Will COVID-19 Be a Wake Up Call for Africa’s Largest Economy?Senior Fellow at Atlantic Council
The economic challenge of the global COVID-19 crisis has hit Nigeria hard, making the country enter its worst recession in four decades. With the oil prices falling over 50% in the first quarter of 2020, growth has evaporated, unemployment skyrocketed and access to foreign exchange greatly limited.
In a baseline scenario, the World Bank expects the Nigerian economy to shrink by 3.2% in 2020, equaling a loss of $20 billion to GDP. Nigerian government statistics put the potential contraction as high as 8%, depending on the level of stimulus and severity of lockdown. Unemployment is expected to reach 40 million by the end of 2020, and the 87 million population living in extreme poverty will swell.
In response, the government released an economic sustainability plan outlining a strategy focused on spurring local manufacturing and agricultural production and a proposal to inject about $6 billion into the economy.
While the overall economy is in for a couple years of negative or slow growth, investment opportunities exist in key sectors, including imports replacing local production, renewable energy and digitization. Smart investors looking at Africa’s largest market will focus on promising subsectors and back entrepreneurs with the ability to operate in uncertain times.
Urgent Need for Diversification
The dire economic reality of the global pandemic will hopefully accelerate Nigeria’s ongoing diversification efforts. While oil constitutes less than 10% of GDP, oil still represents more than half of the government’s revenue — and over 90% of export earnings — making the economy exceptionally vulnerable to oil price volatility.
This dependence hinders the government’s ability to inject meaningful amounts of capital into the economy to counteract the COVID-19 slowdown, and as a result, companies and investors will have a stronger influence on shaping a more resilient post-COVID economy.
Smart investors can see pockets of opportunity even in the middle of a recession. By backing the right management team with scarce capital, companies can seize upon changing consumer behavior and capture market share from cash-strapped competitors.
Global giants — such as Disney, HP and Microsoft — were all started during recessions and built upon their founders’ understandings of long-term trends. Investors should be watching three COVID-aligned trends in Nigeria closely.
‘Produce What We Eat, and Eat What We Produce’
A shift toward self-reliance and local supply chains, mirroring the route taken by countries from Japan to France, is defining the Nigerian approach to economic recovery. The government’s Economic Sustainability Plan prioritizes agricultural value chains as the country seeks to reduce its food import bill and lay the groundwork for food security.
The COVID-19 crisis and concomitant recession requires investors to take a more nuanced view of Nigeria.
Large-scale farming projects are planned in all 36 states with an aim to create five million jobs over the next year. Outgrower schemes, agro-extension programs, government procurement and partnerships with large private sector players are envisioned to help move the food from the field to the table. With local processing at less than 10% of GDP and a total population of 200 million people, Nigeria presents an attractive opportunity for agribusiness investors.
Power has been the major constraint on economic growth in Nigeria for decades with less than 30% of businesses having access to grid electricity. The transition to work from home for some Nigerians, as a result of COVID-19 lockdowns, has further highlighted the challenge. With Nigerians spending over $12 billion per year buying and operating diesel generators, the high cost of power has been a drag on company growth and profits.
But the lack of a reliable national grid has created a large opportunity for solar off-grid solutions, both at a household and industrial level. Companies, such as Rensource, are pioneering solar energy options at a large scale in markets that house tens of thousands of micro-businesses.
The government’s economic recovery plans, along with donor-funded programs, will inject additional capital in the space. Signature programs include the installation of mini-grids, support for reaching five million new households with solar panels and incentives for local manufacturing of solar panels. Nigeria’s green entrepreneurs will have the government as a partner in their scaling efforts, and investors should take note.
Cutting across all sectors in Nigeria is a need to unlock growth through enhanced efficiency and productivity. The dependence on paper processes and in-person interaction constitutes high transaction costs, prevents a proper data market from forming and leads to rent-seeking opportunities.
Nigeria’s young and vibrant tech sector has been slowly chipping away at this national reliance on paper and cash. Flutterwave and Paystack are scaling digital payments, Lori and Kobo360 are digitizing trucking, Helium Health is updating hospital systems and a new cadre of startups are tackling problems in agriculture with digital solutions. The startup ecosystem proved that they could grow during the 2016 recession and continue to attract the largest share of venture capital going into Africa.
A New Awakening?
COVID-19 is accelerating the need to digitize and highlighting the upside of doing so across key sectors of the economy, while also enhancing opportunities in digital-first creative industries, such as film, music and gaming. Nigerian entrepreneurs continue to innovate, and investors who back the best with smart capital and patience will be rewarded with returns.
The COVID-19 crisis and concomitant recession requires investors to take a more nuanced view of Nigeria. Zero or low growth for the next 24 months will certainly dampen global interest in the traditional sectors, such as oil and gas; however attacking inefficiencies can yield growth, and government incentives can help inject scale and certainty into priority sectors.
It will be a long and rocky road back to meaningful economic growth in Africa’s most populous country, but the economy that will emerge will be less dependent on oil, greener and more tech-enabled.