The Nigerian Economy is growing and it's not Oil!
According to the Nigerian Bureau of Statistics (NBS), the Nigerian economy recorded a growth rate of 3.5% in the second quarter of the year (Q2 2022). This was up from the 3.11% recorded in the first quarter (Q1 2022). This is the first time we are seeing increases in the quarterly growth rate of the economy since Q2 2021 and this growth was driven by the non-oil sector.
The non-oil sector contributed 93.67% to real GDP in Q2 2022, led by 4 sectors: The agriculture, ICT sector, the trade sector, and the manufacturing sector with 23.24%, 18.44%, 16.81%, and 8.65% contributions respectively.
The oil sector recorded a decrease with quarter-on-quarter growth (Q/Q) at -4.97%. The sector contributed 6.33% to GDP down from 6.63% last quarter.
So what?
The increase in the quarterly growth rate is a good signal that the economy is on the right track growth-wise. However, with the increased global headwinds including the US increase of interest rates to combat domestic inflation, the increased cost of energy in Europe and the yet-to-be-resolved supply chain issues in Asia we would like to see if the growth is sustained in Q3.
The diminishing role of oil in the economy is a result of a multitude of factors including oil theft, the outpaced growth of other sectors and falling output levels. All this, however, can be tied to one thing, lack of investment. Issues like a problematic regulatory environment, violence in the Niger Delta and a structural shift in global capital towards greener energies have led to significant drops in investments into the Nigerian oil and gas space since 2014.
Moving forward, without a purposeful drive by the Nigerian government to promote investment in the sector, we are likely to continue to see a fall in oil contribution to the national output.
The ICT sector's growth has been propelled largely by the increased digitization of the Nigerian economy. The digitization is driven by the fall in the cost of technological access (think budget-friendly phones and cheaper data plans) and the growth of the Nigerian digital native population. Some credit must also be given to government initiatives like the National Digital Economy Policy and Strategy (NDEPS). The ICT sector looks set to experience sustained growth as the factors that propelled its growth still have a lot of runway.
13 years of fiscal imbalance!
Just like we budget our income and expenses, the government does same for the country. Nigeria’s expenditures has continuously been more than revenue with a widening deficit gap. 13 consecutive years of spending more than we earn, which means we’ve been borrowing.
On a normal day financing expenditure with debt is not always so alarming but it becomes a cause for worry when there is no positive reflection of the spending. The idea is this, borrow money and increase government spending on infrastructure and projects that would be productive enough to pay for itself. When these expenditures don’t produce expected return, debt servicing eats up more revenue and eventually we’d borrow more to pay debt and spend again.
A large chunk of our government expenditure goes to debt servicing and personnel expenses while a measly amount is directed towards capital expenditure. On the revenue side, ineffective revenue collection, high subsidy payments, and rising oil theft cases had been a drawdown on the government’s revenue. In 2021, the country’s revenue stood at N4.39 trillion against an expenditure amount of N11.69 trillion, similarly in the first few months of 2022, the revenue recorded was N1.63 trillion with an expenditure of N4.72 trillion. Even with this much expenditure, more than half goes to recurrent spending. With a synergy like this, we are bound to see the vicious cycle of borrowing to pay debt continue.
So what?
The cycle of continuous borrowing has become more dangerous than helpful to the economy because the expected ripple effects of increased economic activity and creation of more jobs does not follow through. Instead most of revenue and money borrowed goes to paying back debts and more non-capital expenditures.
It is easier for the negative effects of increased government spending which is inflation to have more prowess when government spending is on mostly recurrent items. The Nigerian government spending heavily on recurrent non-producing items will not help the economy. Without a more cost effective governance, we are likely to see the vicious cycle continue.