production)Agriculture (Crop production)nn Oil and GasOil and Gasnn Industry (Manufacturing, esp. Industry (Manufacturing, esp. SMEsSMEs))nn Housing DevelopmentHousing Developmentnn ServicesServices------ especially TOURISM; ICTespecially TOURISM; ICTnn Solid MineralsSolid Minerals

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Growth Drivers?Growth Drivers?Security of lives and property Security of lives and property Sound Macroeconomic EnvironmentSound Macroeconomic Environment–– stable prices!stable prices!InfrastructureInfrastructurenn POWERPOWERnn TRANSPORT and COMMUNICATIONTRANSPORT and COMMUNICATIONnn WATERWATER

FinanceFinanceEfficient Institutions for enforcement of contractsEfficient Institutions for enforcement of contracts------property rights; and facilitation of businessesproperty rights; and facilitation of businesses------ NIPC; NIPC; NEPC; EPZ; CAC; customs; etc.NEPC; EPZ; CAC; customs; etc.Fight Against CorruptionFight Against Corruption------ value for money spending!value for money spending!Human CapitalHuman Capital-------- Education/Health and ICTEducation/Health and ICTFOCUS of Presentation?: Macroeconomic Framework FOCUS of Presentation?: Macroeconomic Framework and Financingand Financing

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Macro Framework for NonMacro Framework for Non--inflationary Growthinflationary Growth

Challenge of STABLE PRICES under Expansionary Challenge of STABLE PRICES under Expansionary Fiscal Policy RegimeFiscal Policy Regime------ monetization of higher oil monetization of higher oil receipts and challenge of liquidity management!receipts and challenge of liquidity management!

For GDP growth (7For GDP growth (7——10%) and inflation rate of 9% 10%) and inflation rate of 9% --------M2 growth MUST range no more than 16M2 growth MUST range no more than 16——19%; and 19%; and Credit to the economy no more than 30% growth.Credit to the economy no more than 30% growth.

To keep Inflation and Exch. Rate low and stable, mopTo keep Inflation and Exch. Rate low and stable, mop--up up of liquidity at market interest rate through of liquidity at market interest rate through TBsTBs/CBN bills/CBN bills

Plus partPlus part-- financing of Govt. Deficit through issuance of financing of Govt. Deficit through issuance of Treasury BillsTreasury Bills

Both Actions MIGHT Drive Interest Rate above single Both Actions MIGHT Drive Interest Rate above single digit.digit.

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Macroeconomic Balancing . . . .Macroeconomic Balancing . . . .Little Incentive for Banks to lend to riskier sectors at Little Incentive for Banks to lend to riskier sectors at lower rates when lower rates when risklessriskless GovtGovt instruments are available instruments are available at HIGHER INTEREST RATES.at HIGHER INTEREST RATES.

Most critical challenge to movement to single digit Most critical challenge to movement to single digit interest rate is the HIGHER INFLATION RATE and interest rate is the HIGHER INFLATION RATE and Government as competitor with the Private Sector in the Government as competitor with the Private Sector in the money market (liquidity mgt and deficit financing).money market (liquidity mgt and deficit financing).

Over the mediumOver the medium--term, a term, a sustainable strategysustainable strategy for lower for lower interest rate is for single digit inflation rate and more interest rate is for single digit inflation rate and more stringent fiscal regime (perhaps, a Balanced budget!)stringent fiscal regime (perhaps, a Balanced budget!)CBN Committed to stable Exchange Rate Regime and CBN Committed to stable Exchange Rate Regime and Effective Liquidity ManagementEffective Liquidity Management------ Both will Dampen Both will Dampen Inflationary PressuresInflationary PressuresCost of funds review (CRR; liquidity ratio) as Monetary Cost of funds review (CRR; liquidity ratio) as Monetary policy requirements permitpolicy requirements permit-------- liquidity liquidity magtmagt constraint!constraint!

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Financing Sources and OptionsFinancing Sources and Options

Financial System underdeveloped relative to the size of Financial System underdeveloped relative to the size of the Economy: (Nigeria’s GDP is about 61% of South the Economy: (Nigeria’s GDP is about 61% of South Africa’sAfrica’s------US$107b compared to US$175b), BUT:US$107b compared to US$175b), BUT:nn NSE is less than 10% of JNSENSE is less than 10% of JNSE–– South AfricaSouth Africann South Africa’s largest BankSouth Africa’s largest Bank------ Standard Bank Group (Standard Bank Group (StanbankStanbank) )

in 2004 had about the Capital base and thrice the Assets of ALL in 2004 had about the Capital base and thrice the Assets of ALL the CURRENT 25 banks in Nigeria combined.the CURRENT 25 banks in Nigeria combined.

nn Total Credit by SA banks to the economy is more than 100% of Total Credit by SA banks to the economy is more than 100% of GDP, and Nigeria’s is about 20% of GDPGDP, and Nigeria’s is about 20% of GDP

nn Mortgage loans in Nigeria is less than 0.5% of GDP, whereas it Mortgage loans in Nigeria is less than 0.5% of GDP, whereas it is about 18% in South Africais about 18% in South Africa

nn SME loans are more than 22% of total loans in SA but about SME loans are more than 22% of total loans in SA but about 0.9% in Nigeria0.9% in Nigeria

nn Market for Debentures and bonds largely nonMarket for Debentures and bonds largely non--existentexistent

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Long Way to Go in Reforming the Long Way to Go in Reforming the Financial System….Financial System….

National Legal and institutional reformsNational Legal and institutional reforms–– creditor rights; creditor rights; mortgages; land tenure, etc (Designate special ‘Federal mortgages; land tenure, etc (Designate special ‘Federal Commercial Courts’ in 2006?)Commercial Courts’ in 2006?)Attracting a reasonably stable deposit base as opposed Attracting a reasonably stable deposit base as opposed to volatile, shortto volatile, short--temtem------ savings certificate; pension fundssavings certificate; pension fundsLiquidity and risk management toolsLiquidity and risk management toolsBenchmarking capital market fees/charges to best Benchmarking capital market fees/charges to best practices practices Creative product developmentsCreative product developments------ bond, debentures, bond, debentures, housing finance; consumer credit; etchousing finance; consumer credit; etcEstablishing a yield curve….Establishing a yield curve….Overall improvement in business environmentOverall improvement in business environmentNOTE: Without Stable Macroeconomic Environment, NOTE: Without Stable Macroeconomic Environment, sustainable development of Money and Capital Markets sustainable development of Money and Capital Markets Will NOT HAPPEN!Will NOT HAPPEN!-------- First priority: Low inflation and First priority: Low inflation and Exchange Rate StabilityExchange Rate Stability

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Deposit and Credit Structure: Squeezing Water Deposit and Credit Structure: Squeezing Water out of the Rock?out of the Rock?

Credit from Deposit Money Banks (N2.0 Credit from Deposit Money Banks (N2.0 trillion in 2004 & N2.5 trillion in 2005trillion in 2004 & N2.5 trillion in 2005

Deposits

75.4

17.7

3.6 2 1.4

Below 30 days 31-90 Days 91-180 Days

180-365 Days Above 365 Days

Credit

50.6

14.28.3

10.9

16.1

Below 30 days 31-90 Days 91-180 Days

180-365 Days Above 365 Days

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Financing Growth in 2006Financing Growth in 2006

AGGREGATE INVESTMENT PROJECTIONSAGGREGATE INVESTMENT PROJECTIONSApproximately N1 trillion in capital spending by Federal Approximately N1 trillion in capital spending by Federal and State and State GovtsGovts in 2006 (8% of GDP)in 2006 (8% of GDP)Private SavingsPrivate Savings–– Investment: approx 20% of GDPInvestment: approx 20% of GDPForeign Direct Investment Foreign Direct Investment -------- estimated US$5 billionestimated US$5 billion--------4% of GDP4% of GDPTOTAL: About 32% of GDP in total investment TOTAL: About 32% of GDP in total investment spending.spending.

Challenge of VALUEChallenge of VALUE--FORFOR--MONEY SPENDING BY ALL MONEY SPENDING BY ALL AGENTSAGENTS-------- can generate more than 10% growth!!can generate more than 10% growth!!

Which SECTORS Are We SpendingWhich SECTORS Are We Spending-------- have have implications for nonimplications for non--inflationary growth?inflationary growth?Also, resolving Debt to Local Contractors will have huge Also, resolving Debt to Local Contractors will have huge impactimpact

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Strategic Use of ‘Excess Crude’Strategic Use of ‘Excess Crude’

Funds for the Future (50%) of Excess crudeFunds for the Future (50%) of Excess crudeRest of the ‘Excess Crude’:Rest of the ‘Excess Crude’:nn Internal Security (APC for each LGA) for effective Internal Security (APC for each LGA) for effective

policing?policing?nn N100 b to recapitalize BOI and Bank of AgricN100 b to recapitalize BOI and Bank of Agric------ to to

lend at lend at concessionalconcessional interest ratesinterest rates------ Fund 30Fund 30——50 50 large scale farmers per state, each with 50 or more large scale farmers per state, each with 50 or more hectares for high impact on agriculture.hectares for high impact on agriculture.

nn Externalize spending: more on Power plants and Externalize spending: more on Power plants and TransportationTransportation

nn Invest in the FutureInvest in the Future-------- EDUCATION; HEALTH; EDUCATION; HEALTH; WATER!!WATER!!

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Special (MicroSpecial (Micro--level) Interventionslevel) Interventions

CBN and the Universal Banks to work hard:CBN and the Universal Banks to work hard:nn Mainstreaming Microfinance Banks (Mainstreaming Microfinance Banks (MFBsMFBs) which can ) which can

jumpjump--start start SMEsSMEs and create millions of jobs.and create millions of jobs.nn Encourage states to devote 1% of budget to micro Encourage states to devote 1% of budget to micro

creditcredit------ about N20 billion in 2006about N20 billion in 2006nn LGAsLGAs to devote 1% of budget to micro credit == N5 to devote 1% of budget to micro credit == N5

billionbillionnn Establishment of African Investment Bank to finance Establishment of African Investment Bank to finance

exportexport--oriented Industries and infrastructure.oriented Industries and infrastructure.nn REVIEW of SMEEIS; ACGS; and Interest DrawREVIEW of SMEEIS; ACGS; and Interest Draw--back back

Scheme to facilitate easier access and maximum Scheme to facilitate easier access and maximum impact especially on Agriculture and Manufacturingimpact especially on Agriculture and Manufacturing

nn Special SME Windows in Commercial Banks?Special SME Windows in Commercial Banks?nn Investment in Entrepreneurship Development Investment in Entrepreneurship Development CentresCentres

in 6 geoin 6 geo--political zonespolitical zones

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nigeria: economic growth drivers and financing challenges

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