Nigeria’s Economic Recovery Growth Plan and the outlook for infrastructure

Construction Intelligence Center 26 Apr 2017 AFRICA

Dariana Tani, economist at Timetric’s Construction Intelligence Center (CIC), assesses Nigeria’s economic recovery plan and its impact on the country’s infrastructure sector.

Nigeria’s infrastructure construction sector will rebound in 2017 due to higher government spending, greater international borrowing, improvements in security, and better budget execution under the recently launched Economic Recovery Growth Plan (ERGP) 2017-2020. However, challenges remain: a weakening currency, shortages of US dollars, and regulatory uncertainties will continue to negatively impact the sector.

President Muhammadu Buhari has vowed to concentrate on the rapid development of the country’s infrastructure, particularly critical existing infrastructure projects in the roads, railways, power, and ICT sectors. In December 2016, President Buhari submitted a budget of NGN7.3 trillion ($23.9bn) for 2017, 20.4% higher than in 2016, and of which NGN2.6 trillion will be committed for infrastructure spending.

The 2017 Budget Proposal includes many of the reforms and initiatives contained in the ERGP 2017-2020. Over the ERGP period, the government aims to restore degraded sections of the federal road network, complete ongoing construction of major railway projects, and deliver the concession on the country’s four main airports, namely the Murtala Muhammed International Airport (MMIA), the Nnamdi Azikiwe International Airport, the Aminu Kano International Airport and the Port Harcourt International Airport.

It also aims to achieve 10GW of additional power generating capacity, and improve the energy mix by the use of greater renewable energy sources. The government also hopes to tackle corruption, achieve greater food security, and drive industrialisation and social development through local and small business enterprises.

The ERGP 2017-2020 builds on the Strategic Implementation Plan (SIP) for the 2016 Budget and covers strategies required to boost infrastructure investment and revive economic growth. The government estimates that it needs to invest $3 trillion in infrastructure over the next 30 years. Given the scale of capital investment required to implement this plan effectively, the private sector is anticipated to play an important role in delivering infrastructure projects either directly or in collaboration with the government.

In Nigeria, most of the funding for infrastructure projects is provided by the federal government directly through budget outlays from fiscal revenues, borrowing, and market-based financing. However, such revenues are significantly inadequate to meet the country’s infrastructure requirements. According to the IMF, the country collects the equivalent of 6% of GDP from taxation, the lowest ratio in sub-Saharan Africa.

Nigeria is heavily reliant on crude oil exports, and low global oil prices and militant attacks on the Southern Delta have hindered export growth and slashed government revenues. Crude oil sales account for more than 90% of foreign exchange earnings and two thirds of government revenues.

In 2016, the economy shrank by 1.5%, the first contraction since 1991. The collapse of the oil sector has led to shortages of foreign currency, weakened the naira, and diminished foreign investment inflows. However, recent improvements in oil production have been supported by reduced incidents of sabotage in the Niger Delta, and government efforts with other African leaders to defeat Boko Haram in the northeast of the country appear to have eased security risks.

A steady increase in foreign inflows through rising export revenues and government borrowing should help reduce foreign currency shortages in the non-oil sectors, and allow the financial and industry sectors more room to support growth.

Construction output also fell by almost 6% in real terms in 2016. The construction sector has been in free fall since the third quarter of 2015, when the Central Bank of Nigeria published a list of 41 items for which foreign exchange was not permitted. Most of these items were related to the real estate construction sector, exacerbating problems in an already slowing sector, as most of the materials required for construction are imported.

The IMF has urged the country to introduce immediate changes to its exchange rate policy by lifting its currency-trading restrictions and removing its system of multiple currency practices. At present, the CBN has at least three exchange rates, including the official rate, a rate for school and medical fees abroad, and a retail rate set by licensed exchange rate bureaus. The fund said that easing foreign exchange controls should be accompanied by tighter monetary policy to anchor inflation expectations and limit the risk of exchange-rate overshooting.

The government is also seeking funding to plug a deficit in its proposed 2017 budget from bilateral and multilateral partners. Currently the government is negotiating a $1.3bn loan from the World Bank and expects to get the remaining $400M of a $1bn credit from the African Development Bank. It also expects to raise the rest from lenders through international capital markets and commercial loans. In late March 2017, the government issued a $500M Eurobond as part of the 2017 budget, after raising another $1bn Eurobond in February.

In summary, government initiatives to strengthen infrastructure along with the new budget and improvements in oil production should help renew investors’ confidence in the infrastructure construction sector that the government is serious about boosting infrastructure investment and getting the economy out of recession.

President Buhari has already approved the establishment of a Presidential Enabling Business Environment Council (PEBEC) to monitor the implementation of the ERGP, which is currently working with State Governments, Ministries, Departments and Agencies to improve company registration systems, tax payment, electricity connections, and construction permit systems and customs procedures.

Nevertheless, unifying the foreign exchange market should be the main priority if government is to restore market confidence and revive economic growth. The IMF has emphasised that stronger policies are needed to improve investor sentiment and has urged authorities to let the market be more involved in valuing the naira while tighter monetary policy and fiscal consolidation should help attract capital flows, improve liquidity and stabilise the currency.

* For more information on the Nigeria construction market, visit the Construction Intelligence Center Report Store.

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