The effect of insecurity on the Nigerian economy

Nigeria’s nominal Gross Domestic Product, GDP, now stands at $509.9 billion, making the nation’s economy the largest in Africa and the 26th in the world, according to the results of the rebasing exercise of the federal government.

The GDP is the market value of all final goods and services produced within a country in a given period. It is an internationally recognised indicator for measuring the size of an economy in a given period of time. 15years-of-demo

The rebased estimates indicate that the nominal GDP for Nigeria was much higher than previously estimated.  In 2010 the estimate was $360. 644 billion; in 2011 it was $408.805 billion; and 2012 $453.966 billion.  The growth rate is driven by the services sector with it contributing about 51 per cent of the GDP. The rebasing exercise on the Nigerian economy which also saw the Per capita rising to $2, 688, covered 2010 to 2013. Nigeria has moved on the per capita scale from 135 to 121st position.

Mr. PeterDrapera senior research fellow at the South African Institute of International Affairs who attended the World Economic Forum’s Summit on Africa in Abuja earlier this month summarized the Nigerian economic growth situation and the challenges facing the nation thus “The accolade was the crowning glory of a year in which Nigeria’s rebased gross domestic product catapulted it past South Africa to number one in Africa by far, notwithstanding Boko Haram’s depredations.

“Opportunities abound in Nigeria’s rapidly expanding market. The government is set on building core infrastructure, particularly energy, railroads, and roads. Modernisation programmes are being implemented in fields as diverse as agriculture and customs. The population, while still poor, is expanding rapidly, along with urbanisation. Consequently, consumer-facing industries such as retail are attracting substantial attention and investment.insecurity1

“Accordingly, many senior business people I spoke to there regard the Nigerian growth story as one they have to be part of. Nigeria is the African market of the future. But consider the environment in which business has to operate. I moderated a session on trade facilitation, or customs procedures. Apparently it takes 141 signatures to move a container through the Lagos Port complex, a figure I informally verified through subsequent personal interactions with logistics executives. Imagine the corruption opportunities this implies, and the associated border delays. Internal borders apparently abound. The official ones are relatively easy to navigate; the unofficial ones are extortionate enterprises. The government is reportedly introducing legislation to remove the official barriers, but this could face a complex political economy passage through the Nigerian parliament.

“Evidently, one of the key motivations for constructing railroads is to avoid these internal barriers. But obtaining permission to construct railroads, or other infrastructure, is a daunting proposition. In one private conversation, I was told that during a certain healthcare reform, one government department resorted to bribing another simply to secure the necessary permissions. Perhaps this is apocryphal, but my confidant did not think so”.

Apart from the internal trade barriers erected by the various governments, internal trade is also now being hampered by the activities of criminals in most parts of the country. In the North East, Boko Haram is holding sway while in the South-South and South East kidnapping is an every day thing. In the last few years manufacturers in the country have been licking their wounds over streams of losses as a result of built up finished inventories of goods in their warehouses they cannot sell.

This is as a result of the insecurity in the Northern part of the country that has taken away part of their market. Many company chief executives said the north is important to their business as the region accounts for more than 30 per cent of the Nigerian market. Though the manufacturers see the market as huge, distribution of goods and services to this region is being hampered by security challenges in the affected states. This has led to significant reduction in turnover, reduction in sales force/ sales outlets; layoff of production staff by companies operating from other parts of the country due to high unsold inventory. From multinationals to small and medium size firms, the story is the same.

Speaking on the issue, PZ Cusssons Plc Chairman, Professor Emmanuel Edozien, said its sales dropped by 1 per cent from N72.2 billion to N71.3 billion. In a review of the company’s performance for the financial year ended 2013, he attributed the drop in the company’s revenue to: “The social unrest in the Northern part of the country and the impact on the consumers’ spending power subsequent to the reduction of the fuel subsidy which exerted considerable pressure on the top line throughout the year.”

Martin Woolnough Managing Director of Nestle Nigeria Plc said “The marketing of our products in the north is being hampered,” He described the state of insecurity in some parts of northern Nigeria as “A stress on the economy”. We can’t get our sales team up there.

That’s likely to impact the middle to long term brand equity in the future.  Distribution, administration and other costs rose five percent from a year earlier to N17.5 billion because of an increase in marketing spend,” Woolnough said. Woolnough, who noted that the company has about 140 sales staff in the country, said Nestle, the largest food company in Nigeria, temporarily withdrew about 10 of its sales staff from the three states for a week.

People still need to eat food and cook their stews, so fortunately we are less affected in the north than other products would be,” said Woolnough, referring partly to the company’s food seasoning Maggi, which he said was a “very strong brand” in some areas affected by the fighting. Woonough retired recently after five years as head of the Nigerian unit of Vevey, Switzerland-based Nestle SA (NESN).

Commenting on the impact of the state of insecurity in the North on his company, Keith Richards, Managing Director of Promasidor Nigeria Limited, said: “You know with the borders closed, a lot of formal and informal exports are not happening.

People are not coming from Chad, Niger, Cameroon and Mali. So you see a downturn in demand. The North is important to us. A lot of our brands are doing very well here. “Now consumption is plummeting.

In 1st Quarter 2012, our milk sales volume declined by 14.3 per cent, powdered beverage sales by 3.7 per cent and tea by 9.1 per cent. But our seasoning products sales grew by 7.1 per cent. And I know all the businesses in the Fast Moving Consumer Goods, FMCG, are affected too, especially with products like beer, soft drinks and tobacco.”

Procter & Gamble Nigeria Limited (P&G) which has an expansive distribution network in the north is affected by the shutting down of stores, stemming from the crisis. But Manoj Kumar, P&G chief for West Africa, says the company is up to the task. “We have been here for 20 years. All sorts of crisis have come and gone. We are therefore not worried like other companies which have spent a few years operating in the country,” he said.

The Lagos Chamber of Commerce and Industry (LCCI) in its Business Environment Report, said that many firms in the country have lost 30 per cent of their sales because of insecurity in the north, which denied them access to the region. The report, which was prepared in the second quarter of the year, also said manufacturing firms sourcing raw materials from the North are now facing serious challenges, while projects funded by banks in the affected states are at risk. According to the report, the hospitality industry in the affected states have been paralysed just as many investors, especially small and medium enterprises are relocating to other states.

“Many bank branches have been closed, while the working hours for others have been drastically reduced. Sales representatives of many companies have fled the affected states. Many projects under construction in the north have been abandoned while security budgets have been scaled up by many firms,” said LCCI. The survey also disclosed that expectations from the North which represent 30 per cent of total Nigerian market have shrunk considerably due to goods produced by these manufacturers are no longer sold out to the supposed buyers because of the flinch market volume.

LCCI furthermore noted that the scope of coverage for manufacturers in the northern part of the country is limited as investors could not set up factories in the north out of fear of being terrorised, bombed or shut down due to lack of low sales and that manufacturers who had their companies in the north and those who distributed to the north all had a loss of market share and revenue derivable from the region.

The survey also disclosed that marketing and distribution activities of many companies in the North have been brought to a standstill especially in the manufacturing sector, adding that most investors and workers had to flee the state(s) to avoid being killed by terrorists. On the effects of insecurity in the banking sector, the survey stated that increased lending to northern business was impossible as the possibility of paying back the loans were not visible .Consequently, banks saw it as a great risk to lend to an investor intending to invest in the north.