Nigeria: Selected Issues
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar
Close

Nigeria: Selected Issues

Abstract

Nigeria: Selected Issues

Job-Intensive Growth Through Strengthening the Business Environment1

This chapter examines recent developments in Nigeria’s labor market, the state of the business environment, and the potential for improvements in the latter to bring about more job-intensive growth. Unemployment and underemployment remain high, especially among youth, as a long period of robust growth did not translate into sufficient job creation relative to rapid population growth. The business environment has improved, but lags peer comparators across several areas. Targeting the substantial heterogeneity in practices across the states, we show that if states operating at sub-par levels adopted best practices, the ease of doing business could improve substantially at the national level. This improvement could reduce labor underutilization, as cross-country evidence suggests that reforms to the business environment could improve the job-intensity of growth.

A. Labor Market Developments and Prospects

1. Until the current downturn, Nigeria experienced robust growth from about 2000. Real GDP grew at an average rate of almost 8 percent per year from 2000–2014, and almost 10 percent per year in the non-oil sector, before slowing sharply in 2015 and experiencing an outright contraction in 2016 (Figure 1).

Figure 1.
Figure 1.

Nigeria: Economic Growth

(real GDP, average annual percent change)

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Sources: National Bureau of Statistics; and IMF staff calculations.

2. Despite this high growth, the labor market has been characterized by low job creation and underutilization of the labor force, especially among youth. While little labor market data is available before 2010, available information suggests that job creation was not commensurate with the rapid growth of the economy. From 2005–2016, the labor force grew by 45 percent (from 55 million to 80 million people), but full-time employment only increased 10 percent (from 49 million to 54 million people) (Figure 2).2 Part-time employment did grow more quickly than full-time employment since 2010. However, unemployment and underemployment rates have risen, reaching over 13 and 19 percent, respectively, in 2016.3 Unemployment and underemployment among labor force participants aged 15–24 is higher, at 24 and 35 percent, respectively, having risen sharply in the last two years (Figure 2).

Figure 2.
Figure 2.

Nigeria: Labor Market Indicators

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Sources: National Bureau of Statistics; Haver Analytics; and IMF staff calculations.1 Data for 2016 are through the third quarter.

3. Looking ahead, the Nigerian economy faces a challenge in creating sufficient jobs to keep up with the rapid growth in the working-age population. The population 16 years old and over has grown by over 2½ percent per year over the last decade, and this rate is projected to continue over the next ten years. Economic growth is projected to slow, and in staff’s baseline scenario would be negative in per capita terms (Figure 3). In this context, significant job creation will be needed to absorb new entrants to the labor force and reduce current high rates of labor underutilization.

Figure 3.
Figure 3.

Nigeria: Per Capita Growth Forecast

(annual percent change)

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Sources: National Bureau of Statistics; and IMF staff calculations

B. Business Environment

4. Indicators suggest that there is substantial room to improve Nigeria’s business environment, which would boost job creation and contribute to sustained growth. According to the World Bank’s 2017 Doing Business indicators, Nigeria ranks 169 out of 190 economies.4 Its ease of Doing Business was 45 out of a maximum of 100, where 100 represents the “frontier,” or best practice among all economies. Nigeria’s score improved two percentage points from 2010, but remained lower than the average for other large Sub-Saharan African economies and well below that for BRICS (Figure 4).5 This ranking is corroborated by broader measures of economic competitiveness, such as the World Economic Forum’s Global Competitiveness Index (127 out of 138 countries) and the Fraser Institute’s World Economic Freedom Rating (113 out of 159 countries).

Figure 4.
Figure 4.

Nigeria: Overall Ease of Doing Business

(0 to 100, with 100 the best-practice frontier)

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Source: World Bank Doing Business indicators.

5. The Doing Business study highlights some reforms made in recent years.6 Starting a business was made easier through improved online portals for some government agencies. A centralized collateral agency was created, strengthening access to credit. Finally, minority investor protections were strengthened by requiring related-party transactions to undergo external review and receive approval by disinterested shareholders.

6. An examination of the subcomponents of the Doing Business indicators points to areas for further reform. Figure 5 shows the ten subcomponents of the overall Doing Business index for Nigeria and for the median across economies, since this differs by subcomponent. Nigeria was closest to the best-practice frontier in the ease of starting a business, though slightly below the median economy, while it was above the median in getting credit and protecting minority investors. Nigeria was 15 points or more below both the best-practice frontier and the median economy in five categories: dealing with construction permits, getting electricity, registering property, paying taxes, and trading across borders.

Figure 5.
Figure 5.

Nigeria: Doing Business Subcomponents

(0 to 100, with 100 the best-practice frontier)

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Source: World Bank Doing Business indicators.

7. Some improvements will depend on policies at the Federal Government (FG) level. Making tax payments and trading across borders generally depend heavily on policies set at the national level. The number of tax payments for the stylized firm under consideration in Doing Business is 59 in Nigeria, compared to 25 for the median economy, and the compliance burden in terms of number of hours is also more than four times the median. Similarly, the time and cost required to both export and import are high for both documentary compliance and border compliance, ranging from two to five times the figures for the median economy. These indicators suggest there is ample scope for improving processes at the national level.

8. The FG is putting together an ambitious strategy as part of its Economic Recovery and Growth Plan (ERGP) to improve the business environment. It has set the goal of reaching 100th in the Doing Business rankings by 2020, and to that end has formed the Presidential Enabling Business Environment Council (PEBEC), chaired by the Vice President. The PEBEC includes senior representatives from ministries involved in facilitating doing business, and is mandated to identify and oversee the implementation of reforms in this area. Furthermore, it will, with the help of a secretariat of staff from across ministries, conduct regular engagement with state governments to coordinate reforms.

9. A number of reform initiatives are already underway. Specific goals for 2017 set out in the ERGP involve improving port efficiency; streamlining administrative procedures for the entry and exit of people and goods, including through creation of a single customs window; simplifying, clarifying, and automating processes for starting, formalizing, and operating businesses; and simplifying government procurement processes. The FG also plans to pursue a strategy of stimulating industrial activity through targeted Special Economic Zones, which would enjoy dedicated road, water, power, and technological infrastructure to support productivity.

10. State and local governments (SLGs) can also play a key role in strengthening the business environment. As noted above, while several indicators in the overall Doing Business rankings are driven by policies at the national level, others are a weighted average of conditions prevailing in Lagos and Kano. This obscures substantial heterogeneity in the business environment across states, as found in a subnational Doing Business study in 2014.7 Figure 6 plots a selection of indicators that depend more heavily on SLG policies, showing outcomes for the best state and lowest quartile state in Nigeria in 2014, compared with the 100th place economy and Nigeria’s national indicator in 2017. The figure illustrates the wide range of practices across states—some follow practices more conducive to doing business than in Lagos and Kano while other states have less favorable practices. It is noteworthy that in four of the seven indicators surveyed, the best practice within Nigeria would already be enough, if adopted at the national level, to rank the country 100th place or better. In the other three indicators, adopting existing best practices across all states would still represent a substantial upgrade. This underscores the potential improvements to Nigeria’s business environment through more widespread adoption of practices already in place in the most business-friendly states.

Figure 6.
Figure 6.

Nigeria: Subnational Doing Business Indicators

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Sources: World Bank Doing Business indicators; and IMF staff calculations.

C. Impact of Reforms on Job Creation

11. Cross-country evidence suggests that a better business environment can improve job creation. Melina (2016) examines the elasticity of employment to output across 70 countries, and finds that for countries with a stronger business environment, the employment intensity of growth is significantly higher.8 Applying these results to Nigeria, with other large Sub-Saharan African countries serving as a benchmark for reforms, suggests that reforms over the medium term to strengthen the business environment could raise the elasticity of employment growth to GDP growth to 0.69, from its historical level of 0.43 (Table 1).

Table 1.

Nigeria: Business Environment Reforms and Growth-Employment Elasticity

article image
Sources: Melina (2016); Economic Freedom of the World, 2016; and IMF staff calculations.

Scale of 0 to 10, with higher being more freedom.

12. Reducing unemployment in Nigeria will require both higher growth and reforms to strengthen the business environment. Applying the historical elasticity of employment growth to staff’s baseline forecast for real GDP growth, the unemployment rate would increase from its current 13 percent to over 20 percent by 2020 (Figure 7).9 Higher economic growth alone, such as that experienced during the recent oil price boom, would not be enough to keep unemployment from rising. Under a scenario in which the economy gradually returns to its average growth rate from 2011–14, and the historical elasticity of employment growth persists, the unemployment rate would still increase substantially over the medium term. However, under a scenario in which growth follows the path set out in staff’s adjustment scenario, accompanied by reforms sufficient to reach the higher employment-GDP growth elasticity calculated above, unemployment would be placed on a downward path once the economy recovers from the current downturn. These scenarios illustrate the critical importance of reforms to Nigeria’s business environment for attaining job-intensive growth

Figure 7.
Figure 7.

Nigeria: Unemployment Rate Scenarios

(in percent)

Citation: IMF Staff Country Reports 2017, 081; 10.5089/9781475591910.002.A004

Sources: National Bureau of Statistics; and IMF staff calculations.
1

By Andrew Swiston, with research assistance from Marwa Ibrahim.

2

Full-time employment is defined as working 40 or more hours per week; part-time employment as 20 or more hours per week; and unemployed as working less than 20 hours per work.

3

Annual data for 2016 has not yet been released. Figures for 2016 are the average for the first three quarters, to minimize the effects of seasonality in the data.

4

These indicators should be interpreted with caution due to the limited number of respondents, limited geographical coverage, and standardized assumptions on business constraints and information availability. In particular, Nigeria’s indicators in 2017 consist of population-weighted averages of the scores of Kano and Lagos (2010 scores are for Lagos only). Furthermore, methodological changes can complicate the interpretation of movements in an indicator over time. See http://www.doingbusiness.org/methodology for further details on the Doing Business methodology.

5

Other large Sub-Saharan African countries include all those with a population greater than 30 million (Democratic Republic of Congo, Ethiopia, Kenya, South Africa, Tanzania, and Uganda).

8

Melina, Giovanni, 2016, “Enhancing the Responsiveness of Employment to Growth in Namibia,” in Namibia: Selected Issues, IMF Country Report No. 16/374.

9

Each of these scenarios uses United Nations projections for the working-age population, and assumes that labor force participation remains at its 2016 share of the working-age population.

  • Collapse
  • Expand
Nigeria: Selected Issues
Author:
International Monetary Fund. African Dept.
  • Figure 1.

    Nigeria: Economic Growth

    (real GDP, average annual percent change)

  • Figure 2.

    Nigeria: Labor Market Indicators

  • Figure 3.

    Nigeria: Per Capita Growth Forecast

    (annual percent change)

  • Figure 4.

    Nigeria: Overall Ease of Doing Business

    (0 to 100, with 100 the best-practice frontier)

  • Figure 5.

    Nigeria: Doing Business Subcomponents

    (0 to 100, with 100 the best-practice frontier)

  • Figure 6.

    Nigeria: Subnational Doing Business Indicators

  • Figure 7.

    Nigeria: Unemployment Rate Scenarios

    (in percent)