Nigeria's Large Agriculture and Energy Sectors Nurture Emerging Industries

The new industry metrics confirm that Nigeria's resource-dependent economy is dominated to unusual degree by the energy and agricultural sectors, which together account for 73% of economic activity. This share is much larger than is seen in most other countries, even those in Africa.

By contrast, other sectors such as utilities, construction, and finance are still relatively small and underdeveloped. Yet, there are hopeful signs that the non-oil and non-agriculture sectors will begin to provide more support for overall economic activity.

For example, the inflation-adjusted growth rate in energy, in particular, decelerated in 2006 from the previous year. Oil production stalled mainly due to the instability in the Niger Delta, and there was serious disruption in the supply of oil products as a result of periodic vandalism of oil pipelines. However, other sectors managed to expand at a much faster pace, so total real GDP growth was a robust 5.3% in 2006, albeit down from the 7.2% pace seen in 2005. The construction and services sectors fared particularly well in 2006, with rapid growth registered in telecommunications and transportation, as well as the wholesale/retail distributive sectors, largely the result of recent government reforms in these industries.

In addition, Nigeria's resource economy has spawned other related or "support" industries. The large agriculture sector provides a basis for a sizeable food and beverage industry, which by itself accounts for close to 17% of the country's total manufacturing output.

The chart below shows the remaining distribution of output in the manufacturing sector, once the food and beverage industry is taken out. The influence of oil is reflected by the large share represented by petrochemical industries. Furthermore, the manufacture of machinery and equipment is dominated by energy-related items (such as storage tanks, boilers, metals finishing, related items), as well as general industrial machinery items (such as pumps, compressors, valves and similar equipment for mining, pipeline transport, and construction). Together, these industries account for two-thirds of the machinery and metallic equipment industries in Nigeria.

The rising importance of these new sectors partly reflects improved business confidence in Nigeria, particularly during the eight-year administration of former president Olusegun Obasanjo, when the country embarked on a gradual path of economic liberalization. The service sector was the first to benefit from these new policies. Nonetheless, Nigerian policymakers’ have retained a generally lukewarm commitment to implementing deeper structural economic reforms. So far, business confidence remains upbeat despite the continuing controversy surrounding the management and the outcome of the recent legislative and presidential elections.

Barring any collapse in oil production or surge in civil strife, real GDP growth will be robust through the rest of 2007 and during 2008. High oil prices, fiscal expansion, and a rebound in the agricultural sector point to good economic prospects for Nigeria. Strong commodity prices will boost government revenues, as well their purchases of goods and services, which is a major contributor to economic activity in Nigeria.

Within this economic environment, the chart below shows which industries should lead growth for the next several years. The wholesale/retail and communications sectors are expected to continue benefiting from past economic reforms. The construction and transport industries will be supported by the large build-out requirements for Nigeria's economic development, and will be fueled by rising revenues from energy and agriculture. Investment in the energy complex will continue to boost the manufacture of industrial machinery and petrochemicals, in addition to transportation and utilities.

Over the longer term, a stable political environment, prudent macroeconomic policies, and a solid export base will largely dictate the country's prospects. Political instability, corruption, and economic mismanagement have always been a major constraint on Nigeria’s development prospects. With the underlying problems still in place—structural imbalances, poor infrastructure, widespread poverty, overdependence on the oil sector, and political instability—economic growth will likely remain below the country's vast potential.