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NIGERIA’S RECESSION: CAN PRIVATE WEALTH CHANGE THE TIDE?

October 2016 Newsletter

A. Introduction

The Nigerian economy fell into a recession in the second

quarter (Q2) of 2016, as it recorded a GDP growth rate of

-2.06% (www.nigerianstat.gov.ng/report/434) owing,

amongst other variables, to the fall in the price of oil. In a

bid to resolve the current economic crisis, there have

been propositions on mechanisms to be adopted by the

Nigerian government in reviving the economy which

include: assets sale; advance payment of license

renewals; infrastructure concessions; economic

diversification; widening the tax net, etc.

This article posits that government should, in addition to

the options stated above, pay attention to mobilizing the

private wealth of Nigerian citizens as a low hanging fruit

for reviving the Nigerian economy.

To drive this thesis that private wealth should be

harnessed urgently, we would analyze some empirical

statistics to compute the private wealth of Nigerian

citizens; and proffer possible ways of utilizing private

wealth to engender growth and productivity, and to

invest in critical infrastructure.

B. Private Wealth Drives GDP

The correlation between the Nigerian Oil Sector

(Government’s cash cow) and Gross Domestic Product

(GDP) tells a profound story. Figure 1 below (particularly

the figures highlighted in yellow) leads to several conclu-

sions highlighted below:

a) The straight facts from the National Bureau of Statis-

tics show that the Oil Sector accounted for 10.45%

and 8.26% of real GDP in Q1 2015 and Q2 2016,

respectively. Non-Oil sectors on the other hand,

contributed about 89.55% and 91.74% to the nation’s

GDP in Q1 2015 and Q2 2016, respectively.

b) The Oil Sector accounts for 85% of Federal

Government’s income but is not the key

driver for Nigeria’s GDP since it last account-

ed for less than 10% of GDP. Over 90% of

Nigeria’s GDP was activated by the private

activities in the non-oil sectors in Q2 2016.

c) Activities such as: Agriculture (22.55%),

Trade (17.57%), Information and Communi-

cation (12.68%), Mining (8.41%) and Real

Estate (7.75%) led the pack in their contribu-

tions to Nigeria’s GDP in the last quarter.

d) The trend is that these top five GDP contribu-

tors (Agriculture, Trade, Information & Com-

munication, Mining and Real Estate) have not

shown a significant decline from Q1 2015 to

Q2 2016.

Detail Commercial Solicitors

Image courtesy paul4innovating.com

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FIG 1: GDP Contribution Per Sector.

Fig 1: Annual Real GDP Contribution by Sector (%) Year-on-Year

Source: National Gross Domestic Product Report 2015-2016 (Q1-Q4; Q1-Q2)

SECTORS CONTRIBUTIONS BY SECTOR

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

OIL SECTOR

Oil & Gas 10.45 9.80 10.27 8.06 10.29 8.26

NON-OIL SECTOR

Mining & Quarry 10.61 9.95 10.40 8.21 10.34 8.41

Agriculture 19.79 21.12 26.79 24.18 20.48 22.55

Electricity, Gas, Steam and Air Condi-tioning Supply

0.36 0.36 0.34 0.51 0.20 0.33

Construction 4.34 4.50 3.22 3.58 4.13 4.30

Trade 17.77 17.22 16.24 16.68 18.19 17.57

Accommodation and Food Services

1.23 0.70 0.89 0.98 1.15 0.67

Transportation and Storage

1.04 1.22 1.17 1.24 1.19 1.17

Information & Com-munication

11.47 12.25 9.80 11.26 11.98 12.68

Arts, Entertainment and Recreation

0.24 0.22 0.18 0.18 0.26 0.22

Finance and Insur-ance

3.52 3.35 2.76 2.76 3.13 3.05

Real Estate Services 6.76 7.83 7.57 8.26 6.46 7.57

Administrative and Support Services

0.02 0.02 0.02 0.02 0.02 0.02

Professional, Scien-tific and Technical Services

3.58 3.56 3.70 3.72 3.56 3.68

Education 2.05 1.79 2.14 2.60 2.13 1.88

Public Administra-tion

2.43 2.55 2.43 2.33 2.45

Human Health and Social Services

0.69 0.75 0.68 0.69 0.70 0.74

Other Services 3.77 2.90 2.35 3.48 4.08 3.09

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Conversely, some of these sectors like Real Estate have shown growth.

e) Given the above, it is clear that the fact that the oil prices have dropped does not necessarily mean a decline in activities in the non-oil sectors.

It would seem intuitive that if government focuses on policies that incentivize increased private sector ex-penditure in these five top sectors that are highest GDP contributors, Nigeria should improve by several eco-nomic indices despite the drop in oil prices. A boost in Agriculture for example, would reduce food import bill, decrease foreign exchange demand, increase employ-ment and generally reduce food prices.

C. Redirecting Nigeria’s Private Wealth

Nigeria is one country where its citizens have private

wealth which, if redirected into the economy with the

right incentives and specific government policies, may

reflate the country’s economy within a few years.

Here are some simple statistics that depict how much

the private wealth of Nigerians may actually be worth:

I. Overseas Education Spending:

Nigerians spend over $2 billion annually on educa-

tion abroad. (Vanguard, February 10, 2016). To put

this in perspective, if $2 billion is converted at

N400/$1, it would amount to N800 billion. To drive

this home, kindly note that N800 billion is over

double the N369 billion budgeted for Education in

Nigeria’s 2016 Budget. Should Nigeria not privatize

some of the public universities (some of them who

have very decent infrastructure) and incentivize

the private sector to own and manage these cita-

dels in order to replicate what they go abroad to

seek?

It should be noted that many universities in the

United States are funded by private endowments.

II. Private Wealth in Domiciliary Accounts:

The Central Bank of Nigeria (CBN) noted some

months ago (Punch, March 4, 2016) that about $20

billion (N 8 trillion if converted at N400/$1) is lying

idle in different domiciliary accounts of Nigerian

citizens.

III. Nigerians in the Diaspora:

Nigerians in the diaspora have remitted about

$104.57 billion into the country between the

year 2010 and 2015. Analysis from remittanc-

es reveal that about $10 billion was remitted

in 2010; $11 billion in 2011; $21 billion in

2012; $20.77 billion in 2013; $21 billion in

2014 (World Bank Migration and Develop-

ment Brief 2015) and $20.8 billion in 2015.

(Migration and Remittances Fact Book 2011

& 2016; Cp-africa.com)

IV. Statistics on High Net Worth Individuals

(HNWIs):

Nigeria has the 3rd highest number of HNWIs

in Africa. In 2013, there were 15,700 HNWIs

in Nigeria, with a combined wealth of $82 bil-

lion, (Business Wire, February 14, 2014)

which is about N32.8 trillion at N400/$1.

D. Conclusions

These statistics are very symptomatic and a few

clear messages come through:

a) Whilst government’s foreign exchange in-

come has dwindled on the back of falling oil

prices and reduced oil production, the GDP of

Nigeria is privately led and held – and many

of the sectors still sustain growth.

b) A combination of monies spent by Nigerians

for overseas education, inward remittances

by Nigerians in the diaspora and monies in

Nigerian USD dorm accounts show a sizable

wallet owned by Nigerians in USD.

c) An indeterminate number of Nigerian citizens

(circa less than 10%) put together control

more USD wealth (in net-worth) than the fed-

eral budgetary allocations over the next few

years.

d) Many HNWI Nigerians who had healthy USD

wealth are enriched today by the devaluation

in the Naira and may have an incentive (given

the right climate) to invest the windfall in Ni-

geria.

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A few random questions may be thrown out there on possible ways to unlock some of the private wealth:

a) Can Nigeria attract more diaspora USD by simply having interest earning domiciliary accounts, at an interest rate of a few basis points above what can be earned in the typical destinations like the UK or the US?

b) Can government attract immediate income by a policy that allows companies make advance or for-ward payments on their taxes becoming due (based on a projected income with mechanism for netting off when the year-end audit has been prepared)? The companies would in exchange receive a healthy tax rebate that should in any case be cheaper than 16% at which government currently borrows.

c) Can government ask some companies to bid as con-sortiums to adopt some Nigerian universities (just the way Kellogg adopted Northwestern University, for example) and to take over the financing of these universities in exchange for zero education tax (currently 2% of income) for a set number of years?

It is important to note that whilst citizens have an inal-ienable right to wealth preservation, it stands to reason that given clear investment value propositions and the right incentives that are compelling; discerning inves-tors (and Nigerians are indeed such) would redirect some of these monies to laudable projects in Nigeria. .

Private Wealth Image courtesy vwv.co.uk

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