Powering Nigeria’s Economy: An Unlikely Source

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Nigeria, sub-Saharan Africa’s largest economy, has just emerged from its worst recession in 25 years but is still far from achieving lasting and sustainable economic growth. Nigeria’s President Muhammadu Buhari will be meeting US President Trump in Washington on 30 April, with the two men slated to discuss opportunities for economic growth and Buhari doubtless hoping for American assistance to help stabilize his country’s economic prospects.

Buhari and Nigeria need all the help they can get in diversifying away from an economy which is over-reliant on oil. While global turbulence in oil markets impacted all of the world’s major oil producers, Nigeria bore the full blast of the 2016 price crash with its first economic contraction in over a quarter of a century. Just this week, the International Monetary Fund (IMF) warned Nigeria that the next crash could be just over the horizon.

The IMF warning comes just as the Nigerian economy starts to regain its footing. Last June, GDP grew for the first time in six quarters, expanding 0.55% from the same period in 2016 and 3.23% from the previous quarter. The final quarter of 2017 saw the oil sector up 8.38% compared to the same period in the preceding year. That return to growth has been far weaker in the non-oil industries, however, which grew by just 0.47% over the whole of 2017.

Diversification Breeds Resilience

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Nigeria clearly needs to expand its export portfolio and build a more solid foundation for stable, long-term economic growth and development. The country has several promising avenues, with the steel sector representing perhaps the most promising. Nigeria has all the raw materials required to manufacture this highly demanded commodity and can look a potentially lucrative export market.

Past Nigerian governments have repeatedly abandoned industrial initiatives, such as expanding steel capacities, due to a variety of factors that including sloppy project management and high-level corruption, but also sponsored sabotage and litigious obstacles. Since taking power in 2015, President Buhari has slowly rekindled the steel sector with a view to reinstating it as a mainstay of Nigerian industry.

Reinvigorating the domestic steel industry would reduce the need for imports and save Nigeria a minimum of $3bn in trade imbalances foreign exchange every year. The country’s experience with its cement industry shows how transformative the growth of cornerstone domestic industries can be. Through government-mandated reforms, similar to those Nigeria is now mulling for steel, domestic cement production rose from just four tonnes to over 40m tonnes in 15 years. That expansion in domestic production reportedly saved the Nigerian economy $4bn every year.

Energy as a Stumbling Block

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There is, of course, a catch. Steel production requires vast amounts of energy, and Nigeria, given the currently horrendous state of its energy sector, is not currently in a position to power an expanded metals industry. Most of Nigeria’s energy is generated through thermal and hydro plants, which are unable to produce sufficient power to meet even current levels of demand from a population of 190m.

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Overall generating capacity peaks at about 7GW, while Nigeria’s severely dilapidated energy infrastructure has less than 5GW in energy distribution capacity. This falls far short of national demand of over 22GW.

Electricity shortages are pervasive, with outages occurring on a daily basis since 2012. Unless distribution operators become more creditworthy, not much is going to improve. Whereas a reliable energy supply is a major growth enabler, an unreliable supply will always represent a major roadblock to any profound economic restructuring or diversification.

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Coal to the Rescue?

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As it happens, Nigeria may also be sitting on the solution it needs to generate badly needed baseload power for steel factories – and the wider economy – in the form of a fossil fuel besides oil. According to current estimates, Nigeria has 2.8bn metric tonnes of untapped coal reserves across 17 different fields. The deposits in Nigeria’s Anambra Basin alone could produce 4.3GW annually for 20 years.

Those fields need to be developed, but international monetary institutions like the World Bank have abandoned their financing for coal projects. That throws a wrench in the Buhari administration’s plans to derive 30% of national energy needs from coal over the coming years, together with a renewable energy target of 16% (7.1% hydro and 5.9% solar) by 2030 to comply with Nigeria’s Paris climate accord obligations.

Without financial assistance from the usual sources, Buhari has begun to look for alternative options for funding. His meeting with Trump may turn out to be very fruitful in that regard, given that Trump is an outspoken coal advocate and last year announced plans for a Clean Coal Alliance that includes Nigeria and several other major economies in the developing world. The US is pressuring World Bank officials to abandon the financing restrictions at the institution’s annual meeting on 20 April, just days prior to Buhari’s visit.

Contrary to WB policies, the Alliance is intending to support the construction of high-efficiency, low-emission (HELE) power plants in developing countries to take advantage of coal’s ready availability. This could also include investments in ailing energy infrastructure, alleviating deficiencies in Nigeria’s national grid.

In the meantime, the African Development Bank has already broken ranks with the policies of the world’s foremost financial institutions. In early April, it agreed to assist Nigeria in its pursuit of developing efficient coal plants, deciding to sponsor the development of coal-fired plants able to produce at least 500MW of power in combination with private investors. These recent developments mean Nigeria could be facing a watershed moment for its economic future. If the IMF is right about the next oil price crash, that watershed could be coming not a moment too soon.

 

SOURCE: Market Mogul

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Powering Nigeria’s Economy: An Unlikely SourcePowering Nigeria’s Economy: An Unlikely Source

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